The condo wars in downtown Toronto yesterday may or may not have meant something. The chanting, the cops, the jabbing elbows, the TV cameras, the melee – it might all have been orchestrated, or at least enhanced, by the developers of the unbuilt 40-storey slab called X2. I have my thoughts.
This much is known: By confusion or design, three separate lines of panting buyers (some may have been plants) formed in proximity to the condo sales office. Some people camped out for a week. Some arrived at 11 pm Tuesday and stayed the night. They fought. Most of them were billed as real estate agents and brokers, but that’s a stretch.
And it was all demeaning. The developer showed a face at 8 am and started handing out numbers, giving the cold, wet, disoriented, pavement huggers the right to come back Wednesday night and buy a unit, or ten, while they last. Meanwhile both prices and floor plans were yet to be released. So nobody actually knows what they’re buying.
“I was here for 10 days,†one condo refugee told the media. “My friends helped pick up my kids from school. I know some agents have a baby, three months, seven months, they carry their baby in the line.â€
Pathos on Bloor Street.
It had all been wonderfully pumped in a viral marketing campaign that had “early bird†and “VIP†registration forms on scads of web sites and Tweeted to the masses. Without a doubt, the developers timed everything – the lineups, the tipped-off media, the units release, the pre-registration blitz – to maximize chaos, attention, exclusivity and sales.
However it all would have failed without the necessary ingredient of human greed. People scuffling on the sidewalk to obtain something they perceived had value. Agents lured by the X2 promise of big commissions. Flippers and speculators and frenzied first-timers.
This may mean nothing. But I quite doubt it.
So, weary of the human condition, I will hand over the rest of this post to two visitors, from the planets GTA and Vantown.
B.N. in Thornhill writes:
Past month. Our neighbourhood, 3 houses sold for approx. 10% over asking price. We’re talking about 25 year old modestly upgraded homes that are going for 650-800K.
We looked at a house yesterday that was listed last week. Entertaining offers tomorrow. listed at 740K, will bet my right nut it’s gonna go over 800K. Sorry, no home inspection allowed. What would an inspector find anyways?   Wife wants the house, I want a drink. Current residence is paid off and at todays ‘take what you want’ rates were good for a 1.5M house. Wow, I’m rich. Wife doesn’t understand why I’m hesitant over a possible 50K mortgage. “Honey, I’ve spent more time inspecting a $5000 used car than this three quarters of a million dollar house. What part of this process seems normal to you?”
Plan a- Want to sell and go rent for a while.  Darling wife/3 kiddies aint gonna let that happen.
Plan b- there’s a raging inferno out there, where’s the fire department. Isn’t somebody responsible for putting this out of control mess out? What? the fire dept. is pouring more gas on the fire? clean up in aisle 8, calling mark carney. that was so sweet of him to ‘remind’ everybody that they’re responsible for their debts. how did that work out for greenspan/bernanke? what? you can’t just walk away from a house in Canada? hello debt slave lifer.
Plan c-wait until our house hits 1M, sometime next year I guess. Sell, buy an entire neighbourhood in florida, california, (hate having neighbours that I can see/hear) and invest the rest in goldman sachs. I hear they’re taking over the U.S treasury dept and the federal reserve. Oh wait, they already own both. my bad.
Plan d- sit back, relax, and suffer a bit more in your 2100sq/ft house and move up another 1000 sq/ft when things calm down (when it crashes and burns?). oh the horror, how will we make do in our 25 year old, paid off, 2100 sq/ft house before we can really live it up in our new, 25 yr old, 3000+sq/ft house?
Frightening how ridiculous it all seems when you actually read it back to yourself.
Mark in Vancouver writes:
I have a hypothesis about the CMHC. I’ve been saying for years that Vancouver left market fundamentals behind around 1986-87 but I had no indication really of WHY that happened. Then, about a month ago I learned that the CMHC only started offering MBS (mortgage backed securities=mortgage insurance) in 1986. So now I’d like to compare market volatility/rise in the pre and post 1986 time periods. I can’t find any Canadian graphs that give useful information before the ’70s so there’s not a lot of material to look at but you CAN see a distinct pattern in many Canadian cities AFTER 1986, there is a sharp rise which doesn’t appear to reflect other factors and more importantly the prices have yet to return to the pre 1986 baseline.
The upshot, if I am correct is that the CMHC has had the opposite effect of their mandate, they’ve made housing less affordable for Canadians AND it means that many Canadian markets have a lot farther to fall than most people believe is possible.
Right click and 'View Image' to enlarge Mark's chart
of house prices in Vancouver. Don't toss your cookies.
N e w s F l a s h !
Houses less affordable! (Duh.)
Does history repeat? Only if human nature does.
Bubble talk continues. The latest contribution is from Scotia economist Derek Holt in a paper entitled, “Is there a Canadian Housing Bubble?†Like most highly trained economists, he doesn’t answer the question, but he does have a lot of cool charts (the one above is amended, as I’ll explain in a moment).
