The inevitable

human nature1

Over the last three weeks I’ve tried to explain in reasonable terms why real estate is overvalued in Canada, and will correct. That should happen concurrently with interest rates rising. There is no doubt both will occur.

I have also published a number of emails from people asking for my opinion on their own housebuying aspirations and their unique circumstances. Now I will make a few final points.

Most people, it seems, migrate to this blog because they are homeless, rather than students of the economy or investors looking to build wealth. By ‘homeless,’ I mean they lust to own real estate (and usually rent nice digs) and were first attracted to me since I seemed to be an oracle foretelling a housing crash. Now some of them doubt my mystical powers (join my wife).

Hey, there are perfectly valid reasons for wanting to own a home, and the letters I’ve shared with you show how irresistible they can be. Many people equate real estate ownership with stability. They just wouldn’t consider having a kid without buying a house. Others fear renting, thinking they might be forced to move in a few years (even though most homeowners now move every 3.5 years). Some are convinced rent is wasted cash flow, even though paying the interest on a mortgage is equal. And others just have an overwhelming need to nest, to have a place they can paint chartreuse or nail plywood butterflies on the garage.

Can’t argue with that stuff. It’s in the genes.

But for those who buy because they believe it’s a smart financial move, a good investment, a wise use of capital or who swear housing is an essentially undervalued asset retaining the potential for large capital gains, well, get over it.

Here is my message:

There’s a rally going on with real estate at the moment, as there is on the TSX. In both instances, it’s a bear market event. This is a rare opportunity to get out, while there are enough fools around, desperate to get in.

To reiterate a couple of key reasons why this is so:

  • The current buoyant housing market is the artificial creation of central bankers who are pulling your strings. If interest rates were not suppressed, there would be a housing glut with few buyers and falling values. The policy makers took rates to the lowest point ever because they knew without an aphrodisiac, you would not get hot and bothered and expose your chequebook. It was crass and manipulative, but it obviously worked.
  • So, with a home-buying binge with rising prices and multiple offers having been stimulated in the middle of a recession, nobody should be under the illusion it will last. Interest rates will be rising because of many factors, including a massive need for capital by governments now with bottomless deficits to finance. As countries compete for capital, the price of it goes up. Add to that the inflationary aspects of public spending, rising energy prices and a recovering global economy over the next few years, and rates will likely double.
  • This dramatic increase in mortgage rates – from, say, 4% to 8% – impacts house prices, since a home is worth what someone can afford to pay for it. Today, at 4%, a $500,000 home might be ‘affordable’ since $450,000 in financing costs $2,300 a month. But if mortgage rates rise to 8%, then $2,300 a month finances only $300,000 – which suggests the market value of that home should be closer to $350,000.

This underscores a basic rule I have always held out as irrefutable: When the average family can no longer afford the average house, the market corrects.

There is no doubt interest rates will rise over the next few years, and substantially (this is worth reading). Buyers today have a far greater threat facing them than simply not being able to afford higher mortgage payments upon renewal. The real risk is declining valuations pushing them into negative equity and turning their emotional nests into wealth traps.

Finally, what about the argument that rising inflation – also inevitable in years of recovery – will lift real estate values as it did over the past 30 years?

Well, it’s bogus. Three decades ago, house prices were advancing from a low point when affordability was exceptionally high. Today real estate in major cities is at, or near, its historic peak. More importantly, in the Seventies and Eighties, the largest group in the population, the Boomers, were having families and setting off a real estate boom. Today those Boomers are on the verge of history’s greatest property dump.

Don’t know about you, but I see only one outcome. And it has claws.

94 comments ↓

#1 Nostradamus Jr's Analyst on 07.29.09 at 10:16 pm

Will the BOC keep it’s promise not to raise rates until next June?

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/

LAST CHANCE TO SELL BEFORE YOU’RE PRICED OUT FOREVER!!!

See, it works both ways.

#2 ca on 07.29.09 at 10:23 pm

Actually, it’s your mystical forecasting powers outside of housing that is more interesting.

#3 Naked Boomer on 07.29.09 at 10:46 pm

Naked Boomer (as you called us with that really scary pic you found somewhere Garth!) here – wanted to say we sold the house. Signed an accepted offer 2 days short of the house being on the market for a month, all subjects came off today/’Sold’ sign was attached to the real estate sign in the yard and papers were faxed to the lawyers for the close that takes place in a couple of weeks. The buyers are first time investers in real estate, the own their own home, wanted another as an investment. Asked if we’d stay as renters at 25% less than our mortgage – we said yes as we aren’t sure what’s next for us, but living in our beautifully fixed up and staged home at less money while someone else pays the taxes and upkeep works for now! We priced very aggressively and were fanatical about the staging and state of the home for every showing – it was a ton of work but it’s done and now we don’t have the threat of a mortgage that might never have been paid off hanging over our heads.

#4 Homeless on 07.29.09 at 10:54 pm

Garth,

The biggest question is by how much percentage real estate prices would correct. If real estate corrects only by 5 or 10% and interest rate doubles then any saving in home prices would be easily eaten up by increase in interest rate. Your example shows a drop of 30%. Other question is would there be any impact on small homes in 300-400K range in GTA or would it be only for big homes.
Don’t you think provincial taxes on new homes would even drive prices higher as people would be desperate to close before July 2010 when new tax kicks in.

#5 joseph K on 07.29.09 at 10:55 pm

You are correct that the RE and Equities rallies are bear market events, and major downturns will follow! Too bad you don’t get it on Anthropogenic Climate Change theory like this Aussie scientist does!

http://www.vancouversun.com/news/Global+warming+religion+First+World+urban+elites/1835847/story.html

#6 Mark on 07.29.09 at 11:05 pm

You know i’ve not lived in canada long – 3 years.

But it seems to me people here are so obsessed with owning property that i’d be surprised to ever see it go down.

Personally i have no interest in owning – i never live anywhere long enough to make it worth my while. I come to this blog as i’m just interested in the whole market. But local people i know/work with/etc seem to “feel sorry” for me for not owning, that somehow i’m missing out – or maybe i cant afford it.. becuause why on EARTH would someone NOT buy?

I’m happily well off, i’m 33, have over $100k in savings/investments (not as much as i’d like), no debts. I earn 95k a year. Single (need to work on that), etc etc..

I have no need to buy a property.. but my friends treat me like a leper because of it.

Absolute craziness! And i think this attitude will keep people buying until the banks tell them “no chance”. The problem is, our economy (like america/uk before us) is now so tied to house prices, i’m sure the powers that be will do EVERYTHING they can to stop it happening.

I *AM* concerned about the economy though (one of the reasons i follow this blog). When (not if) a bust happens, ours will happen when america and the rest of the world will be getting over theirs… What happens then?

#7 wayupnorth on 07.29.09 at 11:12 pm

I read the link in TAE last night and the key line is that your house is only worth what someone else (greater fool) is willing to pay for it.

What I wrote in the last post in jest is very real in this town. Every house under $300,000 is selling quickly unless it is junk while those over are sitting for years. While the house down the street asking 3/4 of a mill. is beautiful and a dream house, less than 5% of the FAMILIES here can trully afford it. I doubt if any individual could buy it on their own unless they already have that much cash and there are even more incredable houses available then that one.

Two very important things everyone seems to be forgetting here is that almost every mortgage written over the last 10 years or so is ultimately backed by your taxes and the banks have no liability unless prices drop more than 20%. Secondly, unless you ask otherwise, banks calculate how much mortgage you can afford based on TWO incomes which is why everyone qualifies for more than $400,000. If you look back through man’s history then you will find it hard to find any time that families had TWO average or better incomes. If you read any of hundreds of good American sites (not MSM) you will have read that it is unlikely for at least a generation that our economy will ever produce even one good paying job per family unless protectionism takes over and every developed country rebuilds their manufacturing base for necessary goods and their agriculture.

If you don’t believe what is happening then good luck with your new home and I hope our government sticks to it’s guns and keeps interest rates at zero despite the fact that the U.S. is about to start raising theirs because the world has run out of money to lend for free.

