Days ago a prestigious national financial professional group asked me to keynote their autumn convention. Sure, I said, and agreed to deliver a talk on the causes, impact and legacy of runaway societal debt.
When asked the title of my talk, I gave it. “House porn.” Not sure, but I think I heard little fainting and gurgling noises on the other end of the line. I am so looking forward to that talk.
You know my thoughts on mortgage debt. It’s the leveller. Perhaps the greatest financial irresponsibility of this generation was to give hundreds of thousands of people with little money billions of dollars at rates which will reset 200% or 300% higher. This alone is reason to believe we are headed for a multi-year housing melt.
Slagging sales and rising listings now, price crumbles by Christmas, desperate sellers in 2011, vultures in 2012, then three years of mortgage renewals as VRM victims meet interest rate reality. If you think there’ll be housing bargains in a year or two, just wait for 2014. You’ll be able to buy houses and write the womenfolk into the offer.
But perhaps I’m a tad conservative. I received this note hours ago from a guy who was an investment banker at Morgan Stanley in Manhattan, chopping toxic mortgage paper at the height of the US housing bubble:
“Straight from the horse’s mouth, the Toronto Real Estate Board, Toronto prices in May averaged $446K, and in the first two weeks of July they’ve crashed down to $427K, putting Toronto prices on a pace to hit $340,000 in 1 years time— but in my experience, the acceleration of the downward trajectory will increase exponentially once the mortgage holders attempt to get out of their mortgages. I foresee prices breaking below $400K by Christmas, and then a steady progression towards below $300K for most of 2011.
He continues: “Canada will see the same housing crisis as the States has been, and for the naysayers, must I remind them that Canada did and does have subprime mortgages— 0/40 & 5/35 mortgages (with the 5% downpayment amortized across the mortgage essentially resulting in 0-down mortgages), artificially and historically unprecedented interest rates, and a general mentality that Canada is different, that housing prices can only go up. But we all know how that ended in the States. In Spain. In Australia. In Japan. In Ireland. Sigh.”
Yesterday US Fed chairman Ben Bernanke rattled markets when he told Congress the American economy faces “unusually uncertain prospects.” That spoiled a perfectly good stock rally, sank our dollar and dashed hope that recent bad economic news was a fluke. The reality is sinking in that even after tanking interest rates to zero, paying people to buy houses, bailing out whole industries and spending $1.5 trillion buying back crappy mortgages and government bonds, Washington is stymied.
Now I mention these things because you should know them. Most people don’t. They’re busy buying Capri pants and riding mowers.
Credit’s been so easy to come by in our society, so normal and accepted, so routine and innocuous, that we’re now addicted. Using other people’s money to buy houses cars and plasma TVs has made us immune to the fact we don’t generate enough ourselves, that we’re living beyond our means.
So, we have the phenomenon of young first-time homeowners padding around in 2,400 square feet of perfectly finished space in a manicured burb, replete with stainless and stone, while their parents never achieved anything close – after a lifetime of work. The kids get luxury. Their folks get adequate. But the old ones also have equity, and safety.
The housing market, and the Canadian middle class, is at serious risk. There’ll be no job-filled recovery here while the US stumbles. No chance mortgage rates will ever sink back below 2%. No planes full of rich Chinese or Iranian greater fools to save us. Instead, next year’s headlines will be about negative equity and the TV casts will feature first-time sellers stunned they’re losing everything.
This is the pornography of debt, thanks to the lust for houses.
Finally, to remind how we got here, believing we’re different, and could make the same mistakes as America without consequences, is former Stephen Harper speechwriter Michael Taube. In Sun newspapers this week he wrote:
“In Canada, we don’t offer subprime mortgages to potential clients. Most importantly, credit checks matter. If you don’t have sufficient personal income or assets, you ain’t getting the deed to the house.”
Sigh.
