As I complete the manuscript this week for my new book, I’ve reached many conclusions. One is that, whatever happens with the Obama Miracle Rescue Plan, residential real estate here and in the States has four istrikes against it:
* Price: It took the market eight years to inflate, and it may take just as long to deflate. How can anyone expect that a 15% dump in Toronto or Calgary prices can balance out prices which doubled in many areas between 2004 and 2007?
* Affordability: No matter what the dollar cost of a property is, the key factor is the ability of a buyer to afford it. When unemployment goes up, affordability goes down. This recession (or whatever it ends up being) will be with us for a few years. Millions of families will require a long time to pay down the debt they walked in to so casually during the bubble years. Going forward, they’ll be cautious about making the same mistake again. This is a key reason housing prices could stay dramatically lower for much longer than most experts (and all realtors) expect.
* Demographics: The downward drag imposed on real estate by the Boomers is just getting started. When these folks understand their RRSPs and 401(k)s are not going to rebound fast after the crash, they’ll be trying to unload houses. For all of us, this is uncharted territory. For the first time in Canadian history we will experience a third of the entire population hitting retirement age simultaneously.
* Energy: Oil prices may have crashed along with stock values in 2008-9 (and will be rising again in the inflationary times to come), but energy consciousness is here to stay. That has changed real estate tastes, and will continue to do so. This is why natural gas-sucking five-bedroom McMansions with hot tubs and three car garages are so, so 2006. The years are at hand when people will need to worry not only about their job security, but also weather events and food. Climate change and energy can take a back seat to economic distress for a while, but eventually the impact of peak oil, food inflation, stable power sources and environmental refugees into Canada will seize us.
In total, we have a perfect storm blowing down house prices. A battered real estate sector in turn becomes a massive anchor on economic growth. It erodes family wealth. It makes us feel poorer. It collapses discretionary consumer spending – bad news in an economy which is more than 60% dependent on people shopping.
But it’s only started – important news for anyone who’s been thinking of selling.
By the time this deflationary bear market in real estate is over, we’ll see that it came in two waves. The first started in the US with the popping of the housing bubble in the beginning months of 2006, and was followed in the Spring of 2008 in Canada by a dramatic decrease in sales, leading to a gradual but steady slide in prices. The second wave came in the States with the explosion of negative equity and corporate layoffs that followed the stock market crash of 2008, and in Canada is likely to begin at the end of 2009 or the spring of 2010 as we all understand there is nothing unique about the country, and no northern antidote for housing contagion.
- Globe and Mail
