- the source for market opinions


October 22, 2018 | Stung

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.

Lately some readers have accused me (among other things) of a political bias. That’s interesting. I was an economic nationalist/commie in my youth. Then a Tory. Elected as a PC in 1988. Lost a party leadership bid to Kim Campbell in the summer of ‘93 when Mulroney left. Ran again as a Con in 2005. Won, but rejected the social conservativism the party was embracing (and was kicked out for saying so). Sat as an independent in the House of Commons. Then accepted an invitation to join the Libs as a special advisor to the leader, working on environmental issues.

So, to summarize, my political career has been knit with a single thread – standing up for what I believed in. As age and experience gathered, those views changed. If yours have not, you’ve yet to mature. Nothing is black. Nothing is white.

Real estate is a common focus here, and nothing impacts housing more than politics. Governments routinely reward or punish homeowners or buyers. They let you raid your tax-free RRSP to get a house, for example. They shower incentives on first-time buyers, then turn around and slap surprise taxes on long-time occupants. They try to control rents, and pass laws making it harder (stress test) or easier (zero/40) to get a mortgage. They set the terms of home loan insurance, decide what the taxation of real estate sales should be and create the conditions determining interest rates.

So following the creation (partially by government) of a massive national property gasbag, we’re now into years where politicians attempt to crush the market because houses cost too much. Duh. That’s why this pathetic blog has been talking politics lately – since what do-gooder but naïve pols try will have large consequences.

Already happening, of course. Just wait until you see the October housing stats. Meanwhile everybody with a high-end house should be looking at what’s going down in Vancouver.

Rising mortgage rates, anti-foreigner taxes, the vacant house tax, the spec tax and the high-end property surtax – all political creations – have conspired to kill the market for expensive houses in YVR. Inventory is piling up dramatically. Sellers cannot sell. Especially creamed are those people on fixed incomes whose sole asset is their home, or investors who believed in bricks and mortar rather than stocks and bonds.

The detached market is crumbling. So are prices, and rents. Here’s a report from local broker Petr Vokoun: “The speculation tax, as well as the collapse in the housing market, is definitely going to affect rental rates in the high-end rental market. A $3 million house that would have rented for $5,000 a year ago will likely rent for around $4,000 a month today. What we’re seeing is that rental rates have decreased up to 20 per cent from the spring of 2017, and it’s getting even worse. And when you look at the ratios, if a person owns a $3 million property, to get $4,000 a month for it probably doesn’t make financial sense for them.”

So there you go. Cheaper houses and condos now cost more because of increased competition for ‘affordable’ homes as mortgage credit tightens. High-end houses are tumbling in value because of excessive taxation, but remain hopelessly unaffordable for average families. Homeowners everywhere, the bulk of them middle-class, are losing equity weekly. But if you can afford $4,000-$5,000 a month in rent, then fall to your knees and give thanks to the NDP, who are making mansions more readily available.

See what a great job political interference does in a marketplace? This is why I am a fiscal conservative, but grew a heart.

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You remember Derek. Over the course of a year his story was told on this site, before he became a national news item – the poster guy for a real estate market toppled by its own speculative frenzy and indigestible avarice.

“When I went into this experience I had no knowledge things could turn out as they did,” he told me on Monday. “It was totally uncharted territory, and things certainly do not work the way people believe.”

Here are the facts: Derek listed his north-GTA McMansion in March of last year, just before the bubble burst. There were 18 frenzied showings in five days, followed by three offers, “with people waiting in cars outside. Insane.” The top two were for $2.25 million and $2.05 million. Derek picked the higher one after his agent did some investigation. “They were 1%ers with high income,” Derek says, “so everything looked great. We had no way of knowing they were so leveraged.”

The buyers panicked days later and walked, leaving only a partial ($30,000) deposit. Lawyers descended. The property was re-listed, eventually selling for $1.78 million after the market started to deflate. Negotiations, litigation and anxiety fell upon both parties as the legal bills mounted, and eventually a court date was set.

The judge ruled the former buyers were liable for the difference between the offer price and sale price, plus some legal expenses. The judgement: $470,0000. Derek rejoiced. The media pounced. His story was widely publicized as an example of what happens in a crashing market. Many people here called Derek out as greedy.

Then the buyers, who live in a million-dollar house and drive a Benz, filed for bankruptcy. That dragged on for months more before a final settlement was reached. At the end of the day Derek accepted $177,000 plus the deposit for a total of $210,000. To gain that he paid $120,00 in legal expenses, for a net of $90,000. He expects to receive a hundred grand by December, and the rest will be paid out in equal installments over five long years. Maybe.

So, I asked him, what have you learned?

“How deceitful people can be,” he said quickly. “This system is skewed to let people wriggle out of their debts and obligations. Sure, maybe I should never have taken that higher offer, since it was clearly bullshit. Maybe it never did pass the smell test – I just don’t know.

“In terms of the legal action, I would have tried harder to get them to the table, so we could have found some kind of negotiated settlement, instead of all that litigation.

“At the end of the day, we all got stung.”

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October 22nd, 2018

Posted In: The Greater Fool

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