The national gamble

From the Washington Post
(Second of three articles)

The cost of real estate, the housing market’s fortunes, mortgage rates and society’s home fetish would not matter, save for this: Eight-three cents of every dollar of wealth Canadian families hold now sits there. This has not happened before. It’s a giant national gamble.

Alan Greenspan, former Fed chairman The reasons for the real estate renaissance, especially since Nine Eleven, are many. Eschewing risk, investors took billions from unstable stock markets and plowed them into bricks and land. The interest rate collapse engineered by Alan Greenspan made investing in fixed-income stuff like bonds and GICs a mug’s game, so billions more went into housing. And Greenspan’s easy-money revolution made borrowing so cheap it spawned two nations of debt junkies.

Cheap money meant real estate prices could rise quickly and persistently because affordability was not really impacted. So they did. Prices went nuts. A mid-Toronto clunker worth $500K in 1995 was worth $1 million in 2005. The average price of a Vancouver single-family home touched $741,000 last month. An MP colleague of mine from Calgary remortgaged his investment properties recently and the bank told him they’d doubled in value in a year. He was astonished, thrilled.

David Dodge, Bank of Canada Governor So, let’s bury the myth right now that government has not had a hand in creating the greatest investment crap game in history. Central bankers like Greenspan and the Bank of Canada’s David Dodge have been instrumental in inflating asset values by deflating the cost of money.

Government has also played a role in lowering the bar for homeownership. The 5% down mortgage was originally intended to help a few thousand struggling young families a year. Today it is used by millions to buy homes they should not be able to afford. The use of extreme leverage in real estate has now become mainstream, for better or for worse.

The feds have also allowed 40-year mortgage amortizations, which lower monthly payments, increase interest charges, and make debt more unrepayable in a reasonable period of time. When it takes four decades to retire a home loan, one can easily ask if this is not a form of life indenture. And then, of course, there’s the advent of the no-money-down mortgage, recently championed by Scotiabank, taking up the lead of smaller, more aggressive lenders.

Government has also smiled on home ownership by refusing to tax the profits it generates. Capital gains realized on the sale of a principle residence are tax-free, unlike the proceeds from every other form of investment. This has also served to divert billions of consumer dollars away from financial assets, including RRSPs, RESP and non-registered retirement and investment funds, and into housing.

In fact, government has played a huge role in getting us to where we are today: the national savings rate is zero, in part because mortgage debt has reached the highest level in Canadian history. Retirement savings assets have stagnated to the point where the traditional mid-winter “RRSP season” has all but disappeared. Assets under management at major mutual funds companies, such as AIC, has been halved. And, as mentioned, eighty per cent of all family wealth is now in one asset alone – the family home.

This is obviously not a problem if real estate values continue to go up forever, or at least the next 20 years so house-rich Boomers will not suffer. But so far in the history of mankind, no asset has performed that way. Even tulip bulbs.

This means, to me at least, that a responsible government does not wait for things to hit the fan. It also means, to me at least, that grumpy, money-losing, stressed-out, panicked and over-mortgaged homeowners are not the best kind of voters to have.

This is why I would argue for s strategy to deal with today’s unique, and uniquely dangerous, real estate mania. And soon, actually.

18 comments ↓

#1 Stephen Heath on 10.09.06 at 10:22 pm

Here’s a posterboy for you Garth…

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2006/10/06/carollloyd.DTL

#2 Real Conservative on 10.10.06 at 12:18 am

Immigration and transfers of third world cash into the first world (some of it ill-gotten no doubt..), is fueling the bouyant economies of a first world buckling under loss of industry to same third-world.

Is this a bubble? You better believe it and one hell of a big one.

#3 Catherine on 10.10.06 at 5:56 am

Having government artificially raise interest rates to cut the stem of housing costs would be dangerous on so many levels. While higher interest rates would be beneficial to retirees and those wealthy enough to invest, the higher interest rates definately would be detrimental to younger people and families. Don’t forget higher interest rates also lead to higher costs to consumer products (these interest costs are passed along to the end consumber). Slippery inflation spiral.

“Government has also smiled on home ownership by refusing to tax the profits it generates”. And as it should. Home ownership should be encouraged. Our parents, scrimped on any luxury and bought homes on low 3% -6% interest rates.

Also, the government does not allow primary homeowners to deduct interest charges from their taxable income; hence, it should not have its fingers in any gains of the sale of the home. Remember – the home owner pays for his home, repairs, and improvements with AFTER-TAX monies.

I’m also a firm believer in “let market forces control the costs.” Those, who are tempted and then buy homes beyond their means and don’t plan for any future personal disasters, then, so be it. It’s the same thing as investers, who put their monies into mutuals or stock markets and lose their nest egg, without analyzing and accepting the risks and potential losses. Remember NORTEL?

Garth, high taxes also lead to normal people not to be able to invest in RSP’s. Also, many people, especially, young ones, CHOOSE to spend their monies on the here and now (SUVs, expensive trips and cruises, bigger entertainment units – plasmas, big screen, surround sound, bigger homes, pools, time-shares, boozing, etc).

#4 Larry on 10.10.06 at 8:24 am

Garth
I think this is pretty sad. How much is our “new government” going to
save?

http://www.cbc.ca/canada/newfoundland-labrador/story/2006/10/10/labrador-internet.html

These Canadians deserve better!

Larry,
Toronto

#5 Geoffrey on 10.10.06 at 8:29 am

Right Honourable Stephen Harper
Honourable James M. Flaherty

Why does the Government of Canada think that Canadians can afford to fork over half their hard earned money to the Government! (see article below) I can never afford to make any significant RRSP contributions, and those I have made in the past had to be de-registered to cover taxes!

As a citizen of this country working as hard as I can, handicapped by my demographic as a Generation-X cohort (I am 41 years old, born in 1965, the worst year economically in the entire 20th century according to Boom, Bust, Echo, by David Foot) and I am drowning. My wife is pregnant and I don’t know how I will pay my income tax bill for 2005 of $6,257.43 due to the fact that I was forced out of a stock position in Enervest Diversifed Income Trust, a position I took to create extra monthly income in a tax advantaged manner so that I could afford to live. I was heavily margined and when the position was sold out it ironically created a large capital gain, even though it decimated my equity. The former Liberal Government decided to create uncertainty in the Income Trust taxation structure, and I was thus sold out by my broker in the crash of this market. I voted for the Conservatives because I thought that they would do something about taxes. My stock portfolio now has ZERO equity and my after tax pay cheque as a discount stock broker is $1100 every two weeks. My employment income in 2005 was $44,798 after payroll taxes I take home $29,000. If I sent all my money to CRA for the rest of this year, I still couldn’t afford to pay my tax bill, let alone mortgage, property taxes, food, utilities, transportation etcetera.

I thought that your Government was supposed to reduce taxes and all you did as far as I can tell is raise my payroll tax 1.5%. The GST cut is a consumption tax, but I can hardly afford to buy anything with after tax income, let alone afford further taxes. I am rethinking having a baby with my wife who is pregnant and the only strategy I can figure out within this tax regime is to sell our house, make a $31,306 RRSP contribution which represents my unused RRSP contribution room which I can never afford to contribute to due to tax, quit my job, deregister the money for the life long learning plan and go back to University for the rest of my life, get divorced and forget about making a living and having a family in this impossible country. I am beginning to hate Canada and it’s tax regime. I will never ever, ever get ahead in this country the way I am taxed. If I am forced into any of the above situations, I will devote 100% of my time and life into creating extremely detailed and savy multi-media campaigns publicizing to all Canadians and the world just how bad the tax regime is in this country and how it beggars Canadians simply trying to have a family. The only people I can think of who are able to get ahead in this country are Federal politicians, so I shall also run for Parliament.

Taxes are killing me. Please explain! I will not tolerate this anymore. Please do something!

Geoffrey L.,
Hamilton ON

#6 KG on 10.10.06 at 8:33 am

Garth
Could you share your ideas about what the government should do regarding the current situation that people find themselves in? The people that are at the greatest risk (High Ratio borrowers) have the least options regarding an exit strategy.
If housing prices start to fall there is not going to be an exit for these people. They are going to lose there equity and in many cases the 0%-5% down people will find themselves owning an asset that is worth less than the mortgage.

Would you advise people that currently have a high ratio mortgage to sell now while they have a chance to get the value of the mortgage back and go back to renting?
I read an article about a condo owner that actually was advised by a real estate advisor to sell and go back to renting. She did and basically broke even on the sale. She is currently living in a rental paying less than her mortgage with some cash in the bank and waiting for a better time to invest in real estate. You have been speaking about the impending real estate bomb that is going to happen … but I have not really heard you speak about things that people need to do to protect themselves if they are one of those people that are at high risk to lose there home.

I will publish some thoughts on this in the next 24 hours. — Garth

#7 jerry on 10.10.06 at 9:17 am

Catherine
“It’s the same thing as investers, who put their monies into mutuals if you have a good advisor, or have educated yourself, and haven’t overextended yourself there should be know problem or stock markets and lose their nest egg, without analyzing and accepting the risks and potential losses. Remember NORTEL?

