Meltdown? What meltdown?

On Friday, as noted below, BMO economist Doug Porter stated the obvious, that Canada is on a slow but inevitable track to repeat the US real estate experience. This, as you know, is the premise of my book released a few months ago, and even when I wrote it last winter, it was obvous the correction was coming.

The chart above, for example, shows the severe imbalance last month of listings and sales in Calgary, which not long ago was a market on fire. Now, obviously, sellers are bailing out as buyers await the inevitable – falling prices. I expect all major Canadian markets will correct by an average of 10-15%, and some areas will be clobbered with 30% declines by the end of 2008, or the early Spring of 2009.

Does everyone agree? Of course not. Just as there are climate change deniers, so are there housing deniers. The article below, from theMontreal Gazette, gives arguments why this is a great time to buy. Especially if you are a greater fool. — Garth

Is Canada about to follow the U.S. into a meltdown in the price of homes? Until this week, you couldn’t find a credible economist in the country who would have said yes, but yesterday one of the highest-profile figures in the profession, deputy chief economist Douglas Porter at BMO Capital Markets, evoked that possibility in a note to clients.

Nevertheless, this is a comment that shouldn’t be taken too seriously. As other analysts point out (Porter himself wasn’t available for comment yesterday afternoon), Canada’s housing market really doesn’t bear much resemblance to that of the U.S.

Porter made the suggestion in a chart and brief accompanying commentary that highlighted how the steep drop in the pace of Canadian housing price gains this year reflects almost exactly the falling-off-a-cliff plunge in U.S. price gains two years ago.

In the U.S., these slowing price gains were just the first step in what would become a massive decline in national average prices, one so severe that it’s probably the single biggest negative force in the faltering U.S. economy.

It’s this context that gave Porter’s note such impact, especially since it drew an explicit parallel with the U.S. market. But it also acknowledged Canada’s slowdown is a long way from matching the severity of what has since developed in the U.S.

For example, one widely followed U.S. measure, the Case-Shiller index of average prices in 20 large cities, is now down 15 per cent from a year ago. Some cities, like Miami and Las Vegas, are down as much as 27 per cent.

It’s true that a few Canadian cities are showing much smaller price declines – Edmonton down by 4.9 per cent in the past year, Calgary down 2.4 per cent and Windsor down 5.5 per cent – but only in Windsor does this reflect economic distress. In Alberta, the price reversals look more like a hiccup after huge runups.

So is Porter really suggesting that Canada’s housing market is about to follow that of the U.S. down the drain? Apparently not, despite the provocative words. “No, we don’t think we’re headed for a U.S-style bust, said a colleague at BMO Capital Markets, senior economist Sal Guatieri.

The most likely outcome, said Guatieri, is that average prices will creep ahead slowly for at least a year or two – by maybe 3 or 4 per cent, in order to let buyers’ incomes start catching up with years of double-digit price gains. And if the economy slows further, he sees the possibility that national prices could even drop by a few per cent.

Guatieri’s forecast isn’t very different from a recent one perpared by the Toronto-Dominion bank, which also sees a couple of years’ very slow national price gains: an average of 2 per cent this year and 3.5 per cent in 2009. Its forecast regional changes this year range from a gain of 36 per cent in Saskatchewan to a drop of 1.5 per cent in Alberta. Ontario and Quebec are near the national average, with gains of about 3 per cent.

Even if you use Guatieri’s most pessimistic forecast of small price drops for a year or two, its important to understand how Canada’s market is in no way similar to that of the U.S. That’s because price gains slowed for very different reasons.

In the U.S, prices collapsed largely because they had been puffed up by speculation and irresponsible mortgage lending to buyers who could never hope to keep up their payments. There was little if any such lending in Canada, where banks are much more conservative, and only minor signs of speculative buying.

Because so many buyers in the U.S. couldn’t really afford their homes or had overextended themselves to buy for speculative gains, the first hint of prices plateauing caused a rush to the exits.

This fed on itself as houses quickly became worth less than no-down-payment buyers had borrowed. That in turn triggered a wave of foreclosures and forced sales that still continues, driving prices ever lower.

In Canada, said Craig Alexander, deputy chief economist at the Toronto-Dominion Bank, lending standards didn’t ease much, meaning that few buyers got into trouble.

Here, the trigger for a dramatic slowing in price gains – from an annual increase of more than 11 per cent last November to just 1.8 per cent in May – was that homeowners simply decided to cash in, which meant more sellers competing for each buyer.

The number of listings of homes for sale had surged by 16 per cent in May from a year earlier, said Gregory Klump, chief economist at the Canadian Real Estate Association.

Alexander believes that the surge of sellers just reflects the fact that as homeowners saw prices reach higher levels than they’d ever expected, any who had been thinking of selling – perhaps because of impending retirement – decided to grab the money right away. And of course, as price gains weakened, more sellers had the same motivation.

But there are very few distress sales in Canada and voluntary sellers usually refuse to sell at much of a loss. And since banks aren’t auctioning off large numbers of foreclosed homes, there’s no reason to believe that any meltdown is coming.

jbryan@ thegazette.canwest.com

76 comments ↓

#1 Virtual Ted on 06.30.08 at 9:49 am

Its a little frustrating to see the author write the housing price will slow to just 4%. 4% on a 300k home is 12K, the 2% raise I recd on my 100k salary equals $2k. So according to the story, because the price of housing only increased my pay raise by 10k, all is well. That 4% raise in house prices, leveraged with debt maintenance and increasing property taxes makes housing much less affordable, not more so. Throw in a slowing economy with higher levels of inflation (eroding disposable income) the near future will see a drop in prices, not a slowing down of increases. The past five years of annual 10% increase has seen to that.

I really appreciate Garth’s Blog trying to keep the special interest misinformation in check.

#2 Sold Out of Cowtown on 06.30.08 at 10:26 am

Hi Garth,

I bought and read your book and check up on your website for news daily and was wondering what type of price correction do you expect for Toronto and Barrie? I sold my home in Calgary and am looking to move to either hopefully by next spring.

#3 Ed Sager on 06.30.08 at 10:46 am

One has to wonder what the RE prognosticators quoted in the Calgary Herald and other papers are smoking these days. Canada is ‘different’, right? Insulated from the US and world economies by some magical potion, no doubt. It is going to be an interesting year.

#4 Mike.slob on 06.30.08 at 11:01 am

Hi Garth,
Please,what do you think about Burlington,Oakville,Milton,Brampton and Missisauga RE Market.Thouse are strongest RE Markets in Toronto Area,and soon will be price correction from 10%?

#5 James on 06.30.08 at 11:09 am

I knew investing in BMO was a good idea. I know I know, the canadian financial industry is going to be trouble for the next while but still I think BMO will be better off than most Canadian banks.

#6 Mountain Girl on 06.30.08 at 11:42 am

So we prospective buyers are waiting for our salaries to catch up with the new higher housing prices?
Does anyone else remember the Stats Can report that came out a few weeks ago that told us all that the average Canadian’s income had gone up by a measly $20 or so since the 60s? And in some demographics, the annual income had actually decreased. Remember that little report? It made the front page of newspapers here in Calgary.
So this financial writer, someone who makes a living analyzing markets and writing about them, can gloss over the small detail that Canadian incomes haven’t risen substantially in the past 40 years, and with a clear conscience, continues to pooh-pooh all the looming signs of trouble and encourage people to jump into the real estate market with their cautious, conservative 40-year mortgages (the ones that cost them two-thirds of their monthly income to service)?
The worst part is that many people use articles like this to influence their financial decisions.
Never mind the fact that we don’t teach basic financial planning in schools these days, how about we just try to make sure that the next generation graduates with a critical faculty?
That might give them some protection against this kind of “journalism”.

