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On Friday’s round-up, we featured the inspiring stories of people who have written in, been featured on this blog in a Reader Case, and have actually followed that advice in real life. As a result, they are now kicking ass, taking names, and regularly coming to the end of every month wondering where all this extra money they’ve saved came from.
So as a contrast to that, I thought it would be interesting to look at the stories of people who managed to do the exact opposite. In a segment I’d like to call: Broke Ass Morons.
These days, travelling around Europe I only occasionally check in with what’s happening back in Canuckistan. Last time I did, I noted that all the new Federal regulations and new housing taxes the Canadian government put into place at the beginning of the year was starting to have an impact, with detached home prices plummeting 17.2% in Toronto. Home Boners, I wrote, have no idea how scary debt is because they’re only used to home values going up. They’ll learn soon enough, I predicted ominously.
So the other day, we were lazing about in a thermal pool somewhere in Poland when Wanderer asked “Hey, whatever happened to that housing crash everyone was talking about in Canada?”
“Huh,” I replied. “I have no idea.” So I Googled it. And I immediately bolted upright. “Holy Shit!”
Article after article filled my screen about people who had gotten crushed by the real estate market and were now basically facing financial ruin.
Would-be buyer ordered to pay the difference after house ultimately sells for 28% less.
Buyer who walked away from real estate deal ordered to pay $360K, CBC.ca
A group of buyers in Mattamy Homes’ Preserve development say provincial measures to cool the Toronto-area housing market have placed them in financial peril.
Oakville homebuyers purchased at their own risk, housing minister says, The Toronto Star.
Mattamy Homes says softening market to blame for steep price drop in new Whitby community.
What did the neighbours pay? Whitby homebuyers just found out the answer: a lot less, CBC.ca
And this is just a tiny sampling of them. Here’s an article from MoneySense chronicling a whole bunch of these stories.
These Toronto buyers lost hundreds of thousands within months…
How to lose big money in Toronto real estate, MoneySense
So after I picked up my jaw from the ground, I read more into what exactly happened to these people. What I found was really interesting.
Who Should Lose Money in a Housing Markets Crash?
When people yell at politicians to make housing affordable, they usually don’t understand what they’re asking for. Making houses cheaper is not a painless thing. When house prices go down, someone by definition has to lose money. So the big questions is: Who?
In most housing transactions, there are typically three parties involved:
- The Buyer
- The Seller
- The Bank
The buyer pays the seller for the house, and the bank underwrites the mortgage. So if one of these 3 parties has to lose money in a housing downturn, who should it be? Most people would say: The Bank! Those big greedy banks have money coming out the wazoo, and a couple hundred grand is peanuts to those people, so let them take the hit.
That’s what happened in the States. People over-leveraged, they became unable to pay their mortgage, and then starting defaulting. The banks responded by foreclosing on the house to recover their money. But when too many people started doing this, those homes started going underwater. The banks’ losses mounted, and then they started falling over. This caused the stock market crash of 2008, credit lines dried up, job losses started mounting, and the Great Financial Crisis happened.
So it turns out the bank is the WORST person in this deal to take the loss. Them taking the loss affects the entire economy, and then everyone suffers.
These New Rules Protect The Banks
Now, I’ve said before that Canada learned nothing from the US housing crash, but that’s not entirely true. Canadian citizens learned nothing. They were the ones who saw the housing crash, ignored the lessons, and then went and bought up houses on jumbo mortgages with reckless abandon.
The Canadian government, on the other hand, did learn something. These new B20 rules which were sold to the public as a way to “bring fairness to middle class families” or whatever, in reality protects the banks from losing money. By implementing stricter qualifying rules to future home buyers, it prevents the banks from taking any more risky loans in a declining housing market while letting them keep their existing mortgage portfolio. As long as the banks don’t spike the cost of money, homeowners will keep paying their mortgages even as their home value goes down. The banks never stop making money.
So who does take the loss? The buyer or the seller? Surprisingly, it looks like in this housing crash, the buyer will be the one who gets screwed.
How Buyers Get Screwed
Way back in the 80’s when houses were actually affordable, people bought houses by signing conditional offers. They would agree on a price, and sign a contract, but the contract would have conditions that would let them back out if something went wrong. Typically, the deal would be conditional on selling their existing home, conditional on financing, and conditional on home inspection. This protected the buyer in case they walked into the bank and for whatever reason couldn’t get a mortgage.
That was then. These days, after a decade of bidding wars, home buyers buy using what are called “Clean Offers,” which simply mean that there are no conditions at all. This is because in the age of bidding wars, sellers won’t even consider an offer that has conditions on it. So nobody uses conditions anymore.
So what’s been happening is that a buyer will buy a house on a clean offer at a certain price. Then, they’ll try to sell their existing house. To their horror, they’ve been realizing that their house is now worth far less than they thought it was worth. In turn, the banks, now seeing a declining market and with stricter lending regulations in place, are refusing to issue mortgages for the new place. This forces the buyer to renege on the deal.
But that’s not the end of it. In Canada, if a buyer walks away from a deal and the seller later sells that place for less than the original deal, the seller can sue the original buyer for the difference. And courts have been siding with the seller when these cases make it to trial.
Here’s a particularly bad example of this happening.
In a case a judge called a warning to prospective buyers in the GTA’s erratic housing market, a couple caught up in a bidding war will have to pay $470,000 after reneging on a multimillion-dollar deal.
Couple ordered to pay $470,000 after reneging on Ontario home deal, The Toronto Star.
Here, the buyers bought a house originally listed at $2 Million for $2.25 Million (!) in a bidding war. The market then turned against them, and buyers tried to walk away from the deal, thinking they’d just lose their deposit. That house later sold, but for $1.8 Million. The seller then sued the buyers for the difference: $470k. And they won!
Here’s the problem: The buyers didn’t have $470k lying around. The only thing they had that was worth that much was their house. The house that was now worth far less than they thought.
So what this judgment did was it forced them to sell their house and hand over the proceeds to the seller. Now the buyer has no deal, no money, and no house. In short, they went from trying to move up the property ladder to becoming homeless.
Is This Fair?
So is this fair? Should the buyers be forced into financial ruin? I think yes.
