Entries from June 2009 ↓

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Canada Day, 2011.

Gas is $1.42 a litre, and a five-year mortgage hovers close to 8%. Effects of the crash of Autumn, 2008 are still being felt, even a year into an ‘official’ recovery. Unemployment is chronic and the federal government’s deficit will still top $40 billion with no hope of a balanced budget for at least half a decade. As a temporary measure, the GST’s been raised 1%.

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Chrysler Canada is gone, of course, along with the notion of daily newspapers and network television. Newspapers and TV still exist but everyday publishing and local TV news are in their death throes. As for Chrysler, all that remains is a $4 billion bill which will never be paid.

The big story is real estate. Just two dozen months after the market entered a classic sucker’s rally, replete with roaring prices, multiple offers and predictions of ever-higher valuations, homeowners despair. Since the summer of 2009, when the national average house price reached its zenith – despite a recession – homes have eroded by 15% overall, and as much as 44% in some areas of British Columbia.

Among those most impacted: first-time buyers, lured into in 2009 homeownership by historic low teaser interest rates, offers of no-money-down financing from the big banks and credible predictions made by respected groups such as the Canadian Real Estate Association, that the market had “returned to pre-recession levels.”

Cassy Luneau and her husband Vache, both 27, spent Canada Day on a Parliament Hill bench, which has been their residence since deserting their home in Mississauga three months ago.

“We’re still in shock,” she says. “I mean, we listened to the real estate guy, and read the papers about housing getting more and more expensive, so we did what everybody was doing – what our parents wanted. We got a mortgage from the bank and they gave us a gift of money just for closing, to help pay for it. We just wanted a nice new house with stainless and granite and stuff. How were we supposed to know mortgage rates would go up and house prices go down, so after, like, a year we owed more than the place was worth. We couldn’t afford to sell it, and with Vache losing his job at the airport, we couldn’t afford to stay. So we came here. I mean, it’s all their fault, right? The politicians. I hate the bloodsuckers.”

Canada Day, 2009.

This week the most authoritative gauge of US house prices showed they tumbled 18% in the latest period. The Case-Shiller Index indicates American real estate has lost 34% of its value since peaking two and a half years ago.

The best guess is that while the pace of the price decline has moderated a little, it will continue for another two years. By that time, American homes will have eroded by between 40% and 50%, more than during the Great Depression, wiping out the life savings of millions of middle-class families.

By the middle of 2009, house prices are back at 2003 levels. It’s reasonable to assume another 10%-15% decline, putting them at 2000 levels by sometime in late 2010. Thus, an entire decade will have been lost. This comes amid news the Obama administration is seriously considering bulldozing sections of cities such as Flint and Detroit to wipe out housing stock, create natural areas and try to stem a real estate-induced urban collapse.

Will this happen in Canada?

Dozers, unlikely. A price correction, absolutely.

We continue to run roughly two years behind the Americans in this real estate saga. There is no escape.

Hence, two years from now, some heartbroken people will wish they might have read these words.

O Canada

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For Garth's latest podcast, click here.

The sight never fails to impress. Pull onto Highway 401 around 7 am any weekday west of Toronto, and as far as you can see are car bums and taillights. Around Trafalgar Road, for example, wheels barely move, so covering the 50 clicks downtown can take well over an hour.

In fact, the average commute time in the area is now 75 minutes, and at $1.05 a litre, it’s as costly as it is long. This is where the greatest number of people in the history of Canada have bought houses within the last ten years. Miles of farmland have become mazes of homes, with predictable results – traffic, congestion, delay, overcrowding and crime.

You might think people came to the burbs to escape that urban blight. But they didn’t. They came to get big, fat houses on single lots. And – guess what? – they’re coming again. The past couple of months have seen real estate activity jump in the nether regions of Best Buy and Home Depot, which has resulted in a mess of cocky talk from realtors. Like this blog, from Milton, which seeks to discredit guys like me:

First let’s talk about the ‘false up’. Doomsayers want you to now believe that this market rebound is only temporary and that we are heading downwards again by September. Their rationale is that we are still in a worldwide economic recession and that it is time for real estate to enter a bigger decline after an eight year run.

But all the economic indicators tell you that the housing market is sustainable at these levels. While unemployment is higher, unemployment is no way near the levels of the eighties and nineties. Affordability – real estate prices, mortgage rates, and incomes added together – is the best (lowest) it has been in over ten years.

We have no foreclosures hanging over the market – in fact we have a shortage of listings in the resale market and a sale to listing ratio of 60% when a normal market is about 35%.  Meaning, for every 100 homes listed, an average market will absorb 35 of them per month (or about a 3 month supply).  Right now, some neighbourhoods and/or types of homes are hovering at nearly 100%.

Finally there has been no price ‘bubble’ – just prices rising in the 3-5% annual range – the historic rate of increase for real estate.

