At 9 am on Tuesday, after reporters have been locked in a windowless basement room for a spell, the Bank of Canada will release its latest interest rate announcement. It will be a bust.
Despite surging oil, swelling food costs, higher house prices and a jump in the core inflation rate, the central bank will hold firm on rates. But only for six weeks.
In fact, there are two shoes about to drop this spring for the real estate market. On March 18th the 35-year mortgage dies a well-deserved death, murdered by F. And on April 12th, interest rates begin a long and inexorable climb higher, sweeping mortgage costs along with them. The initial increase may be modest, just a quarter point, but there will likely be four or five more added by December, bringing the prime rate to more than 4%, and dragging VRMs with it.
As I’ve explained, the 35-year mortgage croak will be significant. Already we’ve seen suicidal young virgins – at the urging of ethically-challenged realtors – loading up on debt and attacking the market “before they are priced out forever.” Tricked into believing houses will be harder to buy after the rule change, they’re directly responsible for a surge in February sales. Sadly, of course, houses will actually be cheaper after the orgy is over. All that will be left are empty KY Jelly tubes and endless debt.
Hard to imagine how the mortgage rule change could have been handled more badly. The sixty-day lead time begat a flood of misleading propaganda aimed at convincing the most vulnerable and inexperienced of buyers they had to act immediately. It worked. Demand was brought forward. Prices rose. And the ensuing decline will be worse.
As for rates, well, don’t doubt Mark Carney. The central banker’s been itching for months to pull the trigger. He knows cheap credit – as exemplified by the 35-year feeding frenzy – will have disastrous long-term consequences. As family debt increases, future spending erodes. In an economy when 60% of everything depends on consumerism, you can hardly prosper when people are choking on loan payments. The only prudent action is to return rates to normal levels – which would put five-year mortgages back around 7%. Within 24 months, we’ll be there. Just in time for the 5/35 crowd who bought in the last few years to face renewal.
And guess what that means? And did I mention all those geriatric hippies who’ll be hitting 65 at the same time, with big houses and no dough? Such fun.
Meanwhile, let’s talk Yellow Peril.
As this blog bears witness, many Canadians now blame unaffordable home prices on immigrant or offshore purchasers from Mainland China. Anecdotal evidence supports that. Areas of the GTA, like Richmond Hill, Markham and Unionville, are peppered with Asian homeowners. In the Lower Mainland, Richmond is turning into a Chinese-dominated community while upscale neighbourhoods such as Vancouver’s west side are the backdrops for Asian-only bidding wars.
This Asian Invasion has been wildly amplified by the media, prompted by real estate promoters who’ve found it handy to have a Chinese monster on their marketing team. In Vancouver that includes The Key, which sponsored that infamous “Chinese buyers” helicopter ride over a terrified White Rock – all to make pre-sales in a condo building. It came to a head on Saturday when a scary story in the Vancouver Sun quoted Key honcho Cam Good saying: “There are literally planeloads of Chinese coming here to buy real estate.” Good then went on to claim he’s sold more than 500 homes to mainland Chinese investors and immigrants in the last few weeks in Vancouver and Toronto.
That would be quite a feat, of course, since it’d amount to about 8% of all the houses sold in those two cities. Even more impressive, considering there are almost 30,000 realtors in Vancouver and the GTA.
So, Cam sold 500. The others averaged 0.2 each. I think somebody is full of 拉屎.
If the two most active Canadian real estate markets are being held aloft by those pesky, filthy-rich, neighbourhood-busting, price-exploding, airplane-stuffing Mainland Chinese, then you’d think there would be some empirical evidence of it. Like, you know, facts.
Instead we get promotional crap like this, duly parroted by our MSM repeaters: “We predict that this will be a dominant trend for a long time,” Scott Brown, senior vice president, Western Canada for Colliers International residential marketing, said in an interview. “Some of the most expensive real estate is only being marketed to Chinese buyers. And Vancouver and Toronto are very popular.”
But perhaps I’m just a gnarly old cynic who has seen too many people fall for the ‘buy now or buy never’ mantra. I’ve seen it with houses, Bre-X, dot-coms, cottages, sun belt and Nortel. Incredibly, it works every time. All it takes is a threat, some confused reporters, a hot marketing guy and people who’ll believe anything if they hear it enough times.
And here are two right now.
My wife and I each have professional degrees and have VERY good jobs. We are conservative and big savers. We just sold a property for 45% more than we paid in 2008.
We could purchase a home in the $1m to $2m price range with cash. We simply can’t fathom paying that for the properties that are listed in that range (except perhaps some in West Vancouver). We can’t bring ourselves to buy what appears to be grossly over priced real estate. Our issue is that we need to live in Vancouver for work.
We are also concerned that the wave of investment from mainland China will not abate and we will eventually be completely priced out of the market. One could argue that logic would dictate otherwise since many of these properties are sitting vacant (I understand that two thirds of the Shaw Tower is empty).
I can’t believe I am about to ask the following question but is it possible that Vancouver is in fact different and will be the exception to the rule? Have you carefully analyzed the Vancouver real estate market? It is perhaps easy to blog that the market is unsustainable in the context of Canada (cost of homes relative to average income) but can foreign investment skew the market significantly and permanently?
See what I mean. Yellow Peril. This will not end well.
Priced to sell - $2,199,000
“Rare opportunity to own a half block from Locarno Beach on freehold 60 by 95 lot. Build your dream home on one of Vancouver’s most prestigious streets.” Listing here.