Entries from November 2008 ↓

Tomorrow in Parliament the finance minister will deliver an economic statement and begin a process of trying to save the nation from financial ruin. If he repeats the statement he gave during a television interview this week, he will say:

“Eight weeks is a long time. When you look at what’s happened in the global economy in the last week eight weeks, it’s staggering. And the election was called in September. No one in September – no one – had ever suggested the Canadian economy might go into recession, and that is now a definite possibility.”

This, of course, is a lie. The Canadian election was called early – just days before MPs were to go back and debate the economy – because the government and its bureaucrats knew the crap storm which was coming. During that election we wasted precious weeks when Canada could have been preparing. Instead, we were told (a) Canada is not the US, (b) our economy is solid, (c) our banks are perfect and (d) there will never be a deficit.

Last week at APEC our prime minister alluded to 1929 and said this is about as bad as it gets. The OECD (and every economist) says we’re in recession. The banks are issuing new shares in a falling market to raise money. Ottawa bailed out Bay Street with $75,000,000,000 in tax money. The deficit could be $14 billion within a year, says the Parliamentary Budget Officer.

Is the finance minister an idiot? Or does he think we are?

For the record, Mr. Flaherty, below are words published here at least eight weeks ago. You know, because you and your boss read them.

September 15 (nine weeks ago)…

The full implications of this can’t be clearly seen by anyone at the moment, but I’d say this is what Canadians can expect:

* The stock market will be hammered, eroding the value of every investor’s portfolio, RRSP and pension. This brings household wealth down, drops confidence and is nothing but negative news for real estate as liquidity is drained away in financial losses.

* Credit is going to be a lot harder to find. Banks on both sides of the border have already pulled their horns in a little, and that can only accelerate. Look for far tighter restrictions on loans and mortgages to new borrowers, to builders, for renovation and lines of credit.

* An inevitable result is a sharp acceleration in the decline of the Canadian market. Without a steady flow of new investors and buckets of borrowed money, there is no alternative, especially in real estate markets where prices are unsustainable…

Those Canadians who thought we could end up with a five-month adjustment, after the Americans have been through a three-year Armageddon, had better think again. This is just the beginning, pushed along by big events like those unfolding on Wall Street and in Washington this week.

Circle these days. You’ll want to recall when the lights started failing.

September 17 (nine weeks ago)…

We’re in the early days of a credit freeze which will affect almost everybody in North America, and most voters in all Canadian ridings now being contested. What’s happening on Wall Street, on Bay Street, on financial markets globally, will not stop there. Already the contagion has wiped billions off the worth of the American middle class, and the next phase could hobble that country itself. To think we’re immune is delusional.

North American stock markets have plunged. More than 20% of all the wealth represented by the Toronto market has been erased in the last 90 days. Three of the biggest investment banks in America have failed. The largest US mortgage companies were taken over by the government. The biggest insurance company is a basket case. At least a hundred more US banks could fail. Liquidity in the world’s largest capitalist country has evaporated. America’s triple-A credit rating is being called into question.

Here’s what this means to Canadians.

Soon – two or four or six months from now – getting a bank loan, mortgage or line of credit will be tougher. First-time homebuyers, people needed refinancings to pay debts, retirees, entrepreneurs and small business owners could be SOL. Banks will simply recoil from risk.

The residential real estate market could be choked off in the process. With mortgages tight, the economy slowing and unemployment rising, the ranks of buyers will be thinner. Desperate sellers will cut prices in a spiral which has already started. For the past nine months I’ve forecast a decline of between 15% and 40%, depending on the housing market. I may have been too optimistic.

Commodity prices, especially oil, could tumble as a serious and multi-year recession dramatically quenches America’s thirst for energy. This has already begun, as crude gyrates wildly, rising and falling more than $100 a barrel this year alone.

Oil might actually go right back to $50, making the oil sands marginal. Combined with a deep freeze on bank credit, well, so much for the Western miracle.

Overall, expect a sharp economic slowdown, the erasing of billions of dollars in real estate equity and retirement savings, and a new normal of falling consumer prices – and incomes – which could last several years.

Now, to the politics of the matter….

Putting Mr. Harper back in office will guarantee the picture I’ve painted will come to pass. In this election he hasn’t said his reckless spending will stop, that he’s got a jobs plan or understands the real estate market. His government has no money left, and even spent the contingency reserve. When the economy sputters later this year and into the Spring, revenues will fall and deficits result.

This is the greatest threat the Canadian middle class has faced in a generation. Just the housing woes alone will be painful. Look south for a preview.

October 1st (eight weeks ago)…

This much, we know. The US economy is in recession and the times will get worse for months and months to come. The mess, as feared, has slopped over onto everyone. Canada, Europe, China – all will be impacted. Commodity prices will keep going down for a while, along with real estate. Billions more will be lost. This is the start, not the end.

Banks will fail, but not here. Ours will just stop lending money to lots of people and businesses. Condo developments will go bust. Marginal companies won’t make it. Car sales will fade with car loans. Inflation will become deflation. And you can stop worrying about high gas prices.