#7 wayne on 06.30.08 at 1:20 pm

You’re right Garth. Most bank economists are trying to put the best face on the RE market. Most of us, even without any economics background think a huge unsold inventory of houses and condos must dictate a drop in prices.
Most of these economists are also soft peddling the impact of ‘shifty’ lending practices. I see a 40 year, little or no down payment, mortgage as little more than a profit centre for lenders and a boon to realtors and developers. Banks have taken the concept of ‘something for nothing’ to new highs (or lows). Instead of the government recognizing that the average Canadian could not afford to own a home these days and trying to put the brakes on, they helped the banks lure the unsophisticated into a potential lifetime of mortgage debt.
If these mortgages are threatened by a drop in the value of the asset/collateral the banks aren’t likely to sit on the sidelines and hope their economists are right about a nice tidy 4% increase in house prices. They are going to force borrowers to increase their equity or sell the asset.
Maybe I see it too simplistically. I should probably read the book again, I’m sure this is covered.

#8 nonplused on 06.30.08 at 1:41 pm

“In Canada, said Craig Alexander, deputy chief economist at the Toronto-Dominion Bank, lending standards didn’t ease much, meaning that few buyers got into trouble.”

I can’t believe these jokers get away with publically making such statement and nobody ridicules them! We do not have a “subprime” problem in Canada, we have something much worse and we lowered our lending standards even further!!! It’s called the 0/40 CMHC mortgage! No one in the US got that crazy! When CMHC needs a big bailout in a few years as all these 0/40 mortgage holders mail in thier keys it will all seem much more obvious. And I understand something like 40% of all mortgages written in the last 2 years were some variation of the 0/40. The US subprime market never got that pervasive, even if you include Alt-A, which is also in trouble.

The other thing I like about how the real estate industry seems to be spinning things is that it is the fault of the mortgage crises that house prices are falling. They don’t seem to see that the reverse was true as well: it was the excess availability of credit and the abandonment of lending caution that led to the price rise as well. It’s almost like there is some sort of denial that the prices are too high, instead the blame is laid strictly on the credit market, and no mental connection between the 2 seems to be made. Even in Garth’s book, he seems to do a great job of highlighting how absurd prices got and how people should not buy at these prices, but seems a bit weaker when it comes to laying blame on the Bank of Canada and CMHC, who are the real culprits in this mess. It wasn’t a spontaneous bubble that came out of nowhere! As in the US, the central bank and the government colaborated to cause the bubble. WHether they were just idiots or they wanted higher house prices to increase consumer spending and increase taxes I guess we may never know, but they took the actions that set it in motion either way.

#9 Another Albertan on 06.30.08 at 1:42 pm

The same BMO that racked up $800M in trading losses on natural gas in early 2007? The same BMO that – based on comments I have heard from the street here in Calgary – that still has losing positions that haven’t been unwound?

All it takes is one portfolio slip-up and all critical eyes are cast back on any and all institutions.

In my experience, I would never assume commentary from bank economists is representative of what may be in the firm’s trading accounts.

You’d have lost less YOY if your money were in TD or RY or BNS versus BMO or CM. Over 5 years, the latter two have essentially been dead money whereas the former three would have at least returned >50%.

Your mileage may vary.

#10 jrochest on 06.30.08 at 1:46 pm

Oh, this is hysterical: sure, Canada is Different!

We don’t have zero-down mortgages! Oh….wait a second…dang, we do…

Well, we don’t lend people more than 3X their income! Oh….hang on, we do, don’t we…

Well, at least we don’t have mortgages that barely make a dent in the principal for 20 years! Oh. Those….40 year things….okay…

Well, Canadians are Different! We will continue to pay the mortgage on house even after all our equity has been eaten by market decline! There will be no foreclosures!

#11 nonplused on 06.30.08 at 2:03 pm

So back to the rent vs buy debate….

I sold my house (Calgary) a week ago (still awaiting approval of financing). It wasn’t that tough to do. I expected not to be able to sell it due to all the stories we keep hearing on blogs like this one and after reading Garth’s book, but appearently I found a greater fool! I hope they don’t discover this site.

What I did find when selling my house is this: I have put a lot of time and money into renovating the kitchen, deck, fences, new flooring, insulation, windows, a basement suite, it’s close to downtown, etc. Probably $60,000 all in if I didn’t do much of the work myself (I come from a family of carpenters). Guess what I got paid for all that? Nothing. My house sold for the same price any other house in this area on the same size lot and square footage goes for. Sure I sold for 2.5 times what I bought it for, but so did everyone else! Mind you I have a c/s sign on my lawn and most people don’t these days so maybe it got me the sale, but that’s it.

So now I have no house, and I am shopping in the area I need to move to. (I’ll spare the details just say my commute will go from 45 minutes to 10 minutes). Guess what? It’s all junk for sale that hasn’t had any maintenence done on it what so ever!!! What is it with these homeowners, who figure thier house is worth $800,000, but can’t be bothered to paint it in 15 years? Even the outside? Even with wood siding? $800,000 and you want to sell me a 30 year old furnace? There is no insulation in the attic? Are you people crazy?

So the lesson is that if you buy, in addition to the mortgage you need to budget $10,000 a year for upkeep, plus taxes and all that. (And don’t get going on new houses, where you have to finish the basement and yard and that can run well over $50,000).

Instead, I found a nice place that I can rent for $2300/month. It’ll take 2 months rent for the landlord to pay the property taxes. But the investor who bought it thinks she’s going to make a killing in a few years. Me, I’m just glad I won’t have to redo the kitchen ever again.

#12 One of the Foolish! on 06.30.08 at 2:35 pm

My oh my… Isn’t this little blog interesting.

First of all, I never trust a BANK for accurate real estate advice, and secondly, I would never trust someone trying to sell a book about real estate either.
The writer of this blog uses 1 person’s advice to support his theory encourages you to buy his book saying that he “knew” that the market was going to turn into something like the US market?!
How naive. Really. I can only imagine how foolish his book titled “Greater Fool” really is.

Just as there are laws of nature, laws of society, there are also laws of real estate. I am not talking legal laws that are written down, but natural laws that are driven by masses of people, not just one person.

One of those laws states that Real Estate is LOCAL. Not affected in any major way by other markets. The other is look at the facts, not the hype!

Is he talking about CALGARY real estate or CANADIAN real estate above. He blends the two and uses 1 to imply its relation to the other in his comments above. This is against the “Law”.

FACT: Our lending policies have been stricter than that of the US, whose failing housing market is directly related to their subprime lending, triggered by a drop in the economy.
According to the International Monetary Fund in 2008, the US has subprime residential mortgages equal to 20.2% of the total residential mortgages. Other countries (Ireland, UK, Australia, Spain) are hovering around 5-7%.
Guess where Canada’s is? 3.6%. Yep, we are in trouble alright – NOT! If subprime mortgages are the first to go in a downturned market – then we only have 3.6% to worry about – unlike the US with 20.2%.

The market is in a correction state. It is taking a breath. It will be taking a breath for a few years. Get used to it – its normal and healthy. Your particular market will be different from other markets, and the extent of the “breath” will be different.

My advice to you: Avoid the negative soapboxers who are trying to sell you something. Find unbiased advice and facts to base your decision on. Anyone can find articles written by the media to support their theories – and we all know how unbiased the media is (yeah right). If it bleeds, it reads! :)

Also, could you be a little more vague with this statement: “I expect all major Canadian markets will coreect by an average of 10-15%, and some areas will be clobbered with 30% declines by the end of 2008, or the early Spring of 2009.” Specifically can you define “ALL MAJOR CANADIAN MARKETS…AVERAGE” and “SOME AREAS”?

No doubt this guy will pull out facts in a years time that supports his statement, and choose areas that support his theory to later define “major canadian markets” and “some areas”.

Good Day Garth Turner. Hope you sell those books quickly and find somewhere to hide – because the truth will put you out of business!

Hasn’t so far. Please read the book, then comment. My message to Canadian homebuyers, homeowners, speculators and real estate addicts is one of caution. It can happen here. In fact, it is. Your words will not change that. Thanks for dropping by, and I wish you well. — Garth

#13 Keith in Calgary on 06.30.08 at 3:09 pm

Denail of reality is commonplace in the financial world nowadays, especially as it pertains to RE.

The MSM, REIC commentators, bank analysts, et al, will never tell you the whole truth, until it is too late and they have no choice because it is obvious to everyone concerned.

That article from the Montreal Gazette is so full of lies it should be on the Comedy Channel.

RE here in 18-24 months is going to be so cheap in relative terms to the numbers from 2007 that only a moron would buy now.

#14 EJ on 06.30.08 at 3:13 pm

The predictions and denial from the vested interests in RE are exactly what we saw from the US “experts” a few years ago.

Funny how it’s all playing out the same way here:

1. Housing never goes down.
2. It’s crashing elsewhere, but it’s different in this country because of blah, blah, blah…
3. Looks like we’re in for a minor correction, but it’s healthy, part of the cycle. Just a hiccup, nothing to fear.
4. Well, prices are down overall, but all RE is local and this city is different!
5. Well, the city is taking a dive, but THIS neighbourhood is different. It’s desirable. A fortress. Prices will always keep going up here.
6. Ok, the neighbour’s house sold for 20% less than it was purchased for, but MY house is different. It’s special, and I’m not budging.

Well, we’re only at step 3, but there’s a ways to go yet.

You’ll hear all the excuses in the world as to why it’s different here and housing won’t crash, but it only takes one basic fact to counter all of them: Prices are too high when compared to incomes.

#15 Internal Exile on 06.30.08 at 4:20 pm

I’m going to go out on a limb here and guess “One of the Foolish!” has money in Vancouver real estate. As things get worse and worse, the refrain of “it can’t happen here” gets louder and louder in Vancouver. If you think Calgary is turning into a bloodbath, the V-Rock is gonna blow your hair back!

#16 kabloona on 06.30.08 at 5:53 pm

“One of the Foolish!” = “Real Estate Professional”

Yeah, looks like Garth struck a nerve there. :-)

nonplused: I know it’s a drag to sink money into your house and not get that “guaranteed return on investment” they always babble about on the RE porn shows, but my observation is this: the house in best condition may not fetch a better price but it almost always sells first.

And you may *need* to sell first in a down market….I have been in that situation twice and my place sold versus other comparables due to the fact mine needed absolutely no repairs and had a few updates such as reno’d kitchen and bathroom or finished basement (work mostly done by me).

All this is based on observation of the RE market in the GTA, but I suspect the same principle holds true everywhere else in Canada.

#17 Mountain Girl on 06.30.08 at 6:56 pm

I think wayne brings up an interesting point. CMHC and the big banks and governments on all three levels are doing their part to make it both legal and possible for people to get into the financial mess of being overmortgaged. But who gets blamed if/when things don’t turn out so peachy?
I definitely think we all need to be responsible for our actions, but were these people getting the real story from the lenders? That’s where I feel uncertain about how vocal to get. I most certainly don’t feel like bailing out the greedy and foolish with my tax dollars, but I also don’t think that CMHC and the banks should be let off easily for being so irresponsible. It’s tempting to just sit back and try not to get splattered by the wreckage ahead, but maybe we should be getting more vocal about not allowing this sort of financing in the first place. It is our business when it hits the public purse.

#18 nonplused on 06.30.08 at 7:26 pm

thanks Kabloona, you are correct I did get the sale. Who knows what I would have had to sell it for if I had let the maintenance slip like the neighbors??

I think “One of the foolish” says something true, real estate is local. However, credit bubbles are not. If only one market was rising faster than the others, you might say something like “retirees moving to the island are driving Victoria house prices higher”. But when every houses in every town city and country in the western economic sphere is rising at 30% per year, what you have is a central bank induced credit bubble. This guy (or gal) obviously hasn’t done much thinking beyond the platitudes.

He is way off on his calculation of the sub prime situation in Canada as well. We may only have 3.5% subprime mortgages, but that’s because nobody needs a subprime mortgage when they can get a 0/40 from CMHC! We have a 0/40 problem, and it covers up to 40% of the new mortgages written in the last 2 years. Nearly all of those will default in the event of a slight downturn in RE prices. (For a 0/40, CMHC adds thier premium to the mortgage amount, so you are actually upside down out of the gate. It is 46 months before a 0/40 holder pays off his CMHC premium and even begins to accumulate equity! So even a little downturn and these people will walk. Why wouldn’t they? Remember, they have no money or they wouldn’t have needed a 0/40. So the potential is there that the Canadian version of financial engineering might actually be worse than the US version.)

#19 David on 06.30.08 at 7:37 pm

The all real markets are local and the housing market is a bit frothy hypothesis was put forward by Alan Greenspan at the height of the bubble. Reviewing the Case-Shiller index makes me think otherwise, since it is a weighted average composite index. Certainly there are variations on a theme and there were some small regions in the USA that escaped the bubble and the subsequent bust.
One of the Foolish seems to think there are immutable laws on housing on par with Newtonian mechanics. Hard to believe a person can ooze naiveté from every bodily orifice.
If anything Garth is probably being too conservative in his calls on housing price declines.
Canadian families committed to 40 year zero down mortgages really wont have much flexibility to adapt to skyrocketing energy, food and transportation costs in the coming years. Job security and defined benefit pension plans went out the window a while back for middle class families in Canada. Everything would be solved by rampant house price increases according to the real estate industry. Don’t all head for the fire exits at once OK?

#20 mattbg on 06.30.08 at 7:58 pm

Garth, do you still see interest rates going down (re: variable mortgage)? It looks like the US, Canada and the UK are all starting to get more concerned about inflation than about the other economic problems facing them.

#21 Chris H on 06.30.08 at 8:40 pm

Hey Garth,

Do you think one of the reasons Stephane Dion is being so cautious about calling an election is because he doesn’t want to be caught in the kitchen when the house burns down?

I’d say it kind of makes sense to let the Conservatives hold on to power for another 9 months until this baby has hit the fan properly.

#22 Peter on 06.30.08 at 9:01 pm

Watch for the GREAT CANADIAN BANKS meltdowns coming…All these banks…NBC, GE (Genworth), BMO, TD, RBC, NBC, SCOTIABANK & CIBC <-All these cdn players are Very Very Agreesive with their Lending Practices (0/40 & Homeline & Loans)for the past few years, , will go in smoke when the real estate market in Canada has been going down the drain real soon…Advice : I will not buy any of the Canadian BANK & Alt-A Canadian Mortgage firm stocks…!!

#23 Vague Hazy Ambiguous on 06.30.08 at 10:23 pm

One of the foolish! said…

“Also, could you be a little more vague with this statement: “I expect all major Canadian markets will coreect by an average of 10-15%, and some areas will be clobbered with 30% declines by the end of 2008, or the early Spring of 2009.” Specifically can you define “ALL MAJOR CANADIAN MARKETS…AVERAGE” and “SOME AREAS”?”

Garth avoided your question. He obviously wants to leave himself lots of wiggle room. He’ll need it. Sales in Calgary are at their highest level all year. Price declined slightly but that was because people bought smaller houses. Inventory is shrinking.

Garth, if you do decide to answer the question, what are you using as your baseline? Dec 2007 prices?

‘Sales in Calgary are at their highest levels all year’? Take a look at the chart above. Does that look healthy to you? Inventory shrinking? As for market-by-market predictions, why bother? They’re all coming down. — Garth

#24 pjwlk on 06.30.08 at 10:32 pm

A co-worker of mine told me today that he just bought a house in Guelph, Ontario and in his exact words he said “The house has already dropped by 20 grand and I haven’t even moved in yet”. He now realizes it was a big mistake.

