Entries from June 2014 ↓


MIRROR modified

I seem to hear most loudly from two kinds of people on this blog. The Garth-is-an-idiot crowd is always popular, reminding us how much money you’d have made buying a house in 1996, arguing that mortgage rates will never rise and renters smell. Then there’s the we’re-all-going-to-die school, convinced I’m also an idiot for telling people to invest in financial assets, because the world’s a giant Ponzi scheme, markets are rigged and everyone else is sheeple.

In between are most of us. Logically, we know houses cost too much, the economy sucks a bit and not having all your eggs in a single basket is smart. But people still want houses, are lured by cheap debt and overwhelmed by investing. As a result, paralysis.

I’m not actually surprised 80% of TFSA money is in bank accounts or GICs or that almost half the people over 50 figure they’ll run out of money. This situation will get a lot worse once housing’s no longer an out-performing asset, and grows illiquid. As a society, our choices are awful, but very human. We’d rather have a happy spouse now than fret over security later.

In truth, life’s not that easy for most working people – especially those who eschew gobs of debt. If you make a middle-class income and try to live within your means, you get Marcel. He wrote me on the eve of the Canada Day weekend, and I’ve decided to share this with you. Here’s a guy who dwells in a place where houses cost less than garages in Yaletown or Leslieville. And he’s scared.

Read it. Then tell me how you would answer the question.

I have been a long time reader of yours…getting advice back when newspapers were all the rage. I am now freaking out.  I am 39, have a university degree, a job in information technology, but I have been unable to get ahead.  Every year seems to be worse than the last.  My wife and I make about 115K per year, but have not had a pay raise in years.  Meanwhile the taxes we pay in New Brunswick (gasp) have increased, the amount we have to contribute to our pensions has increased, and the cost of everything has increased.

We live in a small 2 bedroom house, with a mortgage of about 100K remaining, with a monthly mortgage including property taxes of $850.  My life insurance agent told me that we were doing it right when he came to our house one night.  I asked him what he meant, and he replied “you are actually going to pay off your mortgage before you retire.”

I feel like my situation is better than most, but I also feel like I am falling behind.  I don’t understand why everyone around me seems to be living in a house that is 3X the size, driving an SUV, taking trips south, etc., etc., etc.  According to the stats, our household income is at the top of the scale for New Brunswick, almost twice the median income.  So, if we make twice the median, and our home is less than the average for the province, how are other people doing it?

I have a government pension, which has been converted to a shared risk from defined benefit, and I am worried.  In fact, I am worried sick.  All around me are signs of imminent collapse.  I see subdivisions with dozens of houses for sale that sit there month after month.  Our population is aging at an alarming rate, and the ones who are not aging are actually leaving because there is nothing for them to do.

But while houses are languishing on the market, even more are being built.  Isn’t New Brunswick a leading indicator of what the rest of the country faces?  We have an aging population, with a resource based economy, that is going nowhere?  I have heard musings that Ottawa likely has a plan in place for what to do once New Brunswick goes bankrupt, and I would not be surprised if it happens in the next 5 to 10 years.

So here I am, someone who lives in a province where you can get a house for 150K that is quite nice, earns twice the median income, has a government pension, and is freaking out.  Why aren’t other people freaking out?

The deep end

DEEP modified

“Thought you might get a chuckle out of this,” says Ian. He’s busy packing this week because he and Marilyn sold their Toronto house and are running away with the money. Suddenly retirement looks one hell of a lot better.

“Yesterday in my night table she found our trusty CIBC Mortgage Payment Guide from the years before home computers, the internet etc. I expect that the youngsters jumping into the deep end of the GTA real estate pool today would choke on those numbers.  As you keep saying, the rates today will not last forever.”

The booklet is from 1987. I used to carry one around, too, when I gave real estate investment lectures to horny young people (now your parents). Back then I had one message: sell, because this market is cooked. Four years later prices were down 28%.

CIBC modified

Of course you’ll notice the lowest rate the bank (or anyone) could imagine for a mortgage was 6%. The top was just under 18%. This is why houses were cheap then, and why they inevitably got a lot cheaper. Despite money costing so much, people were convinced houses would rise forever. They camped out overnight in front of sales trailers in Mississauga. They flipped and speculated. Some homes closed a dozen times in a single day, each time at a higher value. Then, a crash.

Today rates are absurdly low, houses have never cost more, and real estate’s once again a mania. Like then, most of your friends, co-workers and embarrassing relatives believe prices will rise without end. Nobody thinks rates will creep up or mortgage rules change much. The longer we have 3% home loans the more everyone’s convinced we will always have 3% loans. Obviously this is not the case.

And if real estate can lose a third of its value when mortgage rates go down (as they did in the early 1990s) just imagine what might happen when monthly payments swell (as they will over the next five years). No, 17% loans are not on the agenda. But you sure certainly count on 6%.

Now this brings us to the Idiot Segment of today’s blog, proudly presented by Re/Max.

Did you notice a spate of MSM stories this week about how cottage sales have rebounded from the Winter from Hell, with romping prices and rollicking demand? That’s because Re/Max diddled the media with another of its trumped-up ‘reports’, 34 glossy pages without a single third-party statistical source. No survey. No data. No methodology. No creds. But the reporters ate it up.

Said the Globe:

A cottage that sold for $7.4 million in Ontario’s Muskoka region highlights the increasing trend of younger, wealthier buyers investing in vacation spots as they profit from housing booms in major cities. “Families and investors have more cash to buy a second home as a booming real estate market increases the value of their residences, according Re/Max. “The equity gains in urban center homes have led to increased demand in recreational properties,” Gurinder Sandhu, executive vice president of Ontario and Atlantic Canada for the firm, said by phone from Toronto Tuesday. “They’re leveraging that to purchase cottages. As a result, you’re seeing an increase in the number of cottages changing hands and a steady price increase.”

Well there ya go. Re/Max fabricates it. The Globe repeats it. Must be true. And if it is, Allah help us. We’re screwed.

The last thing city people, who have seen their houses appreciate, should do is borrow against that equity increase to buy more real estate. Especially a cottage. As generations before discovered, that pop in the value of your home can be wiped away by a mortgage hike, because you’re a CBC or Sobey’s or Sears Canada employee, or when the market inevitably topples under its own weight.

But if you’ve borrowed against that increased value, you could end up with more debt than your urban house is worth, plus a cottage which will never sell for what you paid. In any real estate correction it’s a well-established fact that recreational properties – chalets, hobby farms, cottages, cabins and all-nude beaches – take it in the rear. The universe of buyers is actually miniscule, and shrinking.

Time will tell how many folks believe what they read or hear. How many are turning their houses into ATMs. Or who’s using their illusory equity gains to feed more consumption, believing bad stuff happens only to other people.

A new web survey this week found 51% of Canadians expect houses will keep rising in price – 8% a year. In Alberta, 73% think that way.

Meanwhile Ian and Marilyn keep packing. Sharing a little chuckle.