On Toronto’s western waterfront sits a luxury condo building called NXT. To sell it last year the developer went nuts. People who signed up on a single night, for example, got a year’s worth of mortgage payments with just a wispy deposit. In fact, the cash-back paid for all of the down payment. So, the condos were free. You just needed to shoulder a mortgage worth about $500 a square foot.
Months after the building was finished, vast numbers of units stand empty. Sold, but empty. Most speckers thought they’d be able to flip before occupancy, but no such luck. This market’s already dying. And the renters shall inherit the earth.
This ad appeared on Craigslist. A two-bedder sold for north of $600,000 can now be rented for $1,200 a month, which is 50% of the occupancy cost. It’s also the same rent as others are paying in the building for half the floor space – all the proof you need that rents are about to come tumbling down along with the value of real estate.
It’s turning into an interesting year, just one month in.
It may be a smouldering Egypt, a sputtering Europe, a divided America, an oil price shock or an unsolvable debt crisis that defines what comes next. As this new week dawns, crude is above $90 again, the safe-haven US dollar is bouncing higher and stocks are selling off. The contagion of political unrest could destabilize the Middle East causing higher energy prices as oil supplies are threatened. A pro-Israel Egypt could turn into an Arab foe. Bad news. All while there are wars in Iraq and Afghanistan and degrees of mayhem in Tunisia, Yemen and Lebanon.
What it means: lower condo prices in Toronto. Tears in Vancouver. And millions of house-horny people wondering what the hell they were thinking last year.
The connection between Cairo and Kitsilano is pretty simple: lower economic growth. For the past two years governments have blown their wad trying to rekindle inflation, stimulate consumer spending, spur mindless spending and blow endless sunshine up everyone’s butt. The result has been historic levels of public debt, guaranteeing higher rates and taxes in the future; a staggering mortgage mountain; wildly inflated real estate values; and an economy that’s barely moving, despite almost-free money.
Since the financial crisis two years ago, this apoplectic blog’s been warning that the inevitable would be, well, inevitable. People sucking up huge debts to buy assets at gasbag prices with money destined to grow more expensive, in the middle of a recession were taking the gamble of a lifetime. Soon, I’d say, they’ll start to understand this.
It may or may not be Egypt. Or $2-a-litre gasoline. Or the failure of Barack Obama. Or house-dumping Boomers. Or more export and job loss. Or higher rates and banks hoarding money in Brazil, India and China. There’s a growing list of perils, any one of which is enough to make you question the stainless and granite gods we worship.
While I have no idea what will happen (actually I do, but I’m modest), my best advice still stands: If you’ve been thinking about dumping your real estate, do it now. Today. You’ll thank me in June. If you’ve been trying to buy before the 35-year mortgage dies in March, change your Huggies and wait two years. You’ll get way more for way less. If you’re in debt, sell stuff and get the hell out. If you’re an investor, own things that pay you yield and give you balance.
And let’s really understand what can happen when people come to their collective senses.
Canada is not the USA. But people are people. Americans got house horny a few years before we did. They inflated real estate, dropped lending standards and borrowed too much. So have we. Then this happened:
It’s been five years now since the housing boom in Arizona turned to bust. Home sales started to decline in mid 2006, then tumbled a year later. In one section of Phoenix (Zip code 85009), the median home price declined from $160,000 in 2007 to $30,000 today. That’s 81%.
But less spectacular are changes most people believe are now permanent across the United States. First, there are vastly more renters – by choice. As home prices plunged, investors snapped up cheap property, which now forms a new stock of rented, not owned, shelter. It could be a generation or two before Americans trust real estate again, guaranteeing prices stay where they are. Houses, which most people saw as their wealth and retirement plan, are a failed asset.
Second, millions of families are trapped in their high-end homes because nobody wants to buy them. Typically upper middle-class, they’re eating through dwindling savings and investments trying to survive a bust which will outlast them. They’re among the staggering third of all households who now owe more than they own. Because this has not happened before, the outcome is unknown.
Canada is not America, as I said. There may be no places in this country where real estate falls in value by four-fifths. But a one-fifth decline could put tens of thousands of recent buyers underwater and create a mortgage or bankruptcy crisis. It would wound our economy, which is now 20% made up of real estate activity – repeating a blunder in California.
There was only one mistake Americans really made: assuming real estate values would continue to rise. Therefore they could justify small down payments, big mortgages and low interest rates they knew would eventually jump, since increases in home equity would keep them afloat and justify the risk. But, no asset swells forever. Only human greed.
I read on the weekend that average resale prices in Calgary will jump 5.4% this year, and 7% in Winnipeg.
Are we there yet?