Entries from June 2008 ↓

Toronto’s dive: sales down 15%, listings up 17%

Hello Garth,

I’ve just finished your book. Thank you for potentially being the first writer to specifically focus on Canada’s real estate and its economy. I loved your focus our communities which paint a closer to picture to Canadian readers. I’ve recommended the book to friends and family as a must read. I also have to say that it was very nice to see your columns again after a dry spell of a couple years. I love them!

Barrie was touted as the fastest growing community in Canada a few years back. The growth has slowed down as the city is land-locked and developers have no where else to build. Prices have also gone up dramatically. You mentioned the under 2000 sq. ft $300,000 bungalow as an ideal home. Guelph was used as an example. Barrie has this criteria for homes in the price range of $250,000 to $300,000. However, I wonder what your thoughts are on Barrie as a community. Public transit is not too efficient but present. This city can be called retail city x10000. Yes, that adds to the failure of mass consumeristic families… Theatres and health clubs and every single amenity is being built or is in the planning stages.

The waterfront is wonderful. It’s really desirable for nature lovers such as myself. There are condo towers being built on the lakeshore at a crazy rate. The condos go from $300,000 to $500,000. We’ve visited most of the sales centres to “grab” an investment and the agents tell us the majority of the towers that sell out have baby boomers (or “much, much older people than you” as we are constantly told). We are in our early 30’s. Would you consider Barrie to be a “buy city” or “run as fast as you can because you are in Northern suburbia city”? It would seem boomers are picking up these properties or choosing Barrie as a retirement area. Your thoughts?

In your book you mention that it’s best to go variable. We have a 25 year fixed rate at 6% which we carried from a previous home. Variable would have saved us thousands of dollars per year but the uncertainty locked us in. In hindsight it was a mistake. Historically, selecting a variable rate mortgage would save you on the interest cost over the long run.

Is it still safe to go variable? We are thinking of breaking our 25 year fixed and going variable for the next 5 years or until we pay off the mortgage.

Don

Well, I have good news and bad. The good is that Barrie – being in the Toronto commutershed, and with average prices at least $100,000 less than down Highway 400 – is relatively affordable, safe, pleasant and currently at the top of its real estate cycle. Also good is the fact the decline in prices that will be experienced in the GTA orb in the next six to 12 months will be diminished in that city.

The bad news is worse. Communities with relatively little public transit infrastructure, a nebulous industrial and commercial base and a heavy dependence on a metropolis accessible only by car, have some dark years ahead. We are just on the cusp of an energy crisis the likes of which have not been seen before, and when $1.40, or $1.80, or $2.25-per-ltre gasoline will have a major impact on Barrie as a bedroom community. The future belongs to larger urban centres, or small cities which are relatively self-contained and have their own viable economic base. That ain’t Barrie. Govern yourself, and your investment, accordingly.

As for interest rates, they have nowhere to go but down – modestly – and there is no question but a VRM is the best way ahead.

Hey Garth,

I am a 52 year-old divorced lady who just read your book Greater Fool. I just sold my house in a small town about 1.5 hours south of Calgary. I have had it on the market since February and removed all of the conditions last week. I have about 200K in equity and have just made an appointment with a fee-only financial planner in Calgary. I am moving in with another divorced lady – empty nester – and have no plans to buy for awhile. I’ll pay her some rent and I think it will be a rather nice arrangement for the present. I used to think that renters were losers, but now I am looking forward to not getting the big bills each month.

I’ve checked out your blog and in my heart know that I am experiencing something new and profound. The world is changing so fast – the rise in oil prices is pushing the dominoes over and I feel that there is never a better time to have my eyes wide open. I know that the trend has been there for all to see for a long time, but the swiftness of the oil prices rising is now making those who hesitate poor.

I talked with my 21 year-old son about it all, and he thinks HEY, MOM – look at the opportunities! I guess the glass will be half full at my new rented place. Or as the engineers say – I should have bought the right-sized glass in the first place.

xoxo Sandy

Wisdom in Alberta. I love seeing that.

