From boom to gloom

As published, May 30th, 2008

Leave it to Garth Turner to throw cold water on the notion Canada can achieve a soft real estate landing, when history and the slump south of the border show that is a rare feat indeed.

The personal-finance author-turned-Conservative-turned-Liberal MP for Halton, Ont., was one of the first to warn of the 1990s property flop – albeit several years too early. Now he thinks Canada is facing precisely the same mix of elements that burst the U.S. real estate bubble.

“We are in a monumental denial phase,” says Mr. Turner, who’s book Greater Fool – The Troubled Future of Real Estate was published in March.

“My theses is now reality, we are starting to see substantial sales declines that were ruled out only six months ago as impossible,” he says. “But now people are saying prices aren’t moving down. They will.”

The figures do show a noticeable retreat in the Canadian housing market this year.

Nationally, resales fell 6.1% year-over-year in April, while price gains have slowed to 4% from around 10% in each of the prior five years. Calgary saw sales drop 31.2% over the year, Edmonton, 25.4% and Victoria 14.2%. Calgary and Edmonton also saw prices dips.

According to Urbanation, a condo tracking firm, the condo market has defied the trend and remained fairly steady through the first quarter, even as a several new buildings hit the market.

Mr. Turner says housing markets blow themselves out when prices rise beyond the reach of average buyers. This is what happened in the United States.

“To keep the party going, the mortgage industry, the credit industry, backed by the banks, decided to lower the bar to ownership,” he says. The subprime industry was born and home buyers with scant credit history and skimpy income were drawn into the market, enticed by no-money-down mortgages and interest rates that started out low, then ballooned to unsupportable levels.

Similarly, in Canada, prices have risen beyond the reach of the average buyer, Mr. Turner argues.

“What has been the response?” he asks. “The 40-year mortgage.”

Economists estimate amortizations longer than 25 years now constitute about 70% of all insured mortgage applications and about half of that amount is for the 40-year product.

Mr. Turner reserves his starkest warnings for sprawling suburbs mushrooming around Canada’s major cities. He says many new home developments have mortgage representatives onsite offering the same kind of no-money-down deals that dragged down the U.S. market. Buyers just have to come up with 1.5% of the house value to cover closing costs.

These will become the “particle board slums of the future,” Mr. Turner says, as smaller families and surging energy costs cause the suburbs to fall out of favour.

But the Toronto condo market is heading for trouble too, as overbuilding swamps demand, he says.

“We are classically at the end of a bull market,” Mr. Turner says.

Financial Post

[email protected]

33 comments ↓

#1 Terry on 05.30.08 at 11:49 pm

Markets up TSX closes above 15,000
GDP posts first quarterly decline in 5 years
Housing sales down
Housing prices still rising
US housing collapsing
Western Canada still booming
Eastern Canada cooling
Inflation rising
Canadian prime at 3.0%
Oil at $135.00
Personal debt rising
Canadians sitting on $45-billion in cash
Global warming rising
Everyday Canadians are hit with new headlines that would make the best economist scratch there heads as to what the economic future holds. All these mixed signals in a ever changing world is enough to send most Canadians wondering what is going to happen next. Planning and investing in these times has never been more confusing as we wonder what the next few years will bring.

#2 Mike on 05.31.08 at 2:21 am

It won’t qualify as the great recession of 2008,
but it’s certainly the great stall. Canadian
real GDP growth has been close to zero for
the last two quarters put together, somehow looked to have been the weakest G-7 economy in terms of first
quarter real GDP. UNEMPLOYMENT RATE in Canada from 5.8% last year again jumped up to 6.2% (May/08) and again will see decrease of BUILDING PERMITS, and Housing Starts.
All thouse informations are even worst in Ontario.

About Residential Construction(Housing starts in Ontario)
2003 85180 units
2004 85114 units
2005 78795 units
2006 73417 units
2007 68123 units

About Residential ReSales in Greater Toronto Area:

2003 78,898 sales avg.price $ 293,067
2004 83,501 sales avg.price $ 315,231
2005 84,145 sales avg.price $ 335,907
2006 83,084 sales avg.price $ 351,941
2007 93,193 sales avg.price $ 376,236
About 2007 sales were boosted with 40-years mortgages, Zero down, 7% cashback etc.

