Entries from November 2009 ↓

I took some hours yesterday to tour a few listings in Vancouver. Frame houses, 80-years-old, in serious need of repair, in neighbourhoods I’d only move into with a German shepherd, for $800,000. Even so, such homes are attracting multiple bids, and selling for over list. Sometimes $300,000 over list.

But it’s not just Van. Toronto’s got it, too. The latest numbers show house sales in the first half of this month jumped 85% over last November. In fact, across Canada, if you can believe CREA, monthly sales are ahead 41.5% and the average price has soared 20% in a year.

The media says this is good news. Bank economists are thrilled. The feds will point to increased housing activity as proof of an economic renaissance.

But it ain’t. It’s trouble.

This is because government policies, mainly stunningly low interest rates, have created asset bubbles at just the worst moment – when we cannot afford to have them burst.

That struck Friday morning as I walked into a TV station in Victoria. In fact, CHEK is one of only two television operations on Vancouver Island and was, until a few weeks ago, a Global affiliate. It’s also the oldest TV signal in the West, going on air back in 1956. But, teetering on the brink of bankruptcy, Global wanted to shutter the operation (as it did several other stations) and was ready to, until a brazenly brave little band of employees and 10 investors took it over.

The price: $2. For that, they got a few million worth of electronic assets, a bunch of obligations including immediate operating costs, and a massive challenge. They also had to lease the building back from Global, but all they could afford was the first floor. And even that’s half empty.

My point: Media outlets are the new canaries in our economic coalmines. When local businesses falter and fail, they stop advertising. When that cash flow disappears, the canary dies. In fact, no matter where I travel, and despite what people might be paying each other for houses, the real economy is sputtering – regardless of the billions governments have thrown at it.

Back to the housing bubble. It’s just one of many. World stocks markets have added about 70% to their value since the lows of last March. The price of oil has more than doubled since the winter. Gold bullion’s at a record high.

There is no coincidence this – or the Canadian housing bubble – has happened concurrently with zero interest rates in the States or the plunging American dollar. The asset bubbles we are seeing around us are the direct result of monetary policy which is outrageously irresponsible and could well be irreparably damaging. By crashing rates to almost nothing, the Fed and the Bank of Canada have encouraged borrowing excess that could plunge us into the second leg down of a W-recession.

Why? Simply because this borrow-a-thon is doing nothing to actually stimulate the economy. Oh yeah, realtors and mortgage lenders are feasting, but no more factories are being built or productive jobs created as a result. The only lasting legacy of these months of “accommodative monetary policy” will be billions in consumer, household and government debt.

Worried about the same outcome, US regulators are now urgently probing American banks to see if they have the capital reserves and the mechanisms in place to deal with a crash in asset values. And worried they should be. Cheap rates haven’t been enough to rescue the American housing industry or the country’s middle class. As this week ended, word came that real estate to the south of us is on ‘life support’. Housing starts have collapsed – down 30% below last year’s level – and homeowners are in increasingly desperate shape. One in seven is in default or foreclosures. Sixteen million families are in negative equity. House prices are tumbling again.

Obviously a second recessionary plunge – of the kind Obama warned of a few days ago – precipitated by US government debt or the inevitable bursting of stock, commodity or real estate bubbles of its own making, will be dire.

It will make the rescue mission in the echoing CHEK building that much harder.

It will make regret in many other places.

Fixer-upper in Vancouver:
Listed for $749K, Sold for 1,033,000
13 days on market, 18 offers.

Veni, vidi, Victoria.

Definitely the highlight of my evening was a guy with an iPhone who came up after my talk last night and flashed a photo. “My wife’s cleavage,” he said. That was shocking enough. More shocking was the fact I recognized the bosom.

Hard not to. It had my name on it.

“Remember that,” he asked me? “It was great. We love the blog.” Like I could forget. His beautiful wife had presented her alluring contour with one hand and a Sharpie with the other last winter after one of my previous Victoria gigs. “Will you sign me,” she asked?

Ah, the travails of a financial entertainer. Somebody’s gotta do it…

Actually the large crowd was friendly for a city epitomizing real estate delirium, and which I miss few opportunities to ridicule. But maybe they’ve been softened up a tad. After all, the average home price in October was merely $590,567, down a withering $29,369 – which is a 5% drop in one month, or an equity hemorrhage of $1,000 a day.

Meanwhile affordability levels are flashing red. It now takes 7.4 times the average income in Victoria to buy the average home – seriously unaffordable by international standards, and far worse than the height reached by US real estate just before the crash. Just imagine what even a 2% rise in mortgage rates over a year or two would do to a market like that. Victoria is also a relatively small place of about 80,000, and an urban area of about 330,000.

That means without sustained migration or major new employers, there just isn’t enough population momentum to keep the average house price 50% above the national average. Sure, there is less snow. But this week has been hellish in BC with gale force winds, flooding and little old lady tourists blowing into the sea.

What most folks in the delusional Lower Mainland don’t understand is (a) everyone else does not actually want to move here and (b) even if they did, invading Boomers would first have to sell their big suburban houses in Mississauga and Calgary. The fact is, both Vancouver and Victoria haven been rendered uninhabitable for great swaths of the population, especially the retirement-age set that Vancouver Island caters to.

So, my message was simple: You still make money by buying low and selling at the top. If you own a house in BC, this is the top. Real estate is not going to continue to rise in value forever, or even for five years, since the universe of potential buyers is shrinking fast in this age of economic turmoil. In fact, maybe last month’s dive was a harbinger of months to come.

Whatever. Whadda I know?

But I do worry for those people who fall victim to the mass psychology of insular markets, reinforced by uncritical and myopic local media. What has happened in Britain or the US is always just a few lousy weeks away. The latest news of large numbers of Americans with good credit ratings now sinking into default and foreclosure as unemployment does not diminish should give us all pause.

Anyway, nobody tossed buns at me. Or ugly questions. And there were a bunch of blog dogs there yelping and scratching in the back.

But, sadly, no Sharpies. Just a memory.