Panhandling – a comment for the ages

 Found in the Globe & Mail:http://www.theglobeandmail.com/servlet/story/RTGAM.20070817.wpanhandle0818/CommentStory/National/home

g h from Canada writes: This scary, dishevelled panhandler approaches me today and says he needs money. I point out the location of a local shelter where he can stay warm and get a decent meal, but he seems even more agitated. ‘What’s the problem?’ I say. ‘I don’t want a meal, I want money’ he says. ‘Why?’ I respond. ‘Well’ he says, ‘You’ve seen what’s happened to equity stocks the last 48 hours haven’t you?? My broker has me heavy into U.S. equities and I’m taking a real bath.’ So I told him to just ride it out. If he’s into sound companies then he’ll be okay. This seems to bother him. He tells me ‘Look the 5-year bull market is over. The U.S. returns that investors enjoyed in recent years have been largely fuelled by a mssive reduction in the float of public shares, thanks largely to private equity deals and stock buybacks by public companies.’ I say ‘Yes you’re right of course, but rates are rising and lenders are demanding tighter terms.’ ‘Exactly!’ he replies, ‘Which is why the US$1.55 billion bond sale meant to help finance Kohlberg Kravis Robert’s buyout of Royal Ahold’s U.S. Foodservice Inc. was scuttled last month.’ Well we went back and forth for a good 20 minutes, until he won me over by pointing out how the proposed IRS code change in the U.S. would serioulsy eat into private equity and hedge fund activity, and smart investors will just sock away cash and wait for the right time to buy long-term bonds. I took his advice and gave him $50,000 to cover any margin calls from his broker. And here I was hoping he just wanted to squeegee my window for a buck.

‘Investing’ in real estate

Oh boy ho boy I’m rich! I’m wealthy! I’m independent! I’m socially secure! I’m rich! I’m rich!

Recently the most expensive Condo in Canada went up for sale in Vancouver. According to a Re/Max press release, the luxury market is booming. As pretty much anyone will tell you, real estate of any sort is hot hot hot.

I met two people, each on separate occasions, and each one of them exemplifies a popular type of ‘real estate investing’ that is in reality not investing at all, and like all forms of gambling, could wind up costing them a lot of money. But it’s their business and their money, so I tossed in my two cents and we went on to other subjects. I’m not smart enough to get ‘into real estate’. Or rather, I’m just smart enough to know that I don’t know enough, and that it’s a bad thing to get into unless you really do know what you’re doing. Or get lucky with timing.

The first person I met was ‘in condos’. He still lived at home in the suburbs but had ‘invested’ in several condos downtown. I’ve actually never talked to anyone who’s ‘invested’ real estate about their holdings and so on, mainly because that sort tend to be tedious braggarts, but this person seemed fairly amiable and I was curious about one thing in particular. It was something I’ve often suspected, but basically wanted confirmation.

Most condo developments, particularly the newer ones, charge pretty steep maintenance fees, and it is a renters market right now. So I asked him: with all the costs, and a mortgage and so on, how do you make any money?

With the seeming wisdom of Solomon, the person smiled and said ‘appreciation’.

Of course. Prices will always go up. The market’s been so hot for the past few years that it has to continue. He said with utmost certainty that real estate prices never go down. Guess he never paid attention to what went on in Japan.

I’ve been living downtown in Toronto for several years now. Enough to see the prices of downtown 1-bedroom condos essentially double. If someone bought when I first moved downtown and planned to sell fairly soon, they’d have done very well for themselves. Someone buying now, however, and expecting the same rate of return will likely end up pretty disappointed. As any financial advisor who’s not trying to sell you something will tell you, past performance does not guarantee future results.

One of the things about living and working downtown is that I’ve been keenly aware of how much the urban landscape has changed. Around the CN Tower and along Queen’s Quay there are dozens of new buildings where once there were vacant lots and even golf courses. Most of these are one-bedroom condos, some of the larger two-three-bedroom places, and the ‘luxury penthouse’ that seems to either sit empty, gets bought by some multi-millionaire for a place to stash his mistress or gets rented out to an escort operation.

