Entries from November 2010 ↓

Cowtown moment

Folks in Toronto, Vancouver, Milton or Lunenburg would be smart to think about Calgary once a day. It’s probably the most American city in Canada. Only fitting then that it would be the leading edge in what’s looking scarily like the early days of a US-style housing meltdown.

Fact is, if you own a house in Cowtown today, and you need to sell it, you’d better be prepared to deal with flinty vultures, or see it veg for a long time. Like years. As one realtor told a local reporter this week, if the property isn’t outstanding, “it might sit on the market perpetually.”

So far this month 825 houses have changed hands in this city of 1,080,000 people. That’s down about 25% from last November, and off 7% from last month, which was down by a third from last autumn. It’s the six consecutive month of substantial year-over-year sales declines, which means this is far more than a blip since it spans some of the best real estate months on the calendar.

As for prices, Calgary’s average topped out in the summer of 2007 at $506,000, and a SFH now sells for about $455,000. That number has been reasonably stable this year, the result of a slide in sales which allows relatively few higher-end homes to keep the average elevated.

More important is what’s being experienced by sellers. One of them told me this week, after having a custom-built home on the market for 20 months, that ‘the only option left is to rent it and wait for the market to come back, which looks like it might take five years.’ Meanwhile, as you might imagine and expect, local realtors are sprinkling the fairy dust of false hope.

“I firmly believe that we’re going to see more growth and activity probably not too early in 2011,” says local cartel president Diane Scott, “but I think about February or March we’re going to see a lot of people coming off the fence.” She bases that on, well, nothing.

The fact is things are almost certain to be worse in the spring. The simple reason is so many people have snorted the realtor dust and removed homes from being isted that when they pile back on in March, buyer demand will be overwhelmed. Currently there are about 10,000 houses for sale in the city (which means sellers will wait, on average, almost a year for a buyer), but could easily swell to the early-2008 level of 15,000.

And that would turn a six-month-long sales rout into the beginning of a price decline would could last much longer. More vultures. More desperate vendors. More price reductions. Most lost equity for everyone. It’s a pattern familiar to almost every American homeowner.

Why Calgary?

Because, like Vancouver and Toronto, house prices raced too far, too fast. Calgary was about a year ahead of those cities in price appreciation, thanks to oil which spiked to $147 a barrel, creating a false wealth effect. That made realtors greedy and homeseekers horny. Bidding wars ensued, and suddenly it cost 25% more to live in the middle of Alberta than in the middle of Toronto’s six million residents. That was unsustainable, of course. Just as, say, the average Van house at $800,000 is today.

Exacerbating things was a recession which knocked oil prices down, increased unemployment everywhere (it’s now a chilling 10% in the GTA) and actually led to a decrease in Calgary’s population last year. Now the city is in crappy financial shape (like Toronto and Vancouver), and the new metrosexual mayor is talking about a big tax increase.

Being full of practical people with cowboy genes (unlike Vancouver’s polluted hippie DNA), Calgarians have decided to stop buying houses. It’s a good decision, of course, give what’s about to happen.

We have a handy indicator of that. It’s called the US.

Yesterday the latest Case-Shiller home price index was released, showing new price declines in 18 of 20 major metro areas. Prices were down .08% in September, and this is after four years of almost continuous meltdown. Said an analyst who expects another 20% decline in real estate values:  “Housing is in big trouble. As prices go down, more people get underwater, leading people to walk away. That will be Act II in the whole drama of the housing collapse.”

By the way, my bud Benny Tal, senior CIBC economist, gave a speech a few days ago to a mortgage group, which was not widely reported. He talked about the 24% of American households who now owe more on the mortgages than their houses are worth.  It will take until 2017, he said, for house prices to rise to the point where the average person in the U.S. is able to get out of negative equity. That will be 12 years after the market started to crumble.

Now, it might be extreme to say Calgary’s headed in the same direction. It might even be imprudent to suggest what happens to the largest city west of Toronto is a harbinger for the rest. Perhaps we’ll somehow escape the housing meltdown that nailed the middle class in America, Britain and most of Europe.

Or not.

That’s your Calgary moment for today. What did you learn?

‘It doesn’t love us back’

It took one pathetic ad to push them over the top.

“So much for the early 30′s couple debt free and with combined net income of $98,000,” she wrote.  “We are leaving Vancouver and moving to Ladysmith on Vancouver Island right after New Year. My husband is an engineer and I run my own clothing line startup. We have to leave.”

She calls it the smartest decision possible, moving across the water where house prices are half. Wants you to know that.

“We love Vancouver but Vancouver doesn’t love us back. We have to leave.”

And here’s the ad, from realtor James Lam, flogging a piece of crap on a 33-foot lot that looks ready to condemn. A Vancouver special – bedroom and kitchen in the basement, and don’t disturb the tenant. He bites. For about $800,000.

Ironically, the Royal Bank’s latest bouncy report this week made much of an improvement in the ‘affordability’ of homes in BC, thanks to a modest price drop and some declines in long-term mortgage rates. To the bank it’s great news that across the country owning an average house now sucks off 43.6% of a family’s total pre-tax income – down from 48.9% earlier this year.

Of course, that’s just to own the house. Not to buy it. For that the bank based its ‘affordability’ numbers on a down payment of 25% (the average across Canada at this time is 7%), and a 25-year mortgage (90% of new mortgages are for 35 years).

What does that mean? If the Vancouver couple making $98,000 (about $15,000 more than the average), bought the junker above with 7% down – $55,300 would be needed, resulting in a mortgage of $735,000. At 4% for a five-year term, and 35-year am, the monthly would be $3,257, or close to $3,800 with taxes and insurance. Congratulations! That’s 46.5% of family income. RBC loves ya.

Of course, if they rented out the basement ‘suite’ for a grand a month, that would help with cash flow, making the bank even happier. Now the couple can afford a Royal LOC. A new Lexus would look bitching in front of that place.

The point, of course, is that anyone taking a $735,000 mortgage when interest rates are close to an historic low, and house prices in Vancouver (or Toronto) are at an historic high, which costs 46% of pre-tax income (that’s 63% of take-home income), is an idiot. The nob on your head gets even larger when the mortgage is one with a 35-year payback period, which means after making $195,433 in monthly payments over five years, you still owe $681,728. Yes, that’s right. Over $142,000 in interest, pissed away. So much for home ownership in this world of RBC affordability.

And what kind of a world is it, I hear you cry?

Well, one in which the Canadian economy, outside of the delusional housing market, is a swamp. We already heard this week that our trade is in massive deficit with the rest of the world as imports swell and exports wither. Since the autumn of 2008 there have been eight quarters. Guess how many of those we have run a trade deficit. Yup. Eight.

And Tuesday we get the latest GDP number for the last few months – measuring economic growth. It will be as impressive as the return you get on, oh, a RBC high-yield savings account.

Meanwhile that thing beside where William and Kate live – you, know, Europe – is unravelling. As one analyst put it: “Europe continues to crumble under the weight of their escalating debt crisis. As this has moved from a sovereign debt issue to a major crisis of confidence, it has become increasingly difficult to quantify and forecast the snowball effect.”

And the prescient but controversial Nouriel Roubini now warns Spain is about ready to go pointy-side-up. As he reassuringly put it: “There is not enough official money to bail out Spain if trouble occurs.”

Of course, a debt contagion sweeping through Europe would goose bond rates as investors headed for safe havens, jacking five-year mortgage money across Canada and making anyone spending $790,000 on a two-storey collection of orange crates, particle board and duct tape worthy of endless ridicule on this pitiless and unremorseful blog.

And don’t get me going on the structural unemployment rate in Canada, BC’s vanishing local economy, the certainty of higher federal taxes, unsustainable household debt or the fact our major trading partner is on its knees and electing yahoos and whackjobs to Congress.

Risk augments. Common sense fails.

Believe it or not, kids. There was a time banks paid interest and earned respect.