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. Thereâ€™s a credit crisis and yet interest rates look like theyâ€™re headed for zero.
RRSPs, pensions, nesteggs â€“ theyâ€™ve all been violated. Corporations are whining for federal bailouts and saying they canâ€™t afford pensions for retired workers. Unemploymentâ€™s rising and consumer confidence is plunging.
Strange times. Deflation is the big story now â€“ falling retail prices, crumbling house prices, cheap cars and Christmas sales in October. But in times to come, it will be inflation â€“ since governments are spending billions they donâ€™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. Didnâ€™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, weâ€™ve been told by the prime minister and other less notables, itâ€™s all different. Weâ€™re an island of stability. A rock. Northern star. Canadian Shield (not, thatâ€™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 itâ€™s here. This is vitally important because â€“ as in the United States â€“ 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 â€“ as in the US â€“ 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 â€“ not Wall Street, hedge funds or the greedy twits who ran Lehmans or Bear Stearns â€“ that created the mess in America. The middle class there is being dealt a body blow and it seems weâ€™re destined to be smacked in the same fashion.
Officially, home prices have fallen just over 6% nationally in the past year. But that numberâ€™s misleading. In Toronto, theyâ€™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 donâ€™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 donâ€™t hold your breath. Itâ€™s different here. Youâ€™ll see.