Entries from February 2018 ↓

Debtville

Davisville Moms is a web site about shopping, children, shopping, daycare, shopping, health, parenting and shopping. “DavisvilleMoms.com serves a vibrant group of intelligent parents who have embraced the small town feel of their local community, while loving everything big-city living has to offer,” it says.

Davisville is an itsy (2-square-km) hunk of mid-town Toronto where household incomes are twice the norm and the average house sells for $1.4 million. It’s affluent and upscale, but not wealthy and elitist, full of 5%ers and 10%ers, not the 1%ers who crowd into Lawrence Park, Rosedale, Leaside or other surrounding enclaves. In the GTA these days, this is the middle class.

“I came across this post today on one of my mom groups in Toronto,” says Janey, who reads this blog with a flashlight under the covers. “Thought you might be interested.”

As mentioned here yesterday, quietly – without any announcements or media coverage – one in five mortgage applicants are now being kicked out of the big banks, thanks to the stress test that’s set the mortgage bar at 5.15% or higher. Overall, fewer people are being approved for home loans and those who do are being okayed for less. This, plus rising interest rates, is why the decline in house prices – especially single-family homes (like in Davisville) – will accelerate during 2018.

The Moms post gives you another glimpse into the mess that awaits us. People who bought a year ago at peak house, with cheap, variable-rate loans, are screwed. Property prices in 416 are still more than 10% below the peak, while they’ve collapsed by twice that amount or more in desperate-housewifey places like Markham or Richmond Hill. Those who are coming up for renewal cannot count on it happening automatically in a declining market. Banks have every right to determine the value of the property at the time of renewal and may require a lump sum payment in order to renew within regulatory loan-to-value guidelines, if your home’s worth has faded.

Or, you can change lenders – and pass the 5.14% stress test. Or sell.

Recall that between 40% and half of all Canadians with mortgages will be coming up for renewal in 2018 – a tsunami of refinancing at a time when the cost of money is steadily rising after nine years of torpor, when mortgage regs have been seriously tightened, and the lefties running BC have decided to tax empty houses, all foreigners, speculators, rich people, cowboys, and everybody in Canada who owns a second property there. The perfect storm maybe.

Meanwhile, here’s an alarmist piece of news making its way ‘round the web. Since the Dipper budget in BC last week, says Thinkpol, asking prices on houses have been tumbling by double digits. Hoisted as a dubious example is a Richmond sprawler originally listed at $5.8 million now on sale at $1.58 million. Another in Richmond has fallen by 50%, to merely $2.3 million. (Every day this blog’s comments section contains more examples, thanks to the investigative work of one person.) Says the web site’s source: “This is just the tip of the iceberg. Many sellers are delisting and relisting to hide price falls and reset days on the market counter.”

Already the Van property market was in trouble, masked by romping condo sales and moister buyers who have no idea what lies ahead. The sales-to-active listings ratio for detached homes has plunged to just 11.6%, while it is above 57% for apartment units. The local board of trade says, “taxes don’t make homes more affordable”, a sentiment echoed by realtors (of course). Meanwhile the province’s finance minister has stated flatly that the government’s goal is to depress the market and drop prices.

And, no doubt, it will happen.

2018 has the potential to be the single worst year for residential real estate since the credit crisis. Yes, it comes after a decade-long romp as Canadians pigged out on borrowed money and were pushed by greed, house lust and FOMO into a buying frenzy and price excess. Those who got in and out at the right moments have done well. Untold numbers who bought in the last couple of years, or pushed their finances to the margins, stand to lose. As in the American housing bust, it’s these folks who have the power to bring the entire market down in a hurry. Idiot politicians only make it faster and deeper.

Prepare for a lot of whining mommas.

The misplay

Nicole is crestfallen. What looked like a great plan to downsize, reduce debt and nuke stress has yielded the opposite. What now?

“My husband and I bought a small, detached house in Toronto several years ago, had a kid, and then decided it was time to get out of the gritty city and move to the country,” she tells me. “It just so happened that we were trying to make this transition last spring when the housing market was going crazy, but that wasn’t our impetus.  We bought a lovely little house outside Hamilton (for less than the appraised value of the TO house… we were trying to be prudent), then listed our Toronto house in early May.  It didn’t sell and we only got one offer that was way under asking.”

