In the news:
House sales surge, but best brace for a rough 2010.
Few think prices will decline again: LePage

Pulling my gunmetal Hummer up on the sidewalk, I eyeballed the address to ensure it was where my colleague worked. The street was solid, stop sign to stop sign, with semis built about 80 years ago. Mutual drives. Postage-stamp front yards. Dreary facades. And a solid streetscape of covered porches.

This part of Toronto was built as a decidedly working-class neighbourhood, a dozen blocks north of the Danforth, and as many in from the now-dead Don River. Inside, the small living room opened into a small dining room, which opened into an unrenovated kitchen, and a narrow backyard. No sidewall windows. And I marvelled at what a half million dollars now buys. As does my colleague.

The usual question: ‘Should we sell?’ My usual answer: ‘Absolutely.’ The usual next question: ‘But where would we go?’ My answer: ‘Sell with a long close, and then into a better hood.’

For some months I’ve detailed the housing ascent and the delusional human condition behind it. Had it not been for the emergency interest rates we got earlier this year, this bubble would never have inflated. And had it not been for the federal politicians overstating economic conditions, our lenders pushing 5/35 madness, CMHC sucking all the risk away (for now) or the self-dealing and irresponsible real estate hierarchy, the bubble would have been far smaller.

But, now it’s too late. Sales up 74% this year. Prices up 22%. At the same time exports down 18%, the economy off 3% and unemployment up to 8.5%. This is utterly unsustainable and, as I’ve been bleating away, exhibiting every classic sign of an asset balloon reaching burst. When people say, ‘buy now or buy never,’ it’s over. When they line up in the rain and cold to buy unbuilt condos on spec, it’s over. And when every rational investor knows prices have exceeded value, it’s over.

And soon it will be, with the consequences for recent buyers which were detailed here last week: negative equity.

But, here’s the news. The financial establishment is now lining up behind the bubble theory. This week Gluskin Sheff economist David Rosenberg did it again, pointing out it makes no sense for  housing to be popping when incomes are dropping. Oh, and here comes Merrill Lynch’s Canadian economist Sheryl King, telling the company’s clients, “the seeds of a bubble are definitely in place.”

“With monetary policy in such stimulus overdrive,” King cooed, “there is a real risk that the market could become overheated and an asset bubble form.”

Ya think? Was it the primitive one-bedroom, one-holer cottage in North Van that sold for $999,000 that did it, or the 17 bids on a teardown in East York, or the weenie who paid $704 a square foot for a condo closet in Yaletown?

In any case, it’s now official. The Bank of Canada boss said enough bubbly things last week (in urging us to be prudent) that it’s okay for the rest of us to see the elephant in the room. And it comes just in time, as Canadians are slathering on new layers of debt like thermal undies in Edmonton. Household indebtedness has just hit a new all-time record of 145% of disposable income. This is more debt than US families had when their real estate market collapsed. At the same time, relative to incomes, our housing prices are also higher than they were in America when real estate ate the middle class. Our CMHC is acting just the way Fannie Mae and Freddie Mac did before the collapse to the south. And, of course, our emergency mortgage rates are having the same effect as did teaser rates on American subprimes.

So, why would there not be a similar result?

It’s been obvious here for, lo, these past many months. Now the bubble’s gone mainstream. We are all primed up for the feds and the BoC to drop the hammer, which will surely be coming in the next few months. Because if it doesn’t, the inevitable consequences will be even more difficult to manage.

Hence my advice to my semi-owning bud.

This is the peak. Grab it. Realize your capital gains. List below market. Do some viral marketing. Create an auction frenzy. Sell for a premium with a supersized deposit. Go for a long close. It’s Bubble Buster One, and you cannot lose.

Soon, like our quaint innocence, the greater fools will be gone.