In a housing bubble, the Home-Boning, Hormonal, FOMO-ing buyers are the ones, more than anyone, that push housing prices into nosebleed levels. You can argue banks and government policy had a part to play, but the individual buyers, more than anyone, were the ones to pull the trigger on each purchase. Nobody forced them to do anything. So now they’re paying the price.
Predictably, the buyers disagree, and have been whining and complaining to anyone who will listen (home builders, banks, the courts, etc.) that someone should step in to save them. The government’s response?
On Thursday, politicians and builders said that the buyers should have known they were at risk when they signed contracts with a builder.
“The government is not here as a backstop for real estate transactions gone bad,” said (Ontario Housing Minister Peter) Milczyn.
Too bad, so sad. You are now a Broke Ass Moron, and nobody’s coming to save you. And in my opinion, this is the right thing to do.
These people are idiots. They can’t be helped. If the government were to step in and hand these buyers $470k, they would promptly turn around and spend it on another house! And then a few months later they would be broke again, hat in hand, asking for help.
I think the most valuable thing these Broke Ass Morons can do is fail, as noisily and painfully as possible. That way, they can act as cautionary tales to other buyers thinking of doing the same thing. A few idiots will lose everything and become homeless Broke Ass Morons, but the banking system won’t collapse, the economy will survive, and that way the people who suffer the most will be the ones who caused the housing bubble to begin with. Housing crashes are painful, but I think this is fairest way to engineer one.
So what do you think? Should the buyers be the ones who take the brunt of this housing crash? Or do you think it should be someone else? Sound off below, for what I’m sure will be a civilized and emotionless discussion.
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Failing sucks especially when you are the one failing. However, you are 100% right: Most often, the only way human beings learn is through the pain of failure. And then hopefully the people who have failed become the gospel-spreaders to the next generation of what NOT to do with their money and debt.
Exactly. In a rising market these people love bragging about how much equity they’re gaining and calling renters losers. Well, payback’s a bitch.
I recorded a video podcast with the Bigger Pockets team today about my experience investing in real-estate. Afterward, I thought of you on video as their featured guest:
The Flaming Elmo GIF came to mind. LOL
All our lives we’ve been told that homeownership is the key to financial success and prosperity. It takes a cynical, analytical, dispassionate mindset to take a step back and deprogram ourselves to do what’s right instead of what’s been built up as the be-all end-all of white picket fence bliss.
But man, a contract is a contract. These things aren’t just ink on paper. At least they’re going broke through poor judgment and pie-in-the-sky dreams rather than, say, medical bills forcing bankruptcy.
Yep. Going broke via a crisis of your own making is totally OK in my books. Going broke from a medical crisis you didn’t choose is not. You guys gotta fix that health care system of yours soon, mkay?
The tricky part is if somebody has a medical crisis in which their lifestyle choices likely played a strong role.
Consider lung cancer in a 40 pack year smoker.
Or repeated resuscitations for fentanyl overdose.
Or (hitting closer to home for most) heart attacks, strokes, diabetes … from simply gluttony and sloth (or “food addiction” and “poor exercise habits” for those who are more inclined toward political correctness).
Do we personally or as a society “feel sorry enough” for the above folks that we subsidize the costs associated with taking care of them? In most cases (at least in Canada), it appears that the answer is “Yes.”
The thing is no matter how much we tell these Home buyers to not buy the house they do the opposite. I have this guy at work 24 years old, about to buy a house in GTA. I gave him all the articles he needs, told him to start index investing he would make way more money, but still nothing goes through his head. I just gave up.
Ahhh I wish only if there was a way to change people perspective. At the end, I have realized that when the sensitive topic like housing comes, Home-boners would never accept what they did was stupid.
Yeah I know a couple who just got married and has their sights set on buying a house in the Greater Vancouver area even though they know I just sold my place last year to get out of the unstable housing market. They feel like if they don’t buy now they won’t be able to afford to buy later if the prices go up even more. They don’t seem to understand that at least if you don’t buy now and can’t afford to buy later you still have all your savings rather than if you buy now and the market drops then your savings are gone.
They’ll learn. Let me know when they go bankrupt. I can write a post about them!
Can you share those articles with me! I can relate, I am 24, thinking of owning real state because I am not familiar with investing. Change my perspective! Thank you 🙂
Can you please provide us me with the info you tried to give your 24 year old co-worker? I want to learn . – Another 24 year old, thinking of buying a house.
My friend is all pumped up to get into real investing with another friend as a partner. Here is the bad news. They have no cash for a down payment. They don’t even have cash for 3% to 5% down but they’re determined to find a way. They both have mortgages and HELOC’s. I WARNED my friend that he will be facing two mortgages and a HELOC. Did he listen to my warning? Nope!! They’re determined to find a way to make it work. I warned them but from now on I will say nothing and let them learn the hard way. They have to FAIL to get it. So yeah they’re two broke morons looking to be even bigger broke morons. I am still their friend and will be there for them as a friend.
Be there as a friend, but keep an arm’s length. I have friends who, despite everything I’ve told them, insist that housing can only go up.
I have to keep a distance from these people. They are hand grenades of stupidity. They will eventually explode. And when they do, make sure you’re far enough away to not get hit by the shrapnel.
Hi FC,
I encounter the same situation as you. I advise my friends on the perils of buying the properties at high price. However, they ignored my suggestions and dismissed it as ignorant. Likewise the same as you, I no longer advise them on this matter. At times, they ask me on my plan as I do not buy property. I simply tell them that I am not interested in buying the property. When they hear such response, they will chide me for not following the guaranteened way to wealth building ad following the horde. I will respond by telling them that we have different views on this area and it is better to leave it to each of our own.
Ben
This is one time where deep down you probably wish you hadn’t been right. I know from being a long time reader that you are a not only very intelligent but also a thoughtful and compassionate person. Morons they are, but facing financial ruin is still so painful and scary and there will be a lot of collateral damage to kids and parents of these over extended borrowers. I’m a homeowner of an inexpensive paid for house that represents a tiny fraction of my wealth. I look at it like a car, something that had value for the lifestyle I chose of living in a rural low cost area for my entire career and it is the only house I’ve ever owned. Not an investment by any means but a modest luxury that never exposed me to much risk because it was so cheap. We added on and expanded as our family grew but did that with cash knowing full well we probably would never get all that money back. You are the best at putting home ownership in perspective that I know. Great post as usual!