When I asked how he knew that the price had dropped told me that he has been watching the prices of similar homes in the area and that many of them are now sporting “reduced” or “new price” stickers on the “for sale” signs. Foolish, is that local enough for you? …

#25 Islander on 06.30.08 at 10:49 pm

About half of all mortgages written in the past two years are 10% down or less. That barely covers the disposal costs. A 5% dip in prices and your equity is wiped out. When someone on the block has to sell at distressed prices, everyone’s house gets re-priced. And the ball rolls downhill from there.
Long term, the cost of a house has to reflect its utility value (rent). Market rent reflects earning power. When the average wage is $30K a year, the average house price cannot be $600K. To believe otherwise is to believe in the tooth fairy.
And I’m a realtor.

#26 Another Albertan on 06.30.08 at 11:18 pm

These Calgary stats?

http://www.bobtruman.com/SFH_Monthly_Summaries/page_1869385.html

Or these for Calgary condos?

http://www.bobtruman.com/Condo_Monthly_Summaries/page_1869405.html

#27 patriotz on 06.30.08 at 11:41 pm

http://housingdoom.com/2008/06/28/canadas-housing-market-deja-vu/

VICTORIA — Real estate sales are down in the provincial capital. The number of sales and the total value are lower, and the real estate industry is seeing signs that Victoria’s housing boom is over.

“We are definitely seeing a shift in the marketplace, although it’s certainly not a time for panic,” said Victoria Real Estate Board president Tony Joe. “For people hoping home values will be plummeting any time in the future, I don’t think that’s going to be happening any time soon.”

Joe said the market has been cool so far in 2008, but that’s in comparison to 2007, an “exceptionally busy year when we exceeded all the numbers.” “We’re also looking over the last five or six years and what we’re finding is things are just coming back to normal,” he said.

Phoenix, 2006:

The declines appear so dramatic because Phoenix’s housing market last year (and for the past several years) was so hyperinflated. “Last year was just one of those atrocities that happens rarely,” in terms of bidding wars and soaring prices, says Camille Sullivan, also an agent at Realty Executives. “I’ve never seen it before, and I’ve been doing this for 25 years. It was a very difficult time.”

Sullivan says the market is “stabilizing and getting back to normal.”

#28 nonplused on 06.30.08 at 11:56 pm

$20 grand ain’t much in the scheme of things theses days. A 30% correction in the average house price in Calgary would chop off $130,000. Yikes! But that would still leave them at $315,000, which not that long ago was a “luxury home”, not an average home.

No price declines so far though, most sellers seem to prefer to carry 2 mortgages than cut thier ask price. So that’s one of the reasons sales have dropped off a cliff but prices haven’t. Sellers are refusing to lower prices in order to move inventory. But buyers can’t be forced to buy so sales drop. I guess most sellers think that if they just hold on a few more months the market will come back.

#29 confused and a little crazed on 07.01.08 at 1:46 am

Well guys…

i ‘m looking to buy but I’m try lowballing …sort of and see what happens . maybe try a 50 k-70 k deduction on their list …closer to assessment and see what happens..

#30 One of the Foolish! on 07.01.08 at 2:00 am

Me again…

This is quite a thread. Yes I am in the real estate industry – but I do not have a book to sell you, sorry. So my opinion here is not completely unbiased, but the sources I look to for answers as to what is happening with the market are as unbiased as I can find them!

So why is everyone worried about the 0/40 CMHC insured mortgages? Sure there are plenty of these mortgages out there recently.
Sorry these are NOT subprime. Subprime does NOT refer to the rate, but rather the eligibility of the borrower. So my statistic of 3.6% is not WAY OFF as mentioned. CMHC does NOT equal Subprime. This is a whole different product that is NOT CMHC insured.

Read this to find out what the subprime crisis is REALLY about:
http://www.imf.org/external/pubs/ft/survey/so/2007/RES0823A.htm

The ONLY way you can get a 0/40 loan is if you have Beacon score of above 680. If you can’t, then you can go the subprime route – but will likely pay hefty interest rates!

Who do you think would do this the most? Investors! And who is responsible for the majority of the mortgage default cases in Canada? Investors! I don’t see how this 3.6% of the mortgages will spell disaster for Canadians and a “slow but inevitable track to repeat the US real estate experience.”

0/40 helps people afford to buy a home, and improves quality of life without increasing inflation! Who wouldn’t like that? The picket fence dream for all Canadians with good credit!

The banks have literally NO risk when dealing with a CMHC insured mortgage.
CMHC is insurance for the banks. If the owner defaults on his mortgage, CMHC steps in makes sure the banks get their money.

You pay a premium for this. A 0/40 mortgage can cost you over 7%. On a $400K home, that is $28,000. Not chump change, so CMHC has 7% of your money in the OFF-CHANCE that you will default. And if you do, they also have a percentage from your neighbour, and everyone else who went the 0/40, 5,10,15% down route to back them up. This is the nature of insurance – to mitigate risk.

Combine Canada’s low default rate, with stricter lending standards, and CMHC insurance – I really don’t see how the US subprime crisis will creep its way up here except by way of fear mongering – which I see the author of Greater Fool doing; hence the reason for my rant.
“The perception becomes the reality” – another real estate law.

Sorry, I am not going to buy the book just so I can comment here. I am providing facts, figures and sources to back up my arguments, which I have not seen many others on this page do. Call it “naivety oozing from every body orifice”.
Garth says “it can happen here and it is”, but where is the proof? Sure I see a downturn in the market after a long term housing boom – but what evidence do you have other than news articles and a BMO economist who can’t be found for comment? Lets look at it!

Meltdown – NO. Turndown/Breather – YES.

Skyrocketing: energy, food, transportation = living market, which will breathe just like the real estate market does. The overall trend line will be up just like the real estate market.

Bottom line is this: There are several common fundamentals to each LOCAL real estate market that need to be considered before one can call for a MELTDOWN worse than the US subprime crisis. I look at the things Canada has going for it and I am not worried. People want to live here, they will move here. Supply and Demand, they need places to live. As a society we will adapt to market changes and keep the trend line going up just as it has since land was created – and they are not making any more of it (except in Hawaii – but that’s a totally different blog topic).

On another topic, Donald Trump recommends to people that now (well, 6 months ago) is a great time to buy in the US – but a bad time to sell:
http://www.youtube.com/watch?v=u-XaNrykk_s

Sorry, but in real estate, Donald “Trumps” Turner!

#31 Mike.slob on 07.01.08 at 3:41 am

“largely due to increased affordability through new financing options, such as no money down or extended amortizations(40 years),”
“Our forecast is that price growth in 2008 will average 2 per cent and then it will be about 3.5 per cent next year. So we’re going to be below the (4.5 per cent) trend for a few years,” said Craig Alexander, deputy chief economist at the TD Bank.
So after 5 years if I have to sell property I’ll
will ended with negative balance…
Because of 5-6 per cent agents commisions,higher energy costs,lawer costs,land transfer tax,higher property taxes and banks interests rates in next 3-4 years.
So if my property in GTA will not increase about
$ 70,000 (20% up) or same gain as from January 2006 than all sellers will be winers and I- big looser?

#32 brazer on 07.01.08 at 9:12 am

Op-ed from the NY Times
http://www.nytimes.com/2008/07/01/opinion/01tue1.html

“By the time the Senate returns next Monday from its July 4 recess, some 55,000 more homes will have entered foreclosure. And that’s hardly the full picture of the growing calamity.”

#33 mattbg on 07.01.08 at 9:33 am

Foolish, I agree with you that 0/40 mortgages are not as risky as subprime: the subprime mortgages in the US almost seemed geared to put the borrower in a situation where they couldn’t pay the money back, though I think the reality is that a faith in never-ending valuation increases led people to believe that it didn’t matter whether someone could pay the money back or not.

But, have you read Garth’s book? One of his recurring points is that the main problem with the US market is NOT the subprime problem, but the extension of housing prices beyond the average person’s ability to buy. So, you should probably challenge him on that point.

And… Donald Trump told people 6 months ago to get into US real estate? Are you really using that as an argument? Look at what’s happened to US real estate in the last 6 months, and has not yet showed many signs of slowing.

