There’s a collective sigh of relief this week in the board rooms of the country’s big real housing cartels. Outfits like the Toronto Real Estate Board and the Real Estate Board of Greater Vancouver could not have timed it better – the release of their August numbers on the Friday of the last long weekend of the summer.
If there is one thing I learned in my star-crossed political career, it was the news value of a dead Friday. With network newsrooms unplugged, print reporters in neutral, columnists buggered off and investigative journalists extinct, it’s the best time to announce what you want nobody to know. And the hours before the Labour Day weekend begins constitute the perfect zombie. Few people tune in over the weekend and by Tuesday, it’s all old news – hardly worth reporting.
Good thing. It’ll be ugly.
Indications from just about everywhere are that resales crashed over the past four weeks, especially in BC. In fact, the betting is that August numbers in most urban centres will be about 40% lower than the same month in 2009. In some regional markets, evidence suggests volumes are down as much as 70%. Two days ago I posted a letter from a Vancouver Island realtor lamenting, “the market has completely softened. The market is completely dead. Brand new houses in Sooke, down to $299,900 from $399,900, no calls.”
Meanwhile in Edmonton, open houses are nap time for depressed realtors. In the GTA the condo glut has started in earnest as sales centres turn into ghost cites – with 19,000 units entering the market in 2010. In downtown Vancouver the blocks around the swishy world-class Millennium Water are deserted. The only cars on the street outside belong to agents.
This brings me to the dual questions I wish to answer.
First, often asked here: why are prices not falling as quickly as sales?
The answer has been stated before, but let me make it as clear as possible. Sales levels are set by buyers – they are the ones with the power to make offers, make deals happen. When buyers believe prices are too high, vendors are too greedy or the market is in decline and better values lie ahead, they stop buying. That’s exactly what’s just happened. So, sales crash.
Prices, on the other hand, are set by sellers, who also have the power to withdraw their homes from the market (which they are doing) if they see prices falling. Sellers are largely more delusional than buyers, who like to masquerade as bloodsucking bottom-feeders. In markets like this one, it’s not a good fit. Hence, sales crash, listings diminish and prices stall.
This will, however, change. Sellers who came to market in the last month or so are still hoping to snare one of those greater fool idiots who stumbled out of 2007. It will take 90 days or so on the market, languishing without an offer and barely any showings, for reality to set in. At that point – towards the end of the year (as I told you months ago) – the price reductions will start. And so will the fear.
That brings us to the second question: What happens then?
This is more important. It ‘s where most mainstream economists – those guys who insisted there was no housing bubble to talk about – are completely misguided. Projections from the bank towers that 2011 will bring a peak-to-trough price decline of 10% are worthy of chiselling into the sidewalk at King & Bay. In 2013 we can go there and smirk.
For some time I’ve warned that the American real estate experience could be repeated here – not as extreme; not a carbon copy; and not with exactly the same economic implications. But scary, nonetheless. After all, we’ve committed pretty much the same crimes. We overvalued houses through greed and speculation. We relaxed lending standards. We encouraged people without money to buy homes. We brought in teaser mortgage rates destined to reset much higher. We pigged out on household and consumer debt. We had bidding wars and HGTV. And we all bought into a culture of conspicuous consumption in which a honking big house equated social standing. Now, how is Chicago so different from Toronto, San Francisco from Vancouver, Calgary from Houston, Kelowna from Phoenix or Miami from Victoria?
What does this mean?
Things get more serious in 2011.
For sellers, a brewing nightmare. In the US, prices have dropped from 15% in some markets to 70% in others. And still it’s taking an average of one year to sell a home. This is why real estate is illiquid, and a huge potential destroyer of personal wealth. With sales levels plunging, is it not reasonable to expect similar here?
For lenders and realtors and that part of the economy housing makes up, a crater. Mortgage rates could go from ridiculously low levels today to bizarre new microscopic numbers, and it would matter not a whit. This isn’t about affordability anymore, so dump the economics.
For buyers, a huge gamble. With unemployment rampant, the economy stagnant, taxes rising and confidence shrinking, why borrow a big pile of money to buy an asset that’s declining in value and people are desperate to sell? Wouldn’t it make sense to wait six months, or a year? Won’t homeowners be even more desperate then? In fact, why would you buy anything until you are sure a bottom has arrived and you won’t get creamed?
Right now, of course, it’s all exciting. Bursting bubbles. Dickhead economists. Realtor revenge. Granite and stainless Armageddon. Those people who wondered how 25-year-olds with no savings could afford spacious new digs now know the answer. They couldn’t.
But as I have said a few times, this is but the start.
Enjoy summer’s final hours.
The crowded streets of Vancouver’s swishy Millennium Water development yesterday afternoon.