Entries from January 2010 ↓

What happened to this site yesterday?

As those who tried to access Greater Fool yesterday discovered, we were toast. The site was out for almost 12 hours, during which time no posts or comments could be made. I asked my crack technical team for an explanation, after I had finished waterboarding them. Here it is:

“In the morning of January 28, the database server attempted to execute a self-repair routine on the database table that contains the comments from visitors. The self-repair failed and required intervention by special technical means to be repaired. A repeat failure occurred later that same evening, 10 hours later, but this time the web server software was affected, causing rejection of all traffic during that period in the evening. Special technical intervention again made repair, and also identified a secondary issue that was addressed successfully, thus finally returning all functions to normal status later in the evening. There was no loss of any data, other than visitor comments that were submitted over a few hours in the afternoon.”

* * *

Well, that was interesting.

“This entry really shakes your credibility,” said one critic, while another cited my crushing yesterday of  “your sick pack of rabid antisocial bubble watchers.”

“You are doing some serious backpedalling on your predictions about a RE correction,” a guy warned ominously, while a twentysomething moaned, “you just told an entire new generation of first time home buyers that they’ll be renting til they die.”

The catalyst for despair and derision was my comment that we should expect a real estate correction, not a crash. A decline of 15% in average prices, not a 40% US-style meltdown. That negative equity would be the disease here, not foreclosures. That places like Toronto would decline more slowly, and Vancouver faster. That Canada would see a long, slow and relentless real estate melt, not a housing implosion.

The words were chosen with as much care as they were misread with carelessness. So let me try again.

First, why the market will not blow up overnight:

• The federal government is terrified of this happening. They will endure a bubble, even with its destructive long-term consequences, over allowing market forces to be unleashed. This is called ‘politics.’

• In the light of the cabinet shuffle and the looming budget, the feds are signalling that the pain will come in the form of less spending, then higher taxes.

• The latest statements by the Bank of Canada suggest strongly that CHMC’s 5% down disaster will not now be amended to 10%.

• I’m betting the interest rate increase later this summer will be tame to start – maybe a couple of quarter points. The real misery is being held back for 2011 and 2012.

• Looks like we should expect a wave of new listings in the next couple of months, seriously diluting the supply-demand equation, quickly knocking price increases back to 0% and giving Ottawa a way to back off its recent mortgage threat.

Why the market will melt down, instead:

• Interest rates will be returning to their historic norm. That means mortgage renewals in 2014 or 2015 will shock people who borrowed in 2009 and 2010.

• Housing affordability will crash due to rising rates, stagnant incomes and higher income and consumption taxes.

• The Boomers hit the 65 mark starting in 2011, on their way to Freedom 85 – but only if they ditch the big house. Another tidal wave of listings.

• Economic growth will suck for at least half a decade, perhaps much longer. Government stimulus drugs will be cut off, our biggest trading partner is in decline, and China still has all our jobs.

• Rapidly rising energy costs over the next few years along with more taxes will help stoke inflation and rob Canadians of disposable income. This is hardly the climate for bidding wars, or $900,000 unrenovated bungs.

• A housing correction will become self-reinforcing, as recent buyers taste negative equity and the news spreads that real estate is now eating the young.

What this means:

• As I said yesterday, 2010 will be see the start of a correcting market, with a likely decline in average prices nation-wide of 15% by the end of the year.

• This will be the start, not the end.

• Between now and the time a five-year mortgage renews, I can see residential real estate declining another 20% to 40%, depending on the market, GDP growth, rates and taxes.

• This will bring a return to 2007 or 2008 prices and some extraordinary buying opportunities for those with cash.

Real estate is not a tech stock. It won’t crash in value in the space of a few months. Those who believe this don’t understand how the market works. This Spring a ton of owners – afraid they missed the peak – will list their homes and, being the greedy people they are, try for top dollar. That happens in March. If they have not sold in 90 days, they might reduce the price by 10%. That takes us to July, just when the BoC raises rates for the first time. If no offers materialize, they might drop prices again after another three months, and now it’s October.

At that point – nine months distant – sale prices will drop below list prices as inventory accumulates and buyers melt away.

See what I mean?

There’s a reason I’ve not said on this blog real estate will crash. It won’t. Get a grip.

But this is the top.  The road ahead belongs to the realistic.

A news report about me yesterday in various newspapers had an interesting lead:

“For years Garth Turner has been telling anyone who will listen that Canada’s long-running housing market boom is about to crash. The politician- turned-financial commentator has been wrong so far, much to the delight of realtors, bankers and homebuilders. But, like the boy who cried wolf, Turner’s day may have come.”

Man, let’s be accurate.

I do not forecast a housing crash, a la USA. Ain’t gonna happen. And I was a financial guy long before I lost my sanity and tried to change Parliament. That ain’t gonna happen again, either.