#8 hal smith on 07.29.09 at 11:16 pm

And now, the other side of the real estate argument:
The bubble will not be allowed to pop. The government cannot allow it because if it pops, we have no economy, no wealth, no retirement, no government revenue, and maybe no country either. They will do everything in their power to keep it inflated, if they let it pop, everything collapses.They will lie, cheat, steal, spin, trick you, manipulate you, give you free money, and do whatever it takes to keep you ignorant and the bubble inflated. Interest rates will be kept low forever if possible but if they do happen to rise or if you do happen to lose your job they have a plan for that too. I’m not really supposed to be talking about this but the federal government in Ottawa is set to unveil a new program to keep the bubble inflated. It’s called the Home Owner’s Relief Program, or HORP, and it is for distressed home owners. This program is backed by CMHC and is as solid as the Canadian Shield. It will allow distressed homeowners who can’t make their mortgage payments to defer or skip them and tack them on to the back end of the principal of the mortgage by raising the amortization period from say 35 years to 50 years. This is currently being reviewed by actuaries and the 50 year amortization may be raised to 60 or 65 years due to longer life expectancy in the future. So if you lose your job or interest rates go up or if your crop doesn’t come in on time (esp. in B.C.),HORP will allow you to just skip a few payments and pay later. No pressure, you’re never going to pay it off anyways. So you can “HORP” your mortgage payments over a longer period of time and protect the rising equity in your home as well. But wait, there’s more, and this is the brilliant part. As an added bonus to this rock solid program, it will cause the Loonie to crash. Thru the frippin floor baby. And that’s a good thing because who needs a high dollar ? The Loon will crash to about fitty cents and Canada will be competitive again. The economy will catch fire and we will all be employed again, cuttin’ stuff down and diggin’ stuff up and shipping all over the world. We will even have a labor shortage and we will need more immigrants and more housing for the immigrants and they will stand in line with sharp knives and cut the num nums off each other in the lineup to overbid for your million dollar bungalow which will be a 2 million dollar bungalow when all the bids are in. And since you are now ” in the loop” you can short the loonie and make a killing there as well . These guys are Economists man, and they know stuff, and they are just not gonna let this thing pop. So don’t miss this opportunity people. Borrow as much as you can and buy as fast as you can and start building your equity now. The recession is over and the train is leaving the station and if you are not on it you will be left behind. It’s a once in a lifetime opportunity and your government will not allow this bubble to pop. Hop on baby, you know you want to. All abbooaarrd…! :)

#9 Eduardo on 07.29.09 at 11:22 pm

http://www.zerohedge.com/sites/default/files/The%20End%20Of%20The%20End%20Of%20The%20Recession.pdf

#10 AndyE on 07.29.09 at 11:39 pm

A comment on my recent experience and how it relates to the recent market run up.

It takes a large amount of time and energy to prepare a home for sale, list the home, keep it clean, leave the home for showings, find a place to rent, book movers, move, change addresses, etc. It is requires a leap of faith if you are doing it because you believe prices will decline despite the fact that they are going up. And it is also challenging to make the decision if keeping your 1.55% var mortgage rolling along puts 3/4 of your payment to principal. I know these things because I’m in the middle of doing all this right now.

I wouldn’t be able to do what I’m doing without the support of my wife. Without support my friend took his home off the market in June. His wife couldn’t handle the stress of the showings, the uncertainty. To be fair she has to young children.

I’ve had a perfect storm of support, conviction, opportunity provided by a mini bubble, equity (unlike low down Calgary buyers since 2007) and researched information to push me to make this significant change. Few if any of the folks around me have more then one or two of the above. So noone is selling – yet.

Contrast this to my buying experience three years ago during the market peak. I researched on MLS for a week or two and was preapproved for a mortgage in the meantime. I looked at four homes in 2 days. On the second day I placed an offer and the bid was accepted. Voila new home owner.

There is a lot of talk on this blog about how easy it is to purchase a home. The flip side is how difficult it is to sell to rent when home prices are rising, you are in negative equity, and you don’t have your spouses support. This I feel is the reason so few listings are being added lending support to the run up.

Best of luck to everyone.

Andy

#11 nonplused on 07.29.09 at 11:49 pm

I for one think that home prices will in general always rise…. At about the rate of inflation. But when you have 20%, 30%, and 15% in 3 consecutive years when inflation is in the 2 – 4 % range, you have a bubble, and all bubbles pop.

The market will mean revert. It’s not a matter of if. Only when. Unless someone out there is forecasting 20%. 30%, and 15% rises in wages over the next 3 years. It’s all math. If the workers aren’t earning it, they can’t spend it, and sooner or later all prices revert to what people can afford.

#12 Munch on 07.30.09 at 12:43 am

Brilliant, Garth, Brilliant!

#13 Bobby G on 07.30.09 at 12:53 am

More and more are saying this recession is over
This is when the retail investors are getting “back in”
Always the last to play the ponzi
About the time leaves start to fall so will everything else
Fascinating to watch isn’t it

#14 Steve on 07.30.09 at 1:09 am

I admit it Garth, I don’t understand why people want a house. Didn’t any of them have to mow their parents lawns growing up? I did, and that taught me that a home is a lot of work, above and beyond what I’d have time and interest in doing.

#15 shouldIsaysomething on 07.30.09 at 1:34 am

Dear Garth;

I have been following your blog for quite a while. Tonight I feel I have to say something.

I came back to Victoria to visit my parents. One of my friends also their friend came to see me. Over the conversation, she told me she was going to close the purchase of her first house.

It is 960 sqf house on a 6000 sqf lot. The house was built in 1942. Sales price is $350K. They put 90K and borrowed $250K. The mortgage is $1200. Not a very desirable neighborhood.

I felt sorry for them. They are honest and hardworking people. They immigrated to Canada about 7 years ago. Right now I think their household income is about $50K to 70K (both work).

My husband has over 30 years real estate investment experience, CPA and attorney too. When I told him on the phone, he offered to talk to them and see if he could convince them not to close even if it means they would lose their earnest money.

In our culture, it is not advisable to “pour cold water(discouragement) into a fire (desire)”. But we would not feel good about ourselves if we don’t offer some information, especially my husband is an expert on real estate and economy in general.

But nothing can be changed. Buying a house is such an emotional thing.

She admitted the house is not even worth of 10% of the sale price. My husband told her that rule of thumb is if it is the lot you are buying, you should count on that the combined value of a new house and the lot would be 5 times of the lot. Even now, it can be 3 or 4 times, which means the new house needs to sell for 900k to 1.2M in order to justify the lot price. He asked her if the neighborhood supports the pricing. Obviously not.

They just want a house. BTW, the house needs a new roof.

Before the purchase, they rent a three-bedroom apartment (1000 sqf) for $900 and have 90K in their pocket.

After the purchase, they “own” a three-bedroom HOUSE (960 sqf) with 250K debt and $1200 payment, $2000 property tax, $700 insurance.

Their argument is that if they don’t buy it, they will miss out the opportunity. Other people will grab it in a second.

Garth, I tried, we tried, being a friend who offered the infomation we think we know.

Good luck, that was how we ended the conversation.

Did we do the right thing? I still feel bad that I couldn’t offer a sincere congratulations on their first house.

#16 shouldIsaysomething on 07.30.09 at 1:43 am

Here are a few points my husband mentioned:

1. Right now the interest rate on their mortgage is 3.75% fixed for five years. My husband said after five years, it can be easily doubled and he is pretty sure it would be the case. Not only their payment will go up, when interest rate goes up, their property value will go down.

2. Real estate crash goes in wave. He said in 1985 the recession hit Texas first and East coast, and …., it took six years to hit Hawaii. So his argument was that it would hit Canada for sure. He argued that US econmy is going down further, really bad shape and the worst is yet to come. It is impossible that it will not affect Canada.

3. When the bubble in China bursts, the wave will hit back to US and Canada even more.

4. The stimulus plan is not working. What it does is to reinflate the bubble.

#17 Munch on 07.30.09 at 3:43 am

Laugh for the Day:

“I was in the pub yesterday when I suddenly realized I desperately needed to fart. The music was really, really loud so I timed my farts with the beat.

After a couple of songs, I started to feel better. I finished my pint and noticed that everybody was staring at me.

Then I suddenly remembered that I was listening to my iPod.”

#18 Simon on 07.30.09 at 5:56 am

Bottom line: No matter what positive spin the RE pumpers continue this will end worse than we thought.

In conversation a few days ago a mortgage broker friend was telling me that the 35 year am with 5 or less % down is the most popular combo in Ontario is this current RE frenzy. That tells me that people a not forward thinking at all.

At 5% or less for 35 years means a pile of interest with a very slow growth in equity. If RE values drop or interest rate rise or both these buyer are screwed, if they went in for the 35yr 5 or less just because they feel they can just about afford it at these low mortgage rates.

This is not new news… this has all be said before right here….

#19 Nick on 07.30.09 at 6:07 am

Please keep up the great work Garth!
I’m one of those people on your blog interested in wealth building and the economy and your blog and the news sites you link to are a great help to me.

I’m constantly surprised at the number of people that don’t have a basic grasp of what is going on around them. To me it would feel like I was flying blind!
It also makes it very lonely when you want to talk to somone about investing, economics and the current mess that is unfolding.
Most peoples eyes glaze over, tune you out and start thinking about soft fluffy puppies when I mention this stuff or your name.
I’ll have to make do with my fellow blog dogs and investment advisor.

Cheers!

Nick

#20 Mike (Authentic) on 07.30.09 at 6:14 am

Geat points Garth, I can’t fault you on a one.

Garth said: “Most people, it seems, migrate to this blog because…”

I’m in the investors looking to build wealth camp. I see a home as an investment because you have to sell it one day, and that “day” you want to make some positive return on your money. But like any investment there is a time to buy and sell and you need to know what and where to buy as well. It’s not as simple as “buy a house = make money”. Garth is 100% right, the timing to buy a house for investment is NOT now.

But I’m a renter as well after selling our house in Calgary. I rent a furnish detached 4bd house in London, UK now for $5,500 a month, no garage. But we stay very much in touch with Canadian (and Calgary) RE because we will move back and rent (or buy if the time is right). Think houses, taxes and the cost of living is high anywhere in Canada? Come to the UK or even Norway (where $32 CDN will buy you a cheap burger and fries (as of last week)!).

