Entries from March 2019 ↓

The stretch

“Thought you might get a kick out of this Garth,” says Tom, in Toronto. “Condo pre-con at University/Dundas asking for over $1,750/sq.ft.  280 square foot studio closet for $500k. Ha!”

It’s true, believe it or not. You, too, can live in a garden shed-sized concrete box in downtown Toronto for $489,900 plus closing costs, property taxes and monthly condo fees. With 20% down (about $100,000) that little one-soul coffin would carry for roughly $2,800. Add in the opportunity cost of the downpayment, and it comes to $3,300. To afford that, you should earn about $120,000. And be braindead.

Pre-build Toronto condo sells for $1,755/ft

No wonder RBC says condo ownership is a b-a-d idea, at least compared to renting. Thanks to the stress test (plus mortgage rate hikes) the bank echoes what this blog’s been saying for ages – government policies have shoved demand down into ‘cheaper’ real estate, creating a frenzy and jacking prices. “An increasing number of buyers have been shut out of the higher-priced single-family home categories and turned their focus toward lower-priced options—mainly condos. Trouble is, this stronger demand for condos resulted in sharper price gains and affordability erosion.” And, thus, renters are winning.

Real estate in general, the bank’s latest report affirms, is pooched. Yes, the stress test and Dipper taxes in BC have crashed sales and dropped prices, helping make a house slightly more affordable but, sheesh, it’s mostly bad news. In Toronto: “Owning a home – especially a single-family home – is still a huge stretch for many buyers. So don’t expect the market to reverse its two-year, 31% sales decline anytime soon. If the early months of 2019 are any indication, there’s even further downside risk.”

What about Vancouver? “The market is in full-blown correction mode. Home resales have plummeted 58% since the peak in early 2016 with no sign of a turnaround so far in 2019. While various policy measures triggered and sustained the correction, Vancouver’s ongoing affordability crisis explains most its magnitude. The demand-supply balance now favours buyers and prices are falling.”

So, here’s the damage. Below is a city-by-city comparison of the median pre-tax income a family needs to devote to owning a home (mortgages, taxes & utilities) – and that’s after they’ve found enough cash to make a 25% downpayment. You can see the income requirement is 51% for the nation as a whole, and insane for YVR. (By the way, the acceptable GDS ratio in Canada – housing costs as a percentage of income – is just 40%. How is this not a disaster?)

% of pre-tax income needed to carry a house in…

Source: RBC, Pathetic Blog

Note that this is pre-tax. So, obviously, nobody can afford to live in Vancouver unless they’ve been climbing the property ladder with tons of equity, or are Bill-Morneau-style rich. No wonder the BC savings rate is negative.

As for that rent-vs-own question moisters are always posing, the bank says there’s no longer any contest. The premium for owning a condo in Toronto over the past three years has surged 140%. In Vancouver it’s 119% and in sleepy Victoria, 102%. Sure, rents are higher, but there’s no valid financial argument for purchasing. “This means that buying a condo is a bigger step up from renting than it’s ever been in these and other cities,” the bank concludes.

What next?

Mortgage rates will decline a little as conditions cool and central banks recoil. That should bring the stress test limbo bar down at least a quarter point – but still stuck around 5%. Not much help. Meanwhile the economic slowdown is poor news if you’re looking for a raise, a better job or to buy a house with real dirt. So, competition should remain stiff for condos, regardless of what stats the bank or anyone else trots out. Real estate reigns as our national mania, the creator and then destroyer of wealth.

Just pity the kid who walks into outsized debt to buy a 279-foot tiny home in a Toronto tower.

The good news? It makes sense, the banks says, to own in Regina! And Halifax is “hot”. So there ya go. Death by debt in 416. Or boredom in the flatlands and boonies.

Easy choice.

 

So?

How much do you owe? Seriously. More than you make in a year? Or two? Is your net worth positive or negative? Have you ever thought about it?

Most people don’t ask such questions. Now that the economy’s slowing, central banks have turned into kittens and a nervous government’s paying moisters to buy houses, it’s time to reassess. Are you in a safe place? Can you weather a debt storm? Because there may be one.

First. Let’s compare Trudeau’s Canada with Trump’s America. To be fair, neither leader is directly responsible for the astonishing graph below, but they both influence it. In Canada politicians encourage borrowing, spending and debt with endless real estate incentives. (We got two more last week.) In the US a far higher proportion of households hold financial assets, having learned the lesson that house lust can be costly, even deadly. You can see below exactly when the American property bubble burst – and how that encouraged a debt purge. We have yet to follow.

Here’s the latest news, updated in the last few days by StatsCan.

In the final three months of 2018 our debt load expanded faster than incomes. A new debt-income ratio of 178.5% was set. Then there’s a debt service ratio – the amount of money people must shovel out monthly to carry their loans. Also at a record high, and building for more than a year. So wages aren’t keeping pace with payments.

Together we borrowed a fresh $21.2 billion in the Q4 of ‘18. That brought total household debt to $2.21 trillion, which is bigger than the entire economy. Of that, $1.44 trillion sits in mortgages, with $769 billion in consumer credit, of which $243 billion is in HELOCs, secured by real estate.

Those numbers are hard to digest. They suggest people have borrowed so much money against the future that it’ll take decades (forever, if we don’t stop borrowing) to move the needle. Of course, if we keep buying houses we can’t afford, things will get worse. Until they pop. That day is closer than it was five years ago, or last spring.

But even without a real estate disaster, swelling debts and inadequate incomes mean families have less to spend on essentials like cars, iPhones, Netflix and tats. Since two-thirds of our economy is based on consumer spending, this pretty much ensures a slowdown is coming.

Look at car loans, for example. Delinquencies are at a post-GFC high, and more people are opting to lease rather than buy since rates increased. It’s all about the lowest possible monthly payment – which is why we’ve seen insane developments like 96-month repayment plans for hunks of metal that might last 72 months.

Meanwhile the debt disease is evident in plunging RRSP contributions, plus TFSAs that are just 10% maxed out. Four in ten people report they’re one missed paycheque away from a crisis. Our national savings rate has dropped to 0.8%. Yikes. From 1981 until 2018 it averaged 7.8%. In the US the rate is 7.6%. This is the result of Canadians carrying the biggest personal debt load (measured against the economy) in the entire western world. A bank survey found 32% of citizens between 45 and 64 have saved nothing. Zero. They’ll be retiring on the piteous public dole.

A constant theme of this pathetic blog is that our fetish with real estate has created this disaster-in-the-making. Close to 70% of us have property, but a minority have the liquid assets necessary to finance their lives, while they are carrying epic amounts of debt.

Of course, you’re not included in any of this. You come here. Must be smart.

But nobody will be untouched if the debt tsunami hits. Here are six things to consider doing. Soon.

First (duh), stop borrowing to finance consumption. Second, only borrow if you can achieve tax-deductible debt, used to increase liquid assets. Yes, there is logic to removing equity from real estate and placing it somewhere with a better future.

Third, calculate your net worth (assets less debt). Then apply my Rule of 90. The proper percentage of NW to have in RE is 90 less your age.  So a 25-year-old debt slave can still have hope. But a 65-year-old Boomer best beware. Fourth, rates are falling as the economy softens, so use this as a tool to reduce high-cost debt.

Fifth, strive for balance in your portfolio. As central banks add monetary stimulus (lower rates), bond yields will fall more and bond prices rise. You need some, since they also counter inevitable volatility on equity markets. Meanwhile preferreds have been sideswiped by falling rates, but offer a 4.5% dividend rate and cheap taxes. Love them both.

And, six, don’t have home country bias. Go beyond maple. Canadians have created their own made-here debt crisis which could whack the dollar and stifle economic growth. Nothing wrong with some exposure to the Canadian equity market, but be at least equally weighted in both US and international securities. Plus, as oft mentioned, it’s wise to keep a quarter or so your portfolio in US$.

So, how much do you owe? What’s your net worth? Are you ready?

About the picture:

“Saw these handsome doggos on the way to my son’s training session the other day in Calgary,” says Matt. “Looked like any other family to me. Happy Mrs, gruff Dad, irritated teenager. Thanks for the blog!”