Yes… agree with this. Financial ruin has real and long-term effects and I find it arrogant to just call those people “morons” when chances are they were never exposed to the kind of information available on this blog. Like most of us, they probably did the best they could with the information they had.
Rolling them all up as “broke-ass morons” sure feels like an entitled and heartless viewpoint.
I can’t help them at this point. The best I can do at is point at them as a warning to everyone else.
I agree I do feel bad for these people even if they are morons especially if they have dependents who are also affected.
I grew up with a mother who loved talking shit to me about everyone we knew and one of the few benefits of that was her passing on a lot of information to me in the process of telling me how stupid everyone else is and why.
Because of this I knew about things like realtor commission fees and people being in over their heads in debt when I was a kid and when I was old enough to buy a house I knew what I was getting into, what questions to ask and what to research before buying.
My spouse on the other hand had no clue whatsoever. He was under the impression that we could just sell our house and get all of our money back until I set him straight on how everything works and how much money we would lose if the market didn’t go up before we sold.
When I hear about the people in these articles on one hand I’m smugly thinking “how could anyone be so stupid?” but on the other hand I kind of feel like maybe these people are just ignorant and were lead astray by realtors and mortgage brokers and didn’t know the right questions to ask to be fully informed or even the critical thinking skills to be able to analyze the situation they were getting into. I think a lot of people don’t really understand the real estate market and how it works so they go to a realtor to get advice and the realtor is only interested in making a sale. Similar to how people who don’t know how to invest go to the bank for help and end up buying mutual funds. It’s not the banks fault or the realtors fault in these situations, they are just doing their jobs. The people just went to the wrong place the get the information they needed.
With that being said, I do agree with FC that if anyone is going to get screwed then it is the buyers that should get screwed but it is still sad when it happens.
Oh, it’s predatory. The entire system is predatory. That’s why I started this site.
Know any way for us to get added to high school curriculum? 🙂
Thoughtful and compassionate?!? That doesn’t sound like me at all.
I care about you guys, and about people who I can help. But wilfully ignorant and stupid people? Let them get what they deserve. I’ll be there on the sidelines, pointing out to all who will listen what an idiot they were as they crash and burn.
People should be putting more thought into things that can ruin their family’s financial position. So many cowboy homeowners think they can jump into a hot housing market and score big time, then they are shocked and devastated when their gamble turns sour. I mean, I feel bad for the families in some ways, but these people brought it upon themselves. The best thing they can do at this point is admit to themselves and their children that they screwed up big time and start working to pay those debts off and rebuild. As Dave Ramsey would say, these people have done ‘stupid’ with zeros on the end.
People don’t admit they’re wrong. They complain at the system and bitch about how the whole world’s against them. That’s human nature.
It is sad when people lose substantial sums of money. However, I agree: Nobody was forcing them to get caught up in emotions and buy beyond or near the limit of their means. As Adam said, a contract is a contract. Both parties must honour the deal, regardless of how unpleasant it might seem afterward. (Different story if one party is being dishonest and is hiding or disguising things.)
Side note: The boom is still happening in London, ON. For example, a house in our corner of town recently listed under $500k and sold within days for over $550k. Apparently that is still the norm around here.
$550k. For a house in London, Ontario.
Dear God.
Do you guys even have a library yet?
lol. You crack me up.
PS – I believe we have two now… 🙂
Ooooh fancy!
A house in London, Ontario still isn’t worth $550k though. I could buy a house in Portugal for less than that. Would you rather be in Portugal, or London, Ontario with your two libraries?
lol
I didn’t say MY house was $550k 🙂 I would never buy a house for that kind of cash!
I believe the onus of responsibility really should be on the borrower to “make good” on their deals if they signed on the bottom line. Nowhere is a homeowner guaranteed price appreciation will happen.
Markets are always going to go up and down — Real estate, stock markets, commodities, etc. All markets fluctuate in both directions due to changing conditions.
Why is this so hard for people to understand?
Because they congratulate themselves when markets go up and then whine that it’s unfair when markets go down.
People are entitled idiots.
Sadly, for too many folks, home ownership is their religion (or maybe a cult). We own a home, but it’s modest and well within our budget.
I saw folks here in the USA get CRUSHED in/after 2008 from mortgage debt. Looks like it’s Canada’s turn. 🙁
Ignorance can be overcome through education. Stupid is like being dead. It’s only a problem for those around you.
Great post, as usual!
Ugh. So frustrating.
I have sympathy for the first lemming that goes over the cliff, but the 50,000 lemmings that follow that guy over are just morons.
Perfect. Unfortunately you have to get burned to learn.
House sellers are worse than banks. I hate them and that’s why I rent and make those bastards come clean my dirt toilet just because I can !!! #RentForever
I was complaining about home BUYERS but whatever.
You and your landlord aren’t exactly best buds, I’m guessing?
i don’t get the big attraction of toronto at those prices. i always thought montreal a lot more fun and soulful. houses are nice if you can get ’em for cheap.
You know, I’ve always wanted to do a summer in Montreal. Stand-up comedy and foie gras! Yum and yum!
me too. but I like to work casually – hard to do that without any French, non? and rents were higher than i anticipated. Still, better than TO.
I’m sure there is some obscure legal reason for why the courts let sellers sue buyers when a deal falls through and it’s probably an important thing to keep in the law precedent. But it seems to me like this is nuts. If no one can pony up 550K, that means your house ain’t worth 550K, right? Probably the seller is in the same boat as the buyer – aiming to climb the property ladder and finding themselves short of cash to do so. So I’m wondering if the seller should lose out in the ‘fairest housing crash’ hypothetical. Maybe they’d have to downsize, or they forgo the sweet return, but maybe more people have a place to live at the end of the day? Curious if anyone can play this thought experiment out more completely! What am I missing?
It’s not really particularly obscure. It’s simple breach of contract. You break a contract, you pay damages. In this $2 million listing, the sellers chose these buyers and a contract was signed with them to pay $2.25 million for the real estate.
They certainly turned down X amount of other potential buyers in order to contract with these particular buyers. Other buyers could have potentially been able to fulfill the contract terms, thus leading to an opportunity cost to the sellers as time had passed while the buyers reneged which led to significant price drops. If they could prove that they had other similar offers (which they almost certainly did), then it’s looking like a very easy case.
