Entries from March 2011 ↓

Imagine a place where housing’s hopelