In the middle of the financial crisis, with car companies going broke and car salesguys throwing themselves from hoists, I bought a new car. Cheap. So was gas. It cost about forty bucks to fill. I brimmed it again yesterday, for $75.80.
Some smart people, like Jeff Rubin – defrocked chief economist at CIBC – swear it was not the US housing crisis, scummy loans, greedy bankers or house-horny subprimate credit-suckers that caused the financial panic. Instead, it was $147 oil. The world couldn’t take it. His argument is a sound one. Soon you’ll see why.
As oil peaked in the summer of 2008, inflation roared higher as we all paid huge amounts for energy. To curb rising prices, central banks jacked rates. The Fed did it. So did the Bank of Canada. By the autumn of 2008, a five-year mortgage was 7.2%. VRMs were above 5%. House prices started to wilt.
In the States, it was a disaster. Higher oil prices, energy inflation and rising rates came as the real estate market was deflating after hitting its bubbly apex two years earlier. Shock enough to start a recession and send housing hurtling lower. A few months later we were sharing squirrel recipes and staring at a neo-depression.
Airlines grounded planes. Consumer spending evaporated. Layoffs mounted. Markets tanked. And the people who never saw it coming, saddled with crazy-expensive houses, big debts and scant liquid assets, were creamed.
I mention this in case you were unaware that oil prices have now tripled in 24 months. In February of 2009, when I bought my new Jeep, a barrel was $31. Monday night it was $94. And it’s probably not stopping there.
The Egyptian Revolution now sweeps through Libya, after infecting most of the Arab world. The country’s despotic, shades-wearing, camel-hip leader dispatched the military to mow down civilians, which also sent oil workers scrambling and shot prices even higher. Brent crude passed $108 and US contracts jumped 5% during the day, then pounced to $94. Libya is the first major oil producer to get the revolutionary fever, and Saudi Arabia may not be far behind. Then $200 oil is coming.
Could this happen at a worse time? Hard to imagine. Governments in much of the world are drowning in debt after the financial collapse and desperately trying to kindle growth. Here in Canada, thanks to real estate, families have never before owed so much, saved so little or been so dumbass stupid. A modest rise in interest rates, following an energy shock and spurt of inflation, would crater personal finances.
For some months now this miserable outcast, oversexed blog has warned you about asset deflation and price inflation occurring simultaneously. It’s not cool. For people with the bulk of their net worth in real estate, for example, it means falling equity and rising costs. The value of your house plops but mortgage rates rise. Salaries flatline or decline along with corporate profits, but everything costs more. Inflation eats into monthly cash flow, so you’ve less to spend on iPads, Chablis and all-natural dog chow. Consumer spending drops. Bingo. New recession.
This is more likely than you may think. It’s one hell of a lot closer than 99% of the population imagines. Poor suckers. They were shocked in the autumn of 2008 when the world ended. Why hadn’t the babe on Global TV warned them?
As you know, most people have spent the last two years not saving, building up liquid assets, paying down debt or preparing in case things hit the fan again. Instead, they’ve borrowed their brains out at rock-bottom rates bound to reset, buying houses at historic high values destined to fall. That interest rates would climb and real estate moderate was a given. Now imagine how this plays out with Gaddafi’s tail on fire, $2-a-litre gasoline or a return to 7% home loans.
I called yesterday’s post “Be afraid” for a good reason. Toronto SFH prices rising four times the rate of inflation last year. Average detached prices in Vancouver over $1 million. Mortgage debt at a trillion. Unbuilt Burnaby condos snapped at $700K a pop. Virgins desperate to over-borrow and bid at the worst moment. Speckers and flippers to the right and the left.
Yet stare into the eyes of the person beside you at work today. Tell me what you see.
Was it the faux line-up? The pimping by Global TV? The bargain appeal of $700 a square foot? Planeloads of condo-horny Mainland Chinese? Or is this pathetic blog now so full of crap it can’t see a real estate rally of historic proportions with no upside limit?
OMG. Is it different this time?
Beats me. I just come here for the babes. But it’s an interesting thing that’s happening across the country. In Halifax houses are selling like snowblowers – at a discount. In Toronto a SFH now costs a withering $755,000 with 17,000 new condos on tap, and yet sales have declined year-over-year for seven months. In Calgary prices are off their peak by 15% with condo owners having to take a 30% haircut from what they paid three years ago. And in Vancouver, well, it’s February of 2000 all over again, and Pets.com just launched its can’t-lose IPO. Yeah, baby, we’re on fire…
(Actually money-losing Pets.com attracted an instant $82.5 million from investors. Nine months later it was bankrupt.)
As you likely know by now, the condo tower in suburban Burnaby with the $700,000 units resplendent with laminate flooring (an upgrade), sold out on Saturday. Six hundred people lined up, snapping 202 units, with 2,600 more desperados on the waiting list. By the end of the day, there were units being offered on Craigslist by flippers. In fact, there’s a decent chance every single unit was purchased by a speculator. After all, with occupancy three years away (or never) this was a pure futures play.
So here’s the question: Is it really different this time?
More and more people obviously think so. This comment posted here yesterday encapsulated the sentiment that, well, we have crossed the threshold:
I think condo and house prices in BC (or at least in Victoria and Vancouver) are madness, but I’m wondering if there hasn’t been a fundamental shift in Canada in how we view housing– as a commodity, as an investment, not just a home. Yes, we’re overdue for a major correction in house prices, but I think our political ‘leaders’ are going to be doing their best to avoid one if possible, e.g. by keeping interest rates low. Perhaps things have changed permanently. After all, it’s psychology, not real value, that has driven house prices up to where they are now– perhaps there won’t be enough of a major shake-up to change that, and we will be stuck with high housing prices for the foreseeable future.
Hmmm. Real estate as a commodity and storehouse of value. An alternative to financial assets because it is real. Almost like money in its own right. Sitting on soil that cannot be replaced because it is of nature. Wrought by the hand of the Creator, not of man. Intrinsic value. Timeless and eternal. Standing soundly and assuredly outside of laws. Real wealth.
That, by the way, is exactly what the gold bugs think, too. And they are just as screwed up as the numb nobs who paid world class prices to buy a concrete box in Vancouver’s lousy imitation of soulless Mississauga.
If there is anything the US experience should have taught us (and most people have learned nothing ) it’s that real estate has no intrinsic value. As in Detroit, it can go to zero. As in southern Florida, average families can lose $113 billion in equity by doing nothing. House prices can fall steadily for five years, then fall again, just because there are no buyers. It can happen in retirement ghettos like Cape Coral, or upscale cities like Boston or Seattle. People with houses and mortgages can see values plunge precipitously while they are helpless victims. With a quarter of all Americans now underwater – and most were not subprime borrowers or McMansion gluttons – the average equity citizens have in their homes has plunged to just 2.6%.
So, no, real estate as a commodity is no more real than Nortel. And for many investors, it will have a similar outcome.
But will the government do its best to avoid a housing correction by, say, keeping the price of money at absurd levels?
Nah. Of course not. The little orgy-in-the-condo-tents we saw this weekend in BC is exactly why interest rates will be increasing. The last thing the economy needs is an asset bubble rife with speculation, fed by cheap money and the herd’s conviction that prices can only move in one direction. It’s madness like that that ensures the outcome is a hard landing.
There’s only one reason why house values change. It’s not Allah or the new paradigm. It’s not a shift from money to commodities. It ain’t nature or fate. It’s just what people want. And sadly, they’ve the conviction of weathervanes.
Now, the winds point them to greed. Soon enough it will point to fear.