Mike

#21 somecatchphrase on 07.30.09 at 7:05 am

Anyone contemplating a real estate purchase should first take a vacation in Las Vegas, Phoenix, or Miami. Rent a car, drive around, enjoy the weather, and, maybe convince your significant other that a real estate purchase just might be a financial disaster. Seeing the devastation up close and personal will hopefully have more of an effect than all the rational exhortation in the world.

Just in case you haven’t heard, Canada’s economy is essentially a satellite of the US. Canada needs to expand overseas trade, ASAP. We are far too reliant on the US. I hope this doesn’t offend anyone’s national pride. This is just a fact.

Be grateful for the lessons to be learned from the recent buoyancy in housing. We all get to witness firsthand what the top of a bubble looks like and feels like on a day-by-day basis. Everybody “knows” that real estate is the “best” investment. Google the terms “cognitive dissonance” for more information. The popping of a RE bubble will be a slow motion event compared to the popping of a bubble in the equity markets.

#22 somecatchphrase on 07.30.09 at 7:17 am

#8 hal smith -

Great post. Scary stuff. You got me thinking about gold coins again. Hopefully the bond vigilantes will make this unnecessary.

#23 Bill-Muskoka (NAM) on 07.30.09 at 7:53 am

Speaking of claws (aka, clawbacks) stand by for another psuedo tax break that is NOT yet reality.

Reno tax credit pushed by PM, but not law yet

How Harperest of our Fearless Leader. All the millions that are being ingested into the economy, but there is not yet any LAW to support this scam? Reminds me of the Green Rebate on vehicles of two years ago that was cancelled because it was going to cost the coffers too much. Hey, we need American made weapons systems so Steve can have more photo-ops and play G.I. Joe.

#24 Cheque Mate on 07.30.09 at 8:42 am

The most surprising thing (to me anyways) about Bernanke’s selling of all of his Canadian bonds is….that the Fed Head can control his own personal investments. A man who can move World Financial Markets with a twitch of his whisker still has control of his own investments.

I guess nobody else sees a possible problem here.

#25 Mike B formerly just Mike on 07.30.09 at 8:43 am

There is no question Canadian Real Estate is ridiculous even if you argue the “world stage” theory. We are cheaper than any other world class cities blah blah.
The problem with predicting is that we do not live in a vacuum . If nothing changes at all then we can easily predict the future. Sadly we all know that our governments and central bank will intervene when they see fit to change the playing field . If interest rates go up there should be a freeze of the moronic housing market. But if they only go up slightly that might not have the desired effect we all desire for RE prices. It is very hard to predict where things will be as outside and inside forces impact the outcome. As GT has pointed out several times, those who are predicting hyper inflation should be aware that the government simply will not let that happen. To a certain extent the same can be said for housing here in Canada. Sadly and regrettably I see no monumental drop in prices in general except perhaps in the very top end …say 750k plus. The midrange stuff may only see a 5-10% drop and that would be heavily dependent upon the area.
Now if there is a cataclysmic financial disaster then all bets are off. But as others have pointed out… the powers that be will simply not sit idle and will prop up or bail out or stimulate the sh$#t so it is farther down the street and under someone else’s watch.

#26 Devil's Advocate on 07.30.09 at 8:53 am

A typical $430,000 home financed 100% at an interest rate of 4.5% over 25 years costs the buyer just under $2,400.00 per month in mortgage payments. Raise the interest rate to 8.5% and to maintain those same monthly payments would require that buyer be able to buy that same house for $296,500 or a 30% less than it is today.

The economic fundamentals present today dictate that interest rates are bound to rise and soon they must. Of course our government could intervene with some radical policy to postpone such an inevitable rise in rates, but that is unlikely as controlling interest rates is not so much in a national monetary tool as it is a consequence of the international economic climate. Eventually domestic interest rates succumb to the international market supply and demand of and for money. This is, after all, more a global economy than ever before.

What many do not seem to grasp is that a government doesn’t just print money, they ultimately borrow each of those newly minted dollars through the issuance of bonds. Bonds are government debt and ultimately it is your debt as the government is borrowing on your behalf. Bonds are really nothing more than the promissory note of the borrowing country.

So we have all these countries borrowing money through the issuance of bonds. Yes even China is borrowing to finance their phenomenal growth of late. There is simply not enough money in the world to meet the current demand. What happens when demand exceeds supply? Well, just as we have seen in the housing market, prices rise and so too will the world interest rate market. In order for our government to borrow it will have to pay the world interest rate for if it did not no one would buy our bonds (our promissory notes) as they could find others who were willing to pay more.

Why are interest rates so low in Canada today? Because our domestic interest rates are largely a consequence of the global money markets. The U.S. has been combating the most severe recession/depression since 1929. Until recently their most effective tool in their arsenal was interest rates; lower interest rates to promote consumer spending. That tool is gone as interest rates can not go lower. Now, their only tool is to borrow the money consumers are not spending and spend it themselves (fiscal policy).

Fundamentally economics is really quite simple; it’s all about supply and demand. Increased demand for money results in increased interest rates. In these times of recession when it is thought we need to spend our way back to prosperity, if you don’t do your part and borrow in order to spend your government will do it for you latter passing the bill along to you in the form of higher taxes.

Understand?

Obviously two things, which Garth has been warning of for some time now, are likely to happen in the not too distant future; rising interest rates and rising taxes.

#27 POL-CAN on 07.30.09 at 9:14 am

Time for some play with numbers using a calculator I built.

Using your excample of a 500 K home, 25 year amort at a constant rate of 4 % (we can dream right?), and a down payment of 10 %

Purchase Price of Home 500000.00 4 25

Downpayment (10 %) 50000.00

Land Transfer Taxes 12200.00
Toronto 5725.00
Ontario 6475.00

Lawyer Fees 1200.00
CMHC fees 10000.00

Mortgage amount 473400.00

Minimal Monthly Payment 2498.78
Monthly Payment topup 0.00
Possible rent income 0.00
Real Montly Payment 2498.78

Bi-Weekly Payment 1153.28
Weekly Payment 576.64

So… 2500 per month looks pretty good eh?

What about property taxes, maintanace, insurance, utilities (gas, water, electricity), other bills (cable, sat, phone, etc.)? Assume a minimum of 600 per month although they are probably closer to 900.

And here is the scary part. By the time the mortgage is paid off in 25 years, here is what was spent just on the principal and interest:

Total Mortgage Cost 749,633.88

Total Interest Paid 276,233.88

So your 500 K house cost you 3/4 of a mil over 25 years and you donated a 1/3 of that to your bankster.

By the way, that interest you paid to the bank would have paid for 110 months rent on a 2400 per month place.

And all the above was based on the 4 % interest staying constant for the entire 25 year term. Not gonna happen….

#28 Mathew Gibson on 07.30.09 at 9:15 am

Just to help you understand the profile of your readers …

I am one of those who gravitated to this (and many other) well-written blogs in order to understand more about economics, or at least the economy (there, first lesson learned, they are different things).

The upheaval of last September helped me to realise that I need to manage finances better and to understand the forces at work in the economy.

I had long eschewed real estate, believing that it was overvalued, without really knowing why, except that in my parent’s day a single income could buy a house and now two incomes barely could: ergo, there was a bubble at play, and a correction was inevitable. I and I knew I was in no position to be in a bidding war against boomers with all their equity and higher incomes. In 10-15 years, they would all be wanting to unload their presumed-investments at the same time and the market would deflate back to normal.

As a public servant with a wife and child to support I obviously cannot afford real estate (43k pre-tax doesn’t stretch much past low-rent and food) but circumstance may change in the future and I need to prepared this time. Not necessarily to buy real estate, however.

One of the things I have really understood from your blog is the importance of calculating the real cost of things. For example, my wife has applied for an exchange program to another country. It would not have occured to me before that the smart thing would be to sell sell our (reliable) vehicle and invest the money, rather than keep it. Now, it seems obvious: the money will appreciate, rather than have the car sitting depreciating and attracting licencing fees.

So, I many never buy a house (well, until we inherit our various war-baby-parents’ inheritances) but I have gained a solid understanding of a few financial fundamentals and of the importance of separating emotion from economic value.

Oh, and your writing style has been a hoot.

Many thanks.

#29 X on 07.30.09 at 9:19 am

Garth any thoughts, comments on the HORP mentioned by #8 Hal Smith.

In a manipulative way it kinda makes sense in theory. However, why would the gov’t go to that extent when they semi recently banned the 0/40 mortgage. Really, what would be the difference besides the timing of it.

Sometimes the best intervention is no intervention. The market (RE/stock) generally takes care of itself.

So home prices may go down 10-15%….big deal…the main thing for the gov’t to do would be to reassure the consumer that it is a correction, and not a crash…

#30 Samantha on 07.30.09 at 9:28 am

In 1980 the rates increased by almost 3 full points in one quarter (Jan – Apr). But, the rates were fluctuating back and forth throughout the year.

That was just the warm up. The major fireworks in interest rates ignited in 1981 and 1982.

Rates did come down. Eventually. It took 14 years for rates to reach 5.20%. Even then, rates still fluctuated, but not to the levels of the early 1980’s.

