The landing

Judith’s an accountant. (What does an accountant use for birth control? Personality.) “Every day I am feeling astounded and astonished at people’s financial illiteracy,” she tells me.

Worse, she’s an accountant in Vancouver, the current epicentre of dumb.

“I met with some clients today who between them have a household income of $120k, (they are “educated”), and have a SFH in Vancouver worth about $1m-$1.5m MORE than what they paid for it 15 years ago. So what do they do with their new-found wealth? Maybe sell, and rent? Retire (net worth is probably $2m including the sale of other real estate holdings)? NO! They…..buy MORE real estate, and mortgage it to boot, determined to be landlords in a market that will never fail (real estate in YVR always goes up, they tell me!).”

Remember what I said about higher prices? Yup. They breed higher prices – since human nature makes people greedy and speculative. This is the very essence of asset bubbles, when ‘everyone’ thinks the same way, when risk seems to float away and people crap on certain angelic and blameless bloggers for suggesting caution. Because houses are going up, people expect them to go up. They want to go up. They will go up. God commands this.

“If that doesn’t make you roll your eyes,” Judith continues, “this might. I had a nice conversation with the wife today about RRSPs (they had no idea RRSP contributions made today become taxable as RRIFs after age 71) and she told me she has no idea if her work has a pension plan. Um, ok? After ten years of working there, she has no idea if there is a company pension plan in place, and if it is defined contribution or defined benefit or? Just that she “thinks they have something upon retirement”, what it is, she has no clue (just two decades from retirement).

“Here is a case in point about the mentality in Vancouver these days. Who needs pesky things like pension plans when we have the all godly REAL ESTATE to save us? I fear for people in our city, and I am doubting this will continue much longer. I would say this is the peak, given what I’ve seen. I’m no expert but this is all downright scary, the infallible faith people have in just one asset class, and a government assures us that this is the way to go, debt be damned.”

The longer this goes on, the more insane the chart, the greater the house lust that Judith references, the more I’m coming to believe that the landing will be hard. Splintered-tail-fin-&-body-parts-in-a-smokey-hole hard. It’s not Chinese guys primarily responsible for this (there are far too few offshore buyers) but the unbridled house horniness that spreads in a city where everyone is real estate manic.

Look what they’ve done. Average detached price $1.817 million:

Those who want to blame others for what we’re doing to ourselves figure in a place with ho-hum wages that prices can only bloat because they’re being fed by foreign cash. But Judith says otherwise. People with real estate assets are leveraging them higher. Subprime lending is exploding as buyers stretch to make down payments on houses too dear for CMHC to insure. Family money is doubling down on a single asset class – real estate – as parents borrow against their illusory equity to buy more for their kids. And it’s all happening while people are oblivious to the fact interest rates have finally started their ascent. This is a far more dangerous situation than any invasion from Guangzhou.

The latest news from the US is compelling. The odds for a summer rate hike have increased from 4% to 58%, with central bankers now openly talking of two to four more increases in each of the next two years. Yikes. Inflation data. New home sales (an eight-year high). Labour stats. Everything’s suddenly pointing in the same direction. Normalization has begun.

I will leave you with this note from a husband-wife doctor team in joint practice, earning $800,000 a year. They own a million-dollar condo and a half-mill place in Whistler, plus $80,000 in watches, $60,000 in stocks and $120,000 in cash.

“Wife wants to sell condo and get into Vancouver detached home market. I am not opposed to this idea as we can comfortably finance a fairly large mortgage. However I’m quite annoyed by the value of the houses I see before me.  I do not want to take out 2-4 million dollar loan for a tear down in Kits or a fixer upper. Annoying to see our colleagues living it up in large mansions in Shaugnessey because they were born 20 years earlier to a lower housing market. This and along with the possibly of a crash/correction leaving me high and dry with a mega mortgage is not a scenario that I relish. Other than that our goals are unclear.”

Doomed.