Entries from March 2009 ↓

This Brit threw in a yellow Lamborghini after failing to sell his house. Deflation, anyone?

“…And at the pointy end of the plane are Ernie, he’s the captain, and Jason, who is important because he’s got the map to Toronto and the compass…”

As the Westjet flight pushed back from the gate Friday morning, Edmonton’s airport was getting nicely coated with a driving snowfall. It’s still winter in northern Alberta, and the city’s looking like a cross between Mississauga and a fudgesicle. Miles of ugly industrial units, car dealerships, mattress stores and big box stores are mounded with banks of brown ice. I’d say there are better places to be in late March.

Vancouver, by comparison, was its usual luke drizzle, and back in Toronto, the 737 descended into sunshine and fifteen degrees. The country is incredibly diverse, and yet strangely the same. Not just that every town has a Staples and an Earl’s, but that we’re all headed for a common economic future. This is a fact that is lost on most of us.

In virtually every city, I hear the same thing when it comes to the one thing people want to throw money at, real estate. “It’s different here.”

It’s different in Toronto because that’s where all the immigrants go, so growth will be endless. It’s different in Halifax because of the huge stabilizing influence of the military. It’s different in Edmonton because of oil. It’s different in Ottawa because of the federal government. It’s different in Vancouver because of the sandwiching of mountains and sea.

Of course, none of this matters. All markets will continue to decline, even after a minor feeding frenzy by unwary first-time buyers. This will happen even as equity markets lurch higher and lower, and then recover some time in the months ahead. It will happen despite billions of dollars in new government spending and tax cuts. It will even happen as mortgage rates dribble down to the lowest point ever. And here are six (of many) reasons why:

(1) The jobs famine. House values will never rebound so long as people fear for their incomes. Jobs are now being lost at an annual rate of more than 6 million in the US and, on a per capita basis, the situation here is even more grave. Jobs which are being shed over the course of a year will take seven or eight years to return. If we’re lucky.
(2) Deflation. It’s the thing that keeps central bankers up at night. Rightly so. This monster, once unleashed, knows no master. All the government spending right now, all the cheap loans, all the bailouts, all the debts and deficits are aimed at one simple goal – to prevent a deflationary spiral. Japan is heading into one. So is Europe. Pray we don’t because if it slips loose, anyone who bought a house in the last five years is, well, prey.
(3) Car crash. The collapse of the auto sector is somewhat inevitable. Looks like Chrysler Canada is toast. GM is buying off workers with $20,000 cheques and new cars. Mercedes is selling itself. Saab sank. And meanwhile in India the $2,500 Nano is about to put millions now on bicycles into cars. North America is not far away from losing its industrial heartland. And you wonder why there are 2,171 houses in Detroit right now selling for less than $10,000?
(4) Hollowing out. Endangered is the Canadian manufacturing sector. The steel works in Hamilton are closing. Mills from Newfoundland to northern BC are idle. Small factories employing a dozen or 200 in southern Ontario are shuttering daily. This is the inevitable consequence of no longer being a competitive country. But how can a guy work on the line and feed a family on less than $30 an hour – when houses in Oshawa or Brampton cost $400,000? Answer: he can’t. And neither can the company pay him. They fall together.
(5) Dirty oil. Does anyone seriously believe the Obama administration will not, inevitably, support the move against oil squeezed out of the Albertan mud? After all, it takes eight barrels of water, clouds of natural gas and a devastated environment to produce one barrel of oilsands crude. The dirty oil lobby will find a lot of traction once the Obama billions start building all those new windmills.
(6) Sanity. In Toronto, Vancouver, Calgary, Edmonton, Kelowna, Muskoka, Milton and scores of other places where millions of us live, house prices are still insane. The average family cannot afford the average home, even with the collapse in mortgage rates. So, it is a certainty that prices will continue to decline until the historic norm is restored. This will mean a serious loss of wealth for recent buyers, along with negative equity and heartache. Many people will wonder how they ever could have bought so much with so little thought at precisely the wrong time.

Sadly, even Ernie can’t pull us out of this dive.

The country’s most credible economist says we’re headed for the mother of a debt hangover. The country’s biggest province brings in the mother of all deficits. Just another day in paradise.

Actually, things are unfolding pretty much as forecast here, as I told a cow palace full of Albertans on Thursday afternoon.

The economy’s going to get worse. Jobless numbers will be appalling. The faux Spring housing market will turn to autumnal misery. The denial which is so palpable in places I’ve been this week – Vancouver and Edmonton – will be swept away. And there’s always the chance (still at 20%) that deflation will eat our leaders and lead to something far worse.

In the Q&A after my talk, I was asked that. If there is a depression, would things be better in the country or a small community, than in the city? And the answer, cowboy: you’re damn right. The last place I’d want to be when the Loblaws truck does not arrive, the banks close for an imposed ‘holiday’ or the grid fails is in downtown Toronto or Vancouver. Far better to be in a spot where you have your own water source, the ability to make electricity at home, a stockpile of food and fuel, dirt for a garden and cash buried in a coffee tin.

Self-sufficiency is the holy grail in times like these. But let’s hope for a gentler outcome.

Still looks to me like equity markets will recover first, and be joined on the ride higher by oil (did you hear about car sales in China last month?). Real estate will continue to sink, and a housing recession lasting several years will be a fact of life by this time next summer. Anyone thinking about selling a home who doesn’t try now might as well wait until, oh, 2014.

And that takes us to northern BC, where Tom says…

“5 1/2 years ago my wife and I bought a house in Fort St John, BC. It is a raised bungalow, 6 bedroom, 2 1/2 bath, 2300 sq. feet total. Over the past 5 years we have renovated it top to bottom, inside and out. We have done the renovations as we could afford them, and still owe about 100,000.00 on the house. I have read some of your work, and have believed for the past 2 1/2 years that this housing boom was unsustainable. Had I  been finished the renovations last year, I would have sold then. However, the reality is that we just listed our house this month. We have it for sale privately for 306,000.00 (It was appraised this month for 299,000.00) We are hopeful that we will get close to our asking price for it, as the market still seems pretty good here, although our appraiser has said that overall prices have declined about 7-9% over last year. Some prospective buyers have told us that they are watching the market, waiting for prices to fall lower. Any idea how low and how soon they will fall here in Fort St John?”

No idea, dude. I have been to Fort St. John only three times, listening to beer bottles kiss the sidewalk outside the Pioneer Hotel (where the guests are locked in each night). However, I can’t see why the local market would be stable when the main business – logging – is going to hell.

In any case, you have some challenges. First, what does anyone need six bedrooms for? Sounds like you’ve reno’d this into a bordello, rooming house or a B&B. That could make the sale harder. But more importantly, why are you selling it privately – just to save the commission?

If so, bad move. In a down market you need all the exposure and marketing power you can get. After all, FSJ is not exactly a metropolis – you need to expose the property to any and all people who might consider moving into town. So, how can you do that without being on MLS, and without a listing on realtor.ca? More than 80% of all real estate decisions are now made after web-based research.

So, what’s your marketing plan? How can you tap into a network of existing realtors without an MLS listing? How can you expect anyone to bring clients to your property when there’s no commission in it for them? How much are you going to spend on newspaper ads, and covering how big an area? And why would you possibly price the house above appraised value?

Tom, I hope you like that house. Cuz you’re stuck with it.