There’s even more buildings under construction, and billboards surrounding empty lots advertising yet more condos. I get this sinking feeling that some of these buildings aren’t ever going to be completed. Despite a ground-breaking ceremony over a year ago the proposed Trump Tower is still just a parking lot, and it would also be interesting how ‘Success’ on Bay Street turns out.

Even with all the people who lived at home until they turned 30 and are moving downtown now, and the empty nesters, there’s still only so many people willing to pay nearly $200K for the privilege of living in less than 500 square feet. There’s not even very good evidence that retiring baby-boomers really want to live downtown in vast numbers. Even if that were the case, that would have already been factored into current property prices by now. People who bought in the late 90s or even a few years ago have probably done pretty well for themselves – sometimes really well – but getting in now would be like showing up at a New’s Year’s party after midnight. The party might not yet be over, but the best has already past. Don’t believe me? Take a look at the current state of real estate in Florida.

There’s still a scramble to buy property in Toronto not because it is actually scarce, but because people think it is scarce and will become even scarcer. There’s actually plenty of land in Toronto, it’s just that a lot of it isn’t put to good use.

The reality is that a significant chunk of the people buying these condos are speculators (oops, sorry, I meant investors), who are driving the prices skywards. It’s the same in every hot market – Vancouver, Calgary, Edmonton and so on. Now the really smart money’s buying up chunks of Saskatoon and Regina. There’s an awful lot of people who think they are awfully clever investors, buying property that will climb forever up.

But here’s the problem. How such a person is actually an investor isn’t clear to me. To me, investing means that you put your money into something that generates an income – you have your money work for you instead of you having to do it all. Putting money, especially borrowed money, into something because you think you can sell it for more later on isn’t investing at all, but speculating. Or gambling. I don’t have a problem with that strategy, I just ask that it be called what it is.

The person I spoke too (and I have no reason to believe is story is at all atypical) isn’t renting a property for more than it costs, therefore generating a steady cash flow, but rather, counting on the price to go up. That would be fine if there weren’t an awful lot of people around with the same idea. It also depends on how leveraged this average investor is. The other thing is, that it doesn’t matter what the value of a place is right now. It only matters when you go to sell it. Same goes for every other ‘investor’. But if too many sell at once, the prices will drop. Again, just look at Miami.

The second ‘investor’ I met is similar to the first. Only he’s ‘into houses’. He had a list of properties that have been sitting, for sale, in some of the, let’s say, less upscale parts of Toronto. They weren’t areas slated for the next wave of ‘gentrification’ either. The person I spoke to knows a fair amount about architecture and remodelling and has probably watched a few too many episodes of TV shows like ‘Flip This House’. At least he doesn’t expect to get rich, but I think he’s vastly overestimating how much he’ll actually end up taking in. At least he hadn’t bought anything yet. He might know what walls can be knocked down, but that doesn’t mean he knows about real estate. Sure, the market is hot right now. And so is the resale market. But again, just because something has been hot for a while doesn’t mean that it will continue to be so. And who publishes most of the data about hot real estate markets? Real estate, brokers, companies and associations – the ones who make money on the transactions. Part of me sometimes wonders if reports from the CREA aren’t really all that different in principal than stock-brokers promoting penny-stock pump-and-dump schemes.

See, my older brother is an old hand at this. Not in Toronto, but up in cottage country. Decades ago he owned a Home Hardware franchise and was later a real estate agent. For the past twenty-five years or so, he’s gone from one dilapidated property to the next. He once bought an old barn and turned it into a gorgeous, huge house that sold for, let’s just say, a handsome sum. He bought a decrepit lakefront summer cottage and turned it into a wonderful year-round house. He eventually sold each property for far more than he bought it for, and factoring his labour in, paid himself a decent salary in the process. Remember that – he paid himself too.

