Within recent memory, Toronto’s Dufferin Mall was a place where merchants spent the last part of the day hauling heavy metal barricades over their shop fronts and praying. With reason. It was a dump.
These days, thanks to condo developers and gentrifiers, who live elsewhere, it’s being turned into a place where young couples think the future is dawning. This is a story that’s been played out in hood after hood in the GTA. Some have worked – Queen West, the Garment and Distillery districts. Some have flopped – Leslieville, the stockyards.
But this is not about ambitious couples buying houses in areas where the disadvantaged live, at least until they must flee. Instead it’s about one piece of evidence the bubblette now enveloping some cities is doomed – pricked by a lethal combo of inexperience, greed and herd instinct on the part of a very dangerous set of buyers.
Not far from the mall, as reported the other day in Toronto Real Estate News, a ‘starter’ home came on the market. These days in Toronto, that means something listed at around $400,000. This one was typical of many dives in the area, riddled with knob-and-tube, powered by an obsolete electrical system, with a decades-old furnace, leaky windows and a Flinstones kitchen.
So what happened? There were 17 offers, and an all-out bidding war. The place ended up selling for close to a half million dollars.
Real estate analysts, objectifying realtors and those without their hearts in the mouths attribute this kind activity to supply and demand. The number of active listings has dropped steadily since the buyer’s market of earlier this year, while the number of buyers has soared thanks to cheap mortgages, pent-up demand and media-induced housing frenzy. So, they say, demand outstrips supply, causing prices to rise. Just economics. Move along.
As usual, that’s only part of the story.
Young couples have been fed a diet of misinformation which is not doing them any favours. Most of them were 15 or younger when the last recession came to town, and have little idea how slowly the economy repairs. They believe the real estate market is back on its feet and will soon price them out forever because the recession’s over. And why not? It’s on the lips of Mark Carney, Ben Bernanke and housing industry leaders daily.
Lenders meanwhile are back at their old practices of giving loans to people who have little chance of actually repaying them. Zero-down deals abound, and couples with a combined income of $100,000 can get loan commitments for five or six times that level.
Borrowers, in fact almost all of us, apparently learned nothing from last autumn’s near-death experience. Household debt is back on the rise. Mortgage totals have eclipsed previous records. Consumer spending on large-ticket items like cars and (especially) houses is the sole bright light in the economic firmament.
Everyone seems oblivious to the fact that a new round of borrowing – even at low (one-time) rates – will certainly lead to two inescapables: Higher taxes and more interest.
So, there’s good news and bad news.
The good news is those who have been waiting for real estate to correct and are dismayed at the lunacy around them are far closer than they realize to bargains. If there is anything that forces the Bank of Canada to review its free-money monetary policy it will be asset inflation in the housing market. And higher rates will be toxic in the killing fields around Dufferin Mall or Kitsilano.
The bad news is obvious. These bidding wars will litter the streets with dead. Guess who?
