Sunday, 27 February 2011

Canada's Real Estate Professionals: Overworked and overpaid







When pop culture creates heroes like this, is it any wonder too many people have been attracted to the profession?


I'm not sure there are many real estate agents suffering from workplace injuries, taking stress leaves, or putting in sixty hours weeks. Nonetheless, the sector has become accustomed to an excess of activity that trickles down into employment for all different types of people who didn't have it before. These people are not "overworked" in the traditional sense, when employees are leaned on heavily by their employers who either don't trust anybody else or are too cheap to hire/train others. They overworked because their sector provides a disproportionate amount of economic activity after being artificially juiced and inflated for the past several years by low interest rates, lenient borrowing requirements, and a spike of speculation from "flipping", "income properties", etc. The logic of "saving up" for your first house has disappeared; now the idea is to "get in the game" as soon as possible so you can stop "throwing your money away".

Before getting into today's post, however, I would like to welcome some guest stars. It gets old reading my thoughts and opinions all the time so I'll open up the floor for a minute to some fellow citizens of mine. We will hear some testimonials from people who work in the real estate sector. Real estate is a constant topic of conversation in Canada, but lately some negativity has started to creep into the discussion. All this sudden pessimism is fine, and all, but what is life like for people in Canada who have chosen real estate as a career?

"I was wondering how long I was going to sit in my parents basement on my bachelor of (insert useless major here) degree before sucking it up and getting a serving or call centre job like all my douche bag friends. Then I made the best decision on my life, based on some billboards I saw. I became a "Condo Specialist". Turns out pretending to be an expert about something there is really nothing to (apartments with mortgages and maintenance fees) is the best possible way to market yourself. After you make your first couple sales, some nice clothes, the latest smartphone and a leased BMW do the rest. There's really nothing to it. I moved over 40 units last year and my website gets a thousand hits a day now."
-Darren, 27

"Real estate is like any other business. You got your high end and you got your low end. I decided from the beginning I didn't want to deal with riffraff. No, I don't think they're bad people and yes, you can make a living off them, but the commissions are so low on what they buy, you have to be working on new deals all the time. I was lucky early on to be taken on in a small brokerage in the most established, old money part of the city. Today I own it. You will not find any homes here under a million anymore. And with us its not about buying a home, its about a total real estate experience. Nobody in my office, including receptionists and admin staff, makes less than 65K. Not because we throw money around, but because we can't risk making a bad impression, and they need to be able to afford proper attire. From the words on our cards like "private" and "exclusive", to the green leather furniture in our office, to the dinners prospective buyers get taken out to, our office spares no expense to provide a total luxury home buying experience. And it works. The firm moved over $150 million of real estate last year, almost all of it in a 5 kilometre radius" -Hank, 57

"I wasn't sure how I was going to start a business when I came here from India five years ago. I looked at franchises, convenience stores, manufacturing, but the start-up costs and red tape were so high and there was no guarantee of success or return on investment. Then I got my real estate licence. It's really not that hard. If you're personable and willing to be patient, you'll be successful. After just three years I'm in the top 1% and my face covers the entire side of a bus.

-Rizvi, 35


Life. Is. Good. And that, my friends, brings me to today's related topic, the government's recent moves to regulate the real estate sector which I have been wanting address for some time. Without wanting to inadvertedly praise the Conservative Party of Canada or contribute in the slightest to its latest series of strong polling numbers, this is one department I have to give them credit in. The finance minister has recently imposed new regulations on this sector which make it harder for unqualified borrowers to sign up for lifetime debt serfdom to acquire overinflated properties. As we've seen, the banks have only been too happy to oblige them up until now.


Of course, much of this has been tightening back up the rules that the Conservatives themselves loosened, but it is still a positive development. By raising minimum down payments for secondary properties to 20%, lowering maximum amortisation terms from 40 to 35 then 30 years, and making it mandatory to prove housing debt could be carried beyond a period of being locked in at the current historically low rates, they have thrown cold water on what was an unprecedented wave in Canadian history of runaway real-estate speculation.