He could easily build a mansion from scratch. He knows the wiring, plumbing, structural elements, roofing, you name it. And as I said, he’s made a decent living. Also, being an ex-real estate agent, he had the inside track on all the good (well-enough below market value) properties. Something not available to the average buyer, even with the internet and access to MLS and so on. But he’s not Donald Trump either.

But I get the sense that I understood more about what this ‘investor’ would likely be getting into than he did. Let’s not even get into the transaction costs involved in transferring a property – such as lawyer’s fees, taxes and so on.  This person bragged that he’d be doing all the work himself, so he’d be saving a lot, since we all know that labour is the biggest cost when it comes to renovating. I’m quite sure that supplies aren’t free either, but I digress. What he’s forgotten in the equation, and what my brother understood, is that you have to pay yourself – your own labour isn’t free. You wouldn’t do your job for free, would you?

Secondly, as long as you have a mortgage on a property and no income in the form of rent, it is costing you money as long as you own it in the form of taxes, maintenance and interest payments as well as the mortgage payment. So until you sell it, you are, in effect losing money. And what happens if the market heads south in the meantime?

There isn’t really anyway of predicting what the future will do, and you certainly can’t base what the future will do based on the past. There are people who simply enjoy buying decrepit houses, doing them up from the inside and out, then selling them. A friend of mine bought the result of one such project. If it’s a labour of love, then great, but it’s not often a way to get rich any time soon.

Buyers have been watching those same shows and they, too are getting more savvy. Here’s the reality when it comes to home renos, whether it’s a place you’ve lived a while, or a place you plan to flip. Home renovations do not bring back more money than you spend. It’s just that depending on the room, you lose less with some than with others. You lose less money if you put it in a new kitchen than you would if you were to put in a home office. But that’s just it – you still don’t get more than you put in; on average you get less. Particularly if you factor in the costs of your own labour. No matter what you do to your property you’re not going to be able to sell it for vastly more than what other houses in the neighbourhood go for. Even when I’ve shopped for a place to live, the ‘fixer-uppers’ aren’t really that much cheaper than the ones in ‘move-in’ condition.  Personally, I would prefer to buy a place that gave me room to make it my own.

His argument, of course, was the same as the person ‘in condos’. Prices always rise. I mentioned that they were already falling in parts of the US, and that the real fallout was only just beginning. He then argued that Canada is different. It’s booming here, with all the oil and a hot mining sector and the TSX is still going up. And Canada doesn’t need the US anymore now that there’s China and India. It’s not going to happen here.

The same arguments being used to rationalise high properties prices are the same ones that were used during the tech bubble in the 90s. There’s always people who believe that things are different this time, that the rules have changed. The ones who believe that are usually the ones who go broke.

Further reading: http://www.johntreed.com/flipthathousereview.html

Panhandlers, homeless and crime in Toronto

Media coverage of a recent stabbing death by a group of youths has brought the issue of panhandling in Toronto to the fore, including calls for banning the activity altogether. There are already laws against ‘aggressive pan-handling’. Last time I looked, stabbing someone was also illegal.

I’m not in favour of panhandling by any means. I never give to beggars, and I’ve chided the odd friend I’ve been with who has given to them. I really do believe that giving only makes the problem worse. At the same time, I do not think that banning it altogether would be at all effective.

Why? First off, ‘aggressive’ panhandling is already illegal. It just isn’t enforced enough to deter the activity. Just because there is a law on the books doesn’t mean the behaviour will stop. Secondly, any attempt to curtail the ‘right’ to panhandling will, I guarantee, be met with fierce opposition, and most likely a couple of lawsuits. There’s a substantial amount of case law that protects begging under ‘free speech’. It’s just not worth the effort to try to introduce, and without the assured backing of the courts, not worth it for the police to make a serious attempt to enforce.