Hi Garth
I see other people write to you with questions, and since all other TO RE blogs I’ve found are very bullish, you’re my best hope!

I live in Vancouver and follow the Van real estate bear blogs avidly. I am resigned to having missed the RE boat here in 2003-5 so am waiting on the sidelines, renting cheap & and saving a lot for a down payment and the rest of my life.

My concern is my best friend in T.O. She bought a $300k 2 bdrm townhome in Leslieville as a pre-sale about a year ago. It’s not going to complete until July 09 at the earliest. She & her fiance put a healthy $50K down payment on it and the payments are well with their range, so negative equity & rising rates are not the main worry. My concern is she now is seriously talking about having kids soon (she’s 35) and will want a bigger place two or three years from now. She’s hoping to break even on the sale, but I think even that will be unlikely.

I grew up in Markham & am familiar with Toronto neighbourhoods. From the info I’ve been able to gather online, Leslieville sounds like it’s seeing ‘price compression’ – a marginal neighbourhood that sees rapid house price inflation because buyers who can’t afford the better neighbourhoods bid up prices there. That seems to be happening now in Vancouver’s East Side. In the short run, I fear Leslieville will have a significant correction & my friend will be forced to sell at a loss. I. Long term, Leslieville sounds like it has good potential, but the DVP, assisted living complexes, and nearby waste treatment plant make me think that it will never be the hottest ‘hood in the city.

Since $50k is too much to walk away from, is it possible to sell a condo on assignment (i.e. before it’s completed) in Toronto, like we do in Vancouver? I think it would be at least slightly cheaper for them to rent a place together for a year or two and get more for their money.

I admit, it’s a bit slimy – it would only work if there are still some Greater Fools out there – but I just don’t want to see her stress over depreciating home values & cramped spaces, or selling at a loss, while also adjusting to married life and maybe kids too.

On the other hand, they can afford the payment and will have a good chunk of equity from day 1. And maybe Leslieville is way, way better than it sounds from descriptions online and my recollections. Please tell me if I’m fretting for no real reason!

Thanks for your insight!
A Vancouver Bear

She has a good friend in a bear like you. Leslieville is a dump. The neighbourhood is iffy, and always has been – for a reason. It has a giant, dirty elevated highway running down one side, a smelly major urban waste treatment plan on the other and – because of low property values – has been populated by people in a lower economic bracket. Now the worst is happening. Greedy developers are trying to turn it into a yuppie park, which will displace those who have lived there affordably, while the inevitable result will be homes that will take a generation at least to reach their pre-sale values.

Get out! And, yeah, she can list the property for sale now even though it is not yet built, conditional upon clear title being received later. However, the odds of finding a GF now are slim. Prepare her for a haircut.

Dear sir…Thanks for your efforts and energy in writing this book..i don’t want to bore with a long dialogue of my life,but in the end i have more hope,as i lost my home,(divorce and the bankruptcy)…so at 54 on paper i am not a pretty picture…and being in saskatoon,as you know the prices are somewhere near the planet mars ( but the changes are quickly manifesting themselves)…i used to be in a dither about getting a ‘house’ again..but am now renting a beautiful condo for $945 a month..with parking and water included…when i mentioned that your book has give me hope,it really has..i am not in such a bad place after all…i am self employed with a great business..if you are ever in this city send me a note..i bought your book..i’ll let you buy the first round…thanks again..Campbell

Wisdom in Saskatoon. For $945 a month.

Hi Garth, I have purchased almost all of your books and I have enjoyed reading them.

Believe me, you cannot say that about all real estate/financial books! I tend to believe your opinions on the whole real estate fiasco and the ridiculous prices in Canada that has to change at some point. I have been looking forward to waiting for prices to come down and purchase cheap real estate in Canada as well as the US. My question to you is what do you think about the cheap deals in Arizona at the moment that a lot of Canadians have purchased? Do you think they are too early trying to buy at the low end of the cycle and they should be more patient? It is very tempting to snap a house up for $80,000.