Finaly about ReSales in Greater Toronto Area in 2008:
Jan.2008 sales decreased 2.1%
Feb.2008 sales decreased 11.2%
Mar.2008 sales decreased 22.2%
Apr.2008 sales decreased 7.3%
Mid-May2008 sales decreased 12% avg.price $400,600
This Trend of sales shows that in 2008 will have about 78,800 sales or the same volume as 2003.So the value of houses are the same as 2003.Period.
What’s mean market value? If the product is on demand than the price will going up (gold,oil,materials,food etc.). Unfortunatly about Real Estate Market in Canada is something different world market and will be forever selers market.

#3 womp on 05.31.08 at 4:01 am

The article doesn’t even mention inventory. One look at the skyrocketing inventories in Vancouver and Victoria combined with even the slightest grasp of basic economic principles of supply and demand and it’s pretty easy to see where it’s headed.

#4 Shaju on 05.31.08 at 7:31 am

Good article.
Saw an interesting Canadian documentary yesterday called Radiant City. It’s about new, poorly built tract housing that rings the cities in Canada. Pseudo-communities with nothing in walking distance, full of homes too big for the small families that live in them. At $1.30 a litre, the time and cost to get to and from these communities is going to be less and less appealing.

#5 Colonel Iqbal Singh (Retd) on 05.31.08 at 10:58 am

I do agree that with rising fuel costs, the suburbs may feel an adverse impact as envisaged by the author, but I have not read any credible report suggesting that the mortgage system in Canada, despite its similarities with US, is failing like in the US. It is likely that some areas where the prices have shot up too fast in a short span, may face the consequences as indicated in the article, there are still places which are still cost attractive and at best may face a slow down. In other words, while a slow down is a healthy trend, the American type collapse looks unlikely.

#6 Republic of Western Canada on 05.31.08 at 11:52 am

Here in Central Canada (i.e. Calgary), we have it better than it’s ever been. The economy is running as hot as that in Dubai, and the only ones getting smacked are greedy RE speculators/owners. That’s a good thing – who cares about them anyway.

When that industry collapses like sodden wretched chipboard shacks in the rain, I’ll be able to acquire a half-dozen of those kinds of things for pennies on the dollar. Then bulldoze them and put up something substantial that also actually has some nice architectural design to it. As long as I don’t have to listen to the squealing of all the ‘owners’ as they go like pigs to the slaughter, like we had to listen to the squawking of all the RE shills like a bunch of magpies on roadkill when prices were skyrocketing.

The same goes for the self-serving political-industrial tribes in southern Ontario & Quebec that have attempted to exploit the West for over a century. Don’t come crying to us for another NEP-type handout when you can’t compete with the third world. Get off your collective fat asses and start doing some sweating and innovating, instead of dreaming up unproductive politically-correct crap to waste transfer payments on. I get *so* weary reading all the whining coming from down there. As if anybody really cares at all about it. It’s just one big suburb of Detroit anyway.

As for liquid hydrocarbon fuel prices – let them keep rising. Finally we’ll see some pressure on all the self-centered domestic-oriented suburbanite creeps everywhere to stop squandering every kind of resource imaginable. Hydrocarbons are for making plastics, medicines, paint, and fertilizer from. It’s NOT for pushing vehicles around outrageously spread-out suburbs with. You want cheap healthy transportation? Don’t work for a company that’s not on a bicycle path or not reachable by electric train in the winter. They’ll move.

#7 Sold Out of Cowtown on 05.31.08 at 11:54 am

I bought a home built in 2005 in Calgary, 2 weeks after I sold it in Feb. 08 the new owners brother phoned me about a leak in the kitchen ceiling. I’m sure there’ll be many more problems down the road.

These new areas are so depressing to live in, the homes all look the same, they’re poorly built, they’re scrunched together and if you want to go anywhere and see anything you have to drive for miles. I was renting a room in a similar neighborhood in Edmonton recently for work, and I will not make the same mistake when I decide to buy another home in the GTA.

Question, I was just reading the Calgary Herald Condo section that “substantially softer sales in the existing market have led to increased inventories, resulting in softer price increases” is “softer” RE’s code word for lower, or decrease?

#8 Cam on 05.31.08 at 1:35 pm

Why do people think that mortgages caused the housing collapse in the US? Do you think subprime mortgages are defaulting for the people who bought at the beginning of the boom? They are still sitting on big equity gains and affordable mortgage payments. ALL mortgages are in trouble for the owners that purchased a home for WAY too much money, very little down payment and is now worth less than they paid for it. Canadian mortgages are all but worth less than what they paid for at this point, just as dangerous as the US in 2006.

The only reason mortgage practices contribute to a bubble is they innovate new ways to allow people into the market that could not otherwise afford it. Prices are artificially inflated and… pop. Sounds like 40 yr ammortization to me.

By the way, the only reason a 40 year ammortization is good for the mortgage industry is so that when a person applies for a mortgage, if they tick off the box for a 40 year ammortization, their banker can immediately reply,
“Rejected! You obviously have no grasp of finances and should not be responsible for a loan of many hundreds of thousands of dollars. Now go home and save up a good down payment and come back when you can afford a 25 year ammortization.”
If that were the case I’d say our lending practices would be different from the US, but clearly they are not.

#9 patriotz on 05.31.08 at 2:19 pm

was just reading the Calgary Herald Condo section that “substantially softer sales in the existing market have led to increased inventories, resulting in softer price increases” is “softer” RE’s code word for lower, or decrease?

Prices in Calgary are down, repeat DOWN, 10%+ from the peak last summer. Just look at any property on mls.ca and then look up the assessment on the City of Calgary website. Asking prices are below assessment. The is simply no way people would be asking below assessment if the market were not falling.

#10 Terry on 05.31.08 at 2:44 pm

I find no problem with the length of the mortgage but with the lack or amount of down payment. Banks risk on these 40 year low down payment has been eliminated with CMHC and GE mortgages insurance. 35 year CMHC mortgages where around in the 1960, back then the interest rate was fixed over the full 35 year term. The mortgage could also be paid of at any time with no interest penalty. CMHC has to start to tighten the rules giving more risk to the banks. Most people with long term mortgages end up paying more into the mortgage after 10-20 years as inflation reduces the mortgage payment and should be allowed to pay more into the mortgage than is now allowed. Mortgages have become to profitable for banks and mortgage companies. I often wonder why fixing a mortgage over the full term was ended in Canada and renewing every 5 years became the norm.

#11 eauciel on 05.31.08 at 3:51 pm

Thanks, Garth, for an informative website. Thanks also for not banning some of the less constructive contributors. Slander is the refuge of the weak, but censorship is even more despicable. By reading the various commentaries one learns discernment, the art of eating the chicken and spitting out the bones.

I have read your book “2015, After the Boom” and look forward to reading “Greater Fool”.

I would welcome advice from you or your readers.

My wife and I are now empty nesters, mid fifties, living in the Laurentians, north of Montreal, near St. Sauveur. We are trying to sell the two story family home and subsequently intend to build a smaller more energy efficient bungalow with a vegetable
garden).

My wife has had several knee operations, so a one floor residence is appealing.
We have a deposit on the new lot and were planing to purchase the new lot and build once the present home is sold.

Thumb-nail financial picture; Total debt including mortgage is $180,000 but $20,000 is at high interest rate; Present home bank valued at $230,000 market value $250,000; lot is $60,000 and budget for bungalow, two bedroom, one bathroom is $160,000.

Apart from the comfort for my wife of moving into a home without stairs, we would be able to pay off our high interest debt and only be indebted for a mortgage which we could pay off in 10-15 years.

Under the present economic circumstances, would you counsel selling then renting while waiting for building prices to fall?

#12 Dom-GTA on 05.31.08 at 6:03 pm

Eauciel,

Based on my experience with Garth, his suggestion would be to sell now ASAP and then wait at least 12 months to buy as both interest rates and prices will be lower.

#13 Terry on 05.31.08 at 6:32 pm

Maybe Mr. Turner as a member of parliament can explain to us how CMHC a Canadian Crown corporation can make more than 1 billion dollars a year in profits. Or is the government predicating that we may see a steep rise in housing foreclosures.

http://www.trilliummortgage.ca/cmhc.asp

$ 244 billion Total value of all mortgages insured against default by CMHC as of 2004
$ 875 million Net income from CMHC’s mortgage insurance business in 2004
$ 1.14 billion Projected net income for CMHC’s mortgage insurance business by 2009
$ 8.3 billion CMHC’s projected retained earnings by 2009

CMHC Annual Report 2007
http://www.cmhc-schl.gc.ca/en/corp/about/anrecopl/anrecopl_001.cfm

I wonder how many people who are paying for CMHC insurance do not even know there are paying these premiums or understand the amount they are paying for these premiums?
How about people in Alberta who are assuming mortgages that have CMHC premiums financed in there mortgage payments!