The main point is that real estate here is grossly overvalued and, as I’ve tried to underscore in the last two posts, the folks who don’t understand that are destined to relive the experiences of others. Yes, the market will be lower in a year or two than it is now, but I’m not expecting a 40% decline with foreclosures and abandoned blocks of McMansions. What happened in Vegas will stay in Vegas.

Nonetheless, Canadians will taste the bitter remedy of negative equity which has been forced down the throat of 23 million Americans. Those who bought most recently, at the highest levels, and with extreme leverage, are at greatest risk. The dangers we face have been well articulated here and will logically result in a 15% decline in the national average house price. In Toronto, maybe less. In Calgary and Kelowna, more. In Vancouver, may God be with us.

The consequences, although not as dramatic as Stateside, will be devastating to individuals and families who have swilled the Kool-Aid. The debt that young couples and trophy-seeking Boomers have just taken on has the potential to destroy the next decade or two of their lives. They’ve committed the cardinal financial sin of putting all their wealth in a single asset.

Undiversified and naked, they gamble on a market that will continually rise. Logic tells us they’ll soon be the zombies among us.

So, back to wolf boy. Yes, I may have been baying out my warning for a while now, but it’s hard to fight governments who give away mortgage money. Nonetheless, I would rather be warning too soon, than apologizing too late. The key to building and keeping your treasure is always the same – sell too early.

In Canada at this moment, it’s a seller’s market – a condition which will likely change by April. It’s the polar opposite of the US, where an agonizing four-year slide is not done yet. Looks like prices have another 10% or so to crash, as monthly double-digit declines moderate but are still making houses cheaper, month after month. When Obama announces government spending restraint in his Wednesday night State of the Union, that collective wail you’ll hear will be coming from realtors and desperate sellers nation-wide.

In fact, all governments – ours included – will be turning off the money spigots just as they raise taxes. The economy is not going to boom, or even be moderately robust. Economic growth will crawl at 1% or 2% a year, and many of the unemployed among us will be that way for a long, long time. America is in for endless trillion-dollar deficits and a real jobless rate close to that of the Thirties. How can the  next five years – in which nine million Boomers turn into house-rich, cash-strapped seniors – bring anything but a slow and relentless melt of the residential real estate market?

Negative equity. That’s what it means for recent buyers. The ebb of property values to a level often below the amount of mortgage debt the owners are responsible for. And then, selling is impossible without a huge financial loss.

So, no big, swaying foreclosure signs. No sheriffs with padlocks. No families moved out onto the front lawn. No news crews covering evictions.

This is Canada. No bang. Just whimpers.

But, the wolf howls, you still have time.

Some wag wagered in a post on Monday my next piece would be on affordability, now that Canada has been judged to have the most unaffordable real estate in the world.

Damn straight.

If you’ve heard me speak, read one of my books or stumbled on this site, you know my conviction that Canadians are property fools. Yesterday I demonstrated how we roll over and pay almost twice the price Americans do for shelter. Now comes fresh, steaming evidence we lead the planet in delusionary behaviour. Especially in BC and the GTA.

In case you missed it, the latest Demogaphia survey – a research document comparing houses in Canada, the US, the UK, Australia and elsewhere – has pegged Vancouver, Kelowna, Abbotsford, Victoria and Toronto among the global elite when it comes to house values. Trust me, this is a list you do not want to be on.

The media (as usual) missed the point of this document. It’s not that homes in these places, led by Vancouver, are the most expensive in the world. They aren’t.  Rather that they’re the least affordable. The difference is huge. Expensive houses in expensive cities like Hong Kong and London are affordable to the wealthy residents who live there. That’s why they cost a lot – since those are global centres of economic activity.

Vancouver, in contrast, ain’t. A regional city in a mildly interesting but second-tier country.

So why are Vancouver and Toronto two of the most unaffordable cities in the world? Because the cost of houses is totally out of whack with what people in those communities earn. In other words, high prices without economic justification – which means they’re unsustainable.

Demoghaphia considers a city affordable if the average house costs three times the average income. If it exceeds four times, it’s moderately unaffordable. Past five times, seriously unaffordable. Beyond that it’s comedic. So, Victoria at about eight times and Vancouver at over 9 times income are off the scale. This doesn’t mean the housing in those cities is world class, internationally desirable, glam, or destined to keep rising. Instead, it probably means the locals are nuts.

The more interesting question, then, is how this happened.

And it’s one we’ve already answered.

The current housing bubble has been caused by emergency interest rates engineered by the central bank. It’s the result of government-backed mortgage insurance which lets people without money buy houses. It has been pumped, promoted and pimped by the mainstream media, populated by home-owning producers and editors and run by advertising-starved, indebted corporations. It’s been desperately promoted by the feds through tax incentives and blanket approvals by the minister of finance. And it’s been fueled by self-dealing lenders, realtors, developers, real estate boards and huzzah-huzzah marketers who have told people, buy now or buy never.

In contrast, it has not been the result of an increase in disposable incomes, an influx of new investment and jobs or economic growth. And that’s why the thing cannot last.

At 9.3, Vancouver’s officially ready for the big one.