The other day a reader sent me this article on the CBC talking about the experience buying a home right now for some hapless Canadian buyers. Basically, this couple bought a pre-construction property in Whitby (a suburb of Toronto) last year and were shocked to learn that new people buying into the development right next to them were paying up to $90,000 less than they did. All in a matter of months.
To come back a year later and see the same house that we bought is now $90,000 cheaper, that’s not cool,” Thompson, 52, said in an interview.
Awwww, they’re not happy. It’s not cool. Poor little Home Boners.
Alright, so what the Hell happened here?
Smarter Than Americans, Huh?
As Canadians, one of our favourite pastimes ever is to point out how much smarter we are than Americans. We would never have elected Trump. We have health care and gun control figured out while Americans spin around in a circle. And we absolutely, definitely would never pump housing prices up to a dangerous level and cause a housing crash.
And then we went ahead and did exactly that.
We fucking gorged on debt. At the height of the 2008 housing crisis, Americans’ debt-to-income ratio, which is a measure of how much debt they carried relative to how much they made, hit a high of 147%.
Canada’s debt-to-income ratio right now?
Statistics Canada said Thursday that household credit market debt as a proportion of household disposable income increased to 171.1 per cent, up from 170.1 per cent in the second quarter.
In many ways this is even more bone-headed given that we knew exactly what happened in the US 10 years ago. They had no idea that a housing crash could ripple through a country’s economy as strongly as it did. We do. And we still did it!
But, many people argued, the US housing crash was brought about by sub-prime loans. Payments doubled overnight because of those shitty low-teaser-rate mortgages. Absent a catalyzing event like that, Canada’s housing market shouldn’t correct, right?
Well, we now have that catalyzing event.
In January 2018, the Federal government brought about a new regulation called B20. Basically, this regulation forces buyers to qualify for mortgages with a +2% stress test added onto the bank’s posted rate. 5-year mortgages last year were around 2.5%. Now, combining the Bank of Canada gradually increasing interest rates and the new +2% stress test. That makes a mortgage effectively around 5%.
There’s your doubling of interest rates.
Leverage Leverage Leverage
I love Home Boners. There’s just so bad at mathing shit up. Whenever we try to break down the numbers and show that hey maybe you shouldn’t be going into >$1M in debt for a house, they just say “Leverage leverage leverage,” as if that somehow makes everything OK.
Well, here’s how leverage works. In a rising market, if you buy a $1M house and it goes up 10% to $1.1M before you take possession, yet you only put down a 10% down-payment, then your gain would be $100k/$100k = 100% up! Woohoo! You’re such a genius!
But it can go the other way too, as this couple just found out. They put down a down-payment of $90k to secure their spot on the lot. And now their neighbours’ houses are selling for $90k less. That means they just took their $90k and set it on fire. -100% return. Do not pass Go. Do not collect $200.
And I know, the Home Boners are probably going to say “Well, the stock market just dropped 666 points in one day! So stocks aren’t safe either!”
Which is correct. The stock market is volatile, but you don’t typically go into leverage to invest in it. If my portfolio dropped $100k because of the stock market, that’s OK. I still have over a million dollars in that situation, plus my portfolio is paying me money via the Yield Shield which I then use to fund my nomadic lifestyle. A house pays you nothing. It just costs you money.
But when your house goes down 10%, and you bought it on 10% leverage? It’s all gone. And judging from this couple’s inability to add to their down payment to get their home price reduced, I suspect that $90k was their entire life savings.
I was watching the movie The Big Short on Netflix the other day about the Great Financial Crisis and there’s this scene where Steve Carrell went to a strip club and asked one of the dancers about their real estate exposure. Turns out, the stripper had 3 investment properties. That’s when Steve started getting alarmed.
But fortunately, we’re not that bad yet. Here’s another story about another woman in the same housing development who was shocked to realize that her house just went down $100k.
She says she paid $955,000 for a 2,749-sq.-ft. detached house. Last month Mattamy began selling the same model on a similar lot for about $859,000 in Queen’s Common Phase 2.
“I wish I could walk away from it because it’s just too much money,” Thompson said.
But how could she have known that was going to happen? It’s not like she had warning signs…
When she went back, there were only two lots still available and Boni ended up spending $899,000, plus additional money for upgrades, exceeding her target price of $500,000 to $600,000.
Although she owns a home already, she said Queen’s Common would be a better place to raise her son.
“No one understands until they’re in your shoes. At the time it was rushed. I have a 3-year-old. I’m thinking about his future, I’m thinking this is a good investment. It’s going to go up in price, I’m going to do something nice for my child,” she said.
This is her second property? Yuh-oh…
Thompson, a bus driver, bought her two-storey, detached house as a nest to share with her husband, her children and grandchildren.
Back in the 80’s, my Mom used to be a real estate agent in Toronto (so you can imagine how our dinner conversations typically go), and after 1989 there was a long, protracted 7-year period of housing declines. I was 7 years old at the time, so I didn’t really pay attention to it back then, but I later asked her what it was like to be a real estate agent during that period. She told me (and I’m paraphrasing here), everyone’s always happy when prices are going up. It’s when prices are going down that you really reveal the fractures of a couple’s relationship.
Because even back then, the decision to go into massive mortgage debt is usually not made by the couple equally. Typically, one partner bullies the other one into it. And when shit hits the fan, the one who felt bullied lashes out at the one who talked them into it.
Many times, she would sell a house to a star-eyed couple in love, only to be called back a few months later to handle the fire sale due to a divorce.
So what can these people expect after buying right at the top and seeing their money evaporate almost overnight?
I don’t know. But when they finally take possession, and the mortgage payments start up, and they’re surrounding by neighbours reminding you of your mistake every single day, and one person says “This was all your fault!”
Uh…Hope you have a good marriage counselor…
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