If you really want to bore yourself, you can check out https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=2449&context=facpubs [Damages for Breach of Contract] but the key quote is “Fairness normally requires that a victim of breach at least be
compensated for his costs, including his opportunity costs.” Coincidentally, the example given for that quote is related to construction of real estate.
You’re missing the fact that the buyers signed a contract to buy the house for a specific amount of money. It doesn’t matter what happens in the housing market during or after signing the contract. The house could theoretically be worth $1, but the buyers would still have to pay $2.25 million for it once the agreement is signed. You can’t have people arbitrarily backing out of contracts just because circumstances change.
@Liz I agree with you that this feels wrong. It does feel like the buyers’ fault, although perhaps some additional government regulation could slow down the insanity.
That being said, my issue is that the buyers who walk away are literally stealing money from the sellers. The buyer agreed to pay a price, then the market shifted in what would have been their favor. So, they looked (or could have looked) at the amount of their deposit, realized it was smaller than the market downturn, and went to buy a different house at a better price (even including the burned deposit).
Of course, some buyers were not exactly pulling the above stunt. Some (many? most?) could no longer afford the bigger house since they were assuming they could sell their own at a certain price, which turned out not to be the case.
These two scenarios are very different, but once you are in that mess, it isn’t clear to me how the law would be able to treat them differently. Before the fact, you could maybe not allow banks to include assumed sale profit when looking at net worth to determine whether or not to give someone a mortgage. Or maybe allow them to only if the seller accepts a conditional contract based on a house sale at or above a certain price.
Government regulation?!? They had protections! In the form of conditional offers! The buyers chose to waive them. Let them burn.
They “chose” to. But, they just aren’t educated enough to make better choices. And the sellers wouldn’t have accepted their offers if they had been conditional. Let them burn this time? Sure. Yes. But why not steer them in the right direction so that they don’t need to burn next time?
Seems a bit of a reach to say the sellers should take the hit because the buyers aren’t educated. Just because the buyers are (or chose to remain) uneducated it’s not the responsibility of the seller to act as their parent. You are supposed to do your own due diligence before signing any legal contract.
I’m not suggesting that it is on the sellers. In the current model, FC is correct. And we can’t fix it retroactively. I’m just saying the government could do more in the future to protect the (now broke) idiots.
They COULD, but why should they?
The buyer made a legal promise to pay a certain amount. They can’t promise this and walk away. That’s why, as per FC, these transactions traditionally had conditions. No conditions, no way out.
I think the buyers are the ones who should suffer! I made that mistake before- bought in a hot market and had to sell in a cooler one. Lost 40k and learned my lesson (hopefully;-) Thank you for a great article!
Eep. Well, sorry to hear that, but glad you now know not to do that again. Use conditional offers next time!
Why do we outlaw drugs? Because society needs to be protected from idiots, and idiots need to be protected from themselves.
Do we enjoy watching drug addicts fall to pieces and take down their families with them? Do those cautionary tales really prevent new drug addicts from starting?
To me, the obvious answer is to outlaw the kinds of purchase contracts that quickly and easily lead to financial ruin for any involved party. Or at minimum, raise the eligibility criteria so only those who can afford to lose all that money end up taking that risk. From reading some of the new Canadian housing regulations, it seems they’ve already taken some steps forward in that regard. But there’s still more ground to cover.
You nailed it, Blackwood
You can wait for the cavalry to come save you, or you can READ THE FUCKING CONTRACT before you sign it. Government oversight is great, but at the end of the day the first, best line of defence is your own brain.
Worst comment ever. Buying what you can afford is simple, whether it’s a stick of gum or a house. The buyer was also very much “educated” about real estate – he’s a mortgage broker. He chose to take a risk and lost. That happens in gambling all the time.
Lastly drugs should be legal.
Another in your series of posts designed to win friends.
Not that you are wrong, mind you. 🙂
I have at least one reader/commentator over on my blog who should check this out, but her head might explode. :0 🙂
Is it Angela? It’s Angela, isn’t it? *sigh*
Idiots must be called out Jim! Otherwise how else will realize how stupid they are?
“Oh, yes. Now I see what a moron I am. Thanks for enlightening me.”
LOL 🙂 🙂
Making the buyer responsible is fair. Losing their deposit when waking away from a deal is fair. But making them pay for the difference if the house is sold for less is crazy and opens possibilities to abuse the rules.
By this, the seller could sell it to a friend half price, sew the original buyer for the difference, while the friend can sell quickly for a profit and share it with the original owner… Just an idea…
I would think the courts would disallow the scenario you described and base the settlement on comparable prices. BTW, the buyer who was ordered to pay the 470K difference is a mortgage broker. Go figure…
BWAHAHAHAHA REALLY?!? Oh dear God, I’m adding that to the article…
Ooh, fantastic loophole you just pointed out. I wonder if anyone will exploit that…
I hate to say it but i hope this happens in Australia.
I live in Melbourne and the house price to income ratio is almost 10X
Your argument is very utilitarian – the best outcome is the one that works for the majority.
Nothing wrong with that, it’s a very popular philosophy.
Really? What are the house prices like in major cities in Australia?
Hahaha. I love it. Hand grenades of stupidity. Unfortunately I have a few shrapnel wounds – gonna remember this for the future :).
Worse than Canada actually. The heat fried the brains and apparently that does worse damage than freezing. I can highly recommend looking up Steve Keen. (And reading his latest book with the clickbait title of “can we avoid another financial crisis”. He’s correctly predicted the economic swings since japan crashed (including predictions that Canada’s housing market would crash sometime between 2016 & 2019) – that’s a good track record and I’ll take it. Bank of England recently adopted his economic formulas.
Currently, the median house price in Melbourne is just over $900,000 and the median household income is around $75,000.
That’s stupid. Note quite Canada stupid, but you’re getting there.
It’s insane. My brother lives in outskirts of Sydney and his very average house is worth over $2million. It appears to me they had the boom way before Toronto – there’s been a slow down but no correction.
In most states in the U.S., banks have recourse which means it is a type of loan that allows a lender to seek financial damages if the borrower fails to pay the liability, and if the value of the underlying asset is not enough to cover it. A recourse loan allows the lender to go after the debtor’s assets that were not used as loan collateral in case of default.
Mortgage lenders could and nearly always did include mortgage insurance on the loan (PMI) in case of default to protect their interests.
