Entries from August 2010 ↓

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.

As you might imagine, I get a few emails. From time to time I share them with you (taking care to protect the identities of those who write), because each is instructive. Among those I received this weekend:

Hi Garth – Well we almost made a terrible mistake.
We were almost taken in by the fresh paint, the granite, and especially the glass showers.

Went to an open house south of Vancouver and fell in love with the place.
Yes it was an old house the had major renovations.
Yes it was small which appeals to us but really should indicate a cheaper price, which is wasn’t.

Yes it was expensive, and over priced, even in today’s standards.
Well we have to sleep on it for a few nights, even if we could pay cash, and did you see that kitchen, wow.

I kept saying to myself, where is my head, yes I love the place, but 1.3 mil for a 40 year old, 2200 sq ft house, (on an acre), what am I nuts.
Even if I can afford it, that’s an insane sum for 4 walls and a roof.
Let’s see what Garth has to say these days.
Then your blog brought me back to reality.
Thank you, I owe you one. (actually I bought your book some time ago so guess we are even;)

Garth, please explain to people that when they refinance they will have to make up the difference in their loan should their house value drop significantly.

This was the major kicker in the USA for the middle class.
I was speaking with some people at work and they didn’t understand that if they have $600,000 mortgage, and then house value drops to $500,000, that they will have to come up with the difference before they can refinance.
People don’t understand how a loan works.

Also, as a reality check, we have bought a nice 3br condo in Orlando Florida for $60,000, it was valued at $200,000 in 2008. Our parents will now spend their Montreal winters in Orlando.

Anyway, thanks for the slap in the face, almost got sucked in by the granite!
Cheers, Dianne.

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Dear Garth ~ I have rented my entire life. As my career progressed and I had to move in order to step up another ring on the corporate ladder, moving was much easier when I didn’t have to worry about selling in one city while living in another. And I have never looked at ownership as an investment (people will still tell me that I should) but as a place to put down roots, and create a home… a hearth…stability and safety.

I am now 55 without a job…but I work full time taking care of my husband of 7 years who had a major stroke four years ago… Presently we are living in the house he has rented for over 30 years…at $400/month… I know it is an unreal rent…but here is the thing…the owner who is now in his 80′s is planning to sell this house. It is not worth us buying as to bring it up to code would be astronomically high. The basement is crumbling, the electrical and plumbing are vintage 1950′s…it is on what is now a VERY busy street…the heating is antiquated (used to be a coal burner now converted to gas. No fan) This home will be sold as a tear down…I am sure of it.

We are living on the fixed income of his retirement and his Canada Pension Disability payments. We get a grand sum of 2,700/ month…. Hubby is an alcoholic and drinks up about $600 of that per month. We have no debt because we (his sister, who has power of attorney and myself) put him through bankruptcy while he was still in a coma in the hospital. We are just barely making it. This house costs us a lot of money in utility bills…as it leaks air like a sieve… But on this fixed income we simply cannot afford to rent anything as the average is running between 1,200 and 1,500 per month.

We DO have about $194,000 in RRSPs and a Money Market fund… Am I crazy to think that we should take about $90,000 out and buy something? Yes, I HAVE found several places that are WAY nicer than public housing…that people are desperate to sell. I KNOW of one place that they are asking 79,900 for but it has been on the market for two years….I would bet my hat I could get it for 50,000 to 60,000 cash, with some left over to do things to it that we would like to have. And then we would have a HOME with NO mortgage and no one could take it away from us…

Garth, I have always been a strong person….but frankly, I am really scared… In my former life I had a career that brought in about $90,000 a year…and now I am living right at the poverty line with a handicapped husband to look after… Yes, I know I should have been saving all these years…but I didn’t… I didn’t understand investing…and so paid no attention to it. I am struggling now to understand it ( I have one of your signed copies of “Money Road”)…but having a hard time…

Help… Ruth

Note: I corresponded subsequently with Ruth and suggested a course of action after receiving more information on her personal situation and investments. It does not include buying a house. — Garth

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Hi Garth my name is Duane. A neighbor of mine told me about you and your blog on a Saturday morning. Seeing that I have never followed politics nor even cared I can honestly say i had never heard of you. After spending a great chunk of reading your blog over the weekend I went and bought your book Money Road and finished it within a day and a half. I’m not telling you this to pump up your ego, nor expect you to post this email on your website.

I’m telling you this for two reasons. One you have changed a 34 year old man’s outlook on life, and you have kicked my ass into gear to think about securing myself for the future. You are the one and only person able to catch my attention in this aspect of my life. I’ve heard RRSP this and Mutual Fund that, and simply put I didn’t care. So thank you for the kick in the butt. Once again thank you for the change in life.

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Hi Garth. When my husband and I moved to Calgary in the spring of 2007 we were under a lot of pressure from friends and family to buy a house. “You don’t know what it’s like in Calgary,” they said, “House prices here just go up and up. You have to get in quick.” My husband and I felt a thing or two could be learned from our neighbours to the south (not to mention previous boom and bust cycles in real estate and other sections of the economy).

We have patiently avoided buying a house and have been quite content to rent. Still, it has been tedious to try to explain our decision to others. They can’t comprehend why anyone who could afford a house would not buy a house. (My favorite line is, “But when you’re paying rent you’re just throwing your money away.”) Anyhow, my husband discovered your blog a few months ago and we both read it daily. Now when well intentioned loved ones hassle us about not buying a house we just smile and refer them to www.greaterfool.ca.

You’ve made my life a little bit easier. Thanks!

Jennifer, Calgary Alberta.