On Monday came news 12 condos a day, on average, are selling in the 905. Last year at this time sales averaged 32 a day. This girdle of humanity around Toronto is home to 3.2 million people – more than live in metro Vancouver and Calgary combined.

In other words, house sales are grinding to a halt. In this sprawling suburban nation, where real estate’s a god and home ownership numbers stagger, condo sales plopped 41%. Detached sales crashed 40%, as did semis.

On Tuesday mortgage rates rose again – at least the ones that matter, VRMs. The current thinking is the Bank of Canada will jump them twice more (at least) this year unless, of course, house sales go to zero. In time, though, the economy will revive enough for interest rates to ‘normalize’ which means 2009 buyers with a prime minus a half will renew their 1.75% mortgages at 5%. Not the end of the world. Just them.

Here’s why: forget what the industry’s telling you. Prices won’t likely be swelling again between now and the time all these folks renew their loans in 2014. There is no return to a seller’s market on the distant horizon. No bidding wars in 2011 or beyond. No year-over-year price increases even approaching inflation. The best homeowners can hope for – especially the ones who rolled the dice and bought with 5%, a swagger and a prayer – is for real estate values to flatline.

Even then, they lose. Five years of home improvements, interest charges on their lecherous 35-year mortgages and property taxes, capped off by a real estate commission (and HST). We might avoid widespread negative equity in Canada (though I doubt it), but those waifs who bought in the bubble are staring at five lost years.

This should be enough to put a lie to the myth that Canada did not have subprime mortgages. Our banks loaned billions below the prime rate to borrowers who needed 95% leverage and loan paybacks of three-and-a-half decades – in the absolute knowledge those loans would be reset at rates higher by at least 200%. This was a political act, taken because the central bank and the government it answers to desired massive public borrowing and spending to stimulate economic recovery.

Now the spending’s over. The recovery faint. The debt enormous.

“My name is Nanci and I stumbled upon your blog 2 months ago when my husband and I were considering purchasing a 3rd house as an investment and went looking online for real estate forecasts.  Luckily we dodged that bullet and obviously did not purchase..pheewf!  Since then I faithfully read you blog everyday we have decided to become liquid and sell our houses and rent.  We live in a very desireable area called Steveston in Richmond B.C.  We have a small but very nice house and have listed with a competitive price just this week – $759,000.  Our realtor is confident that we will get a quick sale. (we’ll see).  If it was our ideal house I would not sell but in the future we will need a bigger house. In the meantime we have a line on a rental house in our subdivision that would be perfect for us as we love our area and have small children that we don’t want to take away from their school and friends.

“We could rent for a couple of years, toss some more into savings and then buy back a bigger house in our neighbourhood when prices drop.  We both have secure jobs and our annual household employment income is $110,000.

“I truly believe that you genuinely want to help people like us make the best decisions.  I have to tell you that I am having trouble sleeping at night over worrying that we are making a big mistake selling our current house.  My husband as you would say needs to “grow a set” as he really leaves all important decision making on my shoulders.  I guess what I am asking from you is reassurance that I am making good decisions for my family.  Also, how much do you really think house values in the Vancouver area will drop?  I believe that we live in one of those areas (Steveston) that may only suffer a small correction and all of this will be for not.  Please Garth…I need some sleep tonight. Nanci..sleepless in steveston.”

When you’re selling a small house in Richmond for $759,000, isn’t this obvious? The average household income in Vancouver is $83,000, which means your pokey little hovel costs nine times that amount. This defines unaffordable, especially now with mortgage rates rising, the HST in place and BC doing the Slap Chop on public spending.

The wisest thing you can do is cash out that tax-free capital gain, rent for a few years, then reassess. If Toronto real estate’s overvalued by 20%, Van houses are too expensive by twice that amount. And while a 40% drop won’t be delivered over the next months, it may well be here within a couple of years. No more $1.3 million average West Van fixer-uppers. No more seven-figure crack shacks. No more half-mil concrete shoe boxes hunkering over Robson Street.

So, Nanci, drop your asking price until you suck in a greater fool. Invest the windfall in a balanced portfolio of bonds, dividend-spewing shares and sector ETFs. Stuff twenty grand of it in your TFSAa. Load up the RRSPs with fixed income, the cash account with preferreds and the tax-frees with equity. If stocks tank 20% this autumn, go shopping. The economy will recover, along with markets and profits and rates. The only depression will be in Re/Max franchises.

Sleep tight, babe. You made the right choice. Trust me. I have a set.

Garth's latest podcast is here.