Below is another small piece from my forthcoming book, “After the Crash,” one of the counclusions of which is we have entered into a deflationary period which has the potential to create conditions most people alive today have never experienced. Whether that happens or not cannot yet be known.
However, the news today confirms my thesis: US consumer prices and core inflation have fallen the greatest amount in 61 years. That’s deflation. And new housing starts are at the lowest point since records were first kept in 1959. That’s collapse. — Garth
1. Jobs are being destroyed in the post-crash shock that corporations are feeling. The pace of unemployment will be relentless in the coming two years, driving down the economy, consumer spending and borrowing. The number of potential homebuyers will dwindle and as supply of homes for sale overwhelms demand, prices will continue to slide.
2. Government bailouts will fail to reflate the economy of the US, Canada, Europe or China. As stock markets see clear evidence there is no magic bullet, another wave of selling could occur (reminiscent of what happened in the summer of 1930), which will shatter popular confidence and stall any real estate recovery.
3. It is much cheaper to rent a home than to buy one, so until there is a powerful reason to own real estate (like a sure-thing capital gain) there’s no reason to expect prices to rise. Anyone looking to improve their family’s finances will conclude that tenants win in this environment.
4. Real estate cannot rise in value without a steady diet of new buyers, and right now potential first-time purchasers have been shut out of the market by a return to more traditional financing. With the end of zero down payments and 40-year amortizations in Canada and the collapse of the subprime lending market in the US, it takes actual money to buy a house. New buyers will have to save for a down payment – and that takes years.
5. Interest rates may have been forced down by central banks, but that didn’t make mortgages any cheaper. The credit crunch tightened lending terms and rates, just when buyers were thinning out. Bad news for the market.
6. Armies of small-time housing speculators have been caught and crushed in the real estate meltdown. In Toronto alone 30% of all the new condos under development (more than 50,000) have been purchased by flippers, usually for minimal cash and with maximum financing. These people will either walk away from their investments before closing, rent them out for whatever they can get to offset monthly losses, or dump them on the market at fire sale prices. The dampening impact on the market as a whole – prices in particular – should not be underestimated. The last time something similar happened, in the early 1990s, condo values plunged by 40%.
7. Plunging financial markets and plopping house values are hitting the soon-to-be-retired Boomers especially hard. These people had been drivers of the real estate market for decades and have a huge amount of net worth tied up in their homes. Their exit as buyers from the market is a downer for everybody, and the certainty that they’ll be desperately dumping properties in the coming few years will further crash values.
8. Builders and developers are in a vice. Sitting on acres and acres of development land or half-built towers, with millions in bank financing hanging over them, many will be forced to dump inventory at any price. The result will be predictable, and many simply will not survive.
9. As energy costs rise and disposable income falls, a large amount of housing stock will simply be unsalable. Suburbs will fall out of favour, areas without light rail transit or reliable bus transit will suffer more price depreciation, as will homes that are not energy efficient. Price deflation may be our future, but it will be combined with energy inflation.
10. Houses are not cheap enough yet for people to afford them. The basic reason this bubble burst is the most pervasive and powerful. Until the average family can live in a property of their peers, having put 20% of its price down in cash and able to finance the remainder on a third of their income, prices will continue to crumble.