Also, Donald Trump had many financial problems during the last big housing crash that were related to his real estate investments. He didn’t really start to recover until the late 90s.

#34 Anonymous on 07.01.08 at 9:46 am

One Of the Foolish –

“- and they are not making any more of it (except in Hawaii – but that’s a totally different blog topic).”

You wouldn’t be the first RE person to use this line……

#35 WaitingInToronto on 07.01.08 at 10:31 am

One of the Foolish said “0/40 helps people afford to buy a home, and improves quality of life without increasing inflation! Who wouldn’t like that?”

I would contend that these new mortgage products provide additional people with more money to buy more expensive homes, which directly causes the prices of homes to increase. Cost of living increase = inflation.

Whether the new money comes from larger mortgages to prime buyers or subprime doesn’t matter. The new supply of cheap money means more buyers and higher prices. When that rush is over (ie. all the people “newly” qualified have bought), it will be difficult to sustain the new elevated prices. Combine that with any of: a recession (maybe), subprime defaults (argued as not a problem in Canada), increasing inventory (happening now in Canada), or rising interest rates, and you have to believe prices will drop.

#36 lgre on 07.01.08 at 10:32 am

One of the Foolish! – it is happening already, I have just sold a house in Milton, and have personally witnessed houses drop $25-$30k asking price, last year the same house sold with that non discounted price. A townhouse around the corner from me 1650sqft was listed at $310 originally, after 2 months on the market it was reduced to $290 and still on the market when I left. Houses reducing prices 3 times and so on is not uncommon these days. Mattamy homes is the main builder in Milton and they have dropped prices by $15k on a good handful of homes, I talked to a sales person there and they told me that this never happened since the boom started.

We can talk about 0/40, subprime, charts and whatever we want until we are blue in the face; the fact is that people are not willing to pay for house prices that were effective even in 2007.

I don’t like to talk in the 3rd party but I just saw a friend of mine who I haven’t seen in 8 months, he was telling me that he was going to buy, but his big wig cousin who works for RBC is telling him to hold off . Why is that?

In fact I have a large down payment to put into a house and I’m sitting on the fence as well, I have other reasons not just the market but the timing can work in my favour.

#37 Greg on 07.01.08 at 10:48 am

A disturbing picture of the fallout down south…

http://www.csmonitor.com/2008/0702/p01s01-usgn.html

#38 wealthy renter on 07.01.08 at 11:23 am

One of the Foolish,

You sit can sit and write volumes about how different American and Canadian lending practices were/are, and the great masses of credit worthy Canadians just itching to buy a home. Once question then. Why are sales down and in Canada listing up?

Your line of reasoning obfuscates the fact that we really are a puny nation with big & expensive housing aspirations, and little by the way of economic muscle to back them up. By virtue of every economic comparison, every measure of competitiveness, and every measure of innovation & technology adoption, we are a very poor in relation to our American friends. http://sso.conferenceboard.ca/HCP.aspx (could link hundreds of other studies)

Certainly, the commodities boom has been a boon for Canada, and has certainly shielded us from the fact that minus our resources (and universal health care,) we are a relatively backward industrial nation. I dare anybody reading this blog to name three high tech Canadian companies with a significant presence around the world. I say “dare” with respect because we are not a cutting edge country. It is not an easy thing to do.

Yet you say the trend for housing prices will keep going up, and the MSM agrees with you! http://www.cbc.ca/money/story/2006/06/14/housing.html

Buried in the deepest cracks in the, “We have no sub prime problem in Canada” is the fact that Canadian wages are extremely poor. The average wage for working folks is somewhere around $20 per hour, which given our propensity to tax everything in Canada, is a puny wage for somebody (or a couple) trying to buy the average home in the average city.

http://www40.statcan.ca/l01/cst01/labr69a.htm

When the homebuyer says, “Real estate marketing machine, there are no pennies left to squeeze out me,” the real estate party will be over.

You say that the trend line for housing is increasing? Please tell me how much somebody making $20 an hour can afford? The average family income in Toronto is 58K. How much can they afford?

#39 rocker guy on 07.01.08 at 11:36 am

Mortgages are a side show. The real action is prices that have disconnected too far from fundamentals.

Talking about mortgages during the present housing crisis is like talking about all the cool new laser guided bombs during a war – it misses the point. Either way, many home owners are going to be underwater as prices revert back to levels that make housing investment attractive again relative to other investments.

#40 Jace on 07.01.08 at 11:37 am

Not making anymore land?

Have you been to Alberta? Drive in any direction and within 20-30 minutes of the city you’ll find hundreds of thousands of acres of bare land.

We don’t need to make anymore, we’re no where near the saturation levels of Europe and Asia.

#41 smwhite on 07.01.08 at 12:10 pm

“One of the Foolish!”, you sound like the RE shills in the USA just before the big pop, blaming the nay-sayers(We’ll call them the realist truth tellers) about the impending doom of the RE market:

“Fear mongering” will make the RE downturn come about?

Please explain?

Or do you mean the enlightening of Canadians that their gains of 50% to 100% in the last 5 years in RE is imaginary? That with rising fuel costs the pressures on all facets of the economy will become a drain on these households over the next five years (including which is household carrying costs such as gas, oil, electricity and any other carrying cost that can be effected by rising energy) That the homes many can barely afford, with a shift in interest rates of even 2% – 3%, can put them in the red.

How about the fact that the RE industry and the banks have had 5 years of pushing people into mortgages they could only afford at break-neck rates? Buy now before you can’t afford to. Read that last line, does it make sense that if I don’t buy today I can never afford to buy, that in itself exemplifies a BUBBLE and has been the RE industries mantra not just in North America but all around the world.

Good to see that the RE shills have finally taken the last “infowar” tool out of their batman belt, the old, RE is local song…

The fact you confuse sub-prime with the credit crisis goes to show you don’t understand economic and business concepts outside your own industry. Your the typical RE parrot/one trick pony. Thanks for the standard RE cliches… They add humor to this serious subject and problem that is coming to roost.

And just a note, Garth isn’t the only RE bear and hasn’t been. I have a list of men ten feet long that have been warning of the problems in the RE, credit and banking industry. These people are a hell of a lot smart men then those at the IMF, they have been warning of this since the DOT COM crash… To claim that the IMF has its hand on the pulse of the global banking system is hilarious.

Then to claim there is no subprime and that a 40 year mortgage improves quality of life without increasing inflation! Without increasing inflation? You didn’t just say that, increasing the term to borrow money for a mortgage by 60% lowers inflation? Is that the IMF told you. ha ha ha ha Are you for f@@king real? Please disclose yourself so nobody makes the mistake of taking your financial advice on the most important purchase they will ever make.

PS Housing goes down another 15% across the board in the USA next year, quote Donald Trump all you want but the last time I checked the average person wasn’t a multi-million/billion RE mogul.

I think the fact we get to watch this slo-mo train wreck two years after the fact in the USA from the north will save us from some pain, it won’t be because we’re different, just because we got to the world wide housing orgy, late.

Peace all and happy Canada Day!

#42 nobiasmy*ss on 07.01.08 at 12:37 pm

Foolish wrote “This is quite a thread. Yes I am in the real estate industry – but I do not have a book to sell you, sorry. So my opinion here is not completely unbiased, but the sources I look to for answers as to what is happening with the market are as unbiased as I can find them!”

Wrong – your opinions are biased..just look at your use of exclamation marks – and your choice of ‘answers to what is happening in the market’ which reflect that bias – It all feels a bit desparate in order for someone, ANYONE to believe you (and to ensure more commissions in the future). Your industry is doing a very lousy job of defining what is actually occurring in the housing market, and has completely lost any credibility it had left.

#43 Popping-Bubbles on 07.01.08 at 12:37 pm

One of the Foolish! writes: So why is everyone worried about the 0/40 CMHC insured mortgages? Sure there are plenty of these mortgages out there recently.
Sorry these are NOT subprime. Subprime does NOT refer to the rate, but rather the eligibility of the borrower

My issue with 40-year mortgages is several-fold.