“Our real estate agent suggested we try renting the house out for a year with the aim to put it on the market once the real estate situation had stabilized again.  We successfully rented it for a year for enough to *mostly* cover our costs (which involved remortgaging it to close on the new property and living with very tight budget that leaves zero room for things like home repairs).  The time is coming up to think about selling, but the detached housing market in that area of TO is still flaccid, with our house now likely having dropped in value by about $70K (according to comparable homes in the area).  If it sold as things look right now, we fear that we’d have moved and ended up with an increased mortgage, versus ending with a decreased mortgage (the original goal).  If we rent it out for another year, we don’t know if the value of that house will hold, increase slightly, or slip lower still.

“We are desperately trying to responsibly reduce our debt but we’re not sure what the Toronto market is going to do in the next year or so… would it be wiser to sell this year, or next?    What are your predictions for the detached housing market in west Toronto? Thank you kindly for any time you have for us on this matter.  Any advice would be greatly appreciated!”

What a classic set of mistakes. First, buying before you sell. Second, trying to time the housing market. Third, renting out real estate you should dump.

Gone, Nicki, are the days when anyone should purchase a property before the existing one has been listed and firmly sold . Real estate’s quickly become illiquid in many places, including once-sizzling Toronto hoods. Sure, I know people fret and cry out, “but where will we live?” after they’ve agreed to sell. But get over it. Buying is easier than selling and you can always move into the car.

As for renting out a place you can’t sell for what you’re asking, forget it. A bad move. Never is it cash flow-positive when you factor in the non-productive equity sitting there, plus financing, property tax, insurance, maintenance and the hassle of tenants. The rent received is lumped atop employment income and taxed to the max. And if the tenants decide not to move out, you can’t make them. Seriously. The negative cash flow on condos is bad enough. On detached places it’s truly grim.

Finally, N, you should have lowered the price and stayed last May until a buyer materialized. Yes, prices have fallen about 10% for detacheds since, and there’s more to come. Here are some recent facts to chill you and everyone else who thinks the Big Smoke real estate market will spring back this rutting season.

We’ve experienced only a few weeks of the mortgage stress test, but it’s absolutely having an impact. Mortgage brokers report the big banks are punting about 20% of all applicants, sending these people scurrying to credit unions, private lenders or guys making home loans from their vans. The borrowers often end up getting less money and paying more for it. That means they’ll pay less for a house, too.

But wait. The credit union option (they are not now required to stress-test people) may soon dry up. Quebec’s securities regulator is on the verge of demanding all credit unions in that province adopt the B20 guidelines by the end of next month. Biggie Desjardins is already voluntarily implementing it, and by the end of the year you can be sure giants from Meridien (Ontario) to Vancity (BC) will be following suit. More downward price pressure.

Plus, we’ll all be borrowing at higher rates this year. The next Fed increase in the States will likely be March 21st, and then two – maybe three- additional increases by the world’s key central bank after that. More in 2019

Said a big Fed poohbah on Friday: “It makes sense to think about three or four rate increases in 2018. We should be moving ahead with a rate increase relatively soon, in the near future.” The Bank of Canada will follow suit, lest the dollar tank and Trump flip out alleging our falling currency is a trade weapon. Safe to assume at least two hikes in Canada this year, taking five-year mortgages at about 4% and the stress test to 6%.

Already the impacts are being felt. Toronto sales down 18% last month. Resale detached houses plopping by 9%. Newly-built home sales crashing in January by 48%. More money draining out of land-based housing and flipping over into condos. Not good for you, Nicole.

Finally, more evidence our collective house lust has landed us in a bad place. In the last year borrowing on lines of credit secured by real estate jumped more than 7%, even as interest rates were rising. We owe a stunning $230 billion in floating-rate, demand loans (in addition to $1.3 trillion in mortgages)

Clearly people have been using their homes as banking machines, often tapping into the equity just to make ends meet and service other debts. A quarter of people are paying nothing on the principal and most HELOCs remain in place until a property is sold. As real estate loses value, those borrowings get harder to handle.

Get the drift, Nicki? The odds of your house restoring in value this year are probably zero. The odds of it losing value, overwhelming. And meanwhile you’re shedding money every month carrying two places, while subsidizing a happy renter.

Suck it up. List. Discount. Sell. And remember.