Mr. Holt’s a guy I know well from my time on Bay Street. He’s always been a real estate bull, and changing banks (he was formerly with RBC) hasn’t changed him much. But his report does contain a nugget of info I’ve been digging for (and only a banker would have access to) – the number of people taking long amortizations, which usually corresponds with low down payments.
Says he, 47% of new mortgages taken out in the last three years have had ams of more than 25 years, and 60% of those have been 35 or 40-year jobs. Hmmm.
Why does this matter?
Because it gives some bones to the flesh we see flailing around the market these days – young buyers who have been the principal combatants in bidding wars driving prices higher and helping make housing unaffordable for everybody. If half the new loans are for greater than 25 years, and the bulk of those are 35 or 40, then it’s a fair assumption these folks went that route to achieve lower monthly payments.
As we all know, the longer the am, the more a mortgage debt swells. Those who opt for 35 or 40-year repayments get rid of virtually no principle in their early years, with all their monthlies going towards interest. That’s why they are so loved by the banks and are financial muggings for homeowners. Add in the CMHC insurance money, and it’s a recipe for zero equity gains for several years – unless the market keeps rising.
In other words, no rational homeowner would opt for a 35-year loan. Only those who were buying at the end of their leash, looking for a way to swing the deal. As we know, the key question in real estate today is not, “How much does it cost?†but rather, “How much does it cost a month?â€
So I’m thinking, this preponderance of long-am, irrational, cash-strapped new homebuyers is not the best news an economist could hear. It sure would not be welcome if the conclusion were that, yes, we do have an asset bubble – because bubbles always burst. And when they do, people bleed. Especially those who bought in last, paid too much and have no equity behind which to hide.
This info comes to us, by the way, at the same time we hear that one in four Americans with a mortgage and a house is in negative equity – owing more in debt than the property is worth. Interestingly, it seems most of them were not subprime borrowers, just folks who got caught in the real estate trap when house valuations took a dump.
Such a good thing we’re Canadians. No twitchy mortgages here.
Got two interesting emails today (actually I got buried in them). Here ya go.
This is from a professional real estate guy in Winnipeg:
I am not sure what you are espousing with your doom and gloom predictions for Real Estate in Canada….Real Estate is cyclical, largely dependant on interest rate movements, new supply coming on to the market and inflation. It goes up, it goes down. However, in most part, interest rates rise as an economic response, usually a lagging economic response to inflation. Inflation has a large component dealing with real estate prices so it appears we may have a period of time of rising real estate prices until interest rates rise appreciably.
Will real estate go down at some point…YES….could it continue up another 10-20 percent YES….I don’t know….and after getting two calls today about your interview on the Globe website and then viewing it, I am amazed that someone who goes by another name than God can be so sure.
This is from a professional mortgage broker in Toronto:
I check into your blog sporadically. Daily reading has been bad for my business as a mortgage broker as I found myself spending a lot of time advising my clients not to do things.
It seems well established that a lot of decisions to buy a family home are based on emotion. The lenders play on this emotion.  It seems everyone writing to you is about to succumb to the female “nester†in the relationship and plunge into homeownership. It’s timely to report the human side of the consequences….not my clients but friends of my kids.
House purchase summer of 08 – 100% financing 40 year amortization. Husband a carpenter, wife at home with the new baby. November of 2008, husband laid off, wife goes back to work for minimum wage. Still not enough family income to pay the mortgage and buy groceries.
Value of house has dropped 10% – Payout of mortgage was higher than the purchase price the day they completed. by virtue of 100% financing and the CMHC fee. Real Estate commission 7% on the first $100,000, 3.5% on the balance. Shortfall would be $49,000.
Couples’ families want to help. Daughter and baby move home with her parents. Son moves home to his parents. Duplex is rented out to cover the mortgage payment. This doesn’t work. Husband moves in with wife and her parents. This doesn’t work. Couple rent cheap apartment. This doesn’t work. Mother and child leave after 8 year relationship.
There hasn’t been a lot of time spent on discussing the human side of this recession or investing in a real estate bubble but it is important to note the consequences are not just a loss of money or investment.
The chart at the top of this post came from Derek Holt’s report (the economist). I have modified it to include the bubble real estate market of 1989, and the one we are in now. I’ve also indicated how long it took for prices to recover from the last one – 13 years.
I hope Mr. Holt’s bank tells the kids.
Condo maniacs lash out!
Wednesday condo madness in the Big Smoke: Hundreds of people lined up starting at 5: 30 am in downtown Toronto today to be the first to rush in and snatch a condo in the unbuilt X2 project. That would be news in itself, and another sign that the final stages of Bubble Times are upon us. But more interesting are allegations the promotion-minded developer actually started one of the lineups, and when the legitimate condo maniacs discovered it, chaos ensued, complete with chants and protest signs.
Are we there yet?
Garth's latest podcast is here.
