Ruined

The mighty corp, CBC, says this story was the most-read piece on its site Monday.

No wonder. It’s compelling, Like a runaway car you can’t stop watching, as the vehicle slides uncontrollably down a snowy street towards a busy intersection where you know mayhem will ensue.

So, Gurcharan is an Uber driver. He bought an unbuilt new house last year for $2.1 million in a Brampton development with a deposit of $260,000 to Paradise Developments. With closing costs, that would require a mortgage of $1.9 million. When G made the move a VRM was available at 1.5%. Now it’s 5.4%. Even coming up with 20% down, payments would increase from $5,000 a month to about $12,000.

To qualify, Uber would have to pay him just over $400,000. Not happening.

Worse, that $2 million house is now appraised at $1.7 million (and likely dropping), so Gurcharan and his family would have to find hundreds of thousands more to put down upon closing, since the financing would fall short. But it’s all academic anyway, since passing the stress test of 7.4% would necessitate an income of half a mill.

This guy is not alone. There are reportedly sixty more households in the same boat in this one development. Between them, these folks signed contracts for almost $115 million in new houses. The developer is now building the structures, which are due for completion within the next six months. So if G and his fellow FOMOers do not close on time, it spells trainwreck for Paradise. Undoubtedly there’d be a ripple of unpaid drywallers, suppliers, painters, tile guys and formers.

But the lawyers would do well. Already they’re billing for nasty letters.

Says the developer (quite rightly): “Paradise Developments makes business decisions, enters into contracts with suppliers, hires employees and commits to the contracting of numerous building trades based on agreements we have signed. Based on having finalized and completed these agreements, construction is now advancing on the homes in this community, and we look forward to completion.”

The homebuyers have protested. They’ve gone to the media. They’re asking for political intervention and support. They’ve pleaded for an extension to the closing date. And at this point it seems clear those who do not close will lose their deposit and be sued for breach of contract. Damages will likely include the differece between what was originally paid for the unbuilt house and what it ultimately sells for after being constructed and sold again. Plus carrying costs for the developer and a few buckets of flesh for the legal guys.

The buyers have a tough choice. Walk and face this mounting, unknown legal and financial liability. Or find some way to close, accepting an immediate crippling loss and epic overhead, but at least with a house to live in.

Well, here’s the unhappy crew that CBC managed to round up.

They have no good options. Nor are they alone. Yesterday we reminded you of all the condo closings which will take place in the GTA over the next few months – thirty thousand. It’s estimated 60% of the buyers had no intention of closing, and were planning on selling their units (for a capital gain) to an end user or landlord. Now scads of them cannot close, cannot qualify for financing and have flooded the assignment market.

Why did this happen?

Well, buying a home in Canada is too easy. All you often need is 5% down and the government’s own housing agency will allow 20x leverage, while insuring the loan for the lender. New buyers can get a break on land transfer taxes, collect a hefty federal first-timer tax credit, and also make a tax-free withdrawal from an RRSP (subsidized by other taxpayers) for the downpayment. Yes, there’s a stress test, but that can be avoided by borrowing from one of those credit unions who just love gambling their clients’ money on residential real estate.

In short, the crazy mantra of everyone-deserves-a-house that politicians have embraced has helped get us here. In reality, Uber drivers should probably not be buying $2 million homes. Developers should not be selling them the product. Lenders should not be pre-approving people at current rates for a financing which won’t be delivered for a few years.

And what about FOMO? It flows from financial illiteracy, and probably accelerated by reading Reddit. Cheap pandemic-era interest rates could never last. Peak house was clearly visible. Blind auctions, bully bids, competing offers and 30% year/year price gains in the burbs were the spawn of emotion, not logic. Once again society has staggered through a mania. From tulip bulbs to silver, Bre-X and crypto, the story keeps repeating. Always with the same ending. It’s never different this time.

Yesterday we gave you some reasons why economists think house values must fall another 40% to achieve a ‘normal’ level of affordability. In Brampton, we see carnage and shock when the needle hits just 15%.

Will Gurcharan and the others be bailed out? You’d better hope not.

About the picture: “Been reading your astute thoughts for several years now,” writes Paul. “Decided to purchase as opposed to renting Downtown Vancouver condo 2019 right before pandemic. Still not sure how things will work out, so here is a picture of Minx, my happy Jack Russell Terrier living in the moment…”