The biggest problems arose when the lenders bowed to the pressure of the politicians who said that the lenders weren’t lending to low-income people thus the low-income population was being left out of the “American Dream”. The politicians threatened to pull the business licenses of lenders who were accused of “red-lining” potential borrowers by judging people were they lived instead of their credit worthiness.
As a result of this lending conditions were relaxed with the eventual result of the housing collapse. For more information research “The Community Reinvestment Act”.
I agree that the potential buyer who backs out of an agreement should lose their good faith deposit if they back out of the purchase. But if the value of the house falls before the purchase is completed then no actual sale was made, therefore one shouldn’t be forced into making a purchase that no longer makes economic sense. Market conditions are beyond the control of either the seller or buyer. Who owns the property at this point, the buyer or the seller? The seller, his loss.
Whoever owns the property should suffer the loss and the buyer forfeits the good faith deposit. Both parties lose due to circumstances beyond their control (an act of god, if you will).
In the U.S. a buyer doesn’t have to buy but a seller has to sell. To use an analogy; You’re out on a date, at the end of the date both parties agree to have sex. After arriving to the agreed upon place of the love-making one person changes their mind. Should that person then be forced into having the aforementioned agreed upon sex? No, of course not. But both parties agreed to sex, they made a contract. Perhaps so, but to force someone to go against their judgement is not only wrong it borders on and is perhaps a form of slavery.
And now you’ve made it gross.
This is why I refuse to sign sex contracts when I go out on dates. Screw you, Bill Cosby.
Had a nice article going until the last paragraph. Should have known when to quit.
I don’t know when to quit? This entire site is about knowing when to quit!
FIREcracker. Comment was for James Cooper and his sex analogy.
There is always risk involved in any financial investment, especially the leveraged ones. I think people need to get more education before entering into contractual litigations, it should be taught in school.
I waited until I had a good down payment, and the market had been soft for 2 years. And have been able to double up on payments to burn the debt. This is my cash cushion so to speak, or call it a Debt Cushion.
Renting allowed us to live cheaply and save until we found exactly what we wanted, and the payments didn’t kill us, but I was still sharpening the pencil, and listing to Garth rant the whole time.
There is a right time and a wrong time to buy… this is the wrong time… I do believe, and for a lot of people, it never will be the right time.
Right now renting rules…
cheers
It does, it really does…
The buyers are entirely responsible. They took a huge gamble and lost. It’s akin to investing in a particular stock believing it won’t go down in the short term. It takes an enormous amount of stupidity or hubris to plunge one’s life savings into any asset class without understanding or calculating the pitfalls.
And yet this is what everyone does. *bangs head on desk*
I definitely think that buyers who enter a contract to purchase, are and should be legally bound by that contract. I feel bad for anyone who loses their home, or is stuck paying an enormous debt, even when it’s due to stupidity. I haven’t done much reading about Canadian housing market, but I know the market here in London Ontario, has seen a lot of growth. Is the crash in t.o. Only, or have other cities been hit hard? I know there r other Canadian readers from other cities here, would be interested in what’s happening where they live.
Indeed, there will be more stories like this as the market cools. I’m sympathetic to people becoming homeless after making poor decisions, but one can’t expect the sellers to accept anything below what was agreed upon in the contract.
“I’m sympathetic to people becoming homeless after making poor decisions”
I’m not.
Another London, ON person reporting price growth in a crashing TO market. Interesting…
Putting out one partially contrary comment…
The banks have a partial responsibility in that they should not be lending an amount that the buyers cannot ‘afford’. In the US at least, you fork over every bit of financial data just to see if you qualify for a loan… the loan max amount is supposed to be based on financial resources, history, and ability to pay. However, stupidly loose lending practices by banks in the US was a major part of the bubble & crash in ’08.
I don’t know what the deal is in Canada for loan qualification – I don’t recall you mentioning it.
I’m not saying buyers are off the hook by any means, but there’s something off when a bank is encouraging buyers to gamble by blatantly offering more loan than they can afford. Theoretically, the banks should know better as well.
The bank’s in the business to make money off you, the customer. They are not on your side. The faster people realize this the better.
No, the bank should do what’s in its interests as a corporation in order to generate the maximum profit for its shareholders. Period. Banks are amoral institutions, as well they should be. Any bank that does not do this will pass higher costs along to its debtors and not be able to offer competitive financing and soon go out of business. Duh.
The way we balance the amorality of corporations is with laws and policies that prohibit or discourage business relationships whose character we deem incompatible with our sense of ethics and morality. The problem up ’til 2008 in the U.S. is that we were not doing a very good job of that. As James Cooper pointed out above, the banks were incentivized to issue loans to people who could not afford them because the collateral (the homes) were overvalued; who cares if the borrowers default because we can just repo/liquidate the house?
The solution is not to superimpose our sense of individual ethics/morality on corporate entities whose functioning and success demand that they act solely in their best interest. The solution is to stop fucking with the damn system and stop creating an environment in which banks are actively pushed toward behaving in ways that create or exacerbate a problem.
[Note: I do not mean to say that there were not individual bad actors within the banking system who helped cause the collapse of 2008; that would be a ridiculous and false statement. What I object to is the idea that banks (and corporations in general) have any obligation other than to generate maximum profit. When I want to be charitable and pat myself on the ass for being a wonderful human being, I donate to charity. When I want to make money, I invest in corporations (indirectly via cheap index ETFs, but I digress). I don’t fucking mix the two, and neither should anyone else.]
The bank never (rarely) loses…
HH
This article seems like it was designed to generate a mood of excitement and conversation which I like. However, I don’t know if this was intended, but there seems to be an element of schadenfreude as well. Obviously categorizing a group of unfortunate, but ultimately deserving, people into an insulting category like this is inflammatory. No point in metaphorically standing over someone who’s fallen down hard and making an insulting public show of their mistakes. The courts have made the right decisions and the papers have probably given them a permanent presence in history so it’s not like this is neccessary. Not sure what the point of this article is other than to remind everyone that asset prices don’t always go up and houses are assets not magical investments that you can live in that always go up in value. I for one feel incredibly empathetic for the recent home buyers in Canada who are underwater on their mortgages or , if they played their cards wrong, end up like that buyer who owes 400K+ and has nothing to show for it. Indeed even the buyers who aren’t underwater are still having to spend like 75% or more of income on their homes in a lot of cases. That’s a very high price to pay for ignorance and bad luck but it is their price to pay.
