October 31st, 2008 — Book Updates — E-mail this blog post to a friend
Just in tiime for Hallowe’en! The latest authoritative charting of US house prices – and a further glimpse of what the Canadian market likely has in store. BTW, average prices in the Monterey area of California have dropped 65% from the autumn of 2007, taking the average price from north of $700K to south of $300K. Hang on!
October 30th, 2008 — Book Updates — E-mail this blog post to a friend
The Vancouver hole where a building should be.
Funny days, these. The dollar falls three cents one day and climbs four the next. The TSX is down 700 points, only to climb nine hundred two days later. The government gets elected saying no deficit and two weeks later there is one. There’s a credit crisis and yet interest rates look like they’re headed for zero.
RRSPs, pensions, nesteggs – they’ve all been violated. Corporations are whining for federal bailouts and saying they can’t afford pensions for retired workers. Unemployment’s rising and consumer confidence is plunging.
Strange times. Deflation is the big story now – falling retail prices, crumbling house prices, cheap cars and Christmas sales in October. But in times to come, it will be inflation – since governments are spending billions they don’t have but will be looking for down the road. Higher taxes, increased money supply, less purchasing power.
The Fed threw another log on the fires of distant inflation Wednesday, cutting interest rates yet again, and taking its key rate down to just 1%. This is scary. You might remember Japan did exactly the same over a decade ago when its real estate market went to hell, forcing interest rates to hit 0% as the government tried to prime the pump. Didn’t work, though. Japanese house prices stayed in the shark fin soup for 15 years, recovered a little and have recently crashed again. An apartment in Tokyo that was $1 million US in 1985 is today worth less than $480,000.
But in Canada, we’ve been told by the prime minister and other less notables, it’s all different. We’re an island of stability. A rock. Northern star. Canadian Shield (not, that’s not a condom).
Maybe not so much.
Close to two years ago I said our real estate market was poised to fall. Said it again in a book six months ago. Now it’s here. This is vitally important because – as in the United States – this is the thing you should most fear. Not the stock market. Not the currency. Not energy costs. Houses.
Residential real estate accounts for almost 85% of all family net worth. Meanwhile the Canadian savings rate – as in the US – is now zero. Once home values start to slide, nothing has more of an impact on consumer confidence and concern about financial well-being. Since house prices rose by more than 73% in the past decade (about the same as the US in the years following Nine Eleven), mortgage debt has exploded. After all, household incomes have barely budged, so pricier houses simply mean more borrowing.
So, never before have we (a) saved nothing, (b) had so much of our wealth in one asset, (c) owed so damn much or (d) shown such appalling financial planning, with a total lack of diversification, as now. It was obvious when the average price of a home exceeded the ability of the average family to buy it, the market was over-valued. It would have corrected harmlessly, had it not been for the geniuses who invented subprimes in the US and 0/40 mortgages here. The boom became a bubble, and now a bust.
It was real estate, after all – not Wall Street, hedge funds or the greedy twits who ran Lehmans or Bear Stearns – that created the mess in America. The middle class there is being dealt a body blow and it seems we’re destined to be smacked in the same fashion.
Officially, home prices have fallen just over 6% nationally in the past year. But that number’s misleading. In Toronto, they’re down 15% from the peak, and an equal amount in Edmonton and Vancouver. Condo projects are being cancelled all over everywhere while home sellers now wait months for an offer and realtors play with their Berries during clientless open houses.
Listings have hit a high point, and sales are off 50% in BC, 43% in Muskoka, 70% in Leaside and by half in Kelowna. Spooked by the times, and rightly so, buyers are staying home in drives, knowing prices will be lower in January than they are now.
There is no option but for the Canadian government to push for lower interest rates, bring in an income tax cut and throw more billions we apparently don’t have at the Bay Street lenders. If that were to happen immediately, in an economic statement, it might help some to keep the real estate melt from becoming a meltdown.
But don’t hold your breath. It’s different here. You’ll see.
(From garth.ca)
October 28th, 2008 — Book Updates — E-mail this blog post to a friend
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“You’re done, you’re screwed. It’s one of the worst times to be in debt.” — Laurie Campbell, executive director of Credit Canada.
“History has proven time and time again that real estate is a solid, long-term investment that appreciates at a rate of about five per cent annually.” — Michael Polzler, spokesman for Re/Max in Canada.
“We are getting more alarmed by the day (over Canadian housing market).” — David Wolf, economist, Merrill Lynch Canada
Lo, six months ago I started this blog. At that time I lamented the immediate future of real estate, even when experts said the markets were strong. I laid out my reasons that Canada would not be immune to the American contagion. I attacked 0/40 mortgages and warned the Canadian federal government was making policy decisions which invited the mess to slither north.
Half a year later, here we are. And yet there are deniers who earn consistently more media than the alamists. Every day the evidence builds that we are almost exactly two years behind the US housing market curve. This is why some time ago I forecast a minimum valuation drop of 15% in Toronto and 40% in the West. Both have happened, or are in the process. As I also said at the time, I am probably too conservative. And I am.
Half a year later, Ottawa has dumped the 0/40 mortgages, and yet the move was – also as forecast here – too late. In the next six months we will see the following:
Finally, a word on ML’s David Wolf (whom I have not met) and Michael Polzler (whom I have). Wolf gets it – real estate is an emotion-driven commodity whose future course can only partly be gleaned by a chartist. If enough people perceive it’s a dangerous time to buy, they won’t. Supply accumulates as demand dissipates and valuations plunge. This is what will happen for some time. The charts do tell us far too many units have been built, or are in the pipeline; the headlines tell us credit’s no longer available for speculative real estate; and the word on the street (and this blog) says we have fallen out of love with houses. They are now seen as a destructor of wealth equal to the stock market. No sale.
Mr. Polzler, on the other hand, is a salesguy. Give him all the trust and respect he deserves. After all, he told a Toronto real estate conference this week that Canadian housing is solid in part because, “We have less debt than our neighbours south of the border.”
This is my response:
