A few ramblings

A few people I know just closed on houses this week.

One couple bought a $400K "investment property" up island. It has two units, so "double cash flow" as they call it. Their monthly hit to income after they collect "expected" rents = $700. Sounds like a good deal to me, not!

Another group of three just bought an old house on a busy street. No Realtor could tell them the last time it was owner occupied. I actually lived beside this place about 15 years ago in a really disgusting 2-bed basement suite. It was a slumlord place back then and the same guy owned both houses. Nothing ever got fixed or cleaned. They bought this place because it has three suites in it. They will live in two of them and rent out the third. This apparently was their "last chance to get in the market." Parents gave them the 10% down payment. They paid over $450K.

Across town in an area best known for troubled teens and drugs, another couple bought a triplex (again unauthorized). 2 bed main suite with two self contained 1 bed units underneath. Cost? $540K.

People have lost their minds in this town. It really is irrational. None of these people looked at the state of the market or the greater economic trends. None of them care. They all think RE only ever goes up in Victoria.

I didn't say a word to anyone other than ask the question "Did you look at the market?" Their responses ranged from "my Realtor told me I got a great deal" to "RE always beats the stock market."

On another note, it seems as though the credit crunch is quickly spiraling out of control in Canada as the banks gave a collective FU to those that bought their should have been junk- bond rated ABCP over the past several years.

Here's why you should care about the credit crunch:

Canadians are already getting hit in the pocketbook by the debt-market crisis, and it could get a lot worse.

"It could get a lot more difficult for consumers to get any type of mortgage loan or any type of personal loan," as debt markets tighten up," says Fred Lazar, a professor at the Schulich School of Business at York University in Toronto, sounding a wakeup call for consumers dulled by the big numbers and ugly acronyms of the steadily escalating credit-crunch story.

"I would compare what's going on now with the onset of the Depression period in the late 1920s and early 1930s," says Steven Hochberg, chief market analyst with Atlanta-based Elliott Wave International. "The potential is for it to be a lot worse simply because of the amount of credit outstanding." The total credit-market debt as a percentage of gross domestic product is more than double what it was during the Great Depression, he says.

For about two months now, the banks have been quietly reducing the discount they provide on mortgages. Canadians now negotiating a variable rate mortgage can get .60 percentage points off the prime rate. Two months ago they were getting .90 percentage points off.

With prime at 6%, the difference between a mortgage rate of 5.4% versus 5.1% could mean almost $15,000 extra in interest on an average Canadian home over 25 years (based on a 10% downpayment.)

"Appraisers are saying, 'I don't want this to come back at me.' If the appraisal comes in under purchase price, the purchaser says 'I'm paying too much, I want out,'" he says.

The last thing you want to do is expand your debt obligations. "This means hard times. It remains a reduction in the standard of living as everybody gets their house in order. It's going to be the way it used to be," says the market analyst.

some fallout from the ABCP crisis has already been felt with the $1.2-billion University of Western Ontario pension plan for 6,300 faculty and staff restricting redemptions on some of its funds in early November.

"They were doing alternative lending with high ratio mortgages -- that part of the business might dry up," he says, referring to people with little equity and lots of debt. And the market to buy that securitized debt is disappearing.