I admit to taking joy in certain people’s (deserving) failure. But I also take joy in people’s success, as I did last Friday.
What can I say? I’m a motherfucking joyous person.
Quick, claim the URL…you rock MJP!
#MFJP #ClassyAF
Not really. The folks being mocked here actively and consciously entered into a contract in bad faith; this is an unethical and immoral act, for which they were rightly punished by the state, which represents the will of the law-abiding people in its jurisdiction. For those law abiding people to celebrate the state fulfilling its mandate in such a visible and righteous way is completely natural and healthy.
I’m curious as to what the appraisal and underwriting requirements are in Canada. Banks in the US (and I imagine worldwide) have underwriting standards, one of which is that the property (at least in the US) has to be appraised and that the mortgage can only be a certain percentage of overall appraised value. For example, if the property appraises for $100k, your mortgage is limited to $80k (i.e. you can only borrow up to 80% of the appraised value of the property). There are also alternative methods of financing, such as an 80/20 split between a first and second mortgage and a higher LTV based on creditworthiness or additional collateral, just to name a few, but that’s the basic premise of mortgage lending in the US. I therefore find it interesting that no one has yet pointed out the appraisers’ role in real estate transactions, considering it is the appraisers job’ to figure out the FMV of the property, using a variety of both objective and subjective standards.
So in these various scenarios, we have buyers, sellers, appraisers and banks. Seller is trying to get the upside of the home, buyer wants to move into the home, appraiser wants the $450 appraisal fee and future appraisal business from the bank, and the bank wants to make a loan. The appraiser arguably has the most important role to play, and would seemingly act as a market check on sellers, buyers, and banks. However, each one is motivated by something different, and none of them act entirely rationally or objectively and certainly not in the honest/fair interests of any other player in these transactions.
As such, I don’t think it is fair to categorically assign blame to any one of these players such that each other player is categorically absolved of any wrong-doing.
On a related note, I generally enjoy reading these articles and usually find the comments section informative, thought provoking and interesting. Unfortunately, this article and the comments made me cringe due to the harshness towards people and society in general. The comments section is even worse than the article, showing signs of racism (which red lining has historically been) and a fear of poverty and/or low-income individuals, trying to legitimize their low-income status as reflective of who they are, rather than reflective only of their present circumstances and choices they’ve made. We all make mistakes and I think it’s important to remember the phrase “there but for the grace of God go I”… or go your friends, family, co-workers, teachers, neighbors, etc.
The answer for a lot of people isn’t to remove themselves from real estate entirely. It’s about making smart, informed, and well-thought out choices with regard to real estate. And yes, smart and informed people buy real estate. And yes, a high number of leaders in the FI community own real estate, as well.
Now we can disagree about whether real estate is a good or a bad financial choice, but I think it’s imperative to do so in a respectful way, rather than resorting to name calling for the sensationalized tabloid effect of a click bait headline.
“The comments section is even worse than the article, showing signs of racism…”
I just read through all the comments and I see no evidence of racism. Put away your tin foil hat.
You sound like Clarence Darrow.
Your present circumstances are reflective of who you are. They are also reflective of your past circumstances. But no matter what, if you’re low income, you should not buy things that require high income. That people of certain ethnicities are disproportionately affected by this racially agnostic reality is neither racism, nor my problem.
Holy crap. It doesn’t sound good for our neighbors up north.
Hopefully, most people can tough it out.
There will be a lot of opportunities, though.
A few people were able to take advantage of the housing crash in the US and came out very well.
How does it look on the west coast?
Uhhhhhh….not good. Will write about it in a future article.
If sellers can start a bidding war, buys should be able to do shady things as well. I find these bidding wars shady and illegal. I think sellers and realtors should go to jail for starting a bidding war. If you list a property for X dollars, that means you’re willing to accept that price. Not give me a counter with X + 200k. It doesn’t make sense.
I would see if the buyers can appeal the court decision, and basically fight until the sellers are willing to settle. It’ll be a game on who can burn the most money. At one point both sides will settle.
I would also see if I can sue the sellers and listing agent for unethical practice — though it’s not very likely I’ll win. If I have the time, I think I’ll start poking into that.
Oh God yeah. Sellers and the agents are completely guilty of dirty tricks like fake asking prices, fake bidding wars with hired actors and all that shit. They’re not guiltless here either.
But at the end of the day, the buyer could have walked away from an unfair deal at anytime.
I usually side with you on homeownership discussions, FIRECracker, but not this time.
There should ALWAYS be conditions in any real estate contract that allow one party to walk away in case they can’t go through with the sale. When I bought my home, there were conditions in the contract for just that. And I put down a deposit as my own collateral.
Those conditions included sudden loss of income or assets, inability to obtain a mortgage, or issues regarding the results of an appraisal.
If these contracts are truly “clean”, then that means that these basic and necessary conditions don’t exist. Simply not having the credit necessary to obtain the mortgage would be enough to consider breaking the contract, allowing the seller to sue the buyer for obscene amounts of money. Money that was never put down as collateral.
And this IS a case of the government stepping in….… to help the homeowner! It’s court-approved theft. I know Western governments always support homeowners over renters, but this is downright criminal.
Deposit money is put down because it’s being used as collateral. Money that wasn’t put down as collateral shouldn’t be up for the taking. Otherwise it’s like having the banks foreclose on you for defaulting on your credit card.
Sincerely,
ARB–Angry Retail Banker
How are we in disagreement? I think it’s stupid for ANYONE to sign a clean offer, and these people did, and then are now paying the price. Cautionary tale.
We disagree on the amount of risk a buyer should take.
Clean or conditional, the only risk a buyer should face is deposit risk. The idea of the seller suing the buyer for the difference on a future sale is absurd. You implied support of these types of lawsuit consequences.
I didn’t imply it. I explicitly stated it.
The buyers agreed to pay a certain price with no conditions, and they reneged on it. I agree the conditions that led to them reneging wasn’t their fault, but they still signed the damned paper.
I guess I’m a little biased because I think that housing bubbles are caused more by the buyer rather than the seller. The seller can put up whatever price they want, but it’s the buyers that agree to play along. What do you think?
Your (former?) FA, Garth Turner was initially contacted by the seller and has posted a number of times as the story progressed.
Has he? That’s funny.
Also, what do you mean by “former”? He’s still our FA.
