Entries from March 2016 ↓

What could go wrong? Part deux.


Tim and Steph have the hots. “Face it,” she told me two days ago, “there’s just no way a balanced portfolio of anything is gonna compete with the housing market. So stop trying to tell me otherwise.” And I did. I even said, good luck. Without smirking.

The two of them, late thirties, own four condos, all in negative cash flow. Not seriously – a couple hundred bucks each, monthly – but enough to make one wonder why they’d want to ditch financial assets, making money, to buy more property. Like I said, they’ve got the hots. The house they own doubled in the past decade, so they think they’ve a Midas touch. “The condos,” Tim assured me, “will be golden in a few years. We’re willing to wait.”

It’s interesting how people expect financial assets to give positive returns at once and consistently, or they get dumped. Real estate, however, plays by other rules – because it exists, can be touched and has social status. “We own four condos,” is something your mom understands. “Attsa my boy,” she coos. Telling her you have a balanced and globally diversified, tax-efficient and liquid portfolio of ETFs just doesn’t cut it. They never covered that in Mom School.

Anyway, these guys (Tim & Steph) now lust to purchase s duplex on the east side of the city for $1.8 million. With luck, rents will barely cover the overhead, which means it has a cap rate of almost zero. And they’re out of cash. So, the portfolio is being sold, putting 100% of their net worth into one asset class. Worse, they’ve talked her parents into “investing” seven hundred grand in the project.

The wrinklies can hardly afford it, with a total nestegg of $800,000 after selling their home. The pension income’s too scrawny to live on, so they need investment cash flow. Steph told them they can have a 3% return on their money and no risk. They bought it. Too bad the pittance will be 100% taxable in their hands, and the risk substantial. After all, if the younger ones could have landed enough bank financing, they wouldn’t need to emotionally extort 70-year-olds.

Stories like this are so common. A decade of real estate appreciation and cheap money, combined with the fear that the 2008-9 stock market mayhem engendered, has profoundly affected our nation. Debt’s exploded. We’ve become less diversified. Recency bias has made us think property is invincible. Risk is now misunderstood.

Of course the biggest factor, so far, is that real estate has not disappointed. Sure, most markets are currently stagnant or slipping a little. But there’s been no Big Short moment when the gates opened and the whole friggin’ bottom fell out of our expectations. With everyone so invested in a single thing, bad is impossible.

Young Americans thought the same. Until real estate reached a bubble state and corrected, of course. Because kids are always so much more heavily leveraged when they buy a house, they bear the greatest pain when markets revert to the norm (they always do). So today GenXers – millions of them – are truly struggling after investing in houses (because they’re always safe) and subsequently getting whacked.

Like here, people in their thirties and forties put everything they had in property, taking on significant debt when houses had hit inflated values. When rates went up and the economy went down, many slipped underwater, then into foreclosure. Today there are 19 million American renters who used to be homeowners, over four million of whom faced a foreclosure. Over half are under the age of 45. See the evidence below.


The American housing correction changed the lives of millions of people. They gambled and lost. They believed what they were told by their parents, the media, the government, the real estate industry and the lenders – that houses always go up. Safe. Predictable. And when assessments were rising faster than the value of anything else, they believed it was the new normal. It would last. The best possible chance for the little guy to catapult ahead without the stress or sacrifice of saving and investing.

Now so many are middle-aged renters with crap credit scores.

The lesson here is simple. People forming households, traditionally in their mid-twenties to late-thirties, using big leverage to do so, are always at risk. But when doing so in the apex of time when prices have never been higher and after years of asset inflation – and with money which cannot get cheaper – the risk is extreme. Far in excess of anything their parents faced when the economy was expanding, rates were normal and houses were just homes.

To think today’s conditions are normal – when wages are slack and a million buys a shack – is to delude yourself. Do not allow your daughter to believe it. And reject the compromised beliefs of those who tell you otherwise.

Like Stefane Marion. The National Bank chief economist this week dropped a few jaws by justifying prices in Vancouver – which increased 22% in the last twelve months, or ten times the rate of inflation and wage growth. Why worry, he asks, when there’s a greater expansion in the working age population in places like Van or the GTA?

