Off-duty cops moved traffic with a flourish. If you didn’t look up, you might think it was a glam show opening. But it you did, you saw the Wal-Mart sign. Oh well.
I know the area of north Oakville well. When I was the MP I hosted lots of public, open ‘town hall’ meetings to try and ensure my constituents were heard. But they had nothing to say. Except when it comes to houses and things that might affect property values – like a power plant or a group home. Then, hell hath no fury…
But this past weekend, as an entire country in Europe was being bailed out of debt – partly because its banks bet and lost on the real estate market – Dundas Street was jammed as people tried to inch into a new homes sales centre. Word is several hundred new (unbuilt) houses were released, for which over 9,000 people has registered an interest.
In fact, the latest numbers from GTA homebuilders this week tell us desire is alive. New home sales moved ahead of last October and reversed a 32% decline in September. Seven of ten deals were for condos, and for the first time the average price of a new home in the area passed $500,000. The average new condo now sits at $424,000.
And as I have chronicled here over the last few months, there is no shortage of buyers. Developers’ sales trailers perched on the side of muddy fields full of pink stakes have been assaulted by investors, many of them camping out all night, sucking back Timmys and peeing in the bushes, just to get that coveted red dot on a wall map.
Given that the resale housing market is in its fifth month of decline in most major Canadian cities, with a full-fledged real estate meltdown seizing places like Edmonton and Calgary, what’s up? Why the lines to buy homes which are selling for 5.2 times the average household in the country’s largest city? Where the official jobless rate, at 10%, is higher than in recession-ravaged USA?
One reason. Cheap money. Oh yeah, and house lust.
It’s a heady mix. Banks offering special on-the-spot financing, working with developers to create a seamless homebuying experience so buyers can get granite C tops & s/s apps, extra laundry and media rooms, designer decor and extra-wide 35-foot lots on streets where the nearest litre of milk is a litre of gas away. Builder-induced competition plus online pre-registration now ensures enough competition that gone are oddities like comparison shopping, a lawyer or sober second thought.
So last month 4,535 new housing units sold in The GTA, worth $2.3 billion. If the average down payment was equal to the national norm (7%), then forty-five hundred families just took on $2.1 billion in mortgage debt. In one market, in one month, at historic rates destined to be reset at about double, in a sputtering economy.
Tell me again how this ends well?
Anyway, back to Europe. The Irish are pretty much screwed (that seems about right), now that the IMF is taking over the economy, the coalition government has fallen apart and there’s shoving in Dublin. Just a week ago politicians were saying everything’s cool.
Now they’re saying it in Lisbon, and nobody believes that, either. Portugal’s a mess and will likely be staggering into the arms of a bailout within a few weeks. Greece, by the way – last Spring’s basket case – is in worse shape now than then. The debt crisis has deepened, and the country may not qualify for another round of financing. Speaking of which, the EU financial stabilization fund backing all of this is unfunded – which means players like Germany will have to float bonds to get the money to hand over.
But the big one is yet to come. Spain. The economy is melting in the wake of reckless bank debts racked up in the real estate market, which has collapsed. (Where have we heard that one before?) Lots of smaller regional banks are virtually bankrupt, and their demise would set in place dominoes that could fall across Europe.
Meanwhile in France and Britain severe austerity budgets (largely the result of a property collapse) have sparked rioting, given pink slips to hundreds of thousands of public workers and made millions worry about their pensions. And did I mention America? The transformational president now quacks when he walks with unemployment at Depression-era levels in some states, a housing freefall, Tea Party wackos in office and a legacy of unrepayable debt.
But yadda, yadda, yadda.
This is Oakville. Fortress GTA. Canada, eh? Let the Irish and Greek and Portuguese and French and British and Spanish and American losers wallow in their own shallow failure. Probably deserved it anyway. Pansies.
We, after all, have Mike Holmes, Debbie Travis and our national rodent, Justin Beaver.
Perhaps it’s best illustrated with a story.
Matthew and his wife, Gayle, have a rented apartment, and a cottage worth $300,000. He’s 63, retired, modest pension. She’s 56, retires in two years, also with a pension plus (thanks to being a government worker) a cash ‘retirement gratuity’ of $40,000.
They have a LOC with $46,000 borrowed, forty grand in cash and $170,000 in investments (RRSP and non-registered). The apartment rents for $2,400 a month and the cottage costs $6,000 a year to keep.
