Entries from June 2009 ↓

Some weeks ago I mused the mess we are in will turn out to be a W. Big slide, followed by a hopeful, bubbly recovery, followed by a massive dump, and then – finally – a real recovery.

I now have company. The World Bank said about the same thing this week, and doubled its forecast for negative growth. Meanwhile star economist Nouriel Roubini was adding this voice. Oil prices will ensure this recession stays around, he said, forecasting that a barrel of the stuff will hit $ 100 next year. Which is exactly what this blog told you.

In fact, my three predictions hold: Hundred-buck oil, prime rate doubled and Canadian dollar at par. And all of them are bad news for family finances, the economy and jobs. The swamp we fell into last year will stay dangerous for a long time yet, and anyone who thinks we will go from a rerun of the 1930s to a rerun of the 1980s in eight months has been watching way too much Lady Gaga.

This is what makes the economic conmen so troubling. Especially those in positions of media influence and public importance. Like the CEOs of big real estate companies. Like some federal politicians. And like the Canadian Real Estate Association.

After all, why did the markets tank on Monday (the TSX dove 450 points)? Because the W scenario is credible, realistic and probable. Equity markets, real estate markets and, most worrisome, consumer confidence have raged higher over the past few months. Less than a year after the wheels came off the economy, and we were consumed with stories of the Great Depression (looking for useful pointers), we’ve got multiple offers, bidding wars, rising house prices and a 646-square-foot condo in a so-so Vancouver building listed for over $800K. Oh yeah, and unethical press releases written by unrepentent realtors, broadcast by uncaring media.

Is somebody going to look out for the naive and the young, now being told the coast is clear? Or do we watch them being mowed down next year? Obviously CREA has made its choice.

Now for a happy letter. Apparently there’s some sanity left out there.

Hi Garth,
I am 30, I live in Waterloo and work for RIM.  I bought from a builder 5 years ago, and watched my home increase in value steadily each summer. After reading your book last summer, I was convinced that selling was the right move.  Of course, just as you explain in your book, everyone I spoke with told me I was crazy to want to sell only to turn around and rent.  So I ended up sweating the decision out and listing late in August, without a realtor.  Well I paid for my hesitation with mental duress throughout the winter.  There were lots of calls, and people showed, but never an offer.  I actually did stay calm throughout the whole experience, but people around me were convinced I would have to sell for considerably less.

In the end I got lucky.  As you mention in your blog, the wave of cheap money this summer picked up the market in a hurry.   I went from zero offers, to having a counter offer for my asking price!  I sold my town for $244,900, and will be sitting on 95k in equity when I close in August.  No agent, and being close to the end of my 5 year term meant that I pocketed an extra 12-16k!  It was a proud moment when I closed the deal on my own.

Anyways, I wanted to say thanks for the advice.  I will be moving out of this place in less than 2 months, and everytime I get a little depressed about the change, I always refer myself back to the facts you have listed countless times.  I am absolutely convinced it’s the right move, and I look forward to watching the events over the next 2-5 years unfold…with popcorn in hand!

I’ll be looking for ways to invest my money wisely.  Now that I am no longer in debt, I’ll also be increasing my automatic RRSP deductions from my paychecks, so I can catch up on my contributions (as well as opening a TFSA).

Cheers!

For Garth's latest podcast, go here

Here’s a puzzle for you.

How can a country’s housing prices go up – way up – when unemployment is at an 11-year high, manufacturing’s been decimated, its major car companies are bankrupt, its national airline bailed out, retail sales are plunging and its federal government’s finances have fallen off a cliff with the greatest deficit in history?

Answer: they can’t. Unless, of course, you’re the Canadian Real Estate Association.

CREA earned big headlines last week (as its chief economist Gregory Klump had planned – see what I mean here) with a new media release that was shocking. It said:
* House prices in May hit the highest point in history, eclipsing the previous record one year earlier – just 100 days before the global financial crisis hit.
* In a mere four months the national residential average price soared by 16.4% from its low point in January, for an annualized gain of more than 49%.