We are facing far worse economic conditions, nationally and globally, than anything that existed back in that era. So, how can anyone believe that interest rates are not able to reach these same levels?

The figures used above are from the Bank of Canada “Chartered Bank Administered Interest Rates”. The chart ranges from 1980 to 2008 inclusive. Here’s the link:

http://www.bank-banque-canada.ca/pdf/annual_page52.pdf

The general link for Bank of Canada rates and statistics:

http://www.bank-banque-canada.ca/en/rates/sel_hist.html

#31 POL-CAN on 07.30.09 at 9:29 am

#26 Devil’s Advocate

To add to your excellent post.

From KD last night:

US 5yr Bond Auction Effectively FAILS

That’s right, FAILS.

No, you didn’t hear it reported this way and won’t, but that’s the math.

http://market-ticker.org/archives/1267-US-5yr-Bond-Auction-Effectively-FAILS.html

Mortgage rates are tied to the bond market. Due to QE (printing/dilution) the foreign buyers are demanding a higher yield for the risk and hence rates are going up. We saw that .6 % jump in mortgage rates a few weeks ago and might get another one this week.

The FED and BoC will have to raise the rates at some point to protect the dollar but this could be a while yet. In the mean time the bond market is demanding higher risk premiums and hence the mortgage rates will rise despite the FED/BoC.

#32 Devil's Advocate on 07.30.09 at 9:41 am

#25 Mike B formerly just Mike on 07.30.09 at 8:43 am said “Sadly and regrettably I see no monumental drop in prices in general except perhaps in the very top end …say 750k plus. The midrange stuff may only see a 5-10% drop and that would be heavily dependent upon the area.”

Not necessarily so. The problem is that the midrange stuff is that which is most leveraged. First time buyers have been buying at historically low interest rates with little or nothing down. FTBs typically have not been around long enough to become established. Nor have most FTBs been around long enough to remember failing markets and rising interest rates. Those two probabilities do not factor so much into their house purchase decisions. FTBs want it all, as much as they can possibly get their hands on; they buy not starter homes but that “midrange stuff”. It is the “midrange stuff” owners/buyers who are most vulnerable to economic faltering.

Should the markets succumb to such mechanics as Garth predicts, as they most probably will, it will be the “midrange stuff” which gets hit first and hardest. The shock waves then permeate the rest of the market but not to such a significant degree as the higher end is owned, typically, by those who have stronger net worth, more relative equity in their home, and are able to better withstand economic strife. Most of these property owners have been at it for some time and realized significant easy gains in equity growth the loss of which is not so much a capital loss as equity loss. An equity loss is generally a lot more palatable than the harsh reality of a capital loss. At the very low end the potential losses are mitigated by the lesser exposure, relatively speaking as hurtful to be sure but typically more easily recouped.

Much of the higher end stuff is being sold today by those who understand what is happening. They are selling those McMansions for McMillions and downsizing to something closer (closer but still at the top end) to that “midrange stuff” with cash and no mortgage thus crystallizing their newfound equity of late transposing it into a free and clear title “midrange stuff” home. At the other end you have FTBs entering the market pushing the other end of that “midrange stuff” market. FTBs have access to low cost money and are buying, generally, beyond their means if not at the top of their means. This is the phenomena of the market today during this time of transition as evidenced by the fact that it is the “midrange stuff” which is selling and it is that occurrence, today, which likely leads you to believe that the “midrange stuff” is relatively immune. But that will not last. It is the “midrange stuff” you speak of which is most susceptible to rising interest rates, rising taxes and rising unemployment. As demonstrated in my previous post a doubling of interest rates could arguably result in a fall in “midrange stuff” house prices by 30% not accounting for the additional burden of higher taxes and increased unemployment impact.

#33 X on 07.30.09 at 9:43 am

Ontario HST info:

http://www.kpmg.ca/en/services/tax/tnf/tnfc0920.html

#34 JoJo on 07.30.09 at 9:50 am

Hello Garth!
Where is your housing bust in Toronto Area?

Statistics:

1996.– 55,779 sales, avg. price $198,150
1997.– 58,014 sales, avg. price $211,307
1998.– 55,344 sales, avg. price $216,815
1999.– 58,957 sales, avg. price $228,372
2000.– 58,343 sales, avg. price $243,255
2001.– 67,612 sales, avg. price $251,508
2002.– 74,759 sales, avg. price $275,231
2003.– 78,898 sales, avg. price $293,067
2004.– 83,501 sales, avg. price $315,231
2005.– 84,145 sales, avg. price $335,907
2006.– 83,084 sales, avg. price $351,941
2007.– 93,193 sales, avg. price $376,236
2008.– 74,552 sales, avg. price $379,347
2009. Year-to-Date*June/09*– 40,939 sales,
avg. price *June/09* $403,972

Well, we’ll wait more than 10 years for detach new house in Oakville for less than 300K? Or maybe every house will be more than 1 Mil.? Did you learn from history INFLATE or DIE….
However Bank of Canada reported that low interest will be till June/2010 so will wait maybe in 2012.
Yep, will get lower price 10% in 2012 but than interest rate will be 8%. And, again you should pay even higher mortgage monthly payment than now.
Welcome to Canada…

The numbers prove the inevitability of a correction since family income lags asset values, despite the decreased cost of capital. — Garth

#35 jwk (nee jwkimba) on 07.30.09 at 9:59 am

#8, yes the government won’t allow a hard collapse, but they will allow a soft collapse. It all depends on how the MSM spins it. If prices stay the same in nominal terms for years, they effectivly drop in real terms. That would be a soft collapse of sorts.

My issue with the whole ‘government won’t let it happen’ is the banks. The banks like to make 7% return. They like consistency. They like reliability. They like it nice and even. But most of all, they want their money!

Do buyers think they got a great deal with the 5yrs at 3.x%? Well guess what, you NEVER WIN against the banks in Canada. They are like the house in Vegas. they WILL get their profits. You WILL pay for that 3.x% mortgage later. Remember: They know where you live!

For that reason alone, interest rates will go up not just to historical norms, but a little higher to make up for the lost revenue….

#36 Nostradamus jr. on 07.30.09 at 10:00 am

Simple really…to those unhappy renters in Vancouver, please move to the East Coast….and be careful please, don’t fall off the edge.

#37 smw on 07.30.09 at 10:04 am

Our RESPONSIBLE Austrialian cousins. India/China and Austrialia/New Zealand all worrying about inflation.

http://www.forbes.com/feeds/afx/2009/07/28/afx6706761.html

http://www.bloomberg.com/apps/news?pid=20601080&sid=avEqdJ73iCL4

http://www.bloomberg.com/apps/news?pid=20601091&sid=aW5tpepdszSA

Do you buy the 10 year USA treasuries at 3.75% or the Autrailia 10 year at 5.5%?

When USA is forced to push rates up, so will we.

We might have a little wiggle room to hold back rates in hopes of protecting our cheap exports but not very much.

#38 View from the south on 07.30.09 at 10:05 am

Remember a house is only “worth” what someone is willing to pay. Case in point, I drive by this one quite often. It’s been listed for months.
Asking price $379k, waterfront.
http://www.realtor.ca/propertyDetails.aspx?propertyId=8323830
How about this one, walk to a golf course $369k
http://www.realtor.ca/propertyDetails.aspx?propertyId=8517780
It completely amazes me how a crammed in home in T.O. or Van sells for 3 or 4 times either of these. Anyone that put’s themselves so deep in debt for some drywall, shingles and a square of grass needs to be culled from the herd.
Windsor always seems to be first into a recession and first out. Well it’s not getting any better down here. If you want to see whats coming to a neighbourhood near you…come down and see me sometime.

#39 Flota on 07.30.09 at 10:18 am

When people throw towels, that is when market makes a turn. In real estate as oppose to stock market trends take a long time to form. Bottom line, it is very lonely to be calling trend reversals at the top and the bottom.

As the Buddists practice. Patience and Meditation is the key.

#40 john m on 07.30.09 at 10:20 am

Great post Garth…the crash is coming its only a matter of time.The huge government bailouts gave us a few months of a false economy and a false sense of security and the money is being rapidly gobbled up as unemployment rises. A terrible waste of tax dollars for generations to come. There has to be a correction..a shattered economy does not rebuild from the top…things have to bottom out and rebuild to meet smaller demands competitively. I wonder this winter how long those huge factories working at 1/4 capacity can remain competitive with their utility bills alone? IMO the correction is coming and getting closer daily and anyone who thinks the government can continue to buy our way out of this one is dreaming.

#41 Devil's Advocate on 07.30.09 at 10:23 am

Additionally for example, the median price of those waterfront homes sold in Kelowna in the year 2000 was a $500,000. Today the median price of a waterfront homes sold in Kelowna is $1,400,000 and last year it was $2,200,000. Understand however that $5,000,000 homes are still selling here, just not as many driving down the “sales” median in that market but not necessarily the real values so much. Yes those high end properties have seen significant erosion in prices but they too saw a four times increase in prices during the economic good times between 2000 and 2008 where the “midrange stuff” in Kelowna saw only a two fold increase during that time. That “midrange stuff” is selling in relative greater quantity today almost matching those volumes at the peak of the market volumes in 2007 followed by peak market prices in 2008. This too might lead one to believe the “midrange stuff” is relatively immune. Market fundamentals of late have been such that all is not equal and the apparent stability of that “midrange stuff” is nothing more than the consequence of a real demand for it as we all need shelter but it need not be high end. Yet those who can afford high end typically have the relatively vast resources to be able to afford it and thus it is a more stable market in reality as they have the relative resources and equity gains to weather the financial storms. But the recent buyers of “midrange stuff” are typically leveraged higher, have less equity and fewer financial resources.

