No tomorrow

DOG DISH modified

Well, so much the Greeks. Yawn. There was no olive-inspired collapse on global markets Monday because (as I told you): (a) Greece is old and markets are tired of it, (b) banks have slashed their exposure to the country over the past four years, (c) the Athens stock market already choked, down 50% even before he vote and (d) things in euroland are actually getting better, thanks to massive central bank stimulus. If the Greeks don’t wanna play, good luck to them.

Now, we have better things to worry about. Like us.

Here’s Elaine to set the scene. “I’m an accountant,” she says, “so I see a lot.”

She sure does. In Elaine’s job she gets to peel away the financial underwear and stare at the goods. Scary.

“People with $50,000 in annual net income with $900,000 mortgages. People with net worth of $2.5 million and unable to secure commercial financing (no CMHC there!) I’ve been expecting a lot of my clients to go bankrupt for years. But yet, they carry on. Or, they go bankrupt they’re able to turn to shady online lenders and secure new loans of $100k. I honestly can’t believe it. It almost seems like the banks are too scared to do anything (ie foreclose) because maybe there are just too many insolvent people in Canada? It just doesn’t make sense to me how so many of my clients can carry on with such massive debt, and no consequences. They have little or no equity in their homes, and yet the banks continue to fork money over like there’s no tomorrow.”

Now, here’s Josh. He read the piece here a few days about dreamy Nancy, the perfect woman with a fat lawyerly salary who refuses to be suckered into the real estate morass.

“I was born and raised in Toronto but now work in Houston, Texas as an investment banker. Prior to leaving, I spent a number of years as a CA and then as an equity research associate. If people like Nancy and myself cannot afford houses on much larger than average incomes it just boggles my mind how people do it without their parents help. I don’t see how deleveraging can go smoothly in Toronto when rates rise. I am really hoping that when U.S. rates begin to inch higher that the Canadian dollar goes below $0.77 USD and that housing corrects.”

Finally, a note I received from Landon. “My wife wants a bigger, nicer house now that we have a kid.” he admits. “You know what they say about a happy wife.”

Amen. But Landon writes to share a little tale. He and his squeeze offered on a mid-town Toronto semi in March (in Riverdale) for $1.317 million on a listing price of $1.189 million. They lost. It sold for $1.325 million.

“Lo and behold the same house was back on the market a few weeks ago.  According to the listing agents the buyers were selling due to a “change” in job situation.  They painted it up and it actually showed better than the first time around.  We decided against making an offer.  After a couple of weeks on the market, which is an eternity in Riverdale in that price range, it sold for $1.275M – a drop of $50K or about 4%.  With transaction costs, the family who bought it would have taken a $150K hit.

“My agent claims this dip in price is just part of the normal summer slowdown before things go crazy again in the fall.  However, I’m thinking this could be a harbinger of where the market is going as this is a direct apples to apples comparison of the market over a 3 and a half month span.  Rarely does the same house hit the market in such a short span, at least without it having been renovated. This is obviously just one house but it could also provide a good glimpse on a very micro level of a subtle shift in the market.”

Well, let’s now turn to the news. Oil prices collapsed on Monday – more than 7% – to just $52 a barrel. This is not because of Greece, the wild gyrations on the Chinese stock market (which impact very few of us), or even Jane Fonda and her sexy new hat. There’s just too damn much of the stuff, and we’re adding half a million more barrels a day.

Alberta is not only smoky and politically confused, it’s in serious economic trouble if crude settles at fifty bucks and stays there a year or two. Meanwhile the Canadian economy (as we discussed last week) has shrunk like a dude in a cold stream over the last four months, the dollar is barely above 79 cents, incomes are comatose and consumer credit is romping higher. This is unsustainable. As Elaine put it to me in the subject line of her email, we are “The Walking Dead.” She’s right. Mortgage borrowing is increasing 5.5%. Wages are going up 0%.

This brings us to next Wednesday. That’s the date of the next Bank of Canada rate announcement, and all of this weakness – especially with the latest oil dump – is convincing more people we’re in for another rate drop. As you recall, the last one (January) took the bank prime down to 2.85%, ignited a mortgage war (five-year fixed now 2.4%)) and propelled the SFH price in 416 to $1.4 million and in urban YVR to $2.2 million.

Just look what it did to borrowing…

CONSUMER CREDIT

In other words, the central bank move did not stimulate economic growth or prevent us from sliding towards recession. It whacked the dollar and fueled inflation. As far as I know, there were no new factories opened or jobs launched. Mr. Poloz (the BoC boss) can say all he wants about it rescuing Canada from heart failure, but it seems the negatives (bigger debt, houses we can’t afford, more expensive Harleys) outweigh the positives (ah, um, meh… ).

One bank egghead, Scotia’s Derek Holt, is finding the voice to speak out against those wanting still-cheaper money. You’d have to be an idiot he says to think we can sustain economic growth “off of all-time record highs in the home ownership rate, real per-capita consumer spending, house prices by every measure, household leverage, and renovation spending.”

A rate cut now, or in the autumn, or anytime soon, he adds, would “risk inflaming housing imbalances.” Just ask Landan, who couldn’t buy half a house in Toronto for $1.317 million in the wake of the last rate chop. When money’s so cheap, it devalues. Debt loses its bite. People borrow because there seems to be no consequence. So with every drop in the cost of a loan, prices increase. It’s a death spiral.

But let’s focus on Greece. How could the poor souvlakis not have seen it coming?

So glad it’s different here.