As the realtors had hoped, the MSM ran with this bomb, spreading the word that the recession is probably over and real estate’s back on its way up – perhaps forever. This was exactly the message brokers and agents across the country wanted to hear, so they could relay the news to clients – sellers who could now hold firm (or raise) their asking prices, and buyers who’d be urged to jump in and pay whatever was necessary, to avoid being priced out of a home for the rest of their lives.

Trouble is, the release was tainted. Misleading. Devious. Unethical.

The downfall of average prices, which economist Klump well knows, is that they can provide a completely false snapshot of reality, mistaking market momentum for market advance. In CREA’s case, the May average house price was incredibly skewed by a burst of activity in three of the country’s more expensive markets. But even there, sales increased, while prices were still substantially below those of a year ago.

* In Edmonton, 2,161 properties changed hands last month, a big jump of 18.7%. But the averge price of $326,332 was down 4.2% from May of 2008.
* In Vancouver there were 3,569 sales, a surge of 16.4% from a year earlier, for an average price of $583,674. That was 6.6% less than a year earlier.
* And in Victoria, where 836 houses found buyers, this 14% jump in sales came even though average prices were down 6.2% from May of 2008.

That romp in sales activity in three markets with some of the highest prices in the country pushed up CREA’s total national dollar volume. So, when it was divided by total unit sales, it yielded an average of $319,575 – the highest price ever, and about half a percentage point greater than in May, 2008, even though prices in those three key cities were lower than last year by about 5%.

That is why the conclusion of CREA’s president, Dale Ripplinger of Regina, is so suspect. “Strengthening consumer confidence, low interest rates and improved affordability are drawing buyers to the housing market across Canada,” he said.

Well, er, not exactly Dale. Sales volumes actually dropped in these markets last month from May ’08 levels:
* Durham
* Halifax
* London
* Gatineau
* Quebec City
* St. Catharaines
* Newfoundland
* Sudbury
* Windsor
* Winnipeg

In Toronto, sales were basically flat from a year ago and prices were down .6%. But in Ottawa, home of the biggest-spending federal government in Canadian history, house sales jumped 4% and prices raced ahead 5.5%.

In fact, there were some places houses were just flying off the shelf. For example the market has gone to boil once again in places like Brampton and Milton in suburban Toronto, where first-time buyers are scrambling to get their hands on new houses with 1.5% down and fat, low-interest mortgages. It’s an eerie replay of the scene we saw in the same places 18 months ago, when 40-year amortizations were all the rage. Now that the Bank of Canada has manipulated rates down to an all-time low, affordability has actually increased – even with 35-year ams.

In this context, I came across this interesting comment from Canadian Housing Price Charts:

The Bank of Canada continued to keep its bank rate at 0.5% through the month of May 2009 and suggested it will keep rates low through to the end of June 2010. Welcome to a Soviet style managed economy where a Canadian Conservative government is rigging the interest rates and increasing the public debt by handing over the tax paying public’s money to failed businesses all with a straight face. I get it now, the Conservatives have become the Liberals. There are no conservatives, there is no fiscal responsibility by our governors. A failed government is bailing out failed businesses. That’s an expensive vote buying proposition. Meanwhile the low short term interest rate is refueling the real estate bubble nationwide. We all know what happened 1-2 years ago when the bubble blew up. It popped and prices plunged 16% in Vancouver, 18% in Calgary, 19% in Edmonton, 19% in Toronto, 9% in Ottawa and 3% in Montreal.

As you may imagine, the gulf is widening between what most Canadians think is happening to the economy, and actual developments. Cheerleading economists, self-dealing realtors and whoring media outlets have allowed the perception to spread that conditions (as CREA’s release stated), “have returned to pre-recession levels.”

This is false. There are record numbers of jobless, miles of shuttered factories, rising mortgage rates, catapulting energy costs, record household and mortgage debt levels and the obvious promise of higher taxes and much higher mortgage costs to come. This will not end well.

It might be in CREA’s own interests to misled the country. It is not in ours. Shame.