While the “midrange stuff” has not seen a median price decline such as the “high end stuff” has of late it is more susceptible to real capital loss as a.) it is typically higher leveraged and b.) it did not enjoy the rampant equity gains that the high end did which are more palatable losses when incurred.

Make sense?

#42 Dan in Victoria on 07.30.09 at 10:25 am

That is an excellent link Garth, a picture is worth a thousand words(the see saw).Here’s another bit from Charles,about the current stock market.I enjoy reading him he gets you thinking. http://www.oftwominds.com/blogjuly09/speculation07-09.html Also about the “recovery” http://www.oftwominds.com/blogjuly09/MIA07-09.html I like number 12 just substitute our batch of current morons.

#43 The Gonz on 07.30.09 at 10:41 am

Garth,

I find that you place too much importance on rising interest rates as the trigger for a decline in house prices. I think there is another important variable that has distorted the market and that will continue to bias the market for who knows how long.

CMHC insures banks on advanced mortgages. Because banks know they will not lose money they lend much, much more than they would in an efficient market.

The price of a house is a function of supply and demand, and as long as demand is supported by affordability (ie, low interest rates) and high risk tolerance from financial institutions (backstopped by CHMC) high prices should continue. If one variable (interest rates) change but the other one continues, demand may be corrected just partially.

I would like to ask you to explore and comment more on the topic of CMHC and especially if you see and end to this irresponsible practice.

I personally cannot see how high leverage mortgage insurance can stop, since the spiral CMHC is a crown corporation and I see no motivation from politicians in setting the economy to a realistic level.

Thanks,
The Gonz

Good point. Covered here earlier this month. — Garth

#44 Devil's Advocate on 07.30.09 at 10:44 am

One last thing before I head off to sell some more dirt… while I can. Few understand and appreciate just how close we came to financial Armageddon in the fall of 2008. The US really did pull off an amazing feat and a most necessary one at that. “Quantitative easing” was the right course of action although it turned into something more akin to “maintain Growth with a capital “G” at all costs”. And there will be a cost all-be-it hopefully not so great as the cost which that looming financial Armageddon of 2008 threatened.

Really, too few understand just how fragile our global economy is right now. Too few understand how close we were to the brink of global financial desaster. “Quantitative easing” or more aptly phrased as the intent of letting air, slowly, out of the bubble has turned into effort to further inflate that bubble by spending our way out of the recession.

Unfortunately the crisis averted has only been postponed I fear.

#45 jussupow on 07.30.09 at 10:46 am

Aaaargh,

#26 Do you really think that one is oblivious to the money markets machinations when that someone makes a statement about printing money? Treasury issues those bonds and the only buyer is the fed. How is that not just simply printing money? Yes, it must be paid back on maturity. Hmm what would they do what would they do? Let me take a crack at it. (holding my breath) print more money, rinse, repeat. Classical ponzi scheme and the definition of “quantitative easing”. Next step – stock market machinations (are we there yet?). Buy equities boost the prices. Bernake in his groundbreaking (groan) work outlined all this in 2002. ppl know all this. what seems quite puzzling to me is the naivety. After all that is going on (anyone remember the idyllic earlier days when oh so many were so concern about the “moral hazard”? anyone?) we still dream up some quasiframeworks, some imaginary intelligent boundaries some final frontiers which our ruling will not go beyond. Who is to say this or that government won’t get fed up with this thinly obfuscated ponzi game and just remove all the stops and literally print money a-la Zimbabwe, or the soviet republics in the older days? Aah but they can’t! That will introduce a fatal… what? moral hazard? The naivety is bliss. And btw the government is doing(will do) all this not because of some ridiculous conspiracy theory or something. That is a pragmatic reaction to the situation at hand and because they do not (or are scare enough to do) any better (i call it obama razor). And “they” are literally a very small group of ppl easily adaptable but unfortunately hopelessly indoctrinated.

The low interest rates are here to stay. google japan on this -15 years under 1% and no end. All this Garth rationalization… honest attempt(I guess) but falls far short.

Learn something about economics. This is not Japan. — Garth

#46 613 Happy where I am on 07.30.09 at 11:06 am

Garth said “Most people, it seems, migrate to this blog because they are homeless, rather than students of the economy or investors looking to build wealth.”

I own my little townhouse in downtown Ottawa so I am not homeless but I have a degree in Economics so am very much a student of the economy.

What amazes me is the lack of financial literacy which exists in Canada. It is very hard to explain to young people who have the housing lust to wait a few years and then the market will correct itself… Even now, friends of mine who own mcmansions out in the burbs are finding that the market has softened and cooled down. They are still able to sell but it takes longer.

What will happen when the deluge starts… Us baby boomers won’t be around forever (contrary to popular belief) and will eventually begin forfeiting our hold on the real estate market.

That is one of the evergrowing list of scenarios which could topple this house of cards we call the real estate market. Other scenarios include another oil crisis, rising interest rates, rising unemployment, lacklustre recovery from this recession, etc. We have a perfect storm brewing and we all sit around and daydream about granite countertops and stainless steel appliances.

For me, housing has always been a roof over my head. I have never equated it with status or wealth. We bought the townhouse because we needed a place to live and we chose downtown because neither one of us drives so it made sense. It bores me silly when I have to listen to people talk about their houses, the square footage, the deal they made, etc.

I come on this blog because it is entertaining to watch people trip over themselves to try to gain the upper hand in a market which has long ago lost all sanity. It is in dire need of correction and will correct itself eventually. And we on this blog have front row seats thanks to Garth…

If you are a young person, get yourselves into a financial literacy course and learn a few things about money and the markets before you decide to head into a major decision which will tie up your finances for years to come.

#47 PTDBD on 07.30.09 at 11:22 am

@jusspow – good summary.

Obviously your vision is not obscured yet by the paperprestidigitizer smoke. (Garth is woefully wrong at times…look how he backed Dion) ;-) going forward :-)

#48 Lathnplaster on 07.30.09 at 11:50 am

If all countries are fighting the ‘good’ fight and keeping interest rates down to battle the slump, I would think some country will blink (in order to promote investment cash flow). If that happens, IMO, it will be every country for it’s self.

I imagine whoever has the worst employment and most chance of civil strife would be first to shoot from the hip. My vote would be for France, but for no more reason than that I like the image of a French gun slinger, maybe one with a cute little moustache.

Anyone here have a more rational bet as to where a battle of interest rates would start?

#49 lathnplastr on 07.30.09 at 11:55 am

I imagine whoever has the worst employment and most chance of civil strife would be first to shoot from the hip. My vote would be for France, but for no more reason than that I like the image of a French gun slinger, maybe one with a cute little moustache.

Anyone here have a more rational bet as to where a battle of interest rates would start?

#50 $fromA$ia "Garths Nugget Boy" on 07.30.09 at 12:02 pm

Ya ya rates will rise. What 1/2 % first year?

C’mmon Garth inflation is the Gov’s choice to get out of this mess. Listen to your wife.

Did you know that behind every successful man theres a wife that is responcible.

And an astonished mother-in-law. — Garth

#51 David Bakody on 07.30.09 at 12:05 pm

Now Compare these two …..

http://www.homesinhalifax.ca/listings/Listings_All.html

35 Coulson Ave. Toronto

#52 $fromA$ia "Garths Nugget Boy" on 07.30.09 at 12:10 pm

“The numbers prove the inevitability of a correction since family income lags asset values, despite the decreased cost of capital.” — Garth

I think you fail to see that this Government is going to do what ever it takes to keep people in their homes and to keep mortgage payments from defaulting.

The Liberals hands are cuffed.

You might see RE values drop slightly but inflation will take over.

We are in an artificial world right now.

Artificial Rates=Artificial home values+inflation= reality.

Without higher consumer income the rising market does not sustian, especially if the cost of fianncing increases. Economics 101. — Garth

#53 confused and a little crazed on 07.30.09 at 12:10 pm

Another possiblity???

what if the realestate investors switch to stocks again?.
With the stock market building momentum …people want to get in on the newest thing. Stocks is that thing …put your money in and watch it grow in double digits. They tell teir friends and so on…so on. The bubble emerges and The newest thing is “get in before it’s too late!!!”

you know …the usually sales pitch. Then there will be stock porn …like the housing porn now. Just replace stories of renovating homes with stock success sstories.Those stock stories can include companies that build homes

what do u thinks guys? I think it is unlikely but greed and fear are such prevailing factors

#54 pbrasseur on 07.30.09 at 12:15 pm

Talking of higher interest rates. US bond auction didn’t go so well yesterday. This could drive interest rates in a hurry.

http://www.cnbc.com/id/32201716

Things are not doing so great in Europe also.

The greatest risk of all: spending politicians.