“The underlying force for housing demand is household formation. If your population aged 20 to 44 is growing, you have it. If it’s not, home price inflation is not sustainable,” he said.

There ya go. The slaughter of the innocents.

What could go wrong?

3M modified

Not long ago, in the Kingdom of 416, a nice Type A couple decided to sell the mid-town semi they’d just renovated. The lot is 26 feet wide, property taxes about eleven grand a year, asking price $1,699,000. With Toronto’s double land transfer tax, that actually works out to $1,760,000. To buy it would require a down of (mimimum) $355,000, with a monthly of $7,100. To carry that, you should probably earn at least $255,000.

By the way, a mere 210,000 people in the entire nation make that kind of dough. And of those just 64,000 live in the GTA, among slightly more than six million citizens who earn less. Envy.

But in the Kingdom, it was not enough.

There were six offers for this skinny, sexy sliver of an abode on Cottingham Street during the first week on the market, and the winner ended up paying $1,895,000. With tax, that’s $1,963,000. And the buyer was a single guy. A young professional, who apparently requires four bedrooms and three baths.

SEMI modified

Okay, so this isn’t typical. In 416 these days the average detached is fetching (say the realtors) $1,211,459. In the burbs, that drops to $816,000, but you then require a soul transplant. For the entire mega-region, including the sale of all condos, townhouses, singles and parking spaces (you can pay as much as fifty grand for one), the average property costs a few bucks less than six hundred thousand. Five years ago, that number was $431,000, or 39% less.

In those five years, the cost of a mortgage has barely moved – down just thirty basis points. In 2011, for the first time ever, household debt touched a level equal to 150% of disposable income. Today it’s 13% higher and growing at the fastest rate in half a decade. Over this time the price of oil collapsed by 70%, unemployment increased substantially, and economic growth fell by half. Canadians threw out Con governments in Alberta and Ottawa and replaced them with tax-and-spend, high-deficit, left-of-centre administrations.

So, in summary: Bad economy. Flat incomes. Scant rich people. Higher tax. Big deficits. Property inflation. Way more family debt. And yet we’re among the spendiest and house-horniest people on the planet – a land where it’s made to seem normal that some single dude in a leased Boxster lays down almost two large for half a house.

This worries some people. After all, mortgage debt is not like a car loan. It’s amortized, and can take most of a career to pay off. And while mortgage rates have been reasonably stable for the past five years, most economists don’t expect that to hold for the next five. Now that the future will be peppered with big government deficits and stimulative over-spending, it’s anticipated central bank rates have hit the floor and can only move in a single direction with those in the States.

Days ago Canada was listed among seven countries that are “most vulnerable to a debt crisis” within the next 36 months by US-based Forbes magazine. Analysts there (and elsewhere) aren’t too fussed about our shiny new Lib government borrowing bigtime, but rather they worry about the mountains of debt being accumulated by households without any visible way of paying it all back. If the real estate market just flatlines, let alone corrects, a lot of people will have gambled and lost. As for the larger economy, record levels of borrowing mean a ton of our GDP is being financed by Mr. & Mrs. Hipster, who may now need several years (or longer) to see incomes rise and debt ratios reduced. The conclusion – we’re vulnerable. To a jobs drought. Higher borrowing costs. A shock of any kind.

It’s not just Forbes, of course. Those guys are only the latest to look at Canada and wonder what we could possibly be thinking. Add in the IMF, the Economist, every major US debt-rating agency, the World Bank and now the Bank for International Settlements, which is the globe’s de facto central banker. Two years ago the BIS warned us to slow down on the debt binge and cited early indications of a coming debt shock. As a result, we borrowed more. Look at house prices in Van and 416 in the last twenty-four months.

The good news is that Norway and Australia are more pooched than us. And meanwhile the indie Parliament Budget Officer in Ottawa disagrees with Forbes that we will hit the wall by 2019. Instead, he figures it won’t happen until 2020. What a relief. At that time the amount of money we all spend on debt servicing – even with historically low interest rates – will achieve a record level.

This, he says, “will be beyond historical experience.”

Well, if the young professional who bought the semi above has a five-year, variable-rate mortgage, he’ll have spent $787,000 in down payment and monthlies by then to live there, and still owe $1.12 million. Let us pray for him.

Nah. Let’s just watch.