#14 Darin on 05.31.08 at 7:25 pm

I just drove from one side of North Vancouver to the other, just down some common streets in no particular
pattern. I counted no less than 52 for sale signs posted.
This is just incrediable the amount of new listings here,
particulary in the last few months. I know what alot of them are thinking, we had best try to sell this old 1970′s
overpriced, large fuel eating monster why there’s at least a few suckers out their.
I also noticed that the realty pullout from the local paper has gone from about 10 – 15 pages to 2 pullouts about
40 pages long.
I for one require no more evidents that somethings about to happen here.

#15 Saskatchewan Real Estate on 05.31.08 at 8:08 pm

The only thing I can say is look to Saskatchewan. When all other real extate is going down, it will continue to climb.

#16 Leah on 05.31.08 at 10:59 pm

Darin,

Same in Victoria. On any given street there is min. 1 for sale sign if not 4 or 5.

And people still think nothing is happening?????

#17 vultur on 06.01.08 at 1:47 am

Good ol’ Darth Mortgage. Perveyor of half-truths that suit his agenda.

Here’s the SECOND PART of the article- ie the more positive one.

http://www.financialpost.com/story.html?id=552055

A balanced commentary is appreciated by all I would assume.

#18 patriotz on 06.01.08 at 3:58 am

I often wonder why fixing a mortgage over the full term was ended in Canada and renewing every 5 years became the norm.

If banks are going to loan out money for 25 to 40 years at a fixed rate, they are also going to have to borrow money for that term at a fixed rate, or at least be confident that shorter term rates for their borrowing will not rise. Back in the good old days they could, but since inflation got going around 1970 rates for long term bonds simply got too high. There is too much interest rate volatility now.

There is also the issue of mortgage prepayment on sale of the property which gets more difficult the longer the term.

If it were profitable to lend mortgage money for fixed rates long term somebody would be doing it. There’s no law against it.

#19 Islander on 06.01.08 at 5:00 am

Here’s where we’re at in the cycle:
“I read in the Globe that the bubble is over. We better sell before it’s too late.”
Listings are shattering all-time records. Sales are flat or declining. Prices are flat or declining.
As a realtor, my advice to sellers is that if you’re on a fishing expedition, don’t bother. If you have to sell (job loss, relocation, etc.) be smart about your price right now. If you’re a buyer, relax; in the next 30 days you will be seeing more listings than at any time in your life, probably. Be picky. Lowball. And be patient.

#20 vultur on 06.01.08 at 9:25 am

http://www.theglobeandmail.com/servlet/story/RTGAM.20080530.wcondos30/BNStory/National/

Darth Mortgage, here’s some strong evidence that the condo boom in Toronto has begun to slow down.

I thought you would appreciate some balance.

#21 Realtors Panicking on 06.01.08 at 9:49 am

Vultur, you seem to be very scared of a correction. Either you are a RE Agent or overleveraged.

If you think that the 90′s RE correction was bad, you ain’t seen nothing yet. Everyone I talk to is saying the same. The tide has turned for you.

#22 Sam on 06.01.08 at 11:21 am

Hi Islander,

good to see an honest realtor sepaking the truth. God bless you.

#23 Sold Out of Cowtown on 06.01.08 at 11:32 am

That was a great advertisement from the finacialpost Vultur. If anybody were to give an honest and unbiased opinion of the future condo market in Toronto it would be the developers themselves of course.

I’m sorry but after buying and selling my first home I just feel that there is no bigger scum on this planet than the Vultures, or should I say Vulturs’ of the real estate world ie, the agents, developers, speculators and contractors building their disposable vinyl and particle board slums. What’s your role Vultur? Agent, or Speculator?

#24 vultur on 06.01.08 at 11:57 am

I am nearly. I have a portfolio of unleveraged real estate that I can use to finance new acquisitions if the market does correct. I don’t buy houses so a housing market crash doesn’t do me any good. I like objectivity in my reporting. There is none here.

I think Darth Mortgage is nothing but a scaremonger.

#25 Terry on 06.01.08 at 3:51 pm

patriotz

Seems funny that the US can still offer fixed 30 year mortgages. I think the answer is Canadian banks find the profit on shorter term mortgages to profitable. It’s one reason Canada can find higher default rates on mortgages as interest rates rise.

National Mortgage Rates US 06/01/2008
30 Yr Fixed 5.88%
15 Yr Fixed 5.52%
3/1 ARM 5.44%
5/1 ARM 5.49%

#26 Leah on 06.01.08 at 4:05 pm

Islander,

Thank you for the honest answer!