#55 Dean on 07.30.09 at 12:18 pm

A few times now you’ve mentioned the stock market in the same vein as real estate in terms of a bear market event. The TSX was around, 15,000 and now it’s at 10,661 (July 8th it was 9,653). Housing prices are roughly the same as before the downturn, maybe higher.

A bear market stock rally, I can buy into (though I think it’s not guaranteed). But real estate right now reeks of manipulation. It don’t think the same logic will apply to both.

I did not equate the logic, just the unsustainable nature of both at current levels, given economic realities. — Garth

#56 lathnplastr on 07.30.09 at 12:28 pm

Oops my comment was chopped in sending (above), what I am on about above is investment cash flows between countries. Presently all seem intent on keeping rates low but one will blink eventualy and then who knows who will follow that lead.

#57 Devil's Advocate on 07.30.09 at 12:30 pm

#45 jussupow on 07.30.09 at 10:46 am

Japan’s economic situation preceeded that of the rest of the developed world at a time when economic pressures within their country were not further exasperated by an incidence of the same beyond.

What we should do is learn from what did happen in Japan and how it unfolded and add to that model those factors we are now experiencing today which were not then such an issue. As Garth said “this is not Japan”, yet much of the dynamics which led to Japans “Lost Decade”. Prevalent here, with more dire additional concern, are factors of which there are no robust economies beyond our boarders that we might rely upon to somewhat insulate us from a harsh outcome such as Japan could through the course of their “Lost Decade”.

Demographic shifts have a huge influence on our economy, probably fundamentally the greatest. Japan was, in grreat part, simply ahead of the curve in this regard.

This is not Japan, although we could learn a great deal from Japan’s experience. Unfortunately we won’t. Unfortunately too many think we are different. We are different we are alone as one… all in this together without boarders. Japan could plug along through a “Lost Decade” as one country. We can not as a world.

#58 AM on 07.30.09 at 12:39 pm

jojo #34

Show us the numbers for TO from 1986 to 1996. I think it will look a lot different if you’re trying to illustrate how RE only goes up.

#59 jussupow on 07.30.09 at 12:49 pm

Garth (how dare you):Learn something about economics…

The grandore… Why didn’t you put it in bold Time New Roman 35 points? Fare enough. Shall I point you to certain individuals that think that this IS Japan? Mind you ppl discussing the very issues at the time your were still pumping re? long before you came about with ur little blog? Thought so.

Dog eat your meds? — Garth

#60 POL-CAN on 07.30.09 at 12:51 pm

Updated graph as of yesterday:

Four Bad Bears, Adjusted for Inflation

http://dshort.com/charts/bears-nominal-real.html?four-bears-real

Let us think about it for a few minutes. US $ down, stock markets up, things like oil up due to the weak $, bond auctions almost failing… mortgage rates creeping up…. housing still crashing…. CRE hurting with vacancy rates way way up all over… What to do… What to do?

Crash the stock market… flight to safty back into bonds… lower yields on said bonds… keep those mortgage rates lower slowing down the housing and CRE crash…. stronger $… cheaper oil etc.

Rinse repeat…

By the way… Energy use is down all over the world. Shipping via ship, train, and truck down everywhere. Oil being stored on tankers while usage keeps shrinking… Unemployment still rising…. Savings rates keep going up… Consumer spending is still trending down (duh!)…

What recovery?

Best case scenario is that things flatline from here…. i.e. jobless recovery. Somehow I have my doubts….

#61 artisuseless on 07.30.09 at 12:58 pm

@hal smith:

They did that or something like it in Japan. Real estate prices have steadily shrunk for nearly 20 years but not enough for it to be even reasonably affordable in a lot of places.

Then again, since this all started to go pear-shaped in 2007 I’ve been the crash & start over camp.

Ironically, I believe that if things had been ‘allowed’ to come crashing down back in the summer of 2007 (followed by some pretty serious reforms) we’d actually be on track to real recovery now, not CNBC ‘recovery’.

#62 $fromA$ia "Garths Nugget Boy" on 07.30.09 at 1:08 pm

“Without higher consumer income the rising market does not sustian, especially if the cost of fianncing increases. Economics 101.” — Garth

It seems with the way things are going right now that economics 101 is out the window!

My union just finished negotiations and we negotiated a raise.

#63 Mike B formerly just Mike on 07.30.09 at 1:14 pm

Keep in mind… nothing stays constant… there are always forces at work to affect things so it is very hard to draw conclusions or even predict things. Although we are in fact not Japan per se the economic forces are very similar and it is not hard to see the path they are on vs the one we are on. As well, while boomers may theoretically be unloading their properties over the next 5-10 years , in some cities there are very large numbers of people entering the city to take up the slack. Witness what happened to Toronto via stats from quava.ca…. we went from a 7 month supply in Jan to virtually zip now. Having said that there are still tons of properties in the plus million dollar range on the market collecting dust. That is the area I see being the spot of greatest correction and movement.
Devils advocate is wrong on this one… It is the top end stuff that usually needs to drop a ton because they are the most leveraged for sure. I know this based upon neighbours and friends who have 500-700k mortgages.
Sometimes you see people new to the country buy on spec with tons of leverage to let someone else pay the mortgage, absentee landlords. If you are using the US as your basis for a snapshot into the future then you will realize it is the high end stuff that is being hammered by the biggest percentage corrections . The biggest group at risk are the highly leveraged namely the top end and the entry level who have little skin in the game.
Also playing a role is the volume of houses or units… condos are enormous in percentage of properties on the market. If devils advocate is correct with a 30% decline in house values across the board then we would surely be in a depression not a recession and even GT does not see that happening. Plus one would question the banks willingness to give out mortgages to these potentially valueless properties. There would be a glut of POS on the market and that would spell catastrophe for the economy as a whole. In the GTA I think it is realistic to see a 10-15% correction over the next 12-24 months and a flatness for many years to come.
30% is a dream I would love to have indeed but I am a realist at heart.

#64 dd on 07.30.09 at 1:56 pm

#52 $fromA$ia

“I think you fail to see that this Government is going to do what ever it takes to keep people in their homes and to keep mortgage payments from defaulting”

That is funny. And BOC can set interest rate for a while but the natural interest rate (inflation and risk) will take over at some point … AKA higher rates. Tell that to all the American’s that are out on the street.

#65 jess on 07.30.09 at 2:00 pm

fraud and law suits will be extra brakes to this reverse goldilocks that will take years to “wind” , I think enron is a good example.
So many scandals!
IN the 87 crash – …115 banks /year over ten years were closed. The Public (gov.)are the backstopper until the exit plan but you will still have an insolvency problem.

#66 jess on 07.30.09 at 2:12 pm

desperation follows fear

http://www.theglobeandmail.com/news/world/nys-homeless-solution-a-one-way-ticket/article1235565/
Former mayor Ed Koch tried to buy the Gibber Hotel in the Catskill Mountains during the late 1980s, in an ill-fated attempt to ship 600 homeless men out of Manhattan. When Rudy Giuliani ruled the city, he took a tougher approach, using police sweeps to arrest some of the homeless and force others into shelters. Now it is Michael Bloomberg’s turn to get creative.

Stymied in his attempt to convert a Bronx jail into a shelter, and faced with a homelessness crisis that has been exacerbated by the economic downturn, Mayor Bloomberg has hit upon a novel way to get people off the streets: He’s buying them tickets.

Since 2007, the city has quietly arranged airfare or bus tickets – one-way – for 550 homeless families. They have been sent as far away as India, Russia and Peru, although the bulk have been dispatched southward, to Florida and Puerto Rico. Recipients must demonstrate they have a family somewhere that is willing to take them in, and they are free to choose whether they want to participate in the program.

i remember ralph klein referred to homeless as “hosers from the east”

#67 Devil's Advocate on 07.30.09 at 2:26 pm

#63 Mike B formerly just Mike;

Garth suspects values in such overpriced western cities as Kelowna to drop by as much as 30%. Personally I don’t know that will happen as it would be consequential to more pressing economic failings which we (our government) will try to avert at all costs. Just the same it is a very rational projection based on the economic fundamentals, or lack thereof, we are experiencing today.

Bottom line is somehow, some way the economic peaks and valleys come and go. The economy is like a well inflated balloon, squeeze one end and you will find you have another which needs squeezing, try to fit it through a small square sharply edged passageway to the other side and you risk popping it. Best to deflate it before pushing too hard.

In terms of your comment “with a 30% decline in house values across the board then we would surely be in a depression not a recession “, no we are arguably NOT in a depression… yet.

#68 moneyman on 07.30.09 at 2:34 pm

Reducing interest rates lower than in the Depression might have seduced the young into buying homes costing 5 times incomes.

Cutting off interest income, after having taxed it punitively for decades, ruins savers. It steals from Peter to pay Paul. Even in China, banks must pay interest savings at a rate set by law.

Who is being favored with this monetary policy, the young & innocent? I doubt it.

I will leave the question open to anyone who cares to ponder.

#69 smw on 07.30.09 at 2:38 pm

#62 $fromA$ia “Garths Nugget Boy”

The other side of the rise in home prices, its a bargaining tool for unions, shelter is a neccessity but I’m sure many union members consider a home a RIGHT, just like 3% raises in a downturn.

