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Through Its Biggest Ever Property Boom, Plenty Of People Have Lost Money

Two reports from the Globe and Mail in Canada. “A major cause of the last two downturns in housing prices was an oversupply of properties for sale. Could it happen again? Veritas Investment Research set out to answer this question recently using an informal, quick and dirty survey of more than 200 real-estate investors across the country on their intentions over the next 12 months.”

“Exactly half of the survey participants said their investment properties did not generate positive cash flow after mortgage, maintenance and other ownership-related costs. Eighteen per cent overall were in a break-even position, while 32 per cent were in a negative cash-flow position. The risk to house prices is that we get a recession that makes it untenable for the 50 per cent of real-estate investors not generating positive cash flow to hang onto their properties.”

“‘If everyone who is cash-flow-negative lists their property for sale, you would get the worst supply shock on record for Canadian real estate’ said Veritas analyst Nigel D’Souza.”

“Homeowners hoping to sell a house in the Toronto area for a jaw-dropping premium may be disappointed during the dwindling days of October. David Fleming, a real estate agent with Bosley Real Estate, is envisioning deflated sellers sitting around the dining room table, wondering why their property didn’t inspire the skirmish they expected.”

“‘The eight people that they expected to bid are going to turn out to be three,’ Mr. Fleming says. In coveted first-time buyers’ territory, a lot of new listings came out right after the Thanksgiving long weekend, Mr. Fleming says. ‘Everyone had the same thought – ‘We’ll wait until everyone’s back,’ he says.”

“He has also noticed a new trend of house hunters submitting lowball offers, whereas they were waiting for price reductions if they thought a property was too expensive in the past. Mr. Fleming represented one pair of buyers who had some luck when they decided to submit an offer on a detached house in the Eglinton West area. The house had been sitting for a short while with an asking price of $790,000.”

“Mr. Fleming’s clients submitted an offer of $750,000 with no conditions – and the sellers accepted. ‘We offered $750,000 just as an opening salvo,’ he says. ‘I was shocked at how quickly they gave up.'”

From ABC News in Australia. “The expression ‘safe as houses’ is now meaningless to property investors Matt and Peter. The two men both invested in newly built apartments via the same Sydney-based property research and investment firm. The experience is an ongoing financial nightmare for Matt, whose dreams of buying a home to live in have been put on hold because the debt on his investments is worth more than the properties.”

“‘Recently my wife and I were interested in possibly purchasing our first home in Sydney, so thinking about selling both investment properties,’ he tells RN’s The Money. ‘I rang my real estate agent in Townsville and she told me that it probably wasn’t the best time to sell because the exact same property that I have recently sold for $150,000.'”

“Matt bought his apartment new for $289,000 around six years ago, on the advice of the firm. In 2016, he paid $504,000 to buy a one-bedroom flat in the inner-Melbourne suburb of Brunswick off-the-plan. When it came time to settle last year, the bank valued it at $450,000.”

“For Peter, one investment through the company was more than enough. He paid close to half-a-million dollars for a flat he now estimates to be worth around $400,000, based on the rents he’s receiving, which keep falling.”

“‘It did come with a rental guarantee — so, for the first three or six months we received $495 a week,’ he explains. ‘As soon as the rental guarantee finished, the property dropped to more of a market value, which was around $470, and every time a tenant moves out the rent drops. We’re now down to about $430 and the real estate agent is saying to me: ‘You’ll get more options [for tenants] if you drop it to $410 or $400.'”

“Even though residential real estate has generally been a strong investment for people over the past few decades as Australia went through its biggest ever property boom, plenty of people have lost money, especially buying off-the-plan or new developments. But what is truly disturbing about the cases of Matt and Peter — and thousands of others like them — is not that they bought new properties and lost money, nor even necessarily the ‘investment’ seminars that convinced them to do so.”

“Rather, it’s how they came to be at those seminars. When Matt told his then-accountant about a $30,000 inheritance he’d just received, the financial professional sensed an opportunity. ‘He invited me to an event — I guess you could say networking, but it was a property event — to possibly spend that inheritance on a brick-and-mortar house,’ he says.”

