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Regret

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Tim and his squeeze Shelley (…“just don’t call me ‘the wife’”, she says…) bought their first home in early March in Cambridge, a bluish-collar kinda place. It’s a withering 100-minute drive to DT Toronto on the Death Freeway (401), and about an hour from where Tim works in southern Mississauga.

There was a bidding war for the $1.2 million fixer-upper, storey-and-a-half, 60-year-old pile. So T&S shelled out $1.385 million, no conditions with 20% down ($277,000 – half coming from parents) to avoid CMHC insurance. Closing was last week. But close, it did not.

First, they flunked qualifying for a $1.1 million mortgage, so Shelley’s mom had to co-sign. Then the bank appraisal came in light. Way light. The property, its report said, is now worth $985,000. The maximum to be loaned is 80% LTV, or just under $800,000. “We don’t have another $300,000 to do this deal,” Tim says. “We’re first-time buyers with no house to sell, so this is just effing insane.”

Third, Cambridge is in a kind of free-fall. Like K-W, Whitby, Caledon and King. The local realtor cartel says the average for a detached in February, when the kids were battling for an accepted offer, was $1.09 million. Last month it was $880,000. This month, brokers say, sellers will be lucky to get anything with a eight-handle.

“We paid too much,” Shelley writes, simply. “We can’t afford it. Now we can’t finance it. Our parents have nothing more to give us. The sellers won’t renegotiate the deal and we just got a nasty letter from their lawyer demanding we close or our lives will be ruined. Garth, what can we do? Please help!”

It’s turning into a common story. Bunnypatch prices collapsing. Buyers walking. And in the city scads of investors who bought pre-con condos never intending to close, but to flip, now can’t find buyers for their assignments. The only happy guys have LLB or JD after their name.

Before we get back to the newbies, consider how fast things are unwinding as the Bank of Canada prepares for a massive rate hike in a couple of weeks. Our astonishing new inflation stat (7.7%, on its way past 8%) means housing affordability is collapsing, says a new RBC report. As the central bank tries to douse high prices with reduced credit, the pandemic froth in real estate is being blown off.

This defies logic: it now takes 111% of average pre-tax household income to afford the average detached in Vancouver, even with a huge 25% downpayment. So just imagine how impossible it is to swing this with after-tax dollars. As mortgages pass mid-5%, then 6%, this barrier increases.

In and around Toronto, households need to spend 75% of their pre-tax income (or 100% of after-tax earnings) to effect a property purchase and shoulder ownership costs. “The Bank of Canada’s ‘forceful’ interest rate hiking campaign will further inflate ownership costs in the near term, putting RBC’s national affordability measure on a path to worst-ever levels,” says the bank.

What’s the fix, if the young are not to be perpetual renters? “We think the factor most likely to move the needle is a price correction.”

No kidding.

Here’s another fresh poll done by a real estate outfit, asking houseless people in Ontario if they think owning will ever be possible, even as prices drop. The result: 57% say they’ll never own in the city or town they now inhabit. In the GTA, it’s 61%. In Toronto, 74%. Areas to be hardest hit as the market erodes: “Bancroft, Chatham-Kent and Windsor Essex.”

Oh, and here’s another kick in the Millennial/Z groin. A survey done for HOOP, the huge healthcare pension outfit, says the kiddos “are headed for a perfect storm on retirement insecurity.”

“Well over half of Canadians expect these factors to cause financial challenges and force them to retire later. At the same time, funding retirement through the sale of a home is becoming a less viable strategy for many individuals.”

The problem is simple: increasingly Canadians have opted for a one-asset strategy. Buy a house. Pay the house off. Sell the house to finance retirement. Along the way, save and invest little (who can save when paying for a $1.8 million home?), and end up with a crappy mutual-fund-based group RRSP from work, plus CPP/OAS. So without that real estate to dump at 65 or 70, you may be pooched (unless you read this blog and learn about B&D).

Back to Tim and Stacey.

The first option is to renegotiate. Clear the lawyers and realtors out of the way and talk straight, seller-to-buyer. The vendor will lose if they have to resell in a collapsing market with few buyers. The purchaser will lose if whipped and sued. Everybody can still get something if the price comes down.

Second, ask the vendors for a VTB. They can take-back a mortgage for a few years to bridge the amount the bank would not cough up. The vendor gets an income stream on several hundred thousand. The buyers get the house and don’t lose their deposit. Even the realtors get paid. Only the lawyers suffer.

Third, T&S can try to find conventional bridge financing through a broker. They get the house, and avoid being sued (for damages, costs, plus the difference between their offer and the new selling price). But this is very, very, very pricey money (double digits).

Fourth, worst, walk. Feel like a victim. Lose the deposit. Have a judgment levied. Face the potential of garnisheed wages until you’re 82 or (shudder) chose bankruptcy, screwing your credit for years and possibly your employment options.

The times are a-changing. Makes you wonder. What were we thinking?

About the picture: “I’ve been reading you ever since a much older wiser man led me to your blog and all it’s Dogglyness way back in 2017,” writes Ben. “So far I’ve enjoyed getting the team’s insight and I especially like your writing. Since catching on things have improved for me bigly- thanks for all you do educating us who are mere money knowledge mortals. Here is my Bella Coola sidekick, Alice. She only lived the the exact time I spent in my property in Bella Coola, where she was in charge of the property. She especially loved her roses.”



Source: https://www.greaterfool.ca/2022/06/23/regret/


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