Entries from November 2015 ↓

Deal with it

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You might be interested in some of the stories that the Great Fool real estate Investigative Unit is working on. By the way, this site has applied to the new T2 government for one of those Climate Change grants since it reaches more people than most dailies, killing not a single tree in doing so. After all, if Canada can donate $2.6 billion to ‘developing’ countries to cut their carbon footprint, surely a homeless, vulnerable, pathetic blog is deserving. Once this money flows in, every reader here will get a free puppy. However, you must name him “Justin”, and provide a selfie.

Hot Canadian Money

While YVRers moan and grouse over non-locals buying their precious houses and (they believe) forcing prices higher, others have a different message for foreign purchasers: bring it on! This is especially poignant when it comes to HCM – Hot Canadian Money – and the impact it has on a regional market like Arizona.

It turns out nobody is more unhappy with a 75-cent Canadian dolarette than the people who’ve come to depend on the steady stream of cash flowing south and snapping up desert properties. Sales of Arizona houses to Canadians have plunged by a staggering 50% in 2015 – the result of our currency devaluation, and also the plop in commodity prices.

“Alberta is an oil-rich province in Canada,” realtor Lauire Lavine told the local media. “We’ve had many Albertans buying property, but that is when oil was $100 -$90 a barrel, but with it being at $40 right now, it’s meant a lot of layoffs and job uncertainty. People are holding off on making major purchases.”

AZ realtors have also seen a flood of Canadian owners bailing out of their American properties – not only to improve their financial picture, but also to profit from the exchange rate on any gains they may have made. Makes you wonder if they know about the Foreign Investment in Real Property Tax Act and the 10% withholding tax on sale proceeds.

Oh well. At least somebody’s rooting for Alberta.

Bad, bad bank.

Turns out the Bank of Canada was as dumb as suggested here when it cut interest rates last winter. The impact on an economy reeling from crashing oil was, well, zilch. The impact on real estate prices and household debt was something else entirely. More proof that if you make debt cheap enough, Canadians will snorfle themselves to death.

Housing analyst Ross Kay has released an analysis into the impact of that surprising and unexpected quarter-point drop. “Immediately following the rate cut Canada’s housing market, which had begun to contract in December of 2014, changed direction and accelerated,” he says.  “The damage done since then has been substantial.  Since that time the BoC has issued warnings of overvaluation which are now echoed by CMHC.”

Kay claims, for example, that BC’s housing market had stalled last January after 19 months of expansion, only to be excited to a new level of horniness (still ongoing) after the central bank panicked and dropped its rate. And in Ontario: “the acceleration was so rapid that in the four short months after the rate cut took place activity levels surpassed everything that had gone on since the fall of 2012.”

Some people believe the central bank will again trim its key rate in 2016, even as the US Fed is raising theirs. Arizona realtors won’t know what hit them.

The merchants of Debt

As you’re aware, without a 20% down payment a homebuyer has to obtain mortgage insurance and pay a big premium (most people add it to the borrowing). The insurance protects the lender, not the borrower, in the event he defaults. Happily not many people do this, and CMHC just reported that its payouts on defaults have gone down in the past year. Walking away from debt ain’t a Canadian thing. At least not yet.

But in pouring over the government agency’s docs, one of our highly-trained forensic investigators (a beagle by trade) sniffed out an interesting summary of recent activity. It’s the loan-to-value ratios for loans insured during the first nine months of the year. This is worth knowing: 70% of homeowners borrowed 90% to 95% of the value of their homes. In fact, the average LTV ratio is 92% among these borrowers meaning the average equity they possess is just 8%. Imagine what happens when rates go up.

We are so screwed. But enjoy your weekend.

CHMC

On the edge

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Karma, part deux:

Let’s recap, shall we? The Fed is widely expected to signal the end of Cheap Money in three weeks. Already fixed-rate mortgages are getting more expensive. Banks, led by TD this week, are launching an awareness campaign so the house-horny zombies we live among will be schooled on what’s coming. And our shiny new finance minister, Bill Morneau – having told us last week the Cons left his cupboard bare – has nothing to say about what could be the greatest threat to our economy.

Let’s face it. We’re on our own. There’s no life preserver Ottawa can throw to homeowners about to go underwater. There’ll be no 40-year amortizations, interest buy-downs, foreclosure moratorium, reduced downpayments or rate holiday. The very politicians who aided and abetted this mess are unable to fix it – since the Bank of Canada has already slashed the cost of money and the feds are broke.

That’s Karma One.

The second part is equally bleak so, for God’s sake, do not let your kids read this.

Turns out at least four of the ten people you hang with or are related to, are idiots. Sadly, this might include you. So not only are 70% of Canadian real estate markets now slagging or falling with the cost of mortgages about to rise in the next few months (by almost 1%, according to the bank), but a huge number of us are already screwed. Thus, the combination of falling equity and rising rates for those with a one-asset strategy could become insurmountable.

New evidence comes via a big survey of people making $50,000 or more done by Manulife. When it comes to personal finances, many are hooped. Why?

  • Half of Canadians ‘struggle’ to maintain a balance of $1,000 in savings. A thousand bucks. Seriously.
  • Almost 40%, at least once in the past year, had to borrow money from family, tap credit cards or sell something to pay their usual bills.
  • One in six had to cash in taxable RRSPs or visit a payday loan vulture to make ends meet.

These are fresh stats. Add them to the file telling us over 90% of people have not maxed out their TFSAs, that RRSP contributions have dropped off a cliff and half of everybody believes they couldn’t survive one missed paycheque. Meanwhile new mortgage debt topped $75 billion in the last year and we just hit another debt-to-income record.

Manulife’s CEO Rick Lunny (I know the guy and he’s cool) doesn’t mince words when it comes to an explanation. The cause is houses, he says. “It does appear there are a lot of people living on the edge,” because homeownership has turned into a cult, and insane prices have saddled families with more debt – and overhead – than ever in the past. Meanwhile the real estate bubble has been unsupported by economic fundamentals, which means we’ve spent more without earning more. So we borrowed the difference.

This might make some sense when rates are low and falling and your job’s secure. But Elvis has left the building. We’re decidedly on the path to higher interest rates. Meanwhile the commodity rout ripples out across the country from poor Alberta – where a socialist government decided to raise taxes on individuals, corporations and now carbon. Now every day seems to bring news of more job losses, as much in Ontario and BC as the oil patch.

Well, the 1%ers who hang around here probably think they’re fine. But Karma being the bitch she is, this will end up biting everyone. The events above (higher rates, slow growth, job stress) pretty much assure a real estate correction. Given that vast numbers of people are unprepared, and have made such dumbass decisions, we should expect economic consequences – and then political ones.

Some simple actions will help. Hedge against the dollar by keeping about 20% of your investment assets in US$-denominated securities. We’re going lower. Hedge against the economy by having two-thirds of your growth assets in US or international stuff. Hedge against company risk by investing through index ETFs, and not individual stocks. Hedge against higher personal tax rates by maxing out both your RRSP and TFSA, remembering that the former is for tax-shifting, not retirement funding. Hedge against voracious politicians with family income-splitting, funding kids’ tax-free accounts, a spousal RRSP or joint investment account. Hedge against volatility with a balanced and globally-diversified portfolio, keeping 40% in fixed-income. And hedge against Canada by reducing your real estate exposure.

Or, don’t. Spend everything. Save nothing. Borrow big. You’ll be in great company.