“In Peter’s case, it was his then-mortgage broker. ‘My business got really, really busy and because I was so busy I had some cash that I wanted to invest,’ he tells The Money. ‘My partner at the time also was pregnant and we were going to have a child and we thought, ‘Oh we better do something quickly to invest some money we had,’ and time was very limited. Our mortgage broker/financial adviser at the same time reached out and said: ‘There’s a seminar coming up, would you like to come along?'”

“Peter later learned from some of the documentation around his purchase that this broker had received $4,000 in exchange for that referral. Matt isn’t sure what his accountant got out of the property sales, but is quite certain he received some payment.”

“Independent financial planner Bruce Brammall, based in Melbourne, says he’s constantly receiving offers from developers and the property ‘research and investment’ firms they sometimes use as sales agents. While he bins them, he’s concerned others succumb to the temptation.”

“‘Way too often, large amounts of money [are] paid to hangers-on in the industry or people such as financial advisers or accountants or mortgage brokers to assist in finding clients to purchase the development properties,’ he observes. ‘They can be up to 7, 8, even 10 per cent of the value of the property. It wasn’t rare, and it certainly was happening in Melbourne in the last couple of years, where an $800,000 property may well have had a $70,000 or $80,000 commission paid to a financial adviser, mortgage broker, accountant, etc.'”

“Mr Brammall says the sheer size of these commissions, as well as the advertising costs and developer’s profit margin, are the main reasons why most off-the-plan or newly built properties are terrible investments.”

“‘Property spruikers, property developers are there to do one thing and one thing only, and that is to make a profit,’ he says. ‘The majority of the time — whether it’s inside a self-managed super fund or to those who are purchasing in their own name — the cost becomes pretty clear fairly early on and it’s largely been a disaster. I have not seen good stories come out of the property development industry.'”

“Talking about his property investment mistakes is an emotional experience for Matt, as he ruminates on the implications for his financial future. ‘All I can do is work hard between now and whenever there’s light at the end of the tunnel,’ he says, choking up. ‘Hope to be able to pay off the mortgages one day, and maybe still be at a loss but at least not have the mortgage cloud over my head, and just that sting in the back of your throat when you have made a bad investment.’

This Post Has 66 Comments
  1. ‘Exactly half of the survey participants said their investment properties did not generate positive cash flow after mortgage, maintenance and other ownership-related costs. …’If everyone who is cash-flow-negative lists their property for sale, you would get the worst supply shock on record for Canadian real estate’

    Yeah Nigel and if you asked people in a casino how often they won they’d probably fudge like these shack gamblers did. Shacks aren’t investments.

    1. i am in the GTA (greater Toronto area) for the next 2 months.

      Even with the G&M articles, it is amazing how few people are aware about a bubble risk. They just think it is a lull.

      1. They just think it is a lull.

        Isn’t that what happened last time in Canada? I recall reading here, with dismay, how quickly the Canadian bubble reinflated.

        1. Yes, prices fell a bit, then they took off like wildfire again, eclipsing highs in essentially every market in the country. I don’t think enough attention is paid to the effects of Chinese printed money on the global real estate markets. Every single country has been affected. The Chinese are scammers, by and large, and their central banks have been printing off the charts for decades. Just look at how the Chinese move the fake crypto markets. They pumped Shitcoin up by 40% in a day yesterday because of a comment from Xi.

        1. There’s a reason the majority of Canadians live in the southernmost areas of their country. It’s goddamned cold during the winter.

    2. There are boatloads of home-grown San Diego landlords who are soon going to enjoy the opportunity to learn this hard lesson in life’s dear school for fools.

  2. ‘But what is truly disturbing about the cases of Matt and Peter — and thousands of others like them — is not that they bought new properties and lost money, nor even necessarily the ‘investment’ seminars that convinced them to do so. Rather, it’s how they came to be at those seminars’

    Without irony, ABC says this yet continues to report it’s to the moon Alice!

    These people were gambling with borrowed money and they got fooked. Big surprise.