Debts will become unrepayable for many people, so I hope you have few. Interest rates will be going down as central bankers try everything to stop bad from becoming worse. Albertans, and the oil sands, will not be so envied soon. Prices for just about everything will fall, as will the value of your home.

Regardless of whether or not the $700 billion financial bailout passes the Senate tonight or Congress on Thursday, global confidence has been dealt a major blow. With less confidence, there is less credit. And without free flowing credit, economic expansion stalls. This is what terrorized stock markets on Monday, and will continue to do so.

I suppose it is possible the United States could slump into a quasi-depression, taking us with it. But that’s unlikely. A protracted recession – a year or two of negative growth – is quite possible. Investment portfolios could lose a third to a half of their value. Home equity will fade by, perhaps by as much in certain markets. The value of your mortgage will not fall, even though your wages might. This is deflation – when cash grows in value because every other asset is declining.

Although Stephen Harper did not know the events of today would take place, he knew the danger of imminent financial chaos. So did I. And if you’ve read this blog, so did you. I have spelled out the reasons for real estate deflation, falling family net worth, a protracted US downturn and the considerable impacts on Canada. I told you how the Harper government policies of 0/40 mortgages and of cutting the GST instead of income taxes would make us more vulnerable. And I have detailed why massive higher government spending and a blowing of our surplus would make such a time as this more difficult.

Harper knew the danger, as did the finance department, the head of the Bank of Canada, the PMO strategists, and you and I. That’s why he alone triggered the election, not chancing to wait for Parliament during the very dangerous month of September, when he’d have to answer to the people daily.

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My conclusion: You are about to witness the greatest government intervention in the marketplace in Canadian history. More spending, deficits and debt. Mounting deflation will be countered with an attempt at reflation, along with more dollops of revision. I hope you kids out there like paying income taxes. — Garth

One day I had a tour of the big house factory which sits in a former farm field an hour’s drive west of T.O.’s core. Every day this monster turns out one perfect home from specs ordered by its new owner. The wiring and plumbing are finished. Paint and tiles are on. Dining room chandelier is hung. It’s a done deal when spit out the end of this massive building and onto a vehicle that looks like a cross between a flatbed truck and a crazed bulldozer.

The thing is then transported to a waiting hole in the ground a kilometre or two away, and planted. The advantage of indoor building is that it’s never halted by weather, the workers don’t get cold, there are no construction delays, more materials can be recycled and the whole thing runs like a just-in-time auto assembly operation.

These days, as you might imagine, things are slowing down a tad. The builder used to attract young buyers because all they needed to afford one of these showhomes was 1.5% down. For that, they got all the bells and whistles, plus mortgages too large to actually think about. But in a rising market, who cared?

Now that down payments have rocketed to 5% and 40-year amortizations have been slashed to 35 years, the builder’s offering the same homes for up to $70,000 less than last year. And still business is slow, I hear. Who would ever have thought selling expensive new houses to people without money would work out badly? Oh well.

The larger point worth considering is the place where these things end up – the burbs. Do they still have a future? After all, suburbs have been called one of the greatest wastes of resources in human history. Months ago I posted an article here from the Atlantic making a compelling case for the burbs becoming the slums of the future, rife with crime, largely abandoned by the middle class and worth pennies on the dollar.

I’ve also been following an interesting series on the suburbs over at The Oil Drum, where the focus is on what kind of life we’ll all be leading in the peak oil era soon to be upon us. Will energy shortages and rampant gas increases be the final death knell? Or has society sunk far too much into these sprawling mega-communities to ever contemplate their depopulation?

In decades to come, will these factory-made houses stand the test of time? After all, subfloors are particle board now, while joists are composite and soffits made of plastic.  Will an energy crisis put an end to any desire to live where it takes a litre of gas to get a litre of milk? Will years of economic hardship simply overwhelm owners with no equity, convincing them they’re better to bail instead of to sink? And if the economy actually spirals into deflation or depression, will the suburbs be the worst of all worlds – no urban community or transportation grid and likely fewer government services, like policing?  Will these near-city dwellers have total dependence on wavering utilities and yet be without enough land or resources to become self-sufficient?

Or, more hopefully, will the suburbs become communities where people carpool, telecommute, patrol their hoods and turn patchy backyards into communal gardens? Will they eschew the garage door remote and understand that when whole blocks of people are in the same economic boat they have to row together?

Well, nice thought, but I doubt it. I’ve walked too many of these streets and banged on too many suburban doors not to understand the prime motivation for people moving into these kinds of houses. Stuff. They want stuff. Granite or stone or glass countertops. Hardwood floors. Marble sills, columns, media rooms, stainless appliances, hot tubs and paving stones. Lots of stuff, and lots of credit to finance it. That is the current suburban dream, which is why it has no future.

If this mess continues (and I am forecasting it will, with a second wave of real estate declines next year plus a worsening economy and rising unemployment), I’d say the last place you want to be is anywhere near that housing factory, or a similar development.

The best place, of course, is clear. The exurbs.

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