40-year amortization will lead many people to buy homes which in essence they can’t afford or are overpriced. This will leave many people paying off the house into their 60’s when they should have been saving for retirement. The Vanier Institute recently published a study which shows how little people understand the implications of a long amortization (the added interest) and the sensitivity of thier debt to even modest increases in interest rates (how much their payments might rise).

With 40-year amortizations and low down payment mortgages, after a few years a home owner has paid off so little of the house they aren’t truly invested yet. If prices drop even 10% (not at all unreasonable), many of these home owners will be left with no equity. Zero equity situations are exactly what is driving the US market downward – when mortgages principal owing exceeding the value of the house people walk away (or banks won’t continue to extend financing on reasonable terms). Allowing such complete and total leverage puts the entire housing market at risk.

If the housing market goes south, it is CMHC (the Taxpayer!) which will be on the hook.

There was a reason David Dodge, then the Governor of the Bank of Canada, went to the CMHC to give them crap when the announced the 40-year amortization. It basically amounts to injecting massive liquidity (and risk) into the market, in the end accomplishing little more than driving up housing prices and increasing indebtedness.

#44 Popping Bubbles on 07.01.08 at 12:54 pm

One of the Foolish! says “So why is everyone worried about the 0/40 CMHC insured mortgages? Sure there are plenty of these mortgages out there recently.
Sorry these are NOT subprime.”

WRONG. 0/40 are textbook subprime.

There is no one definition of prime or subprime lending. Prime is meant to refer to the lowest risk lending, and subprime is higher risk lending. Simply speaking, the lowest risk prime mortgage would have a borrower who has a stellar credit history, proven income which can more than cover the loan repayments and a strong down payment so that you are actually invested in the asset. A terribly risky subprime borrow would meet none of these criteria.

So while Canadian lenders like HomeTrust and Xceed tend to focus on portion of the subprime market that can’t document their income or have poor credit history, it is the CMHC (in partnership with lenders) which lends to the subprime segments that can’t afford a reasonable down payment, don’t really have the income to adequately cover the loan repayments (hence the 40-year amortization), or are just speculating.

The fact that huge proportion of first time buyers are taking some combination of low down payment mortgages or extended amortizations implies that too many people are buying assets which they can’t adequately afford (affordability is a matter of degrees). This is risky (subprime!!) lending where the risk is:

* not adequately being charged for as CHMC is subsidized by the Canadian Government. Despite the a huge deviation in the price of the insured housing assets from their fundamentals, the CMHC has not increased their fees.

* not being absorbed by the party making the lending decision (in the case of CMHC insured mortgages, which cover the vast majority of all Canadian subprime mortgages)

* not fully understood by borrowers (studies show that consumer do not adequately understand the implications of low down payment, extended amortization, and other mortgage gimmicks)

* masked by low interest rates (close to zero real interest rates)

* masked by lending gimmicks (7% cash back, teaser rates, step mortgages, skip a payments, builder buy downs, etc.)

* increasing dramatically as prices get further and further ahead of incomes

* willfully ignored or publically downplayed by industry participants

Sounds a lot like the U.S., no? Just becuase our subprime problem isn’t as serious as in the U.S. , doesn’t mean it isn’t serious. This may take a year or so to play out, but with rising unemployment, rising inflation, rising interest rates, record energy prices, record housing inventory for sale, record consumer indebtedness and near record housing unafforability (we’ll beat the record when inflation drives interest rates higher), this will end very, very badly.

#45 JST on 07.01.08 at 1:12 pm

The “Donalds” sound bite can be found here.
http://www.youtube.com/watch?v=Lvp1lV4hogU&feature=related

“the fact is most of the country is horrible and I think it’s going to get worse”

#46 Mountain Girl on 07.01.08 at 1:14 pm

One of the Foolish –
I agree that Mr. Turner has a vested interest in selling his book and that that should be kept in mind when reading his blog (and the book), but the same goes for the advertisements coming from real estate agents and boards. Except that no one calls those advertisements. They go under the guise of “articles” and “market analyses”. And the vested interest of the real estate folks is on a much larger scale than book sales.
Not wanting to spend money on Garth Turner’s book is not a good enough reason to excuse yourself from offering a review on something you haven’t read.
I think his book has some excellent points to make, but I didn’t go out and buy it. I borrowed it from my local library, as I do with all my reading materials. I did have a bit of a wait as over a hundred people wanted to read it before me. Seems like a lot of Canadians are interested in what he has to say. You might want to give the book a read before you start debating it.

#47 Crikey on 07.01.08 at 3:43 pm

“One of the Foolish!”,

You may want to consider this quote:

“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”- Upton Sinclair

You’ve named yourself very aptly, by the way.

#48 Mike.slob on 07.01.08 at 3:58 pm

I preffer more to pay 12% interest on my mortgage and get house price from february 1996 in GTA Market.
That time wes avg. price in GTA was 192k.
Today avg. price is 400K.

#49 David on 07.01.08 at 4:51 pm

Surprisingly there are some real estate bulls extant in Canada at this late date. People who do not want to read Garth’s book can go and read numerous papers written by behavioral economists and sociologists. The academics say pretty much the same thing as Garth does albeit in a more turgid and less lively fashion.
The biggest mistake CMHC made was not putting a cap on how much financial loss it will cover. There will be no good reason for any banking bailout in Canada and if one or more of the major banks happens to fail as a result of mortgage losses too bad. The government doesn’t bail out the guy with an ice cream parlour who overstocked on the wrong flavour at the wrong time. The same should hold true for bankers no bailout.
The current imbalance between listings and sales has to do with aversion to financial loss. Families that over paid for homes are more likely to over price the listing value rather than face the immediate prospect of getting far less than they paid for a property. Less than aggressive pricing means extended listing periods with no offers.
One should question One of the Foolish about the wonders of 0/40 year amortisation fostering ownership. The picket fence nightmare possibly. The Brits used to have a term called buying on the “never never” because that television set purchased on easy credit was never going to be paid off. Adding a few zeroes to the right and that shabby overpriced McMansion is a massive credit bomb bought on the “never never”.

#50 Vague Hazy Ambiguous on 07.01.08 at 5:03 pm

“Sales in Calgary are at their highest levels all year’? Take a look at the chart above. Does that look healthy to you? Inventory shrinking? As for market-by-market predictions, why bother? They’re all coming down. — Garth”

Thanks for addressing my question, but your graph is out of date. Single family homes sales are at their highest this year in Calgary in June. Inventory fell by 8%. Sales/New Listings at its highest level. Avg price fell by 1%, but it was because people are buying smaller homes.

Whatever happens in Calgary seems to be happening across the country a year later. Small price corrections, no crash. As the price falls, buyers are coming back into the market.

Source: http://www.dailystats.ca

Great. More fools. Desperate homsellers will be happy to hear this. There are 62,000 of them. — Garth

#51 Islander on 07.01.08 at 5:43 pm

What’s scary about One of the Foolish is that he’s admitted to being in the real estate industry, yet he REFUSES to consider data germaine to his industry (and more importantly, to his clients.

He refuses to acknowledge that listings are WAY up in every major Canadian market and sales are WAY down, Y-O-Y.

He refuses to read Garth’s book. Not saying Turner has all the answers, but to REFUSE to read it makes him negligent.

He uses bromides such as “everyone wants to live in Canada.” Define “everyone.”

He cites Donald Trump as his authoritative voice on real estate. For a poster who claims “all real estate is local,” what does a billionaire who’s over-invested in Atlantic City and NYC have to do with the price of houses in Regina?

I am a realtor. And I am not afraid of the truth. In this market or any other. People like Foolish make us all look bad. What a chump.

