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August 13, 2015 | Marketing

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.

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As I reported, more than 40% of the properties listed for sale in YVR or the GTA this year have not yet sold. So when realtors publish monthly stats and trumpet “average” prices, this number reflects only the best six of ten on the market. It doesn’t hint where average list prices have settled, nor give any useful market context. That’s deliberate.

The Toronto Real Estate Board, for example, has stopped reporting mid-month numbers and no longer broadcasts the total number of listings. In other words, potential buyers are blind to how much choice actually exists and unable to put numbers into perspective, guaging market conditions. So much for transparency, as the real estate industry goes in the opposite direction to the financial one.

So, we get this:

The MLS® Home Price Index (HPI) Composite Benchmark, which accounts for benchmark home prices in communities throughout the TREB market area, was up by 9.4 per cent year-over-year in July 2015.  Over the same period, the average selling price was up by a slightly greater amount, growing by 10.6 per cent annually to $609,236.

The result? Your mom, your idiot BIL, your house-lusty spouse and everyone at the office thinks all houses are appreciating at 9.4% a year. And now along comes a desperate, election-fighting federal government trying to stop an orangy wave of Millennial angst with candy like a reno tax credit and enhanced RRSP-as-downpayment plan. Suddenly your friends’ heads start to explode. This is just too orgiastic.

So we see the kind of email Jeremy got yesterday from marketers churning yet another condo tower in downtown Toronto, where speculation is rampant. “An amazing investment opportunity,” it says. “Join us for an exclusive one-day sale. We are unveiling the Insider Collection.” And in big type, “35.5% Return on Investment in Year 1 including Capital Appreciation.”

Hot damn. Thirty-five per cent is even better than 9.4%, so where do I sign?

Well, here’s the realtor math:

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On a purchase price of about $350,000 for a 578-foot box (that’s over $600 a pied – ouch) the hustlers say the thing can be rented for $2,197 (a stretch, seeing a bigger unit in the nearby prestigious King Eddy goes for less) and return almost $6,000 a year in positive cash flow. Add in the principal part of the mortgage payment, and the income turns into $11,500. Add in guaranteed annual appreciation of twenty grand and, presto, you make 35% on the downpayment of $87,850.

Here’s the real world math: Put down $87,850 plus closing costs (including $7,000 in tax) and you have $95,850 into the deal. If this were invested at 7%, it would throw off a little over $6,000, so after a year you’ve really tied up $102,050. Even accepting the unrealistic rent, the mortgage, condo fees, property tax and insurance cost $1,950 a month, leaving $250 or a little under $3,000 a year in positive cash flow. It’s 100% taxable, so after-tax (at a 35% rate), that’s $1,900 – or a return of 1.9% on the ninety-five grand in after-tax money you tied up, which is really a hundred grand given the opportunity cost.

That’s the way normal people look at things – cash in, and cash out. The realtors, in contrast, count part of your mortgage payment as a return on investment (it’s only paying back debt), and then slather on a for-sure bump in the value of your unit. One is voodoo accounting, the other’s fabricated.

Imagine someone trying to pry $87,850 out of your hands to leverage up $350,000 in ETFs, stocks or mutual funds making these promises – guaranteed monthly returns, guaranteed annual increases in the capital value and counting your loan payments as capital gains. The regulator would have them hanging by their private bits high above Bay Street. And yet these condo hucksters can snare unsophisticated investors into their web of malinformation and greed, knowing it will be without consequence.

This is why the market is so laden with risk. Add to it the concerns CMHC expressed yesterday – that house prices in Toronto have outstripped income gains at the same time there’s a tsunami of new condos about to hit (over 50,000 are now being built). Meanwhile we could be facing three more years of an oil-induced funk, says Moody’s Investors Service, with the economy already bordering on recession.

If the men running to be prime minister cared about the people they serve, we might have more justice and vision, with less spam. See why I sucked at politics?

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August 13th, 2015

Posted In: The Greater Fool

One Comment

  • Avatar Holly Hallston says:

    So Garth, what’s going to be the best way to short the carnage whent the, you know what, finally hit’s the fan? May as well get something positive out of the collective koolaide drinking stupidity.

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