Garth, high taxes also lead to normal people not to be able to invest in RSP’s. Also, many people, especially, young ones, CHOOSE to spend their monies on the here and now (SUVs, expensive trips and cruises, bigger entertainment units – plasmas, big screen, surround sound, bigger homes, pools, time-shares, boozing, etc).”

Catherine if people would PAY THEMSELVES FIRST there wouldn’t be a problem

Larry, from your article:
“Roberts said if the federal government’s decision is not reversed, sounds like a good plan to me “will have to be found or the site will have to close.”

Geoffrey
“I am
rethinking having a baby with my wife who is pregnant” A bit late isn’t it? Surely murder is not an option!!!

Taxes are killing me. Finally people have caught on to this fact. Don’t know whether to believe your story or not! This is the internet!!!

KG
“Could you share your ideas about what the should do”

Did the get these people into this situation?

OCTJMO… ICBW

#8 jerry on 10.10.06 at 9:26 am

I obviously need more practice with this bold and italic stuff.

Besides messing up quite a bit of the post KG the word government didn’t even get printed. Hopefully you can tell where to put it! If only we could get rid of most of the government so easy!!! Taxes wouldn’t be such a problem to everybody

#9 Tim D on 10.10.06 at 9:52 am

The government should not have artifically increased interest rates to stem real estate investment. The newer mortgage products have enabled many young families to enter the real estate market and realize the dream of owning a home. A short-term fluctuation in prices – a sharp decrease in the rate of growth in value or even an relative small absolute decline in values – is not a significant issue. Why? Because young families I know are not seeking to flip their homes any time soon; these are investing in an asset they will live in and enjoy for many years. Are the changes in lending good for everyone? Probably not. Do individuals need to be responsible for learning what is right for them and making appropriate choices, based on this? Absolutely.

#10 K2 on 10.10.06 at 1:24 pm

I sure hope there’s no thought being given on artificially inflating interest rates. you said:

” It also means, to me at least, that grumpy, money-losing, stressed-out, panicked and over-mortgaged homeowners are not the best kind of voters to have.”

You think we’re grumpy now? What do you think would happen when overnight our managable variable-rate mortgage payments skyrocket exponentially fo no good reason? You wanna do something? Regulate the lenders so that they can’t offer stupid things like no money down mortgages or 35 year mortgages. But don’t punish those of us who scrimped and saved for a decent downpayment and did everything right when we bought our homes. We don’t deserve to have to shoulder the burden for the dough-heads who jumped into the market when they couldn’t afford it.

#11 Paul A on 10.10.06 at 2:02 pm

Imagine a world where people took responsibility for their actions…

Can you believe that people actually blame McDonalds for making them fat!?!?

#12 GLEN on 10.10.06 at 6:52 pm

I have no sympathy for people too stupid to figure out that this is one giant bubble.

I will just sit by and wait for the giant bursting sound and buy your over-inflated house 40% less than you think it’s worth…

Is the government accountable for stupidity Garth?

#13 Flip on 10.10.06 at 8:38 pm

Everything in life is perspective. To a third world immigrant who used to live in slum area, having a minimum wage job living in a bachelor apartment that has running water, electricity is something to be grateful. We have it really good in Canada.

#14 Ray on 10.11.06 at 6:41 am

Mortgage debt is only going to increase with Genworth Financial’s announcement of 40 year amortized mortgages. Read about it at http://www.torontosun.com/Money/2006/10/11/1999968-sun.html.

#15 Henk Verkerk on 10.11.06 at 9:37 am

Garth….Now that you have told us Governments should do something…..!! Well you are Government, so what are you going to do………??

H.H.Verkerk

(1) I have independently researched the problem and spelled out here what I believe a national climate change action plan should contain, and that is known to the decision-makers.
(2) I have taken concrete action in my area to equip all reisdents with an action plan of their own.
(3) For your information, I am not ‘government.’ — Garth

#16 Ken Horton on 10.11.06 at 11:22 am

Garth
Could you share your ideas about what the government should do regarding the current situation that people find themselves in?

[SNIP]

I will publish some thoughts on this in the next 24 hours. — Garth

Any thoughts on this Garth?

It’s coming. — Garth

#17 Henk Verkerk on 10.11.06 at 3:15 pm

Sorry…….I was not referring to climate change as the article I was reading dealt with real estate.

#18 TK on 10.12.06 at 2:09 pm

Wow, I really enjoyed reading this article of yours, Garth. It’s really well written!

I’m waiting for the bubble to go “POP”. I hope it’s soon rather than later. =O) I really need to buy a condominium.