Based on your posts I thought you may have moved on to DIY. He’s my FA as well. We could use Garth as our finance minister.
From James Cooper (commented 5/14 @ 8:04 pm) – The biggest problems arose when the lenders bowed to the pressure of the politicians who said that the lenders weren’t lending to low-income people thus the low-income population was being left out of the “American Dream”. The politicians threatened to pull the business licenses of lenders who were accused of “red-lining” potential borrowers by judging people were they lived instead of their credit worthiness.
As a result of this lending conditions were relaxed with the eventual result of the housing collapse.
From Wikipedia – In the United States, Redlining is the systematic denial of various services to residents of specific, often racially associated, neighborhoods or communities, either directly or through the selective raising of prices. While the best known examples of redlining have involved denial of financial services such as banking or insurance,[2] other services such as health care[3] or even supermarkets[4] have been denied to residents.
What I was alluding to in my previous comment – The link between eliminating the practice of racially motivated redlining and the housing crash (as James Cooper tried to argue in his comment) is a racist fallacy. Racism isn’t a conspiracy theory, so no tin foil hat here.
Elizabeth, I do not condone racism in any form. Race should not enter into a business transaction. However I do believe that one has the right to choose who one associates with.
Thank you for taking the time to read my post and for adding your opinion. All opinions are welcome when they are presented in an adult manner.
During the housing bubble in the US minorities were targeted by “predatory” lenders. See how that works? The EXACT OPPOSITE of “racist” redlining was spun as racist! It’s probably racist in Canada, which is kind of like rape in Sweden.
My Mexican wife was “targeted” by racist mortgage lenders and real estate agents. I don’t know how they knew she was Mexican, since neither her first name nor our surname are “ethnic” (Binks hardly seems Latin, right?), but they’re a wily bunch!
I was also targeted, but since I’m a gringo, it wasn’t racist. My wife was elated to be targeted, and all but painted a bullseye on herself, and on me, and we bought, against my better judgment, at the height of the bubble. I would have called it “against my will” if my own will hadn’t been thoroughly beaten and broken like a piñata at that time. Is that a racist thing to say? Oh well, I like it.
Anyway, we got divorced, and I took all our credit card debt (really hers. Women be shopping!), and she kept the house and mortgage. Now I’m debt free and she still has a house and owes as much as ever.
The basis of the suit is that if the failed buyers had not put in an offer the seller would have received more money, but the delay between offer and failed closing caused them to lose money. Also, the deposit is not collateral.
It’s totally fair game to go after the failed buyers if through their repudiation of the contract you suffer a loss. If folks don’t want that risk on their head they should not make unconditional offers.
As I understand it the banks were pushing for B20. If you want to switch lenders at renewal time you’re needing to pass the stress test requalify, which will trap a lot of folks with their current lenders where they don’t get stress tested.
I suspect the banks are fully aware of this and are highly in favour of effectively locking in their customers with no negotiating leverage.
Yup. I would. That’s why the banks have been raising their posted rates lately.
“Aww, you don’t like it? Well then there’s the door, tough guy. Oh wait, you can’t walk out, can you?!?”
I hope folks learn their lesson. I started off my career in public service with a conservative ontario government and was on two strikes early on with a paid off student loan (1k per month on a 2k per month salary). Lots of tight budgets early on, and a commitment to have a safety net and make good choices, including a good deal on a condo, paid off quickly. In public service there have been 15 years of peace and increasing salaries, colleagues doing a lot of spendiness. I do talk about your blog a lot, hope they listen before things shift, maybe soon ?
Me too. *fist bump*
As a homeowner with a paid off mortgage, I agree with you 100%. And, I share your reaction to the mortgage broker who has to pay the $470k.
How fun is it watching this crap from the sidelines as an actual responsible homeowner?
Only slightly funner than having a paid off mortgage.
It makes me happy to see you educating people who never learned about finances. And you’re always good for a laugh or two on your blog.
I originally had a 30 year VA, no down mortgage and within 18 months changed that to a 15 year mortgage and paid it off in 11 years. So I’m pretty happy over that accomplishment… but now I’m stuck with a house that I’m growing tired of.
Had I just rented over those years, I could have changed locations multiple times as I tired of the apartment or condo. Extra benefit of frequent changes in location would have facilitated my move to minimalism. As it is, now I have to get rid of about 14 years of accumulation in one location.
Why did name calling enter into a civil debate? Not to mention the filthy personal message that you emailed me.
I take offense to the Bill Cosby remark. I have never forced myself onto anyone and I believe that those who do should be locked up.
I don’t see how anyone could condone another person being forced into a life of servitude ($470,000) when the seller is not out anything. Did the seller lose the house? No. The seller had a let down of his euphoria but that was all and he got to keep (I assume) the earnest money.
Ah James,
It is obvious you don’t have a firm grasp of concepts like contractual obligation, financial responsibility, the standards/norms/laws by which modern business is conducted, nor the more informal basics of risk-and-reward or buyer beware.
Comparing a date (a human emotional/social activity) to a real estate purchase (a concrete legal/logical event) is not at all appropriate, nor applicable.
If you think GtA market and home boners are crazy, read about Poland’s mortgage crisis caused by idiots borrowing in Swiss francs at their historical low driving the bubble. When the bubble crashed, franc went up, properties price went down, and what happened is that they could have had a property valued at 0.25mln polish zloty, with mortgage for 100k Swiss francs, that later on was valued at 0.18mln polish zloty with a mortgage of 0.36mln polish zloty (still 100k Swiss francs), despite paying regular mortgage payments.
And unlike in the USA where you can hand in the keys and walk away, here you actually owe 100k CHF in this and next life (or house). So there you go. All because the interest rate of CHF was way way lower than polish zloty and they wanted to be smarter.
Home (b)ownership is not a bad thing if you can afford it.
Another excellent, thought provoking read! The folks who get a “free pass” from the government after a botched real estate deal certainly will expect other “free passes” in the future.
I see similar, though not financial, events at my work. My co workers who don’t study to pass their exams (they cram at the last couple days) obviously fail the exam. My employer allows them to repeat the exam multiple times. Not only that, but my employer allows them to study on the clock! Thus, they have no reason to buckle down and actually pass the exams. Because I passed on the first try (because I actually studied ahead of time), I have to do my job, and sometimes cover for them while they are studying on the clock. The work place is generally less efficient because my co workers get a free pass. My energy goes towards supporting them because they don’t get their shit done.