The moves are however incongruous with the rest of the regime's programs and policies. This is a party that howled for almost a decade when it was in opposition under the Reform/Alliance label about government waste and excessive spending. It became the government in 2006 and proceeded to waste and spend record amounts. The government has managed to reduce the tax base by tens of billions of dollars and increase spending by tens of billions of dollars. Much of this wasted money is the result of corporate tax cuts. From a long-term planning perspective, this course in fiscal policy is the worst possible one we could follow from a long-term planning perspective, but it stems from the Conservatives deep desire to be the party most accommodating of businesses and their interests. With these policies, and their eschewing of any messages that encourage people to be responsible or think long term, the government doesn't just talk the talk, it walks the walk. It is a reasonable expectation that everyone in Canada should one day have a 10 bedroom, $850,000 house mortgaged to the hilt on former farmland, three Hummers, and at least an hour commute to work. It is, after all, an individual's prerogative to live this way should the banks see it fit to encourage him in it, and this is the utopia the Conservative party sees our country someday achieving the realisation of under their stewardship. They've never hesitated to behave this way themselves with our tax dollars . Since they are so quick to point out the importance of leadership, and what they feel are their superior leadership skills, I feel safe to assume this is the message they want to infer by leading by example. So why all the sudden prudence and restraint on its housing market regulation, hitting our guest star real estate agents where it hurts?


It is because the government, as I've noted before, is primarily concerned with strategy and appearance. So it doesn't really matter to them if Canada turns out to have been a significant contributor to resource exploitation, environmental degradation, and skyrocketing emissions when the impacts of these become painful and apparent a decade or two or three from now. It doesn't matter if the country becomes an international joke by 2020. And it obviously doesn't matter, based on the fiscal policy they've been pursuing, if the nation that could have been the richest on earth defaults. All that matters is the next election and the polls. That this government, so loathe to intervene on what it considers the wrong side or face criticism for decisions, acted the way it did with these regulations indicates there was a problem. They don't care if their opponents blather on about 2020 or 2050; they appeal to the segment of the population who is in denial about the various fires we've been playing with. With this particular issue, however, it is clear that if they let things keep going the way they were, they were going to end up with an egg on their face in the very near term. A big, fat, housing bubble shaped egg.


Lest week the government was issued a stern warning by the CREA , a group of real estate "professionals" who wagged their fingers at the government. There should be no more fettering of their ability as professionals to do the important work they do by a once-friendly government buying all this doom and gloom hype. They are, after all, the "experts", and the government should listen to them. And so should you, obviously, if they are grabbing a major headline in a national newspaper in saying so.

This is of no consequence now, but we need to be wary of groups in sectors that are vulnerable to the wrath of logical, free-market fluctuations taking too many individuals under their employ, lest they become "too big to fail" (see Auto Sector, 2008). There are more mortgage brokers, alternative lenders, mobile mortgage specialists, top 1% real estate agents, home stagers, re-financers, private lenders, and all the administrative/clerical personnel who help them than ever before. Places with names like Mortgage Intelligence, Red Hot Mortgages, Mortgage Monster, Mortgages R' Us, Sky High Mortgages, Rocky View Mortgages, and One Stop Mortgage Shop have proliferated on street corners everywhere. Call in shows like Hot Property on CP24 and newer real estate brokerages with names like Peak Realty are demonstrative in their names of the mood and environment in the country whose real estate prices greatly increased during the recession.

Which brings us back to our testimonials of people who profited handsomely during this property "boom". A simple look at the rate at which housing prices have risen in major Canadian markets like Montreal and Vancouver and, to a lesser extent in Kitchener-Waterloo tri-cities and many GTA suburbs when there is clearly no underlying median incomes or labour market to support and justify such rapid increases shows that a bubble has been expanding in Canada for sometime. The real estate sector has experienced corresponding growth and now repeat "recovery" with the same religious zeal and die-hard repetition as the kool-aid drinkers in government. This story, however, is one of hundreds of examples I've read of the peril they are exposing themselves to. When even the Conservative government can see this and put the breaks on, the real estate pros might want to take now and be thankful for the artificially high amount of work that they had, instead of criticising the government and thinking their Trumpesque fantasy could have lasted forever.

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