What Problem?

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How fragile is the housing market? Consider the following.

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Almost two million properties have sold in the last few years to young buyers who raided their RRSPs to find the down payment. As I mentioned yesterday, the Home Buyer’s Plan lets a couple suck $50,000 out of those savings (tax-free), use the money to buy a house and then take 15 long years to repay it. If they don’t, the borrowed money is considered a withdrawal and added to their taxable income.

It’s been a massive boost to the real estate biz, and has undoubtedly added to housing price inflation. It’s also a gift, since the kiddies got a tax refund for making the contribution, which means taxpayers subsidized the purchase.

But here’s the news. The kids are broke.

How else to explain the stunning news that one-half of all the people participating in this plan are not paying the money back into their RRSPs? These million folks have missed payments, ignored them or put forth only partial amounts. As a result, this money is being tacked on to their incomes, taxed at their marginal rates. The only ones being hurt, in other words, are themselves.

Why would almost 50% be defaulting after buying real estate? Simple. They don’t have the money. Most couples bought the greatest amount of real estate they could possibly leverage into, and now can’t come up with the $3,000 a year they owe back into their retirement plans. So it’s cheaper to pay a thousand bucks in extra income tax a year, even when it means they end up with tens of thousands less in the future.

Did I ever mention this won’t end well?

On the same note, this email just went out from Scotiabank loan officers to their realtor clients.

From: Wendy DELETED
Sent: Tuesday, February 12, 2013 2:16 PM
To: undisclosed-recipients:
Subject: RATE DECREASES
Good afternoon,

Scotia has just launched a 2 year rate special of 2.69%!!!!   Also the 7 year has dropped by 20 basis points to 3.59% and the 10 year has also dropped by 30 basis points to 3.69%!!!!.  The 5 year remains at 3.04% – however, I have done as low as 2.95% on  live deals.  Have your clients contact me to ensure they are aware of their options and are receiving the best rate. Thanks and have an excellent day.

Do I sniff a whiff of desperation?

As you know, mortgage originations at all of the big banks have basically collapsed. Insiders are shocked at the rapidity and depth of the decline, and have been furiously lobbying F to reverse the slaughter of last July 9th. What was a powerful driver of bank earnings is now sputtering, as BC’s real estate sinks, as first-timers across the country are shut out by shorter amortizations and CMHC changes crucify the top end of the market.

So here are the banks handing out fixed-term funds for less than the inflation rate in most provinces. It’s as close to free money as you will ever get. And it won’t make a spot of difference. Poor Wendy.

However, there will always be enough fools to keep the branches open in London, Ontario. Like Jim. He writes:

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I’m surrounding by real-estate agents and well as multitude of friends that are landlords. They say real-estate market here is not as crazy as it is in those other places. The case presented is: buy a property close to a student area (in our case University of Western Ontario and Fanshawe College). You can get the property for $200-350K. After the down payment, it seems you’re extremely cashflow positive ($500-1500 per month – depending on property) including the mortgage payments, property taxes, utilities, maintenance / repairs, etc. I understand it’s not a pain-free investment as tenants can be a handful, but despite these problems, my friends continue being landlords because it does seem like a generally winning strategy.

Right now, I have to admit, I tend to agree with them, despite not owning any rentals. I agree in the terms that I’d better buy a couple properties here and start making that sweet-oh-sweet cashflow.

If Jim is turned on by renting to 19-year-olds away from Ingersoll for the first time, he should knock himself out. And buy lots of bug spray and paint. But from a financial point of view, the returns dangled are unrealistic and seasonal. Insurance and maintenance costs for student housing are high, and (more to the point) the Internet is murdering university campuses. Every year enrollment is sucked off by online offerings which allow people to work and get a degree at the same time, instead of spending big bucks to get bored in a place like London.

Worse, the city is already a declining market. No surprise there with cutbacks at UWO and the area’s hospitals, and the closure in recent years of major auto parts plants as well as the massive Electro-Motive Diesel facility. Sales have been falling on a year/year basis. Home prices tumbled 4% last month alone and condos fell almost 8%.

So, Jimbo, empty your RRSP, then call Scotiabank and get some of that cheap mortgage money to buy a property full of hormones that will be worth less in a year. God knows, they need you.

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avatarGarth Turner - The Greater Fool posted Tuesday, February 12th, 2013.

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