Mortgage slaves in Toronto

There’s an interesting ‘slice of life’ article in Toronto Life that profiles buyers who have overextended to purchase a home.  Looking at the numbers in that story you can tell Vancouver is just as bad if not worse:

Their budget inched up, first to $550,000, then 100 grand more. When they saw a detached house in Hillcrest, with its spacious bedrooms, modern kitchen and large yard, it felt like home. It was listed at $589,000, and there were two other interested buyers. Their agent encouraged them to make an aggressive offer of $647,000, a price that was just manageable because the house had a basement apartment they could rent out to help cover the higher mortgage payments. On the night of the offers, Daniel and Louise sat in their car in front of the house, with their competition parked nearby. When the owners rejected the two top bids, the couple had to decide whether to go up or let it go. “Daniel asked me if I thought the house was worth $650,000,” Louise says. “I said that I didn’t think it was worth $250,000, but that’s not what houses are going for in Toronto right now.” They bid $650,000 and the house was theirs.

When they picked up their keys last November, they had few regrets, not even about the cost of the house. “Now we’re in the game,” Daniel says.

But they hadn’t moved in yet. They haven’t had their furnace die during a February freeze, or a tenant’s rent cheque bounce, or a slow leak from the dishwasher rot the floor joists. When you’re overextended by an irrational market and barely making mortgage payments, the smallest house repair can push you over the edge.

I imagine that many first-time buyers in Toronto and Vancouver are getting by on a fairly thin margin, recent stats put the BC provincial savings rate at a negative 7.9% (yes, we owe more than we earn).

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Toronto realtor
12 years ago

Yeah, this is exactly the case. It happens again and again, still the same mistake. I have dealt with couple of cases like this every year during my career. People should be more cautious in this but on the other hand I can understand them. Imagine yourself in a position that you have found a house that fit your dreams and you are under time pressure it could easily happen that you acting bit irrationally. I can just recommend to all potential buyers to read one of my guides in order to avoid problems. You can find them on my webpage Toronto realtor.

elli davis
12 years ago

I agree that the prices now are incredible high but it should be change in a couple of month I believe. I think that buying a house in the US is not a solution for that problem because you may have problems with the selling if you decide like that. What concerns the Toronto houses that`s true that the first-home buyers are in real trouble but renting can be one of the possible options until the situation improves which will soon.

jesse
jesse
12 years ago

"Believe me, spec builders of new unsold houses are scared s**tless"

I agree 100% here. The problem is exacerbated because margins are now very thin due to rising labour costs. One spec builder I talked to said they made their profits on land appreciation and lost on the structure. It is not going to be pretty if prices start dropping.

jesse
jesse
12 years ago

From the article: "B.C. and its trade-dependent resource industries will soon follow the U.S. into recession, with obvious implications for real estate. "

That's actually not the only economic concern. Almost all the reduction in unemployment in the past 5 years has been due to construction/RE jobs (yes). Supply will start waning if buyers do not materialise this year and the vicious cycle will begin.

jesse
jesse
12 years ago

re: Vancouver Magazine article

In terms of MSM articles this one isn't bad. Looks like a few reporters are perusing the blogs and the comments! Maybe they saw the post on MSM bias a few weeks' back? I'll remember the name Jim Sutherland for future reference.

He missed mohican's blog though albeit the FPPS blog is not 100% RE focused.

jesse
jesse
12 years ago

"Incur the debt, obtain principal — like “pre-saving” and hold it or waste it as you see fit, much as you would unexpended income that has gone into savings."

A good way of thinking about your line of questions is understanding the difference between balance sheet and income/cash flow statements. People make careers out of this stuff I hear.

BDK
BDK
12 years ago

FROM VANCOUVER MAGAZINE. 2. Be Condo-Wary This category of real estate attracts a large proportion of the wrath dispensed by the bad-news bears, who regard it as the domain of flippers and “specuvestors,” a group they disdain or, at least, envy and resent. On the upside, it’s led to blogs like Condohype.wordpress.com, which wittily dissects the marketing efforts behind our city of glass (admittedly an easy target). On the downside, it’s contributed to global warming due to the number of bears driving around counting darkened windows—a sign, they believe, that an apartment is empty, which means it is owned by a speculator who will be forced to abandon it to foreclosure when the market turns, a crucial stage in the process leading to real-estate armageddon. All this said, many sane and sober prognosticators regard downtown condos, and apartments in general,… Read more »

BDK
BDK
12 years ago

Vancouver Condo, Un real estate, real estate talks etc. are all mentioned in this months Vancouver Magazine!

http://www.vancouvermagazine.com/articles/08apr/S

Bankerman
Bankerman
12 years ago

The BC boom is not a commodity boom but rather a credit boom where hundreds of billions of mortgage debt has been added to the balance sheets. British Columbia will likely be ground zero for a massive banking system crisis to hit Canadian banks. There is a reason why the bank act originally required 25% down payments in order to protect the buyer. Now with zero down and 40 year ammortizations, this will be truly really ugly. With little industry, wealth creation to support the price level, when the high paying construction jobs cease, this province will see tens and tens of billions of non performing debt. Canadian banks, CMHC are in big trouble. Taxpayer bailout?

franko
franko
12 years ago

Burden of Proof,

Except for what I see in several neighbourhoods and from what I hear from my builder buddies (I used to be in the business), hard evidence of "recently completed houses not moving" is a little hard to come by.

Before the condo craze, the percentage of SFH units was much greater in 81, and many of the current new houses are either marketed exlusively, or don't seem to hit the MLS sheets….so you have to trust your own observation.

Believe me, spec builders of new unsold houses are scared s**tless, and will soon have to drop prices to limit potential losses, not unlike those presale condo flippers on craigslist.

BTW, current futures for framing lumber are now $230/M, as compared to $430 in 2005. No wonder BC sawmills are shutting down at a record pace.

Warren
Warren
12 years ago

Pope, Freako, thanks for the clarification on savings rate. I still find it amazing that we run -5% or worse for multiple years in a row. People are living off of credit cards, previous(?) savings, and its only getting worse.

Burden of Proof
Burden of Proof
12 years ago

Franko,

You said:

"Reecently completed upscale houses that were built at the peak of high material prices and high labour costs ARE NOT MOVING."

I'm always look for indicators. Do you have a source for this information?

scullboy
12 years ago

Hey Regular Joe,

You might want to talk to KRRSH. He's a dumb as a rick and apparently has as much money as Trump. He firmly believes real estate will never drop. Selling to him should be as easy as stealing candy from a window licker.

Oh and Blueskies, sorry to burst your bubble. I think Krrsh has been using vagely feminine nicknames that are also the names of real estate developments. I don't mind, since I told him I'd buy his kids' organs to keep his DNA out of the gene pool. I also implies his mom is providing "happy ending" massages out of Spectrum. I'm probably fair game.

DaMann
DaMann
12 years ago

BDK No she didn't continue to buy RE. Her credit was history! She continued as an agent, moving to Calgary then Toronto, essentially following where the market was hot. She gave it up around 1990. She never did recover. A lot of people did but my Mom was a bit of a gambler and horrible with money. She always had a hard time budgeting making $30k in one month then making nothing for 5 months, never saved for a rainy day. I learned a lot from watching her mistakes. I may have been young but I remembered it all well, and I to this day, have benefited from her mistakes and vowed never to do the same. That's why I laugh at people in this market, it's like pre 2001 never ever existed in this city. It's happening all over… Read more »

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Regular Joe
Regular Joe
12 years ago

Stumbled upon this site a few days ago … its nice to see there are actually some sane people in Vancouver. I thought some of you might want to hear from a regular guy with a wife and two kids and how we see the market and how it's affecting our lives. We moved here from Manitoba a couple of years ago and bought a townhome in Langley in the mid-300s. The prices have moved up a bit – but not much. We have a 25-year variable rate mortgage with about $50,000 in equity. Anyways, we're selling because we want to keep what little equity we have. Listings are going up, sales are decreasing, and we think prices are likely to decrease as more homes become available. Any decrease in price is going to screw my family's financial security. And… Read more »

dingus
dingus
12 years ago

I wonder if I'm getting it. Incur the debt, obtain principal — like "pre-saving" and hold it or waste it as you see fit, much as you would unexpended income that has gone into savings. The spending would be on interest to obtain the principal — this is the anti-saving part. I guess we are just talking about unexpended income with this measure — once the unexpended income is "saved" it goes into another bucket as an asset? As you say jesse — that asset value can decrease to negative, or increase, without any impact on "saving" *as a rate*. Though I guess some increases and losses, when they are realized, would count as income / negative income ie interest or a capital loss. But if you are underwater on your condo, for example, and have to pay to get… Read more »

BDK
BDK
12 years ago

Good story DaMann,

I remember when that happened too.

There are still people who never recovered from that emotionally and it caused more than a few divorces!

Did your Mum ever try to flip property or be a landlord again after the crash?

There were people who'd just built nice cabins in Alpine Meadows in Whistler who had to walk away from them, it would have been really sad…

Drachen
Drachen
12 years ago

DaMann "I think a huge protion of agents fall into this category. They don’t know shit." That's the funny thing. People think that agents have their hand on the pulse of the industry but in reality they have every reason to avoid this sort of knowledge. Sincerity is key to salespeople, if you KNOW that your client is making a huge mistake you won't be half as good at selling or acting as a buyer's agent. Beyond that there's the guilt, most people lie to themselves on a regular basis to avoid guilty feelings. How would you feel if you KNEW that you'd been at least partially responsible for the financial downfall of dozens or hundreds of families? So start with a culture of denial THEN add in a pinch of only getting info from OTHER people who are in… Read more »

franko
franko
12 years ago

Thanks for sharing that story DaMann.

Unfortunately, most of the young bulls here have never experienced a housing crash or a recession, and all those crazy graphs of prices does not seem to phase them.

One of the first signs trouble in 81 was that spec builders on tight margins could'nt unload new houses without taking lossses.

Sound familiar?

Reecently completed upscale houses that were built at the peak of high material prices and high labour costs ARE NOT MOVING.

Just like 81, lumber prices are now dropping dramatically and other materials will soon follow as the recession nears. But that will be too late for spec builders, as many of them will be wiped out by then…just like 1982.

blueskies
blueskies
12 years ago

They don’t know shit.

so true! and they drink the Koolaid ….lethal combination

DaMann
DaMann
12 years ago

King Leaky Funny you should ask. My Mom was an agent back in the early 80's. I was just talking to her about it all yesterday on MSN ( she has since moved back to Germany). I was telling her that me and my wife are thinking of selling our townhouse in Steveston cause I know a crash is coming and I would rather take the money and run now. She told me if you want to sell, sell it fast. She said the market in 1981 turned so fast that she herself didn't even have time to unload her properties. It was a carbon copy of what is happening now. She had 4 condos and three houses, and litterally a month later they were all worth half the money. Bankrupt! Just goes to show agents don't know shit. She… Read more »

jesse
jesse
12 years ago

"How would the principal be treated when the debt is incurred?"

In accounting terms, the principal increases the difference between an asset and the debt on the asset. Debt is a liability. Savings in this definition is equity so either increase your assets (bank account) or decrease your liabilities (pay down debt).

And it is possible to have negative equity and not be bankrupt; many US homeowners are finding this out.

bdk
bdk
12 years ago

Krissh. how did you know I had a big gut and had screws loose in my head? Too Funny. Someone must've told you…. TV Towers is a far better location than Spectrum(s), We'd be in false creek north or yaletown if we had to do it again because it just takes too long to get to Coal Harbour during rush hour (Georgia,Melville, Pender all back right up with commuters heading to North Shore not to mention Hornby, Seymour, Dunsmir and hastings). Regardless of renter, owners, speculators etc. it seems to me that anyone who's been in Spectrum 1-4's opinion is that the building has a higher percentage of trouble makers than the others and I'll go one step further and say it is destined to be a slum, having no parking really screws things up too because no one will… Read more »

King Leaky
King Leaky
12 years ago

I’m sure one day we’ll laugh as we remember the time people were buying crack shacks in Surrey for half a million.

No doubt! Was anyone here around Vancouver during previous housing crashes? How did the general attitude towards house prices change in 1982 or in the 90's? I remember general negativity towards the condo market when the whole leaky condo mess started getting lots of news coverage, I also remember late 90's headlines about local 'underwater' mortgages (people who owed more on their houses than they could sell them for).

Look for these headlines in the next couple of years again here.