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October 2, 2018 | Punched in the Gut

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.

First, a moment to reflect on poor Harrison Houde. This wounded dude scraped together every cent in the world to buy a Vancouver condo, which he then leased to some substance-addled pimp who turned his space into a wild brothel littered with sex and drug droppings. At least that’s what H’s mom said when she went to investigate.

So what does an amateur landlord do when tenants sully the premises? Moan and snivel, of course. Then call his parents. And, natch, start a GoFundMe page . Says blog dog Mike, “When your investment turns on you, time for your friends to pay up? Wow…just wow…”

Mike thought you might enjoy this. Bandit and I did:

I am at a loss of words, within the last 5 months my tenant turned my only apartment into a brothel / prostitute ring of some sort, with severe damages to my once mint apartment, and even stole paintings, and ruined furnishings. It was disgusting what was left, trash cans filled with used condoms, heroin, drugs, a dark web internet modem, burner phones, the nightmarish list goes on, it’s atrocious…. He hasn’t paid this months rent, and was apparently subletting it; but more likely using it to pimp out multiple women. I am in shock that this happened, especially considering the luxury building it happened in that has 24/7 concierge, and security, and a ban on short-term rentals.

You may think; if you can afford to own the condo, you can afford the damages. Here’s my story; I work in the film and entertainment industry and used ALL my earnings over the course of 5 years to get a mortgage on this condo 4 years ago in Vancouver… I am in shock when he didn’t pay this month and my parents gave notice to inspect the unit after the tenant didn’t even respond to multiple requests from us asking for rent payment when he was late. My parents went into the unit, and what they saw was atrocious… I can’t believe this has happened. I am in shock, and tears, and I feel like I have been punched in the gut.

Estimate of damages, stolen furnishings, loss of rent, and loss of an extra month to deal with this / fix the apartment to re-rent to a new tenant will cost upwards of $10,000 Canadian. A cost myself, nor my parents can afford. I am currently living month-to-month like many hard-working individuals, with no savings after moving to LA to further pursue my dreams…

We had called the tenant / landlord BC board multiple times, and you cannot just kick out somebody or change the locks, (under these circumstances we were allowed because of the illegal activity, and severe damage) but it happened so quick, and the BC tenancy act make it difficult to evict a tenant, almost all the rights are with the tenant and not the landlord. Many of those laws certainly make sense! But in special cases, like this, they simply do not… and really can screw over a landlord, and their investment.

The moral of the story: screen your tenants. Second moral: never buy a condo to rent out. Third moral: especially in Vancouver. Fourth moral: If you’re going to have a brothel, it’s best to rent.

Okay, now a follow-on to the USMCA piece published here yesterday, because in the last 24, many more people are supporting what this pathetic blog prophesied: we have absolutely, for-sure turned the corner on interest rates. Hope you locked in.

Look, for example, what JP Morgan just said: “The era of zero interest rates in the world’s major economies ended with the Federal Reserve’s decision to raise borrowing costs last week.” In fact five central banks hiked in the last week, the most in any seven-day period since records were first gathered 17 years ago. Exactly 12 months since the crash of Lehman Brothers, which ushered in the GFC and emergency interest rates, they are over. Kaput. Normalization is now occurring in country after country, led by the US Fed which has hiked nine times, going from 0% to 2.25%, on its way to plus-3%.

Now, look at what’s just happened to bond yields in Canada since the new trade agreement was negotiated, then announced – a seven-year high:

 

This is why you should expect mortgage rate increases in the next short while, and why the Bank of Canada will move on the 24th. Three or (more likely) four increases lie ahead in the next nine or ten months, which will add about 30% to the cost of a mortgage. The impact on the real estate market will be material.

After all, as we’ve pointed out so many times, there is a perfect, textbook, inverse correlation between rates and house prices. Property values soared not because of Chinese dudes, money laundering, evil realtors or your acumen in buying some, but almost exclusively because credit’s been cheap and people have borrowed themselves into oblivion.

Now that the Bank of Canada knows a Trumpian trade war against Canada isn’t happening, a major economic uncertainty has been removed. Our rates can restore along with those in so many other jurisdictions, ending the distortion in asset values which cheap money has caused. Real estate in bubble markets is most at risk. Equities will also be impacted, but with record corporate profits, economic expansion and trade peace, there are reasons to keep buying them. Besides, people don’t take on 20x leverage to build an ETF portfolio the way they do to get a condo in, say, Vancouver.

Harrison may be screwed in more ways than he and his mom imagined.

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October 2nd, 2018

Posted In: The Greater Fool

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