Wouldn’t it be a relatively safe purchase if you paid it outright, used it for vacations or possibly rented it out, and kept it long term? I always thought I would wait for it to bottom out in the next year or two before buying but with so much interest and so many people buying at the moment, it is hard to believe it could be even cheaper. Help! Any thoughts on the matter would be appreciated.
Janice

The US experts figure the American housing crisis has about two more years to run before it hits bottom. That will likely mean a 15-20% price correction, on top of the 15% already experienced. Arizona, like California and Florida, has been one of the Ground Zeroes for this meltdown.

So, sure, you can buy a place for a lot less than three years ago. Or you can wait, and buy it for even less a year or two from now. Is there a reason that, as a Canadian, you are inherently smarter than the local Americans, who shun buying? Ask yourself that before you make an offer.

Also understand you’ll be subject to US withholding tax when you sell the property, which could deepen your losses. In addition, the place needs to be insured, maintained, financed and local taxes taken care of. If you rent it out, you will not get insurance, except at astronomical rates. If you buy a condo or townhouse or linked home in a development in decline, you will be powerless to do anything about its market value.

All in all, you’re a hell of a lot better to just take a vacation, and leave your appetite at home.

Garth,
Just read your book “Greater Fool.” I live in Caglary and have had a really good price run up in my home. Actually we all have out here. Do you not think with the increase in natural gas and oil prices that the economy will keep rolling along in Alberta, especially Calgary? Will this not keep house prices from tanking? Or is the average family income not keeping up with the rise in real estate? Will there be a great effect from the baby boomers in Calgary. I hear the median age is about 40.

Would it be wise to sell, pocket $100,000, rent and wait for the house prices to decline? (I have no kids so a move to a condo would be easy).
Thanks,
DD

Calgary’s housing market has already peaked and is on the far side of the valuation curve. The economy may be booming, but family incomes have not reflected that, while the cost of living has increased for everyone. Sadly, the Alberta effect is largely illusionary for the residents of the city of Calgary, and an outright disaster for those in Fort Mac.

The oil industry is in its heyday now. Like it or not, there will be carbon taxes inevitably imposed – by whatever government sits in Ottawa – and a looming energy crisis will mean further dislocations for the province. We are on the precipice of great societal change, so get used to volatility.

If I could pocket $100,000 in a tax-free capital gain, then live in a place subsidized by someone else, and chose not to, building my wealth, what would you call me? Idiot?

BTW, Alberta boosters, check this out.

Hi Garth,
You have said that most baby boomers are house rich but cashless and will need to sell their houses in order to retire. Isn’t this generation enjoying or will be enjoying their inheritance? Do you have any statistics on how many boomers are enjoying lifestyles funded by their parents’ wealth? Within my own family and circles of friends, I see some paying off mortgages, buying bigger homes or fancy cars, or putting money in swimming pools because they have inherited some money or are anticipating money coming down the road.

I think the baby boomers are better off than the future generations whose parents are unlikely to be able to retire.

MJW

The Boomers are the timebomb of this society. They account for 32% of the Canadian population, and have more than 90% of their wealth in residential real estate. Many of them are indeed taking on new debt and moving into trophy homes, while buying toys with HELOCs and ignoring the fact the financial ground is eroding beneath them. This is not a formula for happiness.

Meanwhile the Boomers are generally healthy, and will be one of the longest-lived generations in history. Living from the age of 65 to 85, without employment income, will require a huge amount of wealth – the majority of which is now locked in housing.

Figure it out. This is a key reason real estate is going down. The next decade will belong to those who understand this. Woodstock is dead.

In the news: 31% plunge in BC ‘just a breather’

No hope until bloated home inventory wanes

(Bloomberg) — Every time a housing statistic emits a faint heartbeat — last week’s 6.3 percent increase in the April pending home sales index, for example — there’s a flurry of pronouncements that the residential real estate market has bottomed.