Scorecard: $464K net worth, of which $300K, or 65%, is in real estate, the rest liquid. No mortgage.
“In about a year,” Matthew writes me. “we’re planning getting out of the apt and buying a condo in the $250,000 range. After the down payment, and paying off the line we’d have no debt, no investments and have a mortgage and maintenance fees monthly payment of about $1,400. Are we sane here in our plans? i.e. using all of our investments plus some of our savings to pay off the line and ensure a manageable monthly condo cost? Are we OK if mortgage rates jump at renewal time 5 yrs later? Is the timing of our proposed condo purchase good?
“Like most, we have been bumbling along blindly…. only to be given a shot in the arm by your daily posts.”
So, after the condo purchase, Matt and Gayle would still have net worth of $464K, but now 100% in real estate and none liquid. Mortgage of about $100K. Living costs down $12,000 a year – but their cash flow is unimproved, since this is less than the income their investments earned. These guys have increased their risk dramatically. Naively.
What does this tell us?
Just how dangerous Ian Lee is.
On the weekend the Sprott School of Business professor, whom I dissed in my last post for fibbing in hyperbole to a numbnuts Toronto Star reporter, weighed in with about 5,000 pithy words in the comments section to justify his position. He was as articulate, verbose and referenced as you’d expect. I was so mesmerized I forgot to dock the pigs.
The prof’s point, argued well, is that no US-style housing collapse will befall Canada. He credits our system of banking, mortgage insurance and lending practices, as well as pointing out cultural differences and brushing off concerns about structural unemployment, house-bailing Boomers and an evaporating middle class. His positives include immigration, state manipulation of the housing market and affordable houses while be downplays higher mortgage rates, saying a 2% jump would change nothing.
And maybe he’s right. Perhaps there will be no US-style collapse. Wouldn’t surprise me.
In fact, I’ve tried for more than a year to suggest there will instead be a Canadian-style housing mess. In this scenario, no wave of foreclosures forcing families, their dogs and couches onto front lawns as news crews film. No 40 to 70% decline in property values in key markets which soared (Vancouver, Calgary, Saskatoon, Winnipeg, Toronto). No ubiquitous negative equity wave submerging more than a quarter of all homeowners, turning their homes into illiquid prisons. And no financial system collapse thanks to greedy, myopic bankers who securitized the poop out of mortgage loans with no actual skin in the real estate game.
Having said that, Canadians have screwed up housing just as intensely as Americans. We inflated values bizarrely until average families could not afford average homes. We turned the need for shelter into house porn, and got all horny for granite C tops and S/S appliances. We allowed couples without money to buy houses. Our government wiped away lender risk and heaped it on the taxpayers. Our central bank brought in emergency teaser rates in a deliberate attempt to encourage profligate borrowing. We turned privately-owned housing from an earned reward into a universal entitlement. And in a time of recession and unemployment, we morphed boom into bubble.
As a consequence, we have more debt and social uncertainty than at any time in several generations. If the wind shifts badly, how are we to escape the fate which befell the US middle class?
So my scenario for a Canadian real estate mess remains pretty much as I have articulated it here over past months. A correction of 15%-20% in prices (depending on the market), followed by a multi-year melt which could shave off another 5% annually, amid slumping sales, a sagging economy, higher taxes, increasing rates and a jump in listings. In the end, by 2015, houses sell for far less.
It’s not apocalyptic. But it’s bad enough. Enough to wipe out the equity and immediate futures of tens of thousands of recent 5/35 buyers. Enough to turn real estate into a disastrous investment for anyone with the bulk of their net worth in it. Certainly enough to sink Boomers who listen to Mr. Lee and tank, up like Matthew and Gayle. Enough to make fools of those people who lined up to buy pre-built condos in Toronto towers or from the pneumatic MissyBunny in Cowtown. Enough for me to continue saying this is the time to exit real assets, embrace financial ones, and love liquidity.
Ian Lee demonstrated he has enough courage and concern to post here and defend his position. Ballsy. He personifies the mainstream belief houses constitute real wealth, are riskless and can only augment in price while being the best store of value. Most of your friends, colleagues and dodgy relatives (all of them, if you’re Italian) share this religion.
And that’s why a retired couple can put 100% of their wealth into one asset and call is conservative. Pray for them. They know not what they do.
Et tu, Ian.
By the way, Mr. Lee, in coming to this narcotic blog, did you know you’ve just joined a cult?
Here, dude, have some Kool-Aid.