The earlier correction towards the end of 2008 and early 2009 was only caused by a lack of consumer confidence and not from underlying economic issues.

So much crap, and so little time… where does one start?

I’d say this realtor wouldn’t know an economic fundamental if one stuck to his shoe. We have a record number of people out of work today, costing the government a stinging $5 billion in extra survival payments. Behind all of that unemployment is a mess of profitless employers and failing companies. Behind that is a punitive tax system, a too-high currency, reluctant lenders and an American economy in reverse – where 70% of our manufactured goods end up.

Also fundamental is the fact few in this country (with the exception of this blog’s astute readers) have done anything about the problems which caused our malaise. Household debt is up, not down. Canadian savings rates have flatlined. No-money-down real estate is back. And pumpers like this realtor say affordability is up, when any sane person knows these teaser mortgage rates will not hold.

Young couples who have never seen a serious recession or a housing reversal are egged on, resulting now in a sales flurry and higher prices. As for ‘no bubble,’ it was CREA which just last week trumpeted a 16% increase in prices in the last four months. Is that a suck, or a blow?

But, thank god, there are no “underlying economic issues” to worry about. That’s good news. It should be enough to wipe away a $2 trillion Obama deficit, catapulting energy costs, nationalized banks, bankrupt car companies, manufacturing Armageddon, the Boomer tidal wave, a generation of higher taxes and vaulting interest rates.

But if it doesn’t, the newly-mortgaged should be told where to expect Ground Zero.

They sleep there.

Hi Garth,

I am starting a family, and have been reading your blog for over two years. I continue to rent and save as much money as possible as per your advice. I have two people to thank for that. You, and the person who referred me to your blog.

I have another friend who is about to make a huge mistake and buy a house. He and his wife have a young child and want to enter the real estate market at the worst time in history. I understand that you might not want to reiterate the same key points over and over again on your blog, but I think a “Back to Basics: why NOT to buy a house” would be helpful for a few new readers.

My friend just walked by my desk and said “I think I found a pretty good house”

- Want to help a friend from ruining his life

On Friday my latest house deal closed. This time I was a seller. In the last five months I have sold two and bought one. At the moment I own a couple more. You might realize why I chuckle when told I’m a property bear or simply a doomer. In fact, I love the stuff.

There are many reasons to buy and own real estate, and I think I’ve lived them all. Investment. Emotional refuge. Shelter. Capital gains. Convenience. Social statement. Wealth. Architectural rescue. Income. Whimsy.

Real estate is like any other asset, which means there’s a time to buy and a time to unload to a greater fool. At the same time, it’s unlike most assets, since it seduces and tricks us. We think home ownership is synonymous with security, when it can epitomize risk. Too many of us have blindly placed our entire financial future in one piece of earth, and confused debt with equity.

My books, and this blog, speak in an unvarnished fashion about real estate – which is why so many people cannot stand me. Usually they make a living from selling or financing houses, or have gambled everything on a home and fear I’ll talk the market down.

Whatever. I just make my opinions known, to be heeded or ignored. Meanwhile I’ll go on following my own personal rules. Here are a few you might want your buddy to know.

(1) It’s a really bad idea to have more than half your net worth in your house. Personally, at my stage of life (between the quick & the dead) I’d never have real estate as an asset class (including my principal residence) amount to more than 40% of my money. A home can be disastrously illiquid or equity turn negative, making this more of a wealth trap than any stock, bond, commodity or fund.

(2) Never buy real estate in a bubble. You will pay too much. You’ll buy too fast. You’ll rush a key decision. Bad deal.

(3) Debt’s to be paid off, not rented. That’s why 35-year amortizations are nuts. If you can only swing home ownership with an unrepayable loan, why bother?

(4) If you don’t have money, don’t buy a house. No-money-down purchases are for losers. This is extreme leverage which can be a few bad headlines away from financial ruin.

(5) Be ready for rising rates. Nobody alive today has seen mortgage rates this low, which means you cannot expect them to last. The cost of money will at least double over the next five years, wiping out a large measure of affordability and playing hell with your resale.

(6) Realize the structural threats to real estate have not been this great since the 1930s. To rising mortgage rates add a massive aging population of house-heavy Boomers, rapidly ballooning energy costs, the ugly effects of climate change, a giant shift in real estate tastes, stubborn unemployment, deflating family incomes, deficit-fuelled tax hikes, and peak oil. The burbs have little future.

(7) Buy real estate to make money, but don’t confuse a house with a home. It makes perfect sense to rent shelter. Most people in the developed world do exactly that.

(8) The financial goal is not to have a giant house making people think you’re wealthy. It’s to be wealthy. Diversify. Kill debt. Constantly reap your capital gains. Reduce risk.

(9) The only reason to buy real estate in a recession is if you can be a vulture. That’s why US markets are moving again, after prices have fallen by half in the South and the West. In Canada, no such declines yet, and no reason to swoop. Wait.

(10) Be a contrarian. Works for me.