    1. ‘The prestigious project niche is in full swing! The array of choice has never been this vast, especially since Montreal attracts part of the international clientele who, despite being financially at ease, is nevertheless beginning to find other Canadian cities somewhat too expensive. Since 2017, Montreal is imposing itself as one of the new high-end real estate hubs. And there is no sign of slowing on the horizon. Therefore, what the heck if you can afford it?’

      http://www.thesuburban.com/life/home_and_garden/fall-open-house-showcase-new-housings-in-the-greater-montreal/article_7cebb602-f689-11e9-8215-0bb36e13275c.html

      1. I lived in Montreal for 2 years. It is an absolutely amazing city. My wife visited with me twice in the past few years and we would relocate there in a heartbeat if the right opportunity came along.

        1. I used to visit often when I grew up in Vermont. It was only 90 miles away. Unfortunately, the winters are still brutal. Maybe not as bad as the 1970s but that was at the bottom of a climate cycle.

          1. Lived through the “crisis of the verglas” (frozen rain) in 1998 in Quebec. Pretty epic power losses.

    2. “real estate agent is saying to me: ‘You’ll get more options [for tenants] if you drop it to $410 or $400.’”

      Ya think the realtor that sold this to him warned him that his investment would yield these fabulous negative returns…

    1. Makes me want to move to LA!

      Dr Drew:

      “So we have tuberculosis, measles, typhus…I started looking at what usually comes on the heels of typhus in this area, what’s endemic in this area, and that’s Yersinia. I spoke to an expert about this and, lo and behold, the last outbreak of bubonic plague (Yersinia) in this country was in Los Angeles when they had a major rat bloom. It was controlled because of some very clever maneuvers by several physicians. One of the maneuvers was killing over 2 million rats. I daresay this time we’d have to kill 12 million. It’s massive and it has spread. It’s been documented on the squirrels, and it’s just a matter of time before it gets on the rats, on then our pets, and then on us.

      In the middle of this, we had a typhoid fever outbreak in a police precinct. We also have a large immigrant population coming in carrying parasites and tuberculosis.

      I really dread what’s coming this year. We have essentially every means of transmission of infectious diseases represented in these outbreaks. We have oral-fecal with the typhoid. We have airborne with the tuberculosis and measles. We have rodent-vector with the typhus and the Yersinia. So here we go. Every major means and component of severe dangerous epidemic infectious disease are set up to go and nothing is being done.“

        1. I was just there and if I never return again in my life I will be better for it. What an absolute armpit. And I was in the “good” areas.

      1. “It’s massive and it has spread. It’s been documented on the squirrels”

        Great now when the seller mandates you feed the squirrels, you get typhus.

  3. On Thursday the Fed upped its repo operations from $75 to $120 billion PER DAY!!! That is a staggering amount of liquidity, but the Fed has yet to offer any credible explanation for this open-ended pumping, nor do our worthless “representatives” seem the least bit curious about what the Fed and it’s cohorts at the TBTF banks are up to. If the Fed is doing this much pumping while our economy is supposedly going gangbusters, what’s going to happen when plummeting shack prices start hitting the collateral the banks are offering to secure inter-bank lending? Oh wait, the banks aren’t lending to each other because they know their collateral is toxic waste, just like it was in 2008 when the credit system locked up. So the Fed is making a desperate, doomed attempt to forestall the financial reckoning day and true price discovery. Better pick up a wheelbarrow for the FedBux you’re going to be needing to buy a loaf of bread when these Keynesian fraudsters go full Weimar Republic.

    https://www.reuters.com/article/us-usa-fed-repos/new-york-fed-offers-to-inject-more-liquidity-into-the-banking-system-idUSKBN1X32EB

        1. I believe that’s correct. The concern is that the number is getting higher and higher, but it’s not cumulative from my understanding.

      1. Pater Tenebrarum said: “Yes, this is not “TARP” – the Fed is not taking shoddy collateral, only treasury and agency bonds are accepted.”

        Not so. Repurchase Agreement Collateral (repo): “Securities eligible as collateral include Treasury, agency debt, and agency mortgage-backed securities.”

  4. David Fleming, a real estate agent with Bosley Real Estate, is envisioning deflated sellers sitting around the dining room table, wondering why their property didn’t inspire the skirmish they expected.”

