Canada's Housing Bubble

Jan 26, 2011 Garth Turner GreaterFool.ca

It took merely a week for F to do to the housing market what he said he was avoiding. By announcing 35-year mortgages were kaput – but not for another two months – the little faux bubble-pricker unleashed what seems to be a torrent of kamikaze buying by the HGTV youth corps.

Mortgage brokers tell me they’ve seen a big surge in kiddies getting pre-approved, while realtors dealing in starter homes are watching multiple bids and panic buying. The generation that only cares about monthly carrying costs (because they know the debt will never be repaid) is desperate to rent a huge pile of money before F’s wee reforms take hold.

And as I told you last week, the flames are being fanned by an industry steeped in irresponsibility. For example, here is part of an email blast sent out by GTA-area realtress Michelle Alton. I did not alter her words, by the way:

35 years amortization being removed, Maximum amortization will be 30 years.
This will increase debt service ratios and reducing the maximum a customer is eligible to purchase.

VERY IMPORTANT!
No news on deals currently approved if the rules will apply if the mortgage closes after March 18th, I suggest anyone looking to refinance or purchase to get an application started and completed before March 18th. Existing mortgages approved I recommend getting me all outstanding conditions met so that we can ensure you do not get effective.

If you have been thinking of buying a home, NOW is the time to do it as there will be less people qualifying to buy a home after the March 18th, 2011 expected effective date!

Thinking of selling? NOW is the time to do it as there will be less people qualifying to buy a home! This includes yours! There could be a lot more houses on the market than there are buyers qualified to buy them. This could in turn, decrease the current value of your home after the March 18, 2011 estimated effective date.

It’s unethical, amoral and carnivorous to be egging on inexperienced and naive property virgins if Michelle expects – as she admits – that house prices will likely tumble after March 18th. She’s encouraging maximum borrowing and immediate purchasing, even though the 5/35 newbies could have their equity wiped out and be underwater by June. She, however, will have a commission.

If I were F, and had not engineered this whole thing just to create a robust housing market and the patina of consumer confidence amid hopes for rising home equity and economic recovery just weeks before a federal election was called, I’d be pissed. Poor dude.

In any case, here’s Jeff. I wrote about him a year ago when he contacted me with a hard-luck story as a former property virgin himself. At that time, this is what he told me:

I bought a home in Central Vancouver Island in 2007 for $300K – $10K down – 40 year amort.  (I know, I know – at least now I do) I did this for sheerly personal, intangible reasons, for the most part.  I had a pretty fiancé, I thought I needed forced savings…and I thought we would settle here. She is gone now.

I am renting the house out for a loss of around $500/month after mortgage + taxes. I am *really* bad with money.  At the time I bought I was generating around $100K a year.  I’ve just seen that reduced to $65K.  Still, I should be able to afford my bills, right?  Since 07, through my own stupidity, laziness and immaturity, I’ve managed to accumulate an enormous amount of debt – and recently found that due to my incompetence with managing my finances, I owe around $95K – over $50K of that to CRA. I am 38 years old.  I’ll be lucky to get a consumer proposal approved.  It would be my second bankruptcy, if I have to go that route, and screw me for life.

The tenants called on the weekend.  The house has carpenter ants. It’s in a place that I assumed will attract boomers, and wouldn’t lose a lot of value, but, realistically – it sure hasn’t gone up much, even through the last 2.5 years. What on earth would I do in 2.5 years when I have to renew at a rate of 7% or more, or even better, NOBODY is buying and if they are, it’s for 2/3 of what I paid or less?

I’ll have to walk away from it. I’m a financial idiot, and I’m hoping you aren’t laughing too hard at me…hopefully I’ve finally learned a lesson.

Last night Jeff unexpectedly sent me an update. He did declare bankruptcy. And he walked.

Hi Garth: Today I signed my consumer proposal and was given the option of walking away from my mortgage, or continuing to pay it and remaining on the hook for it with 2 years left before renewal, and all of the uncertainty with recent developments in mortgage rules and the obvious issue of consumer debt.

Is it not slightly obscene that I had the option to hang on to it at all?

Given that by signing the proposal I have next to no extra income for a few years, I am ecstatic that I will avoid the certainty of dealing with tenant issues (the dryer is already making a noise, the fence is rotting, and who knows when the carpenter ants will return), and don’t have to worry about being underwater when the time would have come to sell.

I took about 2 minutes to decide to walk away.  The freedom is indescribable.  I’ve been a fair bit more responsible with money, and now I’ll be forced to, but the upside is clear as a bell, even considering my non preparedness for retirement.  I won’t have to deal with that albatross anymore.

Thanks for your continued commentary and I look forward, in a sort of morbid way, to seeing what the market holds in the next few years.

There is no good ending to what we are now doing with the commodity that used to be called shelter. No soft landing. No gentle descent to earth and affordability. No escape for the kids that cougars like Michelle will be feasting upon.

But it will be morbid, speckled with ants.