Entries from March 2017 ↓

My folly

It was a year ago that I last wrote about buying real estate. There it was. Pathetic. Lonely. Unloved. Old. Its bricks disintegrating, paint flaking, foundation sagging, with its dusty guts full of knob-&-tube, asbestos and dead bugs. But I bought this pile of misery because it’s a cool place. Potential. Then I told Dorothy. After all, it’s easier to ask forgiveness than it is permission.

Well, time for an update plus all the evidence you might need that I actually do like owning property, especially oddball places with history. It was built as a boozy hotel 130 years ago when men were men and quarried rocks for a living in the Credit River valley northwest of Toronto. Then it became a post office, a general store, biker hangout, restaurant and failed vegan salad bar before spending the last few years quietly disintegrating.

Largely original in its form, sitting on a big lot in a little hamlet with a creek running through the back and tourists flowing through the front, the structure cried out for some insane person to rescue it. So I did. Over the course of four months the dead, decaying bricks were pried out and replaced with ones made to match. The foundation was jacked. Stones inserted. Cement laid. The interior floors gutted, wired, plumbed, foamed and rebuilt. Upstairs the original residential quarters were renewed, downstairs a new retail space created.

Yes, it cost a fortune. Even more than this free blog pulls in each week. But the old lady had come cheap, and the work was creative with a sense of worth that doesn’t really come from turning your basement into a man cave with sex lights. Instead, there was a simple elegance to things built in the 19th Century which, almost a century and a half later, still speaks to people. This pile, I suspect, will be standing long after the $1 million houses being built down the road in Brampton – of particle board, glue and face brick – have been dozed.

So a year ago, my folly and new love, the Belfountain General Store and ice cream parlour, opened for business. I found myself on Saturday mornings cleaning the grounds, putting out the umbrellas, mowing and performing minimum-wage labour with profound pleasure. Of all the things I’ve done in this wizened, imperfect life, whether walking into the House of Commons or speaking to ten thousand people, sweeping a patio has become oddly relevant. Now I realize I’m house-proud, too, and it’s not even a damn house. Just an old place to hang out with people who come to hang out.

So there are 19 folks who have jobs in a little speck of a place in Caledon who did not work there before. I am proud of that as well. They bake muffins and croissants, craft bespoke sandwiches and soups, scoop boatloads of ice cream and make people laugh and stay. Largely they’re kids – high school or university, with a couple of older managers. Locals, too. Most walk to work. As people did in 1888. There might have been a horse of two involved, though.

It’s not all bucolic. The health inspector has made her mark, since the store draws its water from the river as it did in the distant past, and must be pure. Municipal politicians are always fussed about traffic and the number of visitors who want to flock here. The property is subject to the rules and regs of the Town, the Regional government, the Niagara Escarpment Commission and the local conservation authority. The time required to keep everyone at bay is epic. Serving meals to people means a great responsibility – coolers always at the right temperature, hand-washing stations pristine, ovens set correctly, food properly prepared and fresh.

To help with that, Lorna, the manager, last year established a veggie and herb garden outside the employee entrance, so the kids can nip out for a killer tomato or a sprig of something exotic. After the doors opened, people came. Getting started may have cost too much, but the business then paid for itself, met payroll, shelled out taxes and financed all that ice cream. It’s a safe bet I’ll never make a dollar of my money back, but neither will I care too much. It’s just too much fun sweeping.

So after being closed for a few winter months, the store opens again for the season on Saturday. Getting ready involved a mess more painting, redecorating, restocking with gourmet hand-made doggie treats, local preserves and unique gifty stuff. My assigned job that morning is to go and wire up the sagging cedar rails on the perimeter fence, put together the new sign announcing the enhanced seven-day-a-week operation, drag picnic tables around, and stay the hell out of the way.

It’ll be a good day.

Collateral damage

A precursor of the US real estate mashup was serious trouble at big lenders like Countrywide – famous for agents giving loans to people who could breathe and sign a document at the same time. Those days of pre-bust madness were characterized by falsified mortgage aps, NINJA loans (for folks with No Income, No Jobs and no Assets), interest-only payments, fat home equity borrowings and adjustable-rate mortgages, offering people ‘teaser’ rates for a year or two – just to get them into epic debt.

Of course nothing like that could happen here, right?

Hmm. Well, we have interest-only payments, a burgeoning HELOC industry, teaser rates and now the largest independent lender stands accused of application fraud. It also happens that Home Capital Group is Canada’s biggest sub-prime lender, doling out billions to people the banks found too deplorable to actually qualify as homeowners.

How serious is this? Are there lessons?

Serious enough that CEO Martin Reid ended up with a big boot mark on his pinstriped derriere Monday night as the company fired him. “Home Capital requires leadership that can bring to bear a renewed operational discipline, emphasis on risk management and controls, and focus on improving performance,” the board of directors said in a release, as the coyotes from the Ontario Securities Commission circled outside.

This was not enough to keep the company’s stock from being spanked badly on Tuesday, shedding more than 9% of its value in a single session, taking it back to 2010 levels. Home Capital has been an investment star for years now, soaring from around a buck a share to a high of $55 three years ago, before being pummeled back down to the $25 range now. There could be more blood coming.

The company has received an enforcement order from the OSC and the regulator is apparently unsatisfied that Home Capital did enough in response to evidence agents fibbed on mortgage applications for at least two years – handing out loans to borrowers who simply didn’t qualify to get them. About 45 brokers and brokerages were punted after the news broke, but it’s probably a safe bet that where there is smoke, fire’s not far behind.

The OSC has also served a number of company officers, directors and former execs with enforcement orders, which Home Capital admits are related to the NINJA-like fraud. Making matters worse is a class-action lawsuit that’s been filed against the company claiming it lied on public disclosures in 2014 and 2015, which helped drive company stock into the stratosphere and misled investors.

Mortgage changes brought in last October have already hurt HC, making those poor, house-horny moisters pass a mortgage stress test, knocking about a fifth of them out of the market. If Ontario makes good for a foreign buyer’s tax or a speculator levy in next month’s budget, there’ll be more grief at head office.

Is mortgage fraud and lax lending rampant in Canada, or is this just a company caught with a mess of rogue agents? How many clients actually received loans to buy houses they probably can’t afford? We’ll see. Meanwhile the real estate market continues to be driven higher by borrowers who can legally use credit cards for down payments or whose parental loans mask their income deficiencies. Realtors push values higher with blind auctions and engineered bidding wars, while lenders offer 1.99% short-term financing in a world where interest rates are destined to plump.

Meanwhile, CMHC’s decision not to offer mortgage insurance for homes above $1 million – in a market where the average is $1.5 million – means buyers are forced to have 20% down payments, a big chunk of which comes from outfits like Home Capital, and the rest from the banks. This is why 65% of the $2 trillion in personal debt (rising daily) is in residential mortgages and real estate borrowings. Outta control.

As for DIY portfolio-builders, if you need a fresh example of why owning individual stocks is gambling, not investing, here ya go. Home Capital’s share values detached from reality about the same time houses did, and now we know there are enough irregularities within the company to cost Martin Reid his head and have the regulators kicking in the doors. You’re far better off with a broad-based ETF owning an index than trying to score with a handful of companies you really know nothing about.

And what does this say about the Canadian housing market?

Maybe nothing. Perhaps these are just careless, greedy dudes. Or maybe they’re harbingers.