Entries from March 2018 ↓

Humans

Topher Brophy & Rosenberg

When human nature changes, so will markets. That hasn’t happened yet. And this explains a great deal about where we are.

So the maple economy is shrinking. The latest numbers, released Friday, surprised economists (like that’s hard) who had expected modest growth. Nope. Down she went. The culprits were a drop in oil production (prices were boggy) and a sharp decline in household spending and investment – mostly on real estate.

Realtors suffered a 13% plunge in activity. House sales slumped almost 20% across Canada. Mortgage originations crashed. But household debt continued to rise. And then, of course, the B20 stress test started to take effect, while Comrade Horgan began taxing the poop out of housing in BC.

So, the largest economic decline since 2015, after Canada had earlier led the G7 nations with explosive growth. It’s no coincidence our fat GDP number came in late 2016 and 2017 when the housing bubble was the most gaseous. Peak house brought historic prices, epic family debt levels and a surge in consumer buying. As I said – human nature. When mortgage rates were low and real estate values surging, FOMO kicked in, prompting people to drive property prices even higher, to borrow big, and spend large. That’s what economists call the ‘wealth effect.’ You think your house is inflating wildly, so you’re okay taking a HELOC or maxing your credit to buy stuff. After all, personal net worth is surging. Every homeowner’s a winner. Why not enjoy?

Well, FOMO is gone. Household spending is falling rapidly as people cut back. Real estate is going negative in most major markets. The trade picture with the US is cloudy. The dollarette is weak. And realtors are terrified.

“Seriously, I have never seen this before in my career,” says a broker-agent who’s been selling for the past decade. “A year ago buyers would take a few hours, at most, to come up with an offer. Now it’s weeks, literally, that they’ll spend thinking about things, and then come back with lowball stuff that shocks the sellers. And, yeah, they usually take it. Having said that, the buyers are almost gone”

Human nature often makes us do the opposite of what we should. When assets are rising, we covet them. When it comes to real estate, the more it costs the greater the house lust. Every silly price plateau becomes the next floor, allowing people to justify bully offers, multiple bids, blind auctions and over-asking deals. We put up with abrasive, arrogant rockstar realtors, greedy sellers, demands for $100,000 certified-cheque deposits and hours spent in cars idling outside while an owner decides who to shake down for more.

Without a doubt, people who succumbed to that paid too much, borrowed too greatly and roundly impaired their financial futures. Many felt regret, and walked. They’re now the sued. Owners who wanted to sell but didn’t out of fear for where they’d live missed the greatest opportunity in a generation (or more) to harvest unearned, untaxed windfall profits. More regret.

So now, the flip side. Sales activity has slowed to a crawl, and in most markets there are months and months’ worth of inventory available – thousands of listings from which to choose, with virtually no competition. Prices in some areas have already cratered 30% or more, and sellers grow increasingly motivated by the day. For detached homes (almost everywhere outside of a few isolated demand areas) there are no more multiple offers, no bully buyers, no blind auctions and no sleazy agent holding back bids to create maximum buyer stress.

In other words, this is purchaser heaven. A buyer’s market. Sale prices – even in crazed Vancouver – are almost always below the listing ask. Conditional offers are back – protecting buyers with assurances on home inspections and financing. If you make an offer, most often it will be the only one. The vendor – unless she’s a fool – will work with you instead of abusing and belittling you. In short, last spring was hell. This is puppy tummy.

But what happens?

Buyers retreat as prices and sales fall. The economy shrinks. The news travels. The meme spreads that houses are declining. The spiral intensifies. Making it worse – this is precisely the moment tough new mortgage regs take effect and politicians show up to bolt the barn door long after the horse has flown the coop (you know what I mean). The combination of Ontario’s new rent controls and foreign buyer’s tax, plus the mortgage stress test, Vancouver’s empty house tax plus BC’s 20% anti-Chinese tax, spec tax and luxury tax is too much to overcome. The market was rolling over anyway. Now it’s going paws-up.

This blog has teemed for years with snarky, whiny, self-absorbed, envious renters and malcontents who cheered market-killing politicians and prayed for the day they could buy without being forced into a bidding war. They were consumed with both FOMO and rage, supporting any and all government action they thought would punish ‘the rich’ homeowners, and level the field.

Well, kids, this is your moment.

Sales are down. Competition is gone. Mortgages still historically cheap. Sellers desperate. Prices tumbling. Realtors ripped. Bargains at last. You’ve moaned long enough. If you’ve wanted a single house, this could be the moment to try. Man up. Or shut up.

So, buy it

So many questions. So little time. Here we go again, despite the fact this blog threatens to turn into a cheap site full of tawdry advice for hormonal moisters or confused wrinklies. Yes, from ETF strategies to real estate predictions, relationship counselling, canine management and dating techniques, it’s all here.

“Love the blog,” says Quentin, in the mandatory suck-up.