#52 Cam on 07.01.08 at 7:48 pm

Whenever I hear people saying that Canadian housing is safe and will not suffer like the US I’m always reminded of Animal House. You know the scene at the very end of the movie when they start ruining the parade and Kevin Bacon is trying to control the crowd…

Wish I could find the actual video clip (many of you probably know it well)
http://www.tigersweat.com/movies/animal/house13.wav

#53 mike on 07.01.08 at 10:14 pm

Wealthy renter in post 38 is so so correct. We are a tiny tiny nation with tons of resources but a housing market akin to new york . Sorry…T.O. and Vanc ain’t NYC.
For one the foolish to quote donny Trump is utterly hilarious. Trump has tried to sell his casinos in Atlantic City for years…..no takers…The guy is on late night tv
peddling his expertise in making it rich in RE…it is one cheap looking infomercial . Trump trumps nobody…even the program hungry networks gave him the heave-ho…

#54 mike on 07.01.08 at 10:22 pm

David in post 19 & 49 your writing is an inspiration….crisp and biting…a delight to mind. If you are a writer please divulge so we can enjoy your talents
on a regular basis

#55 Joe Realtor on 07.01.08 at 11:14 pm

Interesting discussion.

I for one have seen the slowdown here in the GTA and know that it’s going to worsen.

Resale condos in one downtown building I like that were selling with multiple offers into the 300’s are now sitting on the market for over two weeks listed at 289-299,000. Last year they’d have been snapped up by now.

I know of a house in Mississauga that just sold after close to 200 (yes, two HUNDRED) showings. They got 1 offer. Sold for substantially less than list.

Buyers are being choosier.
Sellers will have to adjust their way of thinking. You can’t throw your unmaintained, outdated home on the market and expect to get what your neighbors beautifully maintained gem did.

We hear plenty about the subprime thing in the states but let me tell you, it’s different driving around California and Nevada and seeing all those for sale signs. Not all of ‘em are lower priced houses either. In the Pebble Beach area, I lost count at 25 signs on 17 Mile Drive. Most if not all of them would be million dollar or more properties.

#56 Peter on 07.02.08 at 1:16 am

For Vague Hazy Ambiguous,
How RE agents delude statistics:
see same sources:
http://www.bobtruman.com/Condo_Monthly_Summaries/page_1869405.html
http://www.bobtruman.com/SFH_Monthly_Summaries/page_1869385.html
SFH:
June 2007 -inventory: 4443; June 2008 inventory: 6557
June 2007 -avr price: 497K; June 2008 – 474K
June 2007 – median price: 439K; June 2008 – 408K
Condo:
June 2007 -inventory: 1438; June 2008 inventory: 3099
June 2007 -avr price: 323K; June 2008 – 315K
June 2007 – median price: 305K; June 2008 – 282K

2007June/2008June:
SFH inventory up: 48% !!!!!!
Avr. price down: 5%
Median price down: 7%

Condo inventory up: 116% !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Condo avr.price down: 3%
Condo median price down: 8%

That’s beginning of the CRASH!

#57 Peter on 07.02.08 at 1:19 am

All those numbers without inflation adjusting!
With inflation adjusting the DOWN will be bigger!

#58 David on 07.02.08 at 4:15 am

The real estate bubble has yet to burst in Canada, although the moment is nigh. Quite likely there are some realtors out there starting to suffer from missing limb syndrome for those fat commission cheques. Housing became a dysfunctional artificial market years ago. The realtors who can adapt will do quite well, the lame, the inept and those pining for the good old bubble days will not survive. The virtuous cycle has become a vicious cycle.
Garth suggested that housing might fall 15%. Even if that is true, the discount may not be deep enough to induce a willingness to pay and buyers will hold off for even steeper discounts in the future. There will not be any fear of being locked out of the market forever.
The 0/40 amortisation route is nothing but a mask for a flawed industry and when the inevitable bust comes and millions of Canadian families are left financially stranded, the house of cards will collapse.
The United States gave Canadians a good prelude of what a market collapse is like. It probably is different in Canada. The market here will collapse, but in its own unique fun Canadian way. Most assuredly the Federal government will be most interventionist in saving bankers from their own stupidity. Remember Dome Petroleum anyone?
Ever resourceful and ingenious Canucks will probably be able to teach Americans a thing or two on how to properly cannibalise an abandoned McMansion with limited structural trauma.

#59 AllConnected on 07.02.08 at 9:33 am

Garth,

I share your opinions concerning the direction of real estate prices, if not the magnitude of change.

I’m particularly interested in the new Toronto condo market. Do you have an opinion on where new Toronto condo prices (currently sitting at about $380/sq. ft.) are heading? Also, do you have an opinion on the actual % of investors and speculators in the Toronto condo market?

Please, if it is within you to do so, refrain from using overly pejorative language such as ‘Fools’ when referring to buyers and sellers. It only adds fuel to the raging fire of negative energy that seems to pervade this forum.

It is estimated by industry players that at least 35% of all condo buyers today in Toronto are investors. The actual number could be closer to 50%. New building prices are headed down, and I stick with my overall projection of a 10-15% decline by the Spring of 2009. Certain buildings will be harder hit. And some other buildings will, alas, never be built. I am sure you know which ones. — Garth

#60 $fromaSia on 07.02.08 at 10:10 am

Garth, your comments are golden!

#61 $fromaSia on 07.02.08 at 10:12 am

I think we’ve gone from the time zone of the Greater Fool to DumB and DumBer!!! ROFL

#62 hillary on 07.02.08 at 10:15 am

“And some other buildings will, alas, never be built. I am sure you know which ones. — Garth”

In such a case, would buyers not get their deposits back? Who loses if a building does not get built?

#63 SMWhite on 07.02.08 at 11:02 am

Peter, thanks for the stats, it just goes to show that the condo markets are pushing the whole market down.

With the mass amounts of speculative condo “shelter” coming on the market, many are getting itchy trigger fingers will attempt sell to lock in any gains. Of course those in denial will hold tight for another year of 10% appreciation, and be very disappointed to find that homes this year have barely kept pace with inflation.

These outrageous amounts of condos put pressure on all shelter, I mean homes…

Throw in the fact that credit markets are tightening up…

We have a lot of overpriced shelter out there at this point, bought as investments, how long can they sit empty or worse case being rented out at half the cost to the owner?

Thank goodness we have the 40 year mortgage tool to keep the amount of money a person has to invest to a minimum, as a tax payer, I can’t wait to start bailing out or “special and different” RE industry.

My brother always waited weeks after easter to eat his chocolate bunny, or until I made mine disappear. Then he’d proceed to either eat it in front of me or make a little cash on the side.

Point is the best time to have cash is when nobody else does, you would have done well south of the border to have resisted the temptation of the last couple years and waited out the RE storm.

Here’s to patience!

#64 brazer on 07.02.08 at 11:55 am

Payroll report: 79,000 private sector jobs lost in June
http://biz.yahoo.com/cnnm/080702/070208_employment.html

Merrill says GM bankruptcy “not impossible”
http://biz.yahoo.com/rb/080702/gm.html

Starbucks to close 600 US stores, rein in growth
http://biz.yahoo.com/ap/080702/starbucks_closings.html

tick…tick…tick…

#65 nonplused on 07.02.08 at 12:55 pm

I’ve been out shopping for a house (in Calgary). I can’t believe how these people live! “Earth to homeowners: You have to maintain your house and if you don’t nobody will buy it!” Yuck what a bunch of over priced and delapitated junk. Whereas you can rent an almost new house for $2300/month.

I never really realized this before, rose colored glasses I guess, but vast areas of the Calgary bleltline actually resemble a US getto. The houses are old, have not been maintained, stuff is starting to sag, paint is peeling, roof needs replacement, appliances are 30 years old, windows are cracked, if there is a garage it needs to be rebuilt, no insulation, paneling in the basement, etc. But it’s a deal at $699,990! And it’s house after house after house after house.

I hope Kuntsler and Turner are wrong about the impending disaster in the xurbs because the beltline will offer no refuge. Other than I guess we can tear all that junk down and build high density housing.

