I attended the top of the Canadian housing market, so you didn’t have to
On Beyond Investing
by Tim Bergin
19 March 2017
Originally, I thought this would be a bit of a joke. There were
billboards in all the Toronto subway cars advertising the Canadian Real
Estate Wealth Expo– learn how to become a millionaire. I thought
this was so ridiculous, it may be fun. What better way to experience
the top of the housing market than watching Tony Robbins and Pitbull
along with a bunch of US real estate professionals explain how Toronto
real estate is the path to riches.
Prices were originally $150 per ticket, but I was able to buy for $50.
While it deeply bothers me that I paid $50 to these shameless (amoral)
self-promoters, I thought it would be worth it to witness, in person,
the top of the housing market.
I had thought, there can’t be that many people stupid enough to attend
this, but I was very wrong—15,000 people were there! I was blown
away. Bubbles are largely psychological. This crowd was tangible
proof of that. 15,000 people in one spot listening to Americans explain
why real estate in Toronto is an exceptional investment. The whole
experience was horrifying. The crowd was very well-dressed, middle- to
upper-middle class (from appearances), and super excited to hear how
much money could be made if you just buy real estate (most of them
clearly already owned).
The first real segment of the expo was a panel of Canadian developers
and real estate agents giving their views on the market. It
actually started off a touch bearish, which surprised me. Two of the
panelists were saying that prices are exceptionally high and no market
goes up forever. With that slight bit of caution thrown out there, it
became a real estate FOMO-building talk.
There are, apparently, two very important things to know when dealing
with real estate. First, you have to face your fear; this fear is to be
ignored and then you should ‘just do it’ and 'buy now'. The next step
is find what you can afford and then buy it. Ignore all ‘non-doers’,
don’t overanalyze or focus on the numbers, just fucking buy. To allay
fears the speakers are actually quite clever as they shift between a
long to short term focus when it suits. For example, now is a
great time to buy because short-term the market is on fire. If,
however, markets cool then you just hold because it always goes up
long-term—and you are a savvy long-term buyer, aren’t you? By showing
no scenario where you can lose I can see how this pitch works on the
susceptible.
The second important factor in real estate is financing. Not everyone
has money, so what can they do? The answers were shocking. Be
‘creative’ was the first response. Pool your money, borrow from friends
and family, own just 5% of a house, get the money however you can and
just do it - remember, it only goes up. Other financing suggestions
were get cozy with a lender and they will ‘bend the rules’ for you! The
fact that the biggest condo developer in Canada (Brad Lamb) said
lenders will bend (but not break, apparently) rules to get you
financing in front of 15,000 people with most people smiling and
nodding was shocking.
So there you go—when it comes to Toronto real estate, just do it (using borrowed money any way you can get it).
The booths outside of the presentation hall were just as
troublesome. Plenty of “high double-digit monthly yields”, retire
early with real estate, “everyone needs a place to live—buy apartments”
type messages. Almost all of these pitches were second lien
lending. Most offered yields in the 8 to 10% range. The
presentations all suggested that you can borrow money, if you don’t
have it, at 4% and then buy these investments at 10%—easy money.
The apartment pitch booth was like most other pitches - it revolved
around stable cash flows + mortgage paydown by renter + equity
appreciation = profit. (Now that all sounds great but owning a
condo at current prices in Toronto is a negatively carrying asset, so
where does this cash flow come from?) Further, investing in apartment
funds is even better if you borrow the money to do so. The pitch goes
on to explain that levering a 30% return makes you more money than not
levering...
The Paramount Equity pitch was also interesting and stated in all caps “HIGH DOUBLE-DIGIT RETURNS ON YOUR CASH, RRSP”.
This product pays monthly, is a second lien mortgage, with a one year
term and LTV <85%. Paramount uses clever language that states
they cover the cost of defaults. By that they mean they pay some of the
fees, not the default risk itself.
There was a space to pick up business cards. I got quite a few from
real estate investors. I plan on emailing them all to learn just how
bad their pitch/product is. I want to learn more about how these second
lien investor pools are sourced and just how bad this is going to be.
Also, perhaps there will be an opportunity to meet a bunch of distressed sellers, before they even know it themselves…
Nowhere in any of this was there ever a mention of risk, the dangers of
leverage, how terrible negative equity can be, how that can trap you,
etc.
The amount of shadow leverage in this system is crazy. The terms
on these second lien loans is one year. What happens when all of these
loans are called? Even lenders with first positions will see clients
sell when these loans become due and there is no money to pay them.
This is going to blow sky high.
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