    I’m envisioning deflated sellers sitting around trash can fires sharing hobo stew and bottles of Mad Dog 20/20, after throwing rocks at the realtors-turned-vagrants who sold them on “buy now or be priced out forever!”

      1. I’m doing seafood stew today, scallops, shrimp and cod. Beautiful fall day in north Texas after an eventful week of weather. The home Depot that got destroyed is about a half mile from my place. I guess I’ll have to find some other place to spend my weekends at until they get that one rebuilt!

        1. I do my best to stay away from Home Depot and Lowes. Only go there if I absolutely must. The last time was July, they had a special on LED light bulbs.

          1. The last time was July, they had a special on LED light bulbs.

            My experience has been the bulbs there last at most a year. At that rate, incandescent bulbs are far more cost-effective, and a lot less of a hassle

          2. At that rate, incandescent bulbs are far more cost-effective, and a lot less of a hassle

            That seems like poor luck to me. I skipped over CFLs to LEDs and I’ve never had to replace one LED yet.

          3. That seems like poor luck to me.

            Perhaps, but its across multiple lots (bought at different times) and brands.

            I’m actually putting the CFLs I replaced with LED bulbs in our exterior lights back in to replace the failed LEDs.

          4. “I skipped over CFLs…”

            I wasted plenty of money on CFLs…short lived. I can’t recall ever replacing a bad LED now that I think about it.

  5. This is such an easy problem to solve. The Realtor or the Property Dev Co must disclose this.

    If i saw a $70K potential commission to some financial advisor – i would wonder what the story is,.

    I.e. if you cant tell who the sucker at a poker table is … it is you

    ————–
    “‘Way too often, large amounts of money [are] paid to hangers-on in the industry or people such as financial advisers or accountants or mortgage brokers to assist in finding clients to purchase the development properties,’ he observes. ‘They can be up to 7, 8, even 10 per cent of the value of the property. It wasn’t rare, and it certainly was happening in Melbourne in the last couple of years, where an $800,000 property may well have had a $70,000 or $80,000 commission paid to a financial adviser, mortgage broker, accountant, etc.’”

    1. Where did all the buyers go?

      “But what’s alarming is that the monthly price decline was the biggest seen since September 2014 despite tight inventories, a sign that a US housing market crash is here. The median price of a new house slid 8.8 percent year over year in September to $299,400. The month-over-month decline came in at 7.9 percent.

      The drop in home prices seems a tad surprising given the tight inventory available on the market. The National Association of Realtors (NAR) recently reported that in September, there were just 4.1 months of existing home inventory. This was lower than the 4.4 months of inventory that was available a year ago and far lower than the ideal inventory level of 6 to 7 months.”

    1. It isn’t just a housing market downturn. The “worst since 2008” headlines are starting to multiply, with the same red flag indicators that telegraphed iceberg ahead before Bear Stearns imploded in ’08 and nearly took down the financial system with it. The Fed’s repo operations suggest that not only is the Fed in panic mode, but also that the central bankers are losing control.

  6. California is reverting to 3rd world status, no electricity for millions and fires everywhere.

    “This sucker could go down” — George W. Bush

      1. Trump’s trolling gives me endless delight. Watching the left’s heads explode NEVER gets old.

      1. Maybe she’s suffering from some form of dementia. She’s starting to sound like Captain Queeg and the strawberries.

        1. She’s always been deranged, but she used to be better at hiding it. Although her most chaste husband knew the score.

        2. The funny thing she is on the air, so someone airbrushed and powdered her. Imagine if her hair wasn’t done?

          1. She was led to believe that she owned us all.

            There seems to be a fairly large group still willing to fight to make that happen. It’s not over yet. Maybe it never will be until her health gets so bad she can’t fake it any more. Then we still have to deal with Chelsea who is also being groomed to take her place.

  7. The risk to house prices is that we get a recession that makes it untenable for the 50 per cent of real-estate investors not generating positive cash flow to hang onto their properties.

    No worries, they are now well trained to hang on through the dip. There’s a pot of gold at the end of that inverted chart rainbow. They’ll hang on as long as they possibly can, as planned.

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