#66 kabloona on 07.02.08 at 12:58 pm

One of the Foolish, thanks for your comments. It’s always good to hear from “the other side” of a discussion, even if I disagree with your conclusions.
Personally, I think we are looking at a major correction in RE values – and places like Vancouver and Victoria are facing a meltdown.

I guess time will tell, but here are some month-ending figures from a few days ago on Paul_B’s NorthVan Condo blog (draw your own conclusions):

“Some numbers:

Sales are down a startling 41% compared with June 2007. This will make some headlines this week.

We started 2008 with slightly less inventory than 2007.We are currently up 53% over last year, and 80% over May 30th 2006. North Vancouver inventory is up over 113% compared to June 07.”

By the way, I’m not a “bear” on RE….I was a bull in the 90s and purchased a townhouse in ’91, then stepped up to a detached place in ’96. I only became anxious about the market around 2006, turned bearish shortly thereafter, and subsequently sold in April 2008. Took me 7 months to sell, boy was I sweating bullets. Now I’m sitting on the sidelines with cash in the bank ….and renting cheap.

#67 Paul W. on 07.02.08 at 1:14 pm

Guys, guys, guys (and gals)…Go easy on poor Foolish. Many of those out there who have not already sold will still need a full array of chumps, led by those “in the know”, to buy their homes. We shouldn’t dare eliminate them all… ; )

#68 Paul W. on 07.02.08 at 1:19 pm

Oh Yeah one other thing. A friend of my wife’s told us a week ago that she’s going to by a house in Calgary Alberta. I told her to wait for prices to drop. She said the price of the house she wants has already dropped $150k. I told her to hang on becuase it will probably drop twice that amount in the next 18-24 months.

#69 Another Albertan on 07.02.08 at 1:33 pm

@Nonplused:

It’s not only the Beltline. Houses are like that ALL OVER CALGARY. Sure, there are some great renos that have occurred in the past few years, but who can tell if they only did the INSIDE of the house? Apparently, “curb appeal” was forgotten.

I toured some out-of-town relatives around last week. They were appalled at the condition of many houses.

“We were expecting everything to be done-up based on what’s been reported in the media in the last year or two. This is a bit of a shock!”

#70 Keith in Calgary on 07.02.08 at 1:48 pm

Let’s talk about Calgary RE with some facts……here’s my numbers source…..

http://www.findcalgary.ca/

Here’s June in summary year over year……….

SFH sales down 18% YOY….

Condos down 30% YOY…..

SFH median prices down 7% YOY…..

Condo median prices down 7% YOY…..

Pay a realtor to get out and you’ve lost 14% once commissions are counted (7% YOY loss plus 7% comm), and hten add in the significant discount you’ll need to give to sell your property….so maybe a 20% – 25% haircut since the purchase of your “investment” in June 2007……heh.

That is roughly a $100-$120K haircut based on a $497K house price in June 2007…….yeah, go out and buy RE baby !!!!!It’s the “best” investment you’ll ever make….!!!!

#71 Mountain Girl on 07.02.08 at 2:01 pm

Calgary is a weird place, real estate-wise.
The inner city neighbourhoods are way overpriced and full of squat, ugly post-war housing bungalows. I grew up in a city full of beautiful old heritage homes, so I just find the aesthetic here pretty uninspired.
The inner city neighbourhoods do have nice trees and usually good parks and green spaces, plus they are more central.
But there is still no way that I would pay upwards of $450k for a squat little cement block.
On the other hand, I would be very leery of buying a new house in Calgary, particularly in the new suburban developments. There’s a lot of hearsay about how poorly built those houses are – how quickly they were slapped up, how many builders took shortcuts to try to keep up with the demand of the boom, how the city inspectors could not keep up with the building. And sure, it’s hearsay, but when you hear stories from people who were actually working on some of the sites, it does give you pause.
In all fairness, though, the real estate market may be out of whack and frustrating, but Calgary does offer a lot of good stuff – even to those of us who don’t work in the oil and gas industry! :)
Just don’t participate in the nutty real estate market. Find a good rental and enjoy! Any city is what you make of it!

#72 Crashing Yuppy on 07.02.08 at 4:36 pm

I think we are going to see some panic selling in the next few months.

Aready the signs are there, huge jump in MLS listings, way longer Days on Market numbers.

Price Reductions with no bites.

Anybody who truly wants to sell need to price at or lower than market value and Get a big (and non-refundable) deposit with a short closing.

Tire Kicker Sellers are not fooling anyone

#73 One of the Foolish on 07.02.08 at 7:23 pm

While my views here are not favourable to most here – and many of the arguments provided by others are true, the line of arguing has seemed to veer off on many smaller tangents. Each of these have their place in light of what is happening in Canada, but not completely in context with my original argument.

We are in a “fear” cycle in real estate in canada right now – and there will be those who capitalize on this fear by writing about it, and sell books about it. They source out articles and data that only support their claims. The problem is that they refuse to consider the other side or the BIG picture, and gloss over the positives that help put this fear into perspective. We are all guilty of this at some time in our lives. Its what makes debate a great thing!

I do not consider myself to be an expert on economics in Canada, but I do know one thing:
When someone writes articles with negative headlines such as, “Meltdown, No turning back, Heavy Days ahead, Yikes!”, etc – this is a negative person who likely doesn’t consider the positive and is very biased. They believe so strongly in their point of view and will likely never admit they are wrong.

The question I immediately ask is, “Why is this person so negative and one-sided?”.

The answer took a bit of research to find, but now I see it pretty clearly – he has books to sell about fear of the future regarding money. In order to sell these books, he HAS to paint a gloomy picture of the future. Then people will be compelled to buy or read his books so they can use his “knowledge” to help avoid it.

So I am not wasting any more of my time arguing about this – but I leave you with one more link written May 26, 2006 (2 years ago). This was not written by me, and I only just found this today. It is a past look at what Mr. Turner predicted in a book he wrote in 1999. It goes through many of his predictions and compares them to how things really turned out.

For those who don’t like to follow links, here is one snippet from this link:
“Just reading all his advice makes my head shake because nearly everything he said to do, would have made you broke! However, if you ignored what Turner said and did the opposite you would be extremely wealthy.”

The link:
http://stockbullz.com/What-Garth-Turner-Wrote-In-1999

Good Day!

Attack the messenger, rather than the message – the perpetual hallmark of a defeated argument. In any case, it’s interesting you accuse me of writing negative books, then post a blog entry from some yahoo criticizing a book I wrote a decade ago that was too positiive. The only important point here is that we’re in very volatile and dangerous times, at the end of an asset and credit explosion. Ignore it if you wish. I am not. — Garth

#74 Chuck D on 07.02.08 at 8:21 pm

One of the Foolish – You bring up Turner being negative and one sided without presenting a balanced picture yourself. Also, you take issue with what you perceive as his bias because he is selling a book. Your posts are clearly one sided and biased because you have a vested interest in keeping this market artificially high.

#75 vultur on 07.03.08 at 12:34 am

Darth Mortgage got OWNED! His reputation has been irreparably tarnished- libel suit anyone?

I think he’s right about falling real estate prices though- it’s tough to argue that we haven’t seen the peak for this cycle but if you live in high growth regions like the T-Dot or Cow Town I think you can reasonable look ahead a decade from now and see higher home prices. With 100,000 new sacred spirits washing up on the shores of Lake Ontario yearly it is tough to fathom too deep a drop. And Calgary is always solidly in growth mode so I think that market has a positive future.

#76 Jon B on 07.03.08 at 4:49 pm

I would like to thank Garth for keeping this blog regularly updated and full of interesting facts and opinions. In order to form a balanced opinion of my own, its nice to get this side of the RE value argument from someone who has significant experience around finance and related matters, while taking into consideration the many other expert opinions out there. I also appreciate the perspective from someone who has been elected as an MP. Surely the flame throwing around these comments isn’t necessary.