I guess this is kind of a parallel (ish) with the broke ass morons who had to pay 470k. The thing is, the government didn’t step in and help them pay that. Stated differently, the tax payers didn’t step in and bail them out of the 470k. Therefore, I agree that the buyer should eat the cost because the buyer should have done the research to understand all of the details of buying the house. I/we shouldn’t have to pay for their stupidity.
smh.
The moral of the story is that actions have consequences. And when you have large amounts of money and leverage involved, those consequences can be pretty massive.
I love it! Home Boners need to be slapped down (figuratively speaking).
While I think your article may have been a little harsh, I do agree with all of your statements. People need to take responsibility for their own actions and consequences. This includes wealth, health, etc.
I do think there is one place where the establishment has let Canadians down. The education system (high school) would really benefit from including mandatory course(s) on personal finance.
Hello. Nice blog but the use of the term “canuckistan” seems derogatory. It’s like saying “hongcouver”.
Okay so hear me out, I live in an expensive city ( DC) Where renting is the same as a monthly mortgage cost. Yes I am 24, I do not have a clue where to invest my money ( I do put away money on my 401k but I do not look at my 401k too often). Thanks to reading your story, I have seen Index Investment pop up multiple times. Okay where do I start with that? Vanguard? Schwabs? Any books that go in detail with Index Investment? Is owning real state that bad when I would be paying the same amount of money that I am paying for rent now? I accept constructive criticism. – Another Millennial trying to get my financial life together
You should check out JL Collins blog series on stocks. It is very helpful and once you get it you won’t believe how easy investing actually can be.
I really want to thank you, because your clearly laid-out arguments about housing reflect my suspicions that this whole thing is a scam for the past decade – I finally feel like I’ve been gaslighted all this time by everyone around me who think *I’M* the crazy one to not buy. I live in Sydney, Australia, where the price of a house is 13 times then median income. Real estate is the national religion, and everyone thinks they’re a genius because they bought something (anything) in the past 5-10 years, put a lick of paint in and sold it for more.
A financial advisor recently wrote to in their weekly email raving about how they helped their client buy an apartment for $425k 9 years ago and now it’s worth $630k, wow I should talk to them about signing up because they helped their client make $200k+! When I wrote back that $425->$630k is roughly 4.5% return over that time, and that excludes interest, maintenance, insurance, etc etc, which then puts it at roughly in line with inflation, not even counting buying and closing costs, that can they please explain how this is a good investment. The financial advisor then fobbed me off about how the market has been underperforming but he’s sure it’ll deliver in the next 10 years. This is in the largest housing boom in the past 40 years! But while I do the math, everyone else is enamoured by the ‘wow! $200k!!’ and I am left to feel like the only sober one in a very drunk party.
This is my very long way of saying THANK YOU. I learnt about 10 years ago there was no point in expressing my point of view, explaining the numbers, pointing out about how this boom is related to extraordinary factors such as quantitative easing, influx of foreign money, deregulation (people can unlock their pension to buy houses for their retirement), because it would lead to religious fervour that ends with metaphorical burning at the stake at these dinner parties. I learnt 10 years ago just to allow people to feel sorry for me who has been working for so long but she still doesn’t even own a house! It’s like she’s not even a real adult!
Thank you for braving the horrid comments you get, to call things out the way they are. There are many of us who have had this inkling that this s*t is f*ked up, and coming here is like finally stepping out of the loony bin. Best regards, from Australia.
I totally agree with you about buyers driving up the prices of homes crazily. The stupid people that end up in foreclosure or bankrupt drive up the price for the entire neighborhood. The other party you didn’t mention was the real estate agents who are the most overpaid profession. If you watch these real estate shows these people with no to little education are making tons of money for doing nothing but contributing to rising housing prices. I think they should get a flat fee, not a percent and hopefully this will be the trend with things like Redfin coming out. The amount of money lost in transactions costs of buying/selling a house is crazy and is an incentive to goat people into being unnecessarily greedy.
Wow. That’s a tough pill to swallow. But I think I actually agree with you. It should allow buyers and spectators to pump the brakes and think about what they are doing. Never hear of this until now.
Honey, it is very naive of you to laugh at the “broke ass morons” who “invested” in real estate: your so-called assets are predicated on those mortgages the broke ass morons take out. Your wealth can collapse as fast as theirs because you have no control over it. It has been done numerous times…
Lastly, having a $1,000,000 in stocks, bonds, and ETFs does not put you in the top 1%. The top 1% do not invest in the stock market, they design and control it.
Cheers!
Trinity, the 1% do not control the stock market. The fundamental value of the market lies in the expected cash flow streams of 3,600 companies all staffed with corporate tool MBAs like me whose mission in life (8-5 only!) is to generate more profit. This is what JL Collins calls the “beer in the glass”.
Sure the wealth of the 1%, speculating on those cash flows, can influence the equities market, but actually most of that is driven by institutional investors, as in big ass bureaucracies. This speculation is what Collins refers to as the “foam” which as we all know ultimately dissipates.
Moreover, Mrs. Shen’s portfolio is a long term strategy supported by her eloquently articulated arguments laid out here and in her book. Her working theories have a proven track record over 100 years, not to mention during her own Investment time horizon which has included 2 financial crises to date. Your criticism of the approach is just a baseless, envious cheap shot.
Lastly, I think “broke ass morons” is her saying that these people acted foolishly and she is using some literary license and humor to use their scenarios as a cautionary tale.
Caveat emptor, let us not forget.
I own my home. It’s just that, a home. It’s not an investment. As JL Collins says “they are indulgences”. I love mine. My garden, tropical fruit trees, bonsais give me joy. I mean how cool is it to grow bananas in your back yard!
I moved around a lot as a kid and had some other life experiences that have led to my enjoyment of the grounded feeling that owning my home brings me. I’m very happy where I live and By May 2020 I will have paid off my 20 year mortgage in 6 years.
However, this is $500,000 of my net worth not throwing off cash. Depending on my FIRE date and plan this might have to change long term.
Bottom line is that home prices generally appreciate at the rate of inflation and as Mrs. Chen rightly points out in her book, taxes, maintenance, insurance, etc don’t make that an investment. You have to live somewhere.
People who make commitments need to keep them. personal responsibility.