Entries from November 2008 ↓

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Update:

Gulp. Toronto stocks crash 600 700 765 points

GM shares sink to lowest value since Depression (the last one)

Canadian banks set for big job cuts?

What the economists now fear the most: deflation.

Toronto house sales crashing as head realtor blames CNN

US jobless claims jump to a 16-year high

Oil heads for $50 a barrel as stocks nailed again

TD Bank takes credit hit on investment losses

Financial crisis has Canadians rethinking retirement

Click on headlines above for links

In the first two weeks of November, only 800-odd houses sold in Toronto, which was about 50% less than the same time last year. Prices were down and listings were up. At this rate there’s about a 2-year supply of homes for sale, so good luck if you’re trying to flog one.

But that’s just one punch in the gut. The Dow is now at the lowest point in over five years and the TSE’s lost damn near half its value in a few months. Small business people are being told their prime-plus-one lines of credit are now prime-plus-five and Visa card rates have been adjusted upwards to punish those who have trouble paying. That’s a genius move.

The Bank of Canada boss is saying out loud that the economy’s slipping, and interest rates will be coming down again soon – not that anyone will see it. The finance minister said today, “there will be a deficit if there is a deficit” which is not exactly what he said when trying to stay finance minister which was, “there will be no deficit.”

So far Ottawa has given a more massive bailout per capita to the Big Banks than Washington did. And while American politicians debated, agonized over and struggled with their rescue plan, ours never went for a vote in Parliament, was never discussed by a committee and was never even explained to the people, who are now on the hook for $75 billion in high-ratio mortgages. It was a personal disappointment that my former opposition colleagues were mute.

Layoffs are turning into an epidemic, and it’s this fact, not $40 oil (soon to arrive) which will do the most economic harm. Consumer spending is drying up by the hour, a fact you can see in car dealerships, furniture stores or any one of the deserted department stores coast-to-coast. Except Wal-Mart. That place is packed.

A long time ago I said real estate excess would lead us into this swamp, and it has. But the real killer is turning out to be debt. Corporations and families have learned very quickly that deflation knocks down incomes and asset values in just weeks, but that debt is the cockroach which survives every disaster. This means hundreds of thousands of Canadians by the Spring will have negative equity in their homes, with mortgages that exceed their falling property values. It means companies like Canwest can’t service billions in debt once ad revenues disappear. It sure has the entire car business on the edge of oblivion. Toyota, for example, which opens a $1.1 billion car plant in Ontario in a few days, and will then shut it down to decrease inventory.

Some people think a major Canadian bank will fail (not hard to guess which one) before this is over; that real estate in Toronto and Vancouver will decline by about half; and stock markets in T.O. and New York have at least three thousand more points to give up. Without a doubt, the federal government will be in deficit, unemployment will soar and the devil of deflation will be licking our ankles. On Thursday came news the core inflation rate in the US dropped the most in 61 years. Maybe ever. That’s just when the record-keeping started.

As tough as things feel now, the months to come will be far more intense. If you have not yet started a list of personal and family actions, I urge it. Suggestions will come here in the days ahead. Feel free to ignore them. Most will.

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.

Van homeowner offers $100,000 to unload his house