- the source for market opinions


July 7, 2015 | Lost

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Kim’s so typical. “Every time I get horny for a property and consider making an offer,” she says, “I just log into your blog and the feeling goes away with 3 minutes of reading. I need an occasional dose of reality, even if you make for a depressing read.”

Depressing? Kim. Baby. I’m here to save moist virgins like yourself, from yourself. Especially now.

BTW, here’s her story: 30, makes 100 grand. Defined-benefit pension, Enough saved for a 20% down on a $400,000 box. Other assets are a TFSA with $15,000. Period. Single, no kids. “Expensive hobbies.”

“I love this condo, and also feel as though I wouldn’t have any problems with the mortgage and also managing to save each month. However, I’m not sure if this is a good investment, partly because it sits on leased land (10 years) and is 700 square feet. I think I know what you’re going to say. What concerns me the most about this property is:

1) It’s on leased land. No ownership for me. What does that do to resale value, particularly if the market softens.
2) Why are there so few lenders offering mortgages on leased land?
3) Should I wait and see what happens in the market? Is it possible that in a year or two from now prices will be lower?
4) What will my resale value be in 5-10 years (at most!) when I want to move out of my small, 750 sq. foot condo?

“I’m not sure if I’m reluctant because it’s my first purchase and apprehension is normal, or because deep down, I know it’s a poor financial decision. Thoughts?”

Now, is Kim writing to me because she’s horny again and needs to be hosed down, or because she knows it’s a “poor financial decision” and wants to be rewarded for her insight? Damn kids. So confusing.

Anyway, it’s an easy answer. Don’t do it. Buying a condo is bad enough in this environment (peak house) and because you don’t own any actual dirt – but on a leased plot it’s even dumber. That alone is a deal-killer. Then, Kim, why would you want to throw $70,000 into an apartment and take on a $300,000 mortgage which is 100% guaranteed to reset at a higher rate in five years – when you can lease the place for far less than the loan payment, strata fees and property tax?

You’d end up with only a $15,000 TFSA, less monthly cash flow and a dubious investment that will likely turn negative. And you think you can live in 700 feet for the next five or 10 years? What if you stop being single? Lose your job? Gain weight? Get a dog? Or need to move to Winnipeg? Why the lust for buying a unit that you can live in as a tenant with no debt, less cost and more freedom? I don’t get it. Like I said, especially now.

This is not the time to buy, no matter what the herd’s telling you.

As mentioned yesterday, the Canadian economy is in, or entering, a recession. That simply means growth is negative. We’re shrinking. Fewer jobs. Oil is a big part of it, now barely above fifty bucks. Count on a wave of new layoffs in the energy sector over the next few months – affecting everyone. The latest trade numbers suck, again. Big deficit in May, and for 2015 to date we have the largest imbalance on record. That means more money is leaving the country than coming in ($13.6 billion). It’s way worse than in 2009.

And what are people doing – at least in YVR and 416? Yup, going gonzo. Real estate sales last month were up 18% in Toronto with average prices spiking 12%. The average SFH is again over $1 million. BMO economist Sal Guatieri doesn’t like this one bit. “The bigger question is whether the ‘side effects’ of the current (and future) low interest-rate environment will send the patient back to the emergency ward if (and more likely when) prices correct lower,” he said Tuesday.

As this pathetic but manly blog has tried to point out lately, there’s no good outcome here for homeowners. Higher rates (inevitable, led by the US) will knock down prices and equity in the future. Lower rates (if the Bank of Canada does it next Wednesday) just increase borrowing, inflate prices, create additional uncertainty and set us up for a bigger shock to come.

Anyone paying the new, bloated price is embracing an historic level of risk. Those buyers (11,992 of them in the GTA last month) are gamblers, hitching their financial futures to a fading star. After all, rates in Canada (which have given us high prices) are low only because the economy’s on its knees. Is this the time you want to be paying the highest price on record?

Hopefully, Kim, you’re now depressed and unaroused. I have that effect on women.

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July 7th, 2015

Posted In: The Greater Fool

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