“Question. I have a SFD in Kelowna I purchased in November 2017 and yes it was more of an emotional decision that has really got me doing a rethink. I paid $ 385k for it (nice old lady had owned) and I cleaned it up a bit, paint etc. Do I sit and wait or cash out and rent? The big seller right now is anything under $500k still has a chance to sell before the sky falls in. Make 60k clear and stick in a fund .Sounds like a plan BUT the issue is Kelowna rents are now min$1,200 to 1,500 /month + utilities for a one bed room condo or basement suite. My mortgage is $1,800 taxes included /month. Also the dog (10lbs of smarts) loves the yard space, why are rentals so anti-dog? The song “should I stay or should I go” comes to mind. Put me straight Garth, right hook to the chin.”

Yes, Q, K-town is pooched. It’s not coming back until the Dippers are tossed in the next election, along with their insane ‘speculation’ tax. Keeping Kelowna in that zone is capricious and vindictive and will have a tangible impact on the market. Expect to sell for less in a few months, and to have a longer wait for a buyer to show up.

Having said that, why do it? You bought cheap, built sweat equity, have stabilized your living costs and own a detached house for your dog to enjoy which still costs less than a Jiffy John in VYR. Kelowna rents will fall along with house prices, but you are building some equity and not gutting your income. Besides, it’s been proven girls dig guys with houses and dogs who hum The Clash.

“This may be a quick one for you and not as interesting as other stories you are getting from other readers,” says Thomas, corresponding from some soulless street in the burbs.

“I am 40 years working as a consultant with about 200k annual billing. My Inc. pays me and wife total 125k. I have two kids going to school next to my current house. This house was bought in 2013 and now worth 1M. Mortgage (400k) is up for renewal now. Bank is willing to give 500k at 3%. Wife and I have total RRSP + TFSA room of 100K. Since I am planning to keep this house for now (you may not like) until kids are done from this next door school, another 8 years.

“So here is my question, is it worth taking extra 100K mortgage and invest in diversified portfolio? If yes, should I get 100k extra mortgage or 100k as HELOC? Is interest tax deductible?

First, Tom, your income-sprinkling days are over, thanks to Mr. Dressup. The last budget put the kybosh on the ability to split your corporate income with your squeeze, unless she’s making a significant contribution and essentially acting as an employee.

Second, regarding the mortgage, remember that amortized debt is not cool. By agreeing to pay back a mortgage over 25 or 30 years you fork over a whack of interest which is font end-loaded so the lender gets its cut first. So if you borrow some extra for investment purposes it should be in the form of a HELOC. Yes, the rate will be higher (prime plus a half, probably), but you can make interest-only payments, then deduct 100% of that from your taxable income. In fact if you ask the bank can probably structure a mortgage/Heloc combo for you, perhaps at a lower rate.

The big question: should you borrow to invest? The answer: if you understand borrowing increases risk. If you intend on staying invested for a long period and can ignore volatility. If you put the money into the correct assets in the right weightings. If you have some professional advice in structuring the portfolio. And, especially, if she agrees.

“I don’t think I’ve missed a blog post in 6 years,” says Peter, genuflecting quietly.

“I may need talking off a ledge and figured who better to get mocked by than you?  I’m 35 years old and run a small e-commerce company.  I make ~$100K per year on paper with additional funds kept in the business.  I’ve got around $350K in savings spread across a maxed TFSA, some RRSPs, some non-registered and cash, mostly in ETFs; no debt, minimal monthly expenses.  The Fiancé makes around $60K/year with minimal savings.

“That’s the financial side. I’m currently renting with the Better-Half in downtown Toronto a medium-sized one bedroom with two dogs and a cat for a couple grand a month (I know it’s a steal).  That said, we’ve been itching to get out of downtown for quite some time and were considering some farm land north of Port Hope. We’ve got a solid business idea/plan for a sustainable and profitable agricultural operation that will take about 7-8 years to reach full production.

“The land we’re eyeing is 62 acres, 30 of which is cleared. Has a beautiful newer 2 bedroom home and we could probably get it for $850K on the high end. Anyway, my question to you is, do your recommendations regarding abstaining from real estate still ring true when the land is used as a business?  I’ve ran the numbers diligently and realize that it’s probably more beneficial for us to buy the land under a corporation and forego the capital gains exemption in order to benefit from the many years’ worth of write offs.  My hesitation lay on the obviously large initial investment that will gut about 2/3’s of my savings in order to give the city the finger while staying within a couple hours drive of both our families. Advice? All the best and keeping rockin’ it.”

Why would I mock a 30something who is self-employed with an online biz who aspires to having dirty fingernails and wearing wellies while driving the F150 to town for more seed and binder twine? Sounds like a reasonable goal to me and makes a helluva lot more sense than dropping $1.2 million on an urban semi on 17 feet of questionable dirt. Be careful with financing, since some banks will insist on a higher rate for a mortgage on rural property or anything to do with agribusiness. No way you’ll qualify for a rate subsidy until the business has proved itself, ditto for property tax rebates and other farmerly incentives.

Buying through a corp is a bad idea. Accounting fees are high, the capital gain tax exemption on the house will be eliminated and you’ll have to claim a taxable benefit for living on the property. Plus there are not really any costs that you cannot write off through a sole proprietorship, which costs nothing to set up or maintain accounting for.

Ah, just one question. Is this a weed ranch?