#27 zzz_ddd on 06.01.08 at 5:25 pm

To Mike:
Mike thanks for excellent GTA stats.
They do show the trend (in sales and in avg.sale price growth)

#28 squidly77 on 06.02.08 at 11:39 am

hello vultur

#29 Al on 06.02.08 at 4:09 pm

I ahve noticed that there is an abundance of homes for sale in Port Dover , Ontario. It has been quite some time since I have seen this. Prices are not really falling ,however, it could just be sellers hoping to cash in on high values. New subdivisions are being created with homes costing much more than the average. The only way for many to buy here is the 40 year mortgage. Unfortunately, banks do not show these people what the costs could be if the rates rise in the future….and they will. Once these rates rise we will truly see a domino effect in sales and prices and forclosures. It’s unfortunate but than the 40 year mortgage for that eventuality.

#30 snapshot on 06.02.08 at 10:20 pm

“Once these rates rise we will truly see a domino effect in sales and prices and foreclosures”.

Yep.

Yuo can renegotiate a loan, but never the purchase price.

#31 Doug on 06.14.08 at 2:27 pm

Buying a house in today’s market is the worst financial decision ever. With current house prices in Canada so high it doesn’t make any sense to buy, keep renting and this is why. Considering the average Canadian home cost $344,000 and today’s buyers are young couples between 25 and 30 years of age and most already have student loans and other debts and don’t have any down payment. Not to worry the Canadian Banks will give them a 40 year mortgage with no money down. 68% of all mortgages today are of the “NO MONEY DOWN” type. If you think that is safer than an American sub-prime loan you’re mistaken. A monthly payment on a $344,000 loan is $1992.72 a month. After 40 years you end up paying $997,566.44 for a house that cost $50,000 to build. The Land transfer tax and closing costs would be over $20,000 in some provinces. The property taxes alone would be $400 per month for as long as you live. House maintenance and yard care would be $2000-$3000 per year. Even if you could pay off you mortgage (WHEN YOU’RE 75 YEARS OLD) which you won’t, you would have spent nearly $2,000,000 to live in that home. Do you really think you will ever see your house worth 2 million dollars someday………..pphsst dream on!!!
To make a long story short, if a renter were to take what they would pay just for property taxes and put that monthly payment away in a high yield savings account for the same length as the mortgage (40 yrs) they would have 1.28 million dollars to retire on. Starting with $0 and depositing $400 monthly over 33 years and 4 months (at a rate of return 9% compounded monthly), you will save $1,005,971 accounting 101. Think about it….to buy a house in today’s market is the absolute worst investment you will ever make.

#32 Cory on 06.14.08 at 2:30 pm

We have decided to rent. Why, because the whole housing market has become crazy economics. My wife and I both earn above the national average wage and we are first time buyers and cannot afford to buy a house. This kind of market pricing is unsustainable……no commodity, what ever it is, can defy the fundamentals of basic economics that its affordability is pro rata to national earnings unless it’s a Van Gogh!. This government’s economic policy over the last ten years of encouraging cheap credit and allowing people to gorge themselves on debt have inflated house prices well above the correct economic balance. I am afraid we shall all now have to pay the tally man his dues, no matter how hard this will be and return to prudent controlled finance is coming.

#33 Gerry on 06.14.08 at 2:47 pm

I think part of the problem in smaller cities is the agents. With small cities, “Realestate” agents can control markets especially with younger buyers and this is what happened to me.
I recently sold my home in Winnipeg, MB. The potential to make some coin was to great and my wife and I decided to flip and wait for the market to crash. Plus we could rent the same house for way less then mortgage. My house was listed for $159,900…….double what I paid 4 years ago. The agents had one open house and then offers were accepted the following night. There was only one offer and it was well under list. My agent told me I should expect more then my list so when I saw this I was surprised but then he told me not to worry. I could not believe what happened next. Both Agents, (listing agent and selling agent) sat at my kitchen table and phoned the buyer with some bad news. The buyer was told that there was another offer (“A Phantom Bid”) which was a total lie, but who was I to say anything. These young buyers got nervous and offered $200,000 for a 60 year old-800sqft bungalow with a leaky roof. WOW I was amazed and shocked……very happy to have made that much money but a feeling of guilt. How can this be legal??????? I watched these agents bamboozle this poor couple until they were willing to pay way to much for my home…….oh well young, greedy, uneducated buyers seem to rule the market. I would have to think there are going to be some agents in trouble soon. As for me, I paid off my tiny mortgage and will be buying a brand new house just as soon as the market crashes…….maybe I’ll buy two houses.