There is, however, a very serious and worsening problem with panhandling and homelessness in Toronto. In five years, my life hasn’t changed that much. I’ve worked at the same job, hung around the same areas, lived in the same vicinity. For five years I’ve walked the same streets nearly every day, and see many people come and go along with a few hard-core regulars that my husband has seen around since he was in high school in the late 80s.

There seems to be a lot more panhandlers this year than ever before. Though oddly, I pass by fewer people sleeping outside on the streets than I did last summer. The city of Toronto recently launched a ’study’ of panhandlers in the downtown area, though the part of Queen Street where the stabbing occurred falls outside the area.

I’d like to see the results of the study. But most of all, I’d be interested in knowing: where do they all come from? The most curious thing about the most recent high-profile crime is that three of the four were from the US. If it turns out that the majority on the streets of Toronto are not actually from Toronto it would certainly bolster Mayor Miller’s case for uploading responsibility for social services back onto the province. Or even the feds – doesn’t immigration fall under their domain? Why should the Toronto taxpayer be expected to fund a group lazy kids from California?

I’m acquainted with one guy who’s a panhandler, though I don’t see him much any more. In some aspects, he fits the stereotypical beggar quite well, in other aspects, he does not. He does have a place to live, though it’s in a lousy part of town. He has mental health issues, though he is not an alcoholic or a drug addict. He’s had people offer him work and has declined. But he really is a ‘lost soul’; I can’t see him being able to function in any sort of workplace environment beyond the most menial sort of labour. And he doesn’t have the health that that sort of labour requires. He most likely doesn’t eat enough. Certainly not anything nutritious. He pans for various reasons – sometimes out of necessity, though it also seems to be the only way he knows how to get extra money. He mostly supports himself on welfare, though most people forget that with a diagnosis of mental illness one qualifies for ‘disability’, which has more entitlements than regular welfare does. It’s not an amount I’d ever want to live on though.

The biggest problem with homelessness and with panhandling is that each issue is far from simple. There is no single cause of either, and therefore, no single solution. Each person who ends up on the streets, either to sleep or to beg for change is there for a different reason. Some are old, and haggard. Pretty much unemployable. Some are serious alcoholics. Some are obnoxious and have alienated all around them, while others are beaten down and forgotten by everyone. Some people just need some guidance that no one has provided them, others need chronic support that in the long run is likely cheaper for society to pay for than not, and all that some probably need a swift kick in the ass.

The second biggest problem is that so many people – and so many policy makers, it seems, refuse to acknowledge the complexity and instead call for simpler and therefore ultimately ineffective solutions.

The ‘right’ seem to think that each person is entirely responsible for their destiny and tolerate no excuses. But they don’t tend to have grown up poor, or fully understand how profound and resistant to change even psychological barriers are. There’s this ‘I got mine’ mentality that seems to penetrate through every facet of being. They tend to forget the ways in which the average taxpayer supports their quality of life. Corporate welfare is ignored or played down. Or it’s ‘good for the economy’.

Those on the ‘left’ refuse to admit that some people are fully deserved of their lot. Some people really are lazy, irresponsible and selfish, and will game the system for whatever they can. There are limited resources, or at least limits to the voters’ and the taxpayers’ patience. There’s plenty of money to go around if you add up all the funds and revenue from the various social service agencies and charities and such. A lot of it is miss-spent. Where does all the money go that the churches collect? Or the United Way for that matter? Why do temporary shelters cost half millions of dollars to run each year? How do you really get people off the drugs so that they can function – and do they want to? If people flock from all over Canada and end up on Toronto streets, what entitles them to be subsidized by the Toronto taxpayer?  Why not just stick them on a bus back to their home town?

Until these sorts of questions are answered – honestly – there will continue to be homeless and panhandlers in Toronto. Then there will be the rare, high profile crime that brings those issues to national attention again, along with more cries of banning this or that, or for funding this or that. And then a few weeks will pass, then months, and some other item in the news will distract people and on it goes.