We all have a price

First, inflation and rates. Then, hypocrisy.

So the official hefty little number is 4.7%, says StatsCan. That means the annual inflation rate is up from 4.4% and sits at a 30-year high. It’s the seventh month running that the cost of living index has exceeded the target range set by the Bank of Canada. In fact, in October the annualized rate of increase was an eye-watering 8.4%. Meanwhile wages in Canada upped just 2.1% in the last year. This means three things…

(a) The bank was hasty – and wrong – to say inflation is transitory. Looks like we’re just getting wound up and wage demands will heap more fuel on the fire, and
(b) this hikes the pressure for higher rates, sooner. Mr.Market says the current BoC rate of 0.25% is headed for 1.5% in the next 12 months, meaning at least five quarter-point increases. So,
(c) five-year mortgages at less than 3% will soon be history. VRM borrowers will see a hike every few months. No wonder the kids have been flooding the banks to lock in.

Given historic low inventory levels now (owners are afraid to sell since they cannot buy) it all telegraphs increased competition and higher prices in the short term. Beyond that, with the cost of home loans headed for 4% – or double what they were six months ago – it’s an open guess what the impact will be. There’s always been an inverse relationship between rates and home prices. Will it hold, or have we completely, irrevocably, totally lost our minds?

 Of course we have. Even the people supposed to be in charge have thrown in the towel. Thus, it is with regret that we relate the sad tale of one Stephen Poloz.

Four years ago he was being driven around Ottawa in his black limo with that private parking spot at the Bank of Canada, where he was boss. He gave a presser in the spring of 2017 when real estate was going nuts (and prices were 50% less than today), slamming investors, speculators and the financialization of shelter.

“There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” he said sternly as values climbed 30% year/year. “Demand is being driven more by speculative demand, or investor demand, as opposed to just folks that are buying a house.” Investors inflate houses, he said. And that’s just plain bad for everyone.

That was then. This is now. The car is gone. So is the ethical compass.

This week Mr. Poloz helped launch a new company, called Key, which is all about turning residential real estate into a commodity, and in a way destined to further increase prices. People who become clients and take up fractional ownership through Key, he stated, are “attaching themselves to the price, so that if the price continues to go up, at least they’re not missing out of that potential.” So it’s no longer “just folks that are buying a house” but folks who wish to “not miss out” profiting on housing. Hypocrisy.

What’s Key?

The company is flogging co-ownership of real estate through investments worth just 2.5% of a property’s value. Clients (a.k.a. investors) buy little slices of a condo, for example, then Key signs up an occupant who will live there, also buy a 2.5% share, and make monthly payments to cover expenses and gain a little more equity over time. The example used is a $537,000 unit requiring $13,425 for the fractional ownership share, then about $2,000 in monthly fees. After three years the resident can buy it outright after taking a mortgage which will pay off the other investors – who profit from enhanced property values.

Bingo. The unit was turned into 40 financial securities. Involved was the owner-buyer, the securitization firm (Key) and forty lawyers. And how much has this added to the cost of a condo unit?

But wait. Besides making expensive real estate more unattainable by turning it into a speculative commodity, the math just doesn’t work. The poor schmuck who comes up with a 2.5% “down payment” also needs to foot closing costs on 100% of the sale price. This amount of money would be enough to buy all of the equity, not just a fraction of it. “The real problem here is that this startup, under the guise of being a venture to help people actually own a home and benefit from its rising value, is instead preying upon the most vulnerable people in the housing market,” says legal analyst Aron Soloman.

The risks are legion. Key is a nothingburger start-up and could be gone next week. What happens to your 2.5% then? Real estate values could fall – even a little – and the fractional ownership becomes worthless. Legal title to the unit could be seriously in doubt with multiple owners and an unproven corporate partner. Is the exit strategy sound? After all, an ‘owner’ can’t even sell the unit until three years has passed.

As you might imagine, Key is being slammed everywhere by those who understand real estate and lament the shysters, carpetbaggers, grifters and charlatans that a steamy market attracts. Stephen Poloz, to be charitable, may have been swept along on the tide of our times, failing to complete his due diligence and dissing the common good.

Or, it could be deeper. The man ran federal monetary policy for seven years. Gulp.

About the picture: “Attached is a photo of my Mexican neighbour Juan Carlos and his precious “salchicha” dog Charlie,” writes Don in Mexico. “We live at the end of a cul-de-sac and Charlies barks ferociously when strangers get too near our end. Charlie would love if you would use his picture. Oops, almost forgot the “MSU”. I’ve been following your blog since early days and give you full credit for getting my wife and I on the right path with our finances.”