Entries from September 2018 ↓

Crowd teasing

This was probably inevitable.

So what do you get when you combine a moister thirst for real estate with a cool phone-based app, blockchain technology, human greed, crafty marketers and investor illiteracy? Well, in Van it’s called “IMBY”, which means In My Back Yard.

Here’s the idea: crowdfunding. That’s it. People get the chance to use their phones to acquire shares in a company which buys properties they could never afford. Initially these “investors” will end up with a tiny piece (think one drywall sheet or three asphalt shingles) of a 100-year-old YVR house being redeveloped into a few condo units, and perhaps in the future a share in homes people are refinancing.

“We believe everyone should have the opportunity to invest in property in the communities they love,” say founders Michael Stephenson and Stephen Jagger. “That’s why we’re reinventing real estate investment.” This makes IMBY into Millennial clickbait, given the fact nobody can afford a house there anymore and because of the fabulous promise of “returns of 35%” that the founders are dangling.

The first project (and maybe the last) is a gut-house being bought for $1.6 million with almost all of that land value. Stephenson & Jagger think it can be rebuilt and expanded for $1.2 million, with strata units being completed in 2022, making it worth $3.75 million (seriously). Of course, with lots of approvals required, the cost of building, rising mortgage rates and a slumping Van market, risks abound. This is a purely speculative real estate play being made at a time when lots of professionals are pulling in their horns after a fabulous 9-year bull run.

But the hype is intense, since S&J are very good at selling.

“Our first development property on the IMBYx platform is sold out — there are 200 investors in this house,” Stephenson said in a recent media piece. “Bar none, real estate has been the world’s best investment over the last 150 years,” Stephenson says. “It’s an amazing investment class that most of the public doesn’t have access to because the barriers to entry are so high.”

Young, property-less investors may find the reality a little different.

In documents filed with the BC Securities commission, IMBY discloses that as of a couple of weeks ago (Sept.13)  only 86 locals had signed on, committing just $107,000 to the project. They also reveal the first allocation of funds raised will be to pay back IMBY’s founders for a loan of $688,634 – not to build out this little strata project.

Other things the app-flipping, smartphone, blockchain-struck, crowdfunding young ones should know: The shares they’re buying are illiquid. There’s no way to sell, trade or cash them in without the consent and approval of the directors. The total capitalization of the company is less than $1 million, and it has no revenues other than potentially renting this old property for $3,000 a month until enough cash is raised to raze it. In other words, if crowdfunding fails, so may IMBY. And no refunds.

There’s more. The money being brought online will be used to buy this property, not build it out. That will take a further crowdfunding of $1.2 million (expected soon). Naturally that will dilute the equity position of those who bought in early.

Additionally, the founders have zero experience as buyers, developers or builders, according to the Securities Commission filing. S&J are tech guys and real estate marketers. They spent most of the last decade together in the Philippines building out a successful web site that provides virtual assistants to realtors, plus an HR app and an instant messenger/AI platform. Clever boys. But hands-on, two-by-four guys they are not.

And what of this big plan to let homeowners go online, list their properties then have people nibble away at their equity by buying pieces of it for as little as $1? Yikes. A legal quagmire. Just imagine selling off 17% of your house to 231 “investors” and then trying to sell it. I understand having a shared economy and communal assets is all the rage these days, but is this not a perversion of what residential real estate is meant to be?

So while IMBY is a bold idea, a sexy app and perhaps a dodgy investment, it sure turns a corner on home ownership. This is the final admission houses in Van have become investment assets, not places to raise your family. By integrating crowdfunding into neighbourhoods these guys remove one of the last lines of defence against runaway, speculative pricing – the fact that when average families cannot afford average house, markets inevitably correct.

As an investment, this is unproven and illiquid. As social policy, it sucks. As an accelerator of prices, it’s genius. And for those who own 51% of the company that others finance, well, you know.

Let’s hope the moisters are not this naïve.

Ballistic

This may not end well, Part Deux. Days ago we told you the beavs are borrowing again.  Household debt’s rising even as interest rates snake higher and real estate wobbles. The decline in new mortgage originations is being made up by refis and home equity LOCs. It may be hard to believe on this blog where our grapes are peeled and the divvies keep rolling in, but the masses are pooched. They borrowed bigly, are swamped with monthlies, and would rather swap a new HELOC for a 19% credit card balance.

Remember mortgage broker Rob McLister’s warning? Rates could easily spike, not just swell. Five-year mortgages could be at 5.5% before you know it, with the mortgage stress test at 7.34%, squishing moister dreams of owning anything. If that were to occur, real estate might do a Cat 5 correction, rolling us back to 2010 pricing. (The average Toronto property way back then sold for $427,329, or 44% less than today.)

That warning is based on some simple assumptions: Trump  continues to gas the economy with tax cuts, weaker regs and protectionist walls; the US federal deficit goes wild, taking the bond market with it; unemployment stays at half-century lows and inflation pops because of wage demands. All of which, ahem, is now occurring.

And that brings us to Wednesday afternoon.

The US Fed and its new boss, Jerome Powell, will announce the eighth rate increase in this cycle. What’s also expected is a hawkish tone on what comes next. Markets think there’ll be another increase in December, two more in the first half of 2019 and then… maybe more. A Fed rate of 3% is considered “neutral” – not stimulating or choking the economy, and we’ll be there in a few months. That much is assumed. Listen to some of the voices:

“While the US dollar has been strong throughout the year, it hasn’t translated to weakness in US markets or economic numbers, so we have no doubt that as long as the stock market continues its upward trajectory it is an all clear sign to this Fed,” says Brett Ewing of First Franklin. Meanwhile Scotiabank’s Derek Holt adds: “I suspect that one of the Fed’s goal this week will be to nudge market rate expectations higher. It will seek to do so in a way that doesn’t derail U.S. economic momentum and is consistent with medium-term stability. To that end, several Fed officials have already come out individually to make a stronger analytical case for a more aggressive path of future hikes.”

At this point “aggressive” means a quarter point hike every quarter. That will get us to 3% lickety split – and add about 1% to Canadian mortgage rates. But some think there’s no stopping at that point.

   “Tomorrow they will hike rates again. That won’t be it,” says Bay Street analyst Ed Pennock. “Bilton of JPMAM global Multi Asset Strategy says that next year the FED will push rates past neutral, “ushering in a Period of genuinely tight monetary policy”.  It’s just going to increase the cost of capital. We know how that ends. In line with this, the 10 year Treasury is close to breaking out at 3.106%.  It’s a crowded trade.”

The danger, then, is that Trump loses control of the economy. Or, rather, that it does just as he hopes – getting more wired, extreme and ballistic than Elon Musk. The deficit hits $1 trillion and stays there as tax money ends up in the bottom lines of Apple and Amazon. Wages spike as corps compete for qualified workers (there are already over 6.9 million job openings – more than one for every unemployed person). Inflation soars. Bond yields spike towards 4%. Trade wars turn into trade deals, flooding markets with speculative optimism. The Fed repeatedly taps on the brakes, then jams them hard. And uppa she goes. The McLister scenario arives – in which case you will may not believe what happens to real estate here in maple.

This ain’t that far-fetched. Every element for an American melt-up is in place. Tax cuts. Reg reform. Full employment. Swelling prices. Consumer confidence. Record markets. Runaway profits. And a bully as the world’s most powerful person. The Fed’s job will be to ride herd on a stampede. Two hundred basis points is no fantasy.

Anyway, pay some heed to Jerome on Wednesday.  Then go lock your loans.