…and take a 42% wholloping in Toronto
Meanwhile, in Wild Rose country… need a car?
CALGARY, $2.9 Million. Simply the best! Brand new, large 2 bedroom, luxury downtown condo, in Calgary. Fantastic views of the City and Rocky Mountains. Includes all modern conveniences, large patio, 4 underground parking stalls and Mercedes SL55 Convertible. Dedicated direct elevator access. Private Sale. (Globe & Mail classifieds #1083, Aug 9, 2008)
The chart above from Alberta Real Estate Watch: A selected compendum of statements by CREA Chief Econonomist George Klump on the Calgary real estate market, juxtaposed with the real thing. Ooops.
Photo: Langley Financial Planning Blogspot
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Vancouver’s housing hangover
Canada posts biggest job loss in 17 years
Cooling housing market exposed to crash
Loonie dives on jobs report
Housing slump stalks Western Canada
Fourteen months ago I forecast that housing, a collapse in the real estate market, and the crumbling family finances resulting from it would be the big story to come. Nine months ago I wrote a book detailing exactly why this would happen. Five months ago it was published. And now it’s happening. Don’t act surprised. There’s lots more to come.
The evidence is overwhelming. Real estate sales levels are plunging in every major city, from 42% in Vancouver to 12% last month alone in Toronto. At the same time, the number of people trying to sell their homes has exploded. More than 64,000 resales are on the market at the moment. In the GTA, the choice for buyers compared to this time last year has mushroomed by a third.
Falling sales and rising inventory. This means supply is outpacing demand and we all know what ousing costs at exactly the same time as 40-year loans were being made available, seducing people into far bigger, more expensive homes than their salaries justified. The Canadian dollar should not havcomes next – price declines. In some markets, like Calgary and Edmonton, it’s already a reality with average home prices down more than $40,000 in each city. The next on the hit list (in this order, I would say), are Vancouver, Toronto, Victoria, Regina, Winnipeg and Saskatoon. In those last three cities, the reduction in home values could look more like Armageddon, with drops of up to 50%. In Vancouver, it will be about 30% by this time next year, and in Torontopolis, 15% with more pain to come after that.
The housing woes will not be over by next summer, either. This is a story which is just beginning. After all, let’s remember the US real estate crash started in September of 2005 and is still going strong. There’s at least 12 more months of falling prices to the south of us, which will bring that real estate bust to four full years.
Can the same happen here? Quite likely, although I’d bet more on a two-year down market before things stabilize, thanks to our commodity-laden economy. No thanks to the government, however, which helped turn a boom into a perilous bubble by allowing zero-down purchases and 40-year mortgages, both about to be phased out this autumn.
In fact, we have a perfect storm in Canada for falling housing values: We allowed bankers to get sloppy and greedy with those “innovations†in home financing. We are seeing disposable cash flow sucked off by record high energy prices. The heartland of real estate – southern Ontario – is suffering as the auto sector chokes and manufacturing jobs flee. Household debt levels have hit all-time highs, and our national savings rate is zero. Worst of all, family incomes stagnated at the same time housing costs (and prices) escalated.
The proof of impending trouble is irrefutable. As I have said so many times, when the average family cannot afford the average home, then prices will tumble. This can be temporarily delayed (or made worse) by financial junk like subprime mortgages in the US or forty-year ams in Canada. But it cannot be stopped.
As Merrill Lynch Canada economist David Wolf correctly points out, the average house here is now equal to four times the average household income. During the last boom market (1989) which ended in bust, that ratio topped out at just over three times income. In the United States, where there is a real estate depression, the ratio at the peak was less than it is here right now.
So, housing is overvalued, by between 15% and 50%, depending on the city you call home. This means a crisis looms for many. Those who bought within the last two years will certainly soon realize they paid too much. Those young buyers who got into homes with nothing down will owe more than they own. The hardest hit will be those who must sell, and find that it takes months – perhaps years – to find a buyer, with constant price reductions necessary to do so. People who decide to give up and walk away will find Canada is not America. We not have “short selling†or “jingle mail†here. You’re liable for every dollar of your mortgage, plus costs, even if the debt far exceeds the value of the house you are surrendering.
But, hopefully, most families will be able to stay where they are, weather the storm and carry on. It’s instructive to realize, however, that anyone who bought a house in 1989 in the Toronto area (the top of the last cycle), had to wait for 13 long years just to break even. And this downturn will certainly be more severe than that one.
Could government have done anything to prevent this real estate disaster from being imported into Canada? In a word, yes.
Forty-year mortgage amortizations, introduced in the Harper government’s 2006 budget, were a huge disaster. They have lured tens of thousands of young couples into debt many of them will never be able to service. (Remember that mortgage costs have increased 9% in the past year.) Zero-down financing, approved by Canada Housing and Mortgage Corporation, should not have qualified for mortgage insurance coverage. Because it did, developers have sold thousands of homes and condos to people with no money. That never turns out well.
In the end, of course, we’re all to blame. We went real estate nuts. We walked into obscene levels of debt. Bankers traded profits for prudence. Realtors were insanely irresponsible. The media was uncritical and slavish, while publishers raked in real estate ad revenues. Politicians did stupid things with unintended consequences. HGTV slipped into non-stop housing porn.
But, as I said, it’s just starting.