We know its all horse balls…

#70 MenWithHats on 07.30.09 at 2:43 pm

I seemed to be an oracle foretelling a housing crash.

Accurately .

#71 kitchener1 on 07.30.09 at 2:48 pm

RE# 8 and his “HORP” talk

Complete f***ing nonsense. It will never happen.

Here is how capital works in a simplified sense:

Banks get capital from the BOC which in turn raisies capital in the bond market. Bond market prices risk into the yield they are willing to accept.

It would be next to impossible to migate the risk of a 10-15-20-25 etc.. bond if HORP were to come into place. With Canada alreadt 50 Billion in the red, there is no telling where we will be in X amount of years with an aging population and workforce that earns less then the boomer wave of retirees comin up in the future.

HORP would increase interest rates significantly and keep them there for years to come.

We are not Japan with there 50-100 year ammorts.

Can;t see it ever happening, espically when the Conservatives are crying about increasing UI premiums.
I dont even think the NDP would try something as insane as that theory, never mind the libs or con’s

#72 jd on 07.30.09 at 3:10 pm

Doesn’t anyone remember what happened in the 80′s when interest rates skyrocketed to high double digit mortgage rates? House prices went up, way up along with the rates. They went up until people were paying 18% on their mortgages. Remember everyone pumping ‘get in before rates go higher’? So if mortgages double to 8% will that kill real estate? Not a chance. It would take at least a tripling of rates and you know if governments can artificially hold bank rates down to almost nothing they can sure keep it from going to 10%. The politicians control the money system and they need to keep electors somewhat happy to get re-elected. They are not going to poop in their own nest unless we are in a total and complete depression; and in that case you will be in the same boat as everyone else with a mortgage. The banks can’t repossess every house and they would be toast with all those mortgages and no income. But a landlord with friends can evict you for non payment of rent.

Clean off your rearview mirror. High rates killed the market in 1988, and prices did not recover (in Toronto at least) for more than a decade. — Garth

#73 Mike B formerly just Mike on 07.30.09 at 3:20 pm

Real Estate and manipulation go hand in hand. No way anyone can argue that. It is run by the MLS Borg system..
even agents prefer to dodge the system as it is designed to goose the market .

#74 Your Mystical Powers... on 07.30.09 at 3:41 pm

join my wife.

Thanks Garth, but I have enough troubles with mine lol

#75 jess on 07.30.09 at 3:49 pm

geez isn’t of fixing bridges they were getting fixes from somewhere else.

‘Noah Wilcox’s family has owned and operated Grand Rapids State Bank since 1920 and, as he watched colleagues and rivals plunge into Minnesota’s hot real estate market over the past decade, he recalled a comment a friend in the business once made: “Real estate is the cocaine of the banking business.”…

A credit manual, circa 1990, warned him and his colleagues: “The pivotal issue in CRE lending is knowing when to stop. Restraint must be initiated by bankers because historically borrowers have been unable to recognize the warning signs. Commercial real estate lending should not be viewed as the cornerstone of a loan portfolio.”

With more than 100 years in banking, BankCherokee should have known better. But by the end of 2006, the bank’s portfolio of commercial real estate loans reached five times its total capital.

“We had it figured out,” said Heidi Gesell, president of BankCherokee. “We’d been doing it for a number of years and had not experienced losses.”

Now, BankCherokee is sitting on $15.1 million in bad real estate loans and is one of the state’s 20 banks warned by regulators in recent years to raise money and clean up its finances.

Steve Gilmer, president of State Bank of Delano, also was hooked on real estate loans — for building homes and developing land both in the metro area and outstate.

“We thought we were diversifying,” Gilmer said. The bank is struggling with nearly $7 million in bad commercial real estate loans — equal to more than 6 percent of its assets. That makes it among the state’s 50 worst for relying on commercial real estate.

#76 Devil's Advocate on 07.30.09 at 4:20 pm

#73 Mike B formerly just Mike on 07.30.09 at 3:20 pm

Get real. Real estate prices are a function of market fundamentals of which greed and fear are an influence along with interest rates, location, location, location, employment and such all of which affect the supply/demand equation. The MLS® is nothing more than a well shared list of those homes available each of which the asking prices (invitations to treat) are set by the sellers autonomously. There is a LOT of overpriced inventory on MLS® which will NEVER sell and no agent will be paid for their marketing efforts and expense. If it were an MLS® BORG SYSTEM, as you so suggest, the prices of those homes would be reduced by the BORG to reflect the true market value so that they would sell and the MLS® BORG SYSTEM REALTOR® would get a pay cheque.

#77 My_View on 07.30.09 at 4:31 pm

Does Xurbia now sell Chrystal balls? I mean if course rates will go up, they are at rock bottom, although there still is room for another cut LOL. But 8% in 5 years, give me a break. The BOC is maintaining the rate till next year, I know fluff. Let me rub the ball, the banks prime rate will be in 2014, 3.5%. That’s my prediction. Maybe by then the banks will offer back the variable (prime – discount) hey but what do I know. Prime will not be doubled in a year, fat chance, so no bust. I wish Garth would post correction, so the dooms day clan can refrain from calling it the crash, or bust. What was the prime rate in 2005?

#78 Nostradamus Le Mad Vlad on 07.30.09 at 4:32 pm

Garth’s words — “Well, it’s bogus.” — are reflected quite nicely in the following statements . . .

#6 Mark on 07.29.09 at 11:05 pm — “. . . my friends treat me like a leper because of it.”

#8 hal smith on 07.29.09 at 11:16 pm — “. . . So don’t miss this opportunity people. Borrow as much as you can and buy as fast as you can and start building your equity now. The recession is over and the train is leaving the station . . .”

#26 Devil’s Advocate on 07.30.09 at 8:53 am — “. . . if you don’t do your part and borrow in order to spend your government will do it for you latter [sic] passing the bill along to you in the form of higher taxes.”

P.T. Barnum once remarked “The recession is over and the train is leaving the station . . .”, and The Wizard of Oz has also remarked on more than a few occasions that “. . . there is a sucker born every minute”!

#40 john m on 07.30.09 at 10:20 am — “. . . government bailouts gave us a few months of a false economy and a false sense of security and the money is being rapidly gobbled up as unemployment rises.”

Of course, govts. use taxpayers’ money (ours) to bail out failed automakers, banks (didn’t Carney hand them $75 bln. a while back?), decreasing our net worth then prov. govts. sneakily bring in the HST, increasing our outlay for the necessities of life, thereby making us continually poorer.

As unemployment rises, govts. use taxpayer funds to fund EI / Welfare, etc., but cut back on other prov. social safety nets.

In effect, sheeple are in a constant lose – lose situation; the more incoming, the greater outgoing.

#71 kitchener1 on 07.30.09 at 2:48 pm — “HORP would increase interest rates significantly and keep them there for years to come.”

Using the prior posts mentioned as guidelines, I would venture to say that is what Carney / Harper / Flaherty will use to crash the Cdn. economy shortly.

Higher interest rates along with higher mortgage renewal rates, new taxes, mass unemployment for western civilization is on the cards, although it won’t start biting for a year or two. Then the whole deck of cards collapses.

BTW, Bernanke / Geithner / Paulson / Carney / Goldshit Tarts, etc., when combined together, produce a chemical reactive combustion known as a “freefall on the stairway to hell”. Thanks, but I’ll skip this train!

A few lines from Bill Bonner of The Daily Reckoning . . .

“This Too Shall Pop, Part II . . . the bubble in builders’ shares? Investors – especially investors in China – have learned nothing from the crash of ’07-’08. . . . the result of it in China…a country where the feds have money to spend…and the power to tell bankers what to do. The markets have gone wild…Get ready for another crash…the next leg down of this historic correction…the next kick in the pants…the next moral lesson.”
——
Here are two possible solutions to one problem. –

http://www.theatlantic.com/doc/200907/ideas-rent-home

http://correspondents.theatlantic.com/richard_posner/2009/07/mortgage_modification_reconsidered.php

“A government program to modify home loan agreements isn’t working because lenders prefer foreclosure or self-cures . . .”
——
For Nostradamus. Jr. –

http://www.alternet.org/environment/141657/is_vancouver_about_to_become_the_greenest_city_in_the_world/

#79 Mike B formerly just Mike on 07.30.09 at 4:47 pm

Yes indeed high rates do kill the market to say the least.
there are plenty of realtors and friends of realtors who bought in late 88-89 who only “broke even” MINIMUM ten years later. I know a handful who took almost 20 years to break even. Of course that doesn’t take into consideration the interest payments and what they finally did pay for the property including maintenance so in many many cases people lost money. Do I see a return to 10% plus interest rates… nothing in the cards that I see. The US could never afford to do that.. paying over 10% on US debt treasuries to the Chinese et al… doubt that very much. I sure hope it does just for the GIC rates and possibly bonds. Those with cash would be on easy street. Now if you look at Japan with low interest rates for 11 years and still real estate has slid. That is a highly industrialized country… Canada is not…. the US has given that up for the most part. They prefer to party hardy.