Hope springs eternal. Housing has been down so long it looks like up, especially with the graph turned upside down.

New and existing home sales peaked in July and September of 2005, respectively. It took a while for homebuilders to catch the drift: Starts didn’t top out until January 2006, leaving a huge inventory of unsold homes in their wake.

Single-family starts, which are the most sensitive to changes in interest rates, are down 63 percent from the January 2006 peak, easily topping the 38 percent peak-to-trough decline in 1973-1975 and 57 percent 1984-1991 dive, and vying for first place with the 65 percent plunge in 1977-1981.

No wonder homebuilders are glum. In a departure from normal practices, the National Association of Homebuilders elected to release its monthly builder survey to the media via conference call on Monday. I received so many advance e-mail alerts I was starting to wonder if the index had sunk to zero in June, and the NAHB wanted to soften the blow.

The quantitative results weren’t that bad: The housing market index fell 1 point to 18, matching the all-time low of December 2007.

The qualitative context was awful. David Seiders, NAHB chief economist, called the “persistence of the low level” of the HMI, a measure of housing demand, “pretty troublesome.”

Price Option

The index “has been in a tight range for a 10-month period,” he said, “unlike the 1990s, when there was a quick rebound. None (of the news) is encouraging at this point.”

As downbeat as Seiders was on the June survey results, the builder responses preceded “the run-up in interest rates,” he said. “I haven’t factored that into the outlook yet. The risks are piling up to the downside.”

While homebuilders are pressuring Congress to enact a tax credit for first-time buyers, they are resisting the one thing that requires no legislative action to spark buyer demand, according to Thomas Lawler, founder of Lawler Economic and Housing Consultants in Leesburg, Virginia: Cutting prices. “Builders are reluctant to do that” to compete with the growing volume of distressed sales of properties in various stages of foreclosure, he said.

Forget the Granite

In Southern California, for example, one of the areas where the bubble started early and ended hard, median home prices are down 27 percent in the past year, Lawler said.

“If you look at observed transactions on distressed sales, you could make a case that we are closer to a bottom because prices have plunged so rapidly,” he said. “But that’s no solace to non-distressed prices.”

In Florida, another epicenter of the boom-bust in real estate, “sales are 20 to 30 percent below year-ago levels, but prices haven’t moved very much,” Lawler said.

Builders have been reluctant to slash home prices for fear of alienating previous customers and encouraging current buyers to wriggle out of their contracts.

“Once clearing prices are way down, you can’t attract buyers with granite countertops and gold trim,” Lawler said.

Foreclosures rose to a record 2.47 percent in the first quarter, according to the Mortgage Bankers Association.

Future Inventory

Using the MBA and other data, Lawler calculates that there are 1.34 million one-to-four family first-lien mortgages in the foreclosure process, which amounts to 27 percent of the inventory of existing unsold homes. A year ago, foreclosures represented about 18 percent of the unsold inventory, he said.

As scary as that number sounds, so far it’s just on paper. It takes about a year for today’s foreclosures to be dumped on the market, adding to the already-bloated inventory of unsold homes, according to Michael Carliner, a former NAHB economist and now an independent housing economist in Potomac, Maryland.

The foreclosure process varies from state to state and in the length of time it takes from the first default notice to the assumption of the title of the property by the bank.

A few relationships are constant. New home sales lead housing starts. It is starts (residential construction) that contribute to gross domestic product. Housing’s drag on growth won’t lift until builders whittle away their backlog. Lower prices seem to be the quickest means to that end. (At lower prices, the quantity demanded increases.)

“We are unlikely to see a sustained increase in nationwide new home sales until builders are willing to cut prices to match the plunge in the prices of existing homes in seriously distressed areas,” Lawler said.

If and when they do, you might not have to turn the home sales graph upside down to see the improvement.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at [email protected].