A property I found fetching in April, and toured, was listed at $649,000. The listing agent emailed me this week: it’s now $499,000.

This interests me for two reasons.

First, it sits on the western fringe of the GTA Republic, where the local real estate board’s whipping potential buyers into a frenzy with media releases about runaway sales and spiking, record prices. So, what’s the deal with a 23% price reduction? Turns out, they’re everywhere in the 905, north of 500K.

Second, the owner’s now under water. She owes $501,000, having paid $689,500 two years ago, coughing up just over $200,000 in cash for the down and closings. I know this, because I know her. But if I didn’t have personal knowledge, her negative equity situation would go unknown, unreported and unrecorded.

This is unlike in the US, where excellent stats exist on exactly how many families now owe more on their homes than those properties are worth, and even projections on what this situation will look like in six months. More on that shocking situation in a moment.

Negative equity is the thing Canadians should most fear. We have few foreclosures, almost nobody being thrown into the streets and it’s rare to hear of a sheriff seizing a home and changing the locks while a bank agent sits outside in a sedan with smoked glass. Sure, people go bankrupt, can’t make their payments and go through year-long power of sale proceedings. But even that happens without public disclosure.

But this is not the danger.

Instead, in a country where the average downpayment on all properties is now less than 10%, where zero downs are common again, where 35-year amortizations mean monthly payments hardly touch the principal and where 95% financing (or more) is virtually the norm with all new buyers, we are always just a couple of rough months away from personal disaster. A general decline of 10% in real estate prices would put almost all 2009 buyers under water. A 20% reduction would be Canada’s financial Nine Eleven.

Here’s why:

Say you bought a new starter house in the Toronto suburb of Brampton months ago for $359,000. You put 5% ($18,000) down, and borrowed the closing costs ($6,000) from your folks. Your mortgage is $341,000 and the combined monthly is $2,300.

If housing prices drop by 10%, the property is worth $323,100. If the dismayed owner decides to sell (or is forced to do so by a job loss in the household), he’s on the hook for commission (5%, or $16,155), mortgage penalty (3 months, or IRD, at least $4,500) plus legals and moving ($1,500 and three cases of beer). In other words, the homeowner will walk away from the deal with $301,000, which means he has to take a cheque for $40,000 to his lawyer on the day of closing.

Under water – and only a 10% correction. In this case, the loss is about $65,000. If the homeowner didn’t have cash to get out of the deal – after being lucky enough to find a buyer willing to pay full market price – he’d be trapped in this house.

Now imagine if the market dropped 20%. The loss here would double.

You might think that’s just impossible, but so did homeowners in Fresno, Cleveland, Miami, Los Angeles, Bakersfield, Fort Myers and a host of other places where property values have fallen precipitously. They saw housing values soar, stabilize, then plunge after reaching levels unaffordable to most families. And they weren’t just the no-money-down, fog-a-mirror subprime set. Falling property values have infected entire communities and every homeowner living in them.

In fact, a new study estimates that (are you sitting?), 48% of all mortgage holders in America will be under water by March. That’s 25 million households with mortgages larger than the total value of their homes.

This is not a rogue number. There were already 11 million families in negative equity by the end of 2008 and 15 million four months ago. So if housing prices drop another 14% (on top of the 30% the country has already experienced over four years), 25 million houses will be unsalable by their owners, many of whom will chose to walk.

(Sadly in Canada, walking is not an option. You’re still responsible for the mortgage amount, penalties and costs, even if you deposit the keys up your loan officer’s rear.)

Of these underwater households, 41% are expected to be ‘prime’ borrowers – Leave-it-to-Beavers who bought their homes with significant downpayments and have conventional mortgages. Half of those will owe an astounding 25% more than their houses are worth, making a sale virtually impossible.

And this: It’s estimatesd that within half a year 77% of borrowers in New York City will be in negative equity, 65% of mortgage-holders in Chicago and 93% in Fort Lauderdale.

There, but for the grace of God, go we?

We're not making this up. Really.

“Right now, it is a seller’s market … We’re constantly in multiple offers. Recently, a two bedroom bungalow, with no parking and an unfinished basement had four offers. It was listed at $329,000 and it sold for $375,000.”
- Candace Kaszas, Toronto realtor, National Post August 6, 2009