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November 16, 2018 | ‘It Has Begun’

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.

After all of the reports, data, stats and polls, let’s finish off this dreary week with some real-life reasons why Canadian real estate – at least as we know it in the bubble regions – is a big-risk place to put money. The supply of greater fools is being exhausted. We’re hitting the wall of affordability. Even the rich are vexed.

Herewith two examples of high-income, professional people –  in Van and 416 – seriously worried about what they see around them. Should they roll the financial dice and buy into markets that are clearly irrational? Or be prudent and wait? But what happens if everyone’s gone completely bananas and continue to inflate properties? Is FOMO warranted, or does  logic dictate it’s better to sit on the curb?

Meet Alice and Bev. Both blog dogs. Trying not to be roadkill.

In April of 2016 Bev, a corporate president, and her husband moved to Vancouver on a corporate transfer. “We didn’t know it would be the worst possible timing,” she says. Here is the experience:

“We thought we could come from Ontario and buy a home after selling ours, we knew it would be smaller, but um, no. Wow, were we wrong. Worked with a great realtor, yes there are a few of those, I was once one myself, we learned quickly that we could never own a home here. The crack shack next door to the part of a house we pay $5000/month rent for sold for over $2.6 million. It’s a dumpy teardown, nothing updated since 1970. The roof had a tarp, selling owner told me the basement leaked and mold permeated.  It is now stuffed with 6 students in a 2 bathroom, with beer bong still out front from the summer and knee high grass.

The house we rent was worth $3.8 million at peak. It should go for $550K in Collingwood, ON.  Even on a President’s salary, we didn’t hold a hope. Coquitlam was $1.8 million for anything built in last decade. We did heartily try to find that unturned stone, a decent, fairly priced property. Uh uh. I recall the Customs House project starting up in Victoria harbor, converting that lovely old building to condos. We thought, well maybe Victoria is affordable. Are you kidding? Everything started at $1500/sq ft. Every project in Vancouver started at $1500-1800/ft, and they were taking price increases to $2000 + up soon. For particle board, cookie cutter, cheap Ikea type cabinetry. Identical in every development, grey. How long till they all look old? And these are small places! Nothing over 1200 sq ft, usually hovering around the 1000 mark.

Checked out the Horseshoe bay development…the West Van sales office was stuffed with Lambo-driving shiny-shoed salesman snobs, and starting at $1800/ft. To live way out there with nothing nearby? We told both of those developments, give us a call when you come back to earth. Looks they are all starting to!

Oh, and there are still a lot of empty houses in Kitsilano. One that sold last spring by us couldn’t be emptier, no redevelopment permits or orange tree wrap. I see them every night, walking the dog. Meantime, plotting our return to Trillium land ASAP so we can afford to live.

By the way, Bev just emailed me a promotional piece for a “Black Friday Sale” on townhomes in Seymour Village – a hefty commute across from downtown Vancouver.  “It has begun,” she says. “We couldn’t believe our eyes – this it the very first “discounted pricing” for a new development we have seen in YVR yet.” As this pathetic blog pointed out the other day, prices have indeed started to fall as BC is blanketed in new NDP taxes. But sales are falling, too. And ‘affordable’ is a distant mirage.

Far, far away, but sharing the same anxiety, Alice and her husband try to balance fear of debt with desire to own. Even for two lawyers, there seems no clear path forward. It takes at least a million to buy half a dodgy house in a gentrifying part of town that’s 45-minutes distant in rush hour from the downtown towers.

“Love you and figured I would write to you to see if you could give some advice about a high-income-millennial-renter situation. Our combined annual income is $230k plus bonuses (likely to increase in the next couple years). We really want to buy a house, but we live in Toronto and we’re pretty conservative people, so we’re scared to death to go for it.

We’ve been renting a concrete shoebox for five years now, saving and paying down law school student loans. We have about $150k for a downpayment/taxes/closing costs, plus we have nicely funded RRSPs in 50% fixed income-50% equity portfolios.

We’ve been looking for a house for the last 12 months. We’ve made some offers and lost, made conditional offers and backed away, and passed on more houses than I can count. We really feel like we’re “homeowner” type people, we want to get something rough and fix it up over time, and we feel extremely unsettled as renters.

I saw your post today about prices not falling in the 416, and I’m really interested in hearing what you think about our search (I was surprised to read that sentence on your blog). We know we want to buy a house at some point in the next year or two, it has to be relatively close to downtown, and we’re not willing to consider a condo. Our mortgage broker says that we can get a five year fixed rate at 3.39%, so our monthly mortgage payment would be about $4600 (leaving some of our “downpayment” cash as an emergency/repair fund). That $4600 monthly mortgage payment *should* be doable on our $12k/month take home (pre-RRSP funding) pay – but are we crazy to go for it?

I guess the shorter question is – are we better off buying now, or renting for another year and then buying? Will rising rates bring entry level homes in prime Toronto neighbourhoods down in price, or will they become even more expensive as more buyers are pushed to compete in the sub-$1M bracket? I think what we struggle with is that this is obviously an uncomfortable amount of debt to take on, but maybe that’s just the new normal – if it’s going to be the case for the foreseeable future that rowhouses in Leslieville cost $1M, we might as well do it now and like where we live. Anyways thanks again for considering writing about it.”

Bev, who is older, says no to debt and silly prices. Alice the younger is not so sure. She may end up with a needs-work slanty semi costing five grand a month to carry and requiring two hundred in structural work. So is it worth taking on $900,000 in debt and unknown liability?

Being impertinent, I wrote and asked Alice if they’re going to have kids, how many and when? Yes, she said. Two. Within a couple of years. Because young barristers don’t have pensions and seldom paid mat leave, starting a family could be a financial bomb. But they want one. They want it all. They’re human. Well, as much as lawyers can be.

No, urban housing will not be clobbered like the suburban stuff.  At least in Toronto. But it will be impacted as credit shrinks and even high-earners like Alice and Bev recoil at what’s happened. Prices will flatline. Bargains will emerge as the over-extended panic and bail. Given the extreme costs of buying and selling, understand that even in the Big Smoke, real estate could well be a losing investment.

Advice? If the monumental sacrifice and gamble is worth it, buy. But purchasing in conditions like these is emotional, not logical. Not worth it. So when the wealthy balk, the rest should walk.

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November 16th, 2018

Posted In: The Greater Fool

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