#80 Mike B formerly just Mike on 07.30.09 at 4:55 pm

Devils Advocate…. THE MLS is like a giant auction. It draws in people to bid against one another to falsely pad the prices. As you no doubt have read, people in Canada are more indebted than they have ever been. Primarily because they were assimilated and forced to buy through MLS and the agent system of ever increasing prices to help pay for that 5+ % commission. Each seller wants the next buyer to pay for that amount. True enough supply and demand but in a highly manipulated system rigged for the agent system.
Most agents do very little work for a property after the first two weeks. I personally know agents who met their client the night of the offer as they were an associate of the listing agent and netted a commish of 12 grand for a few hours work. Doctors don’t make that kind of dough… Not even lawyers.. If that ain’t a rigged system I don’t know what is. D.A. Hey are you a lawyer??

#81 Samantha on 07.30.09 at 5:18 pm

#77 My_View

From Bank of Canada (Chartered Bank Administered Interest Rates)

Jan 1980 13.25

Aug 1981 21.25

Percentage increase = 60.37735% in 20 months.

If you want to look at the rest of the chart, see post #30, link is posted there.

#82 Samantha on 07.30.09 at 5:26 pm

Re comment 30 and whatever # to #77 My_View,

The BoC chart is for conventional 1 year mortgages and is based on the rates charged by the banks per data last Wednesday of each month.

#83 Vancouver_bear on 07.30.09 at 5:35 pm

Vancouver keeps setting records all week in record temperatures and crappy air quality.

http://www.news1130.com/more.jsp?content=20090730_161100_6452

According to news 1130:

Air Quality deteriorating in Lower Mainland
The Air Quality Health Index for Metro Vancouver and the Eastern Fraser Valley has reached 8, indicating a high air quality risk.

Welcome to Beautiful BC…
The “BEST” PLACE ON EARTH?

gasp, gasp, cough, cough

Will go south this weekend…

Houses are cheaper there as well, though Seattle area considered to be overpriced.

I remember last winter when it was impossible to get around in a car during Xmas, becasue of the snow in the streets, this best place on earth is ABSOLUTELY NOT PREAPARED TO HANDLE ANY EXTREME WEATHER CONDITIONS!!!! No central A/C systems even in newest buildings, why to bother if it sells anyway and influx of fools is endless. Hey Nostri, am I right?

#84 JHO on 07.30.09 at 6:02 pm

I
LOVE
YOU
GARTH.

Thanks for helping me help myself by keeping my money in interest earning investments.

#85 rory on 07.30.09 at 8:49 pm

#76 Devil’s Advocate

“…which the asking prices (invitations to treat) are set by the sellers autonomously.”

Which invites the question as to why do we need a Realtor …oh yeah the monopoly called the MLS and the Realtors experience …oh but that should not end in the result you talk about …ooops.

“There is a LOT of overpriced inventory on MLS® which will NEVER sell and no agent will be paid for their marketing efforts and expense.”

You Realtor guys never learn…who do you think listed it at that price – not the Sellers but the Realtor (remember Realtors have the MLS access not sellers)…the agent could have declined but the guy behind them would take the listing at that price (there is that professionalism at work again) so the Realtor is out of pocket what …the MLS fee …big deal …for a chance at $10 to $40K + they will talk the seller down – later…oops they will say… the RE agent accapted and set the price high to get the lisiting (ever hear of such nonesense – rofl)…as to you being out of pocket – dont show the house so no expense incurred …the profession is it own worst enemy …and yes the MLS system is rigged in the RE biz’s favor …DUH! …if it was not then why not let everyone in to list.

Like I said before your marketing eforts + expenses are worth $499…quit trying to justify your exisitence -your are a bunch of quasi pros running around thinking they are deserving of every overpriced dime…like your time is worth hundreds/thousands of $$$ per hour …get over yourselves and call it what it is – we got you by the balls so shut up and pay up.

As to marketing effort = MLS + MLS + MLS + digital photos + own web site that promotes Realtor + other ads that promote Realtor + a sign (that helps + promotes Realtor) …so in effect most everything outside of the MLS is self-promotion trying to get the next client versus actually selling the clients home….so the MLS + $499.

All, IMO and Mikey B

#86 rory on 07.30.09 at 8:58 pm

Mike B formerly just Mike

D.A is a Realtor in Kelowna …he sounds like a good one but then again even the good ones are not worth the price …sorry D.A. …it just means the good ones should stay in business and the bad ones should go.

A new cheaper and simplier business model would be easy but killling the goose that lays the golden egg will never happen …but never say never …we (minus Realtors) can all hope.

#87 Mike (Authentic) on 07.31.09 at 2:28 am

34 JoJo “Hello Garth! Where is your housing bust in Toronto Area? Statistics:
1996.– 55,779 sales, avg. price $198,150
2009. Year-to-Date*June/09*– 40,939 sales,
avg. price *June/09* $403,972″

Jojo, I’m going to let you in on something that will make you go “ahh!”

$198,150 in 1996 was worth more than $198,150 in 2009 due to inflation of currency. So while prices “doubled” number they didn’t double in value.

I don’t have the numbers, but $200k in 1996 was most likely around $300k (or more) today.

Mike

#88 Pjwlk on 07.31.09 at 12:29 pm

#6 Mark said “I earn 95k a year. Single (need to work on that), etc etc.. ”

I’m going to do you a favour Mark. Have a look at this youtube video. The “big man” will help you… ; )

http://tinyurl.com/stay-single

#89 Pjwlk on 07.31.09 at 12:45 pm

#15 shouldIsaysomething

Somebody once left some prudent advice here saying:

“You can not save those who do not want to be saved.”

I think you’ve already done what a good friend should.

#90 Solitario on 07.31.09 at 7:07 pm

The reason the Boomers was the largest generation in the 70′s is: the next generations were not born yet!

Currently, the Boomers’ generation (born 1946-1965) is smaller then both GenX (1966-1985) and GenY (1986-2005).

I don’t have a chart for Canada, but if you’d check the attached link for US,
maybe we can put a stop to the BS about the boomers’ property dump.

http://1.bp.blogspot.com/_nSTO-vZpSgc/SC0y3ckMgGI/AAAAAAAACmU/9baEIdXcAJs/s1600-h/demographics-2010.png

In conclusion, for the delusional fellows here, waiting for the prices to come down as a result of the so called boomers’ property dump: keep dreaming!
The next generations looking to buy are bigger in size… and the boomers are quite intent on living long lives in their own houses after retirement.

There are 9 million Boomers in Canada, constituting 32% of the population. This is the largest single age group, and controls the greatest block of reisdential real estate. It would be unwise to minimize its impact on the real estate market in the next decade. — Garth

#91 My_view on 08.01.09 at 12:57 pm

#90 Solitario,

I agree, the boomer dump! Not going to happen. The boomers are the wealthiest generation ever, period. YES, SOME WILL SAY HOUSE RICH! At least they have pensions and will swap diggs if need be. I look at it different. I SEE $$$$$$, LEGACIES WILL EXCHANGE HANDS!

In fact 70% of Boomers do not have pensions, and the bulk of their net worth is in houses. The dump is coming. — Garth

#92 Solitario on 08.01.09 at 8:04 pm

70% of boomers do not have pensions…maybe so.
But they own about 2/3 of Canada’s government debt. Only about 1/3 is external debt.

Link? Or did you just make that up? — Garth

#93 Solitario on 08.01.09 at 10:27 pm

“Link? Or did you just make that up? — Garth”…

Deduction.The link below is from 2000.

http://highered.mcgraw-hill.com/sites/dl/free/0070897875/48078/rosen2_ichap3.pdf

Page8: 17% of federal debt ($96B) and 55% of provincial debt ($139) was external.
The situation didn’t change much in the last 9 years. Whatever Paul Martin managed to pay back in a decade, Flaherty pissed away in two years.
I believe total government net debt (not taking into account surpluses from Canada’s and Quebec pension funds) in Canada (fed+ prov+ local) is currently about $800B, with about $300B external.
I have good reason to believe the boomers own the rest.
Obviously, I’d be very interested to know your opinion about Canada’s debt, internal and external.

Thanks for proving you have no idea what you were talking about. The bulk of domestically-held debt is in the hands of instritutional, not retail, investors. This has zero to do with pensionless Boomers selling real estate to finance retirement requirements. — Garth

#94 Solitario on 08.02.09 at 9:18 am

“Thanks for proving you have no idea what you were talking about. The bulk of domestically-held debt is in the hands of instritutional, not retail, investors. This has zero to do with pensionless Boomers selling real estate to finance retirement requirements. — Garth”

Institutional investors…you mean mutual funds and pension funds (Ontario’s Teachers…, Quebec’s Caisse) and insurance companies? I didn’t say the boomers own $500 billion worth of bonds directly…

As for the boomers property dump, we shall see…

This wouldn’t be the first time when you’d be wrong in a debate with me…actually, thinking about all the disagreements we had over the years (I warned you about Harper, I opposed Afghanistan, I complained about your FIRST vote on income trusts destruction, I complained about your support for Dion’s carbon tax…), I was mostly right and you were mostly wrong…

I do admit you stand a better chance of being right this time- you were a Minister of Finance, not me…

actually, I’ll take that back!- Flaherty just came to mind…he’s the living proof being Minister of Finance in Canada doesn’t require any qualification…and it doesn’t offer any special insight…