Canada not immune from subprime crisis: Garth Turner


    The U.S. real estate crash is about to sweep into Canada, says Garth Turner in a just-published book entitled “Greater Fool.”
    Turner – the Liberal MP, entrepreneur and real estate investor – says the problems underlying the American subprime crisis “go far beyond mortgage products and also reach into Toronto, Calgary and Vancouver.”
    In a nutshell, Turner urges his Canadian readers to sell their real estate if it makes up much more than a third of total family net worth and consider renting until the storm passes.
    He suggests baby boomers sell their “McMansions” while they can still get decent prices and find more reasonably priced modest homes located near hospitals, public transit and other amenities.
    The book is timely enough, considering it includes such recent news reports as the line-ups for downtown Toronto condos: line-ups he says were largely fabricated for the benefit of gullible media types.
    “When bungalows in Vancouver cost $900,000 and resale homes with no parking in midtown Toronto are $1 million, it’s only forty-year mortgages and an embracing of debt that sustain the unsustainable,” Turner writes in the Key Porter published book, subtitled The Troubled Future of Real Estate.
    He warns that overextended young Canadian couples are buying into several real estate myths, “egged on by real estate marketing machines and reassured by economists paid by our largest lenders.” They “cling to the absurd belief that paying too much for something is okay” and that “there will always be a greater fool willing to pay more.”
    Turner does not believe the American housing crisis was caused by subprime mortgages extended to otherwise unworthy borrowers. “That was but a symptom” of the real disease, which was the rush into real estate that followed the flood of cheap money Alan Greenspan unleashed following the shock of 9/11.
    With 5% down mortgages and the new 40-year amortization schedules, Canadian homeowners are just as overextended as their American counterparts, Turner argues. He also notes that subprime [or near-prime] loans are also available in Canada through firms like Toronto’s Exceed Mortgage.
    “The inevitable conclusion is that the current Canadian real estate market is floating on a sea of unrepayable, and perhaps unserviceable, debt.”

    Among the myths Turner identifies:

    1.) Unlike stocks, real estate is a riskless investment.
    2.) Houses [always] appreciate
    3.) Canadian lenders are more conservative [than U.S. subprime lenders]
    4.) Industry experts are worth heeding
    5.) You need some place to live anyway
    6.) A house is a great investment
    7.) Better to be an owner than renter
    8.) Rising markets are normal
    9.) Real estate profits are tax-free
    10.) Canada is different

    And here are his recommendations (or what he terms “strategies.”

    For Homeowners:

    • Wait and see what happens
    • Hang on and hope for the best – a downturn of just a few years
    • Liquidate now, invest the proceeds and rent
    • Sell with a long close, hope the contract is honored, then buy back into a declining, buyer’s market
    • Ignore it all
    • Diversify, and promise you’ll never be so foolish again.

    For Homebuyers:

    Turner suggests buying real estate with a future and that empty-nester boomer couples will be downsizing into bungalows, townhomes and condos of 750 to 1500 square feet. Access to urban services will be important. In other words, “buy real estate with a fighting chance of retaining its resale value.”
    And for those thinking of buying a second home, Turner’s one-word recommendation is “Don’t.” Those who want cabins on a lake or farms with a pond should rent instead, because overextended investors will be dumping their country retreats before their urban principal residences.
    And finally – here I’m talking to anyone who viewed the recent video blog interview with Mark Dziedzic – Turner warns Canadians not to
    get sucked into buying “bargain” foreclosure properties in the United States.
    Turner closes with the disclaimer that “my views may be prescient or be proven wrong. Regardless, there will be a greater fool.”
    Well, that’s covering all the bases. And what do I think? Turner makes some good points and he's certainly been around the real estate block a few times. I wouldn't disregard his points out of hand. Personally, I'll be hanging on to our own Toronto residence, but then it already qualifies as a modest home near public services, it's mortgage free and does not exceed a third of our net worth. Nor do we own a second property.

    However, if I were among the many people tuning into TV shows like "Flip this house" and thinking of speculating on real estate, I'd certainly want to consider Turner's arguments before borrowing money in the hope of instant riches at this stage of the game. It's one thing to have a paid-for home you live in and quite another to be speculating on real estate on the hope prices will always rise and a greater fool will arrive to save you from your greed and foolishness.
    Much of Turner's criticisms are directed at people who have saved nothing for retirement or even for emergencies and who live beyond their means, buying more house than they need with such atrocities as 40-year amortizations. I agree with Turner that if the only way you can afford a home is through a 40-year am, then you'd be better off renting and waiting until you do have enough money saved to buy a more modest home. Thankfully, the new Tax-Free Savings Accounts (TFSAs) Canadians will have by 2009 will help young Canadians take such a prudent approach to home ownership.
    Whether the real estate market cracks before then remains to be seen.