I sat in the lobby, on a $5,000 mesh chair and watched a twentysomething in red high tops float across the marble floor on a skateboard. Minutes later I was on a tour. The lounge with the pool table. The server room packed with winking gear as chilled air blew from the floor. The employee cafe with the full-time chef. And then I went for a ride with the CEO, in his Viper to a lunch where he spent $1,400.
It was the Spring of 2000 and this company was burning its way through the latest $42 million it has just raised selling stock. It had no revenues. Little in the way of sales. No experienced management. But it did have a cool name with a dot-com on the end. And shares people some people couldn’t get enough of.
Sixteen months later, it was gone. The employees went home. The Viper went back. The stock went to zero.
This memory came back to me as I read the last Teranet-National Bank House Price Index. Yeah, it did register the first decline in Canadian national housing prices in 16 months. But bank spokesguys fell over themselves to explain that this was not the start of a US-style housing decline. “We do not think that a significant price correction looms in housing.”
You wish.
Speaking of the States, I hope you’ve noticed what’s going on at the moment. Sales of existing homes dumped 26% last month, while new homes also crashed. In swaths of the country it was the worst October in 20 years. And it dashed hopes anything is getting better or real estate is nearing a bottom, almost five years after the wheels came off.
Why? Because the only reasons the market was improving (in terms of sales, not prices) were government tax credits and lots of dirt-cheap foreclosed homes. Now the tax freebie is ended, and the supply of distressed properties has narrowed as banks hold them back. This has exposed a shocking reality: there’s hardly any demand.
Said a leading economist: “People aren’t buying houses – period.”
Meanwhile in Canada, it could hardly be more bizarrely different. For example, I told you two days ago about a new development in Oakville which had 9,000 registrants for pre-sales, and was mobbed with people wanting to drop a half million dollars.
Marco lives not far away and watched the insanity. Sent me this: “Detached homes were $670,000 in the morning and over $750,000 5 hours later because “sales were strong”. Yes, they raised prices on the same home (same model, sq.ft etc). I simply can’t believe this is happening. One person from my office bought that model of home, and they make less money than me. WTF?”
Like the US, the GTA has a 10% unemployment rate. Like American families, Canadian ones owe $1.45 for every dollar they earn. Like them, we have household incomes which haven’t gained an inch in three years. Just like the Yanks, we live in a world in which Europe – a major trading partner – could be in financial crisis by Christmas.
Families in Ontario and Illinois make about the same incomes. Mortgage rates are roughly equal. The education systems are similar, just like life expectancy, literacy and car ownership levels. And yet houses on this side of the line cost twice what they do there, despite the fact Americans can deduct mortgage interest and property taxes while locking in borrowing costs for 30 years – all factors which should increase real estate values.
But demand is zero. While in Oakville nine thousand people were willing to spend a half million (or more) for unbuilt houses in a field on the ragged edge of town.
So, back to 2000. To dot-coms. To the chef and mesh chair. To a delusional, greedy herd of investors.
Despite what you read and are told, there is no economic underpinning for the Canadian real estate market. Current valuations are not supported by incomes, economic activity, household balance sheets or employment. Like profitless Internet start-ups with cool names and pimply executives, they survive on human emotion. When everybody wants something, everyone else does, too. When prices rise, we all want in. When demand exceeds supply, more demand is created.
Apparently the memory of wrecked RRSPs and lost fortunes a decade ago has been erased. Even the panic of two winters past is forgotten. People are busy being people. It’s why most of them fail.
You’ll never guess what that Viper went for in 2002.
An almost-30 with fifty thousand in the orange guy’s shorts and a GF “with a ticking clock.” “She grew up in one house and that’s what she wants now,” he said, “and babies.” He puts on a brave face.
A father of three, 55, with a company, “in the yellow zone thanks to this economy.” Two hundred left on a four hundred house, $85,000 in a GIC, no pension, nice suit. Have you told your wife yet, I ask, if she knows you’re going to run out?
A retiring 60ish civil servant with a pension of thirty thousand and less than $8,000 in liquid assets. Two kids, 22 and 26, back home after losing their jobs. Paid-for house, but he’s convinced he can’t pay the electric bill.
Rural boomers with an acreage near town they always planned on as their retirement strategy. So they worked hard to pay it off, and neglected investing. Now the farm’s in an environmental protection zone, and illiquid. “These days,” she says, “I don’t sleep anymore.”
Just four I spent time with over the last few days. Looked into their troubled eyes. They asked me for advice and I gave it. Asked for help, but there was little. Stories like these underscore two realities of our time. A majority of people – despite the veneer of middle classness, and the nice car which just pulled up beside you – are disasters in the making. Second, real estate’s as much a destroyer of financial security as it is a builder of it.
It wasn’t supposed to be this way, as you know. If you got married, had kids, bought a house and threw at it what was left after everyday living, you’d be fine. Pension, maybe. Lots of equity, for sure. Inflation, wage gains, a swelling economy and constantly rising asset values would paper over neglect, ignorance or foot-dragging. It was a formula that worked just fine for about half a century. Until two years ago.
So this week, the Koreans started a pissing contest. Could soon be a war. Ireland crapped out, with Portugal and Spain now on bond vigilantes’ hit list. The US real estate market took another bullet, as new home sales dropped and the shadow inventory of resales – foreclosed homes not yet for sale – ballooned to over 2.1 million. This could keep American staggering for three more years. President Palin?
Ontario announced it’s spending $90 billion on a power plan which will double electricity bills. Ottawa revealed a big jump in inflation, of which the HST figures prominently. F told MPs there is no housing bubble, while he prepares an austerity budget for the new year.
In short, there’s instability, global debt excess, country risk and rising prices – at the same time governments figure they have no choice but to turn off the spending taps. This means hundreds of thousands of laid-off civil servants in Britain. Higher retirement ages in France and elsewhere. Budget massacre in the PIGS. A Tea Party austerity binge in the USA, and belt-tightening here.
In this world now unfolding, prices will keep rising while asset values fall. So you’ll pay more for power, food, insurance and taxes, while your house loses value and your wages flatline. If you happen to be like any of the people I’ve tried to help this week, and lived your life as your parents wanted you to, well, you’re pretty much toast. As I keep telling anyone who will listen, having the bulk of your net worth in one piece of property over the next few years will be like betting your future on Butterbutt in the fifth. Not diversifying into multiple asset classes, or thinking a baby needs a 2,500-square-foot, is an equal gamble.
Some people come to this sorry blog because they’re anxiously awaiting a 50% plunge in housing values so they can buy one. Others come to argue a housing collapse is impossible and sustained demand (as we see now) will propel it higher, emasculating mortgage debt. Neither group gets it.
It’s not that housing won’t correct. It will. But Vancouver won’t become Phoenix or Toronto turn into Toledo. By the same token, without a burst of economic growth, more jobs and higher salaries, no boom’s possible. Instead, it’s the dangerous, muddling middle that we have to understand.
Modest, but sustained, price declines. Economic torpor. Unemployed, boomers especially, who never work again. Young homeowners under water, until their kids move out. No bang. Many whimpers.
Some people have no time to recover. Millions do.
You?
