A little screwed

Andrew just bought a condo in DT Calgary. Poor Andrew. Unlucky in love, now horny over property.

“A few years ago my life changed and I stopped owning a house (along with a wife and a couple dogs, I really miss the dogs) but with my divorce winnings (I mean home equity buyout) I put down a deposit on a condo. Seemed like a good idea at the time; shortly after I found your blog which I’ve been following ever since,” he says. “The logical side of me regrets buying the condo (since renting is cheaper) but the emotional side is excited for it as its a pretty sweet condo in downtown Calgary (which as a single guy can only help my cause).”

This is a small lesson in delusion. It goes to the federal election coming up in 26 days, because people will make themselves believe just about anything, in the face of overwhelming evidence to the contrary.  For example, Andrew works in the oil sands, a fly-in-fly-out guy who should know that on days like Tuesday (oil lost another 2% of its value) he has the job security of a gnat.

Second, buy in Calgary in the autumn of 2015? What’s he thinking? Sales are way down (off 33.5% this week year/year), prices are starting to slide (the average is now 5% lower) and housing starts are a disaster. Last month new house construction plunged 30%, according to the Conference Board of Canada. In short, the real estate plop has only just started in Alberta as more sellers realize crude ain’t coming back soon, nor the jobs it swept away.

Third, hormonal little Andrew (he’s 28) tells me he’s trading a rented condo costing $1,500 a month all-in for a $370,000 unit that will drain $2,000, not including property tax or utilities – in which he plans to live only 50% of the time when not up in Fort Misery. So there you have it – converting cash into a combination of debt and eroding equity at a time when the economy is sagging and jobs blowing up.

But Andy reads this pathetic blog: “It was always my intent to put down another 10% on the condo to get rid of cmhc fees and lower my monthly payment but with mortgage rates currently so low I’m starting to think I should use that money (37k) to max out my rrsp, beef up my tfsa and pay off my motorcycle.” At least the bike goes fast and vibrates.

I hold up this young dude as today’s example of why we’re a little screwed. Collectively, we’re making risky choices. The house lust continues unabated – in fact it’s picked up speed. The descent into debt is unprecedented – in fact I expect more, now that everyone believes interest rates can never rise. And voting intentions among the sub-35 cohort show a serious tilt to the left, in the belief the country can tax and spend its way forward. After all, this is what they’re being told. Similar happened in Alberta when the NDP won a historic election there.

Against this, lie some ugly facts.

For example, in the Conservatives’ last budget – the one on which all the parties are basing their projections – economic growth was pegged at 2% for 2015. In reality, it will (maybe) be half that. “For this year as a whole, we think the economy will be lucky to grow by 1.0%, possibly falling just short of this,” says economist David Madani.  “What’s more, if our fundamental concerns about the overvalued and overbuilt housing market begin to play out next year, then growth next year won’t be any better.”

What does this mean? Simply, nobody can believe anything in the economic promises of the NDP, the Libs or the Cons. The numbers are outdated.

Thus, if Mr. Harper is reelected and maintains the status quo, there’ll be no surplus unless the economy rebounds, which is doubtful. Instead, the deficit should be about $4 billion per year (including this one). If Mr. Mulcair is elected, promising over $4 billion in additional spending all to be paid for with higher corporate taxes, there will still be a $4 billion deficit, plus pissed-off employers. If Mr. Trudeau is elected, his forecast of a $10 billion annual deficit will be something closer to $15 billion, and he will have increased taxes on companies and higher-income individuals in the process.

But there’s another problem Andy knows all about (or should). Oil. The stuff is currently trading around $45 a barrel and is under pressure as commodity prices sit at 16-year lows. Several credible forecasters say the bottom is somewhere between $20 and $30, with recovery to take years. But the Conservative budget of just six months ago (which all parties are using) predicted crude would soar to $75 a pop in a little over a year. Oops.

So chew on that. Economic growth 50% less than forecast and the price of our major export 40%  under the estimate. What else could go wrong? Oh yeah, a housing correction, with rising mortgages as bond yields swell, plus more layoffs. And did I mention that since last July the number of Albertans collecting employment pogey has increased by 72.2%? Or that a survey of business confidence released Tuesday finds most Albertan entrepreneurs now believe things are getting worse?

If you think this is the time for more tax, well, meet Andy. He’s confused, too.