There are
three simple rules to live by: Don't grocery shop when you're hungry. Don't
date when you're horny. Don't text when you're drunk.
Unfortunately,
we seem unable to follow such timely advice despite our knowledge of the
guaranteed consequences. We seem to fall
victim to predictable disaster despite our awareness of history’s past fiascos.
This blog will illuminate the folly of people who repeat the same mistakes
again, again and again. We tend to
forget the lessons learned in the past because “it’s different this time” or
“the rules have changed”. Despite popular
opinion, nothing has changed. This blog will tackle our favourite water cooler
topic du jour – real estate.
The
debate on real-estate in Canada, and primarily in the Toronto area, has
infected almost everyone. Anywhere you
go people are arguing as to whether real-estate is in a bubble and will crash;
whether rich Chinese foreigners are buying up all the land; whether immigration
will send Toronto’s prices to the moon; and, of most importance, whether the
Leafs will win the Stanley Cup within the next 50 years.
Real
estate is a very personal matter to all of us. We all want a safe, comfortable
and nice place to live and grow with our families. For the longest time, the purchase of a home
was a relatively non-event. House prices
were stable, predictable and generally followed the pace of inflation. A
couple, let’s call them Sharon and Randy, would go to their bank to figure out
how much they could afford to buy. The
bank, as a holder of the loan, would verify the couple’s income and assets and
ensure they were credit worthy. Typically, the bank would not loan more than
2.5-3.5x the family income. The couple would then hire a real estate agent and
see a dozen or so houses and after careful consideration they would make an
offer on a property for less than, or, in rare circumstances, the asking
price. There would be conditions on the
offer such as financing and a home inspection. The latter being the most
important as this would likely be the couple’s biggest financial transaction in
their lifetime and it is important to know that the property is in good working
order. There might be some negotiation between the buyer and seller and voila,
a deal would be struck.
Oh, have
times changed!
When was
the last time you heard one of your friends or family members had an experience
like Sharon and Randy? You probably have
not since the system has been turned on its head as of late. It is now common
for prospective buyers to participate in veracious bidding wars where young
couples have resorted to writing lengthy letters to sellers as to why “they
would be perfect fit for the home” while trying to out bid each other by $100’s
thousands of dollars at a time with unconditional offers. People are now obtaining mortgages of 5, 6,
or even 7 times their yearly income.
Lenders do not bother checking if you can afford the mortgage and
whether you could afford an interest rate hike. Bank of Mom is now handing out
huge gifts of money to her kids so they can “get on the property ladder”. Heck, the real banks do not even care if
someone fails to pay their mortgage because there is an insurance policy on
it!
Many
people are left wondering whether it is better to buy something now before they
are “priced out forever” as “they don’t make new land”. Realtors, newspaper
pundits, “investment” gurus like Tony Robbins, everyone wants you to believe
that real estate is the sure path to wealth. Parents, wives, husbands,
neighbors, even the nice person who works cash at Chipotle are all pressuring
you to buy and buy now. How could they
be wrong? Have you seen the gains in real estate prices in Toronto year after
year for, I don’t know, the last 14 years?
Anyone in their 20’s and 30’s has parents whose home has increased by a
factor of 3, 4, or even 5 times.
The
naysayers dismiss the melt down in the US back in 2007-2008 as banks who were
behaving badly and poor regulated. Ireland’s real-estate crash? A one off
event. Spain’s real-estate cratering?
Who cares about Europeans anyways.
You know
there is something troubling in the air but you cannot put your finger on it.
As the saying goes, when there is smoke, fire is not too far behind. Somehow,
people are lining up in droves and magically affording million dollar
properties yet they barely make much more money than you. Every third person
seems to be driving a Mercedes, Audi or some other fancy import. The advertisements on TV are all offering
mortgages from some jewellery buyer or offering debt consolidation assistance.
The signs
of trouble are staring us directly in the mirror. Unprecedented levels of
personal debt held by the average Canadian. Almost one half of people are one
pay check away from defaulting on their debt obligations. Banks and lending
institutions lending money faster than it can be printed. Insurance products on
loans to protect negligent lending institutions. Mortgages with no down payment
or income verifications. The hairdresser owning five condos because she is a
smart “investor” yet they have negative cash flow. Incomes which have barely budged in the last
decade. Record low interest rates that will be rising. Building cranes on every
single corner of the city. HGTV.
All
dismissed as nonsense. Time honoured fundamental indicators such as income,
rent to price ratio and inflation have become roadkill.
The real
estate promoters continue to feed us the same lines over the past several decades:
immigrants are flocking to Toronto in record numbers, Canadian lending
standards are strict, there is just not enough land to build, Trudeau will
never let interest rates rise, real estate always goes up, and, my favourite,
it’s different this time.
I suppose
I might as well end this blog right here as there would be no point in
continuing since real estate can only go up in Toronto as it’s different this
time. To the dismay of many, this is the starting point. We will explore in depth all the factors
which got us into this unhealthy situation and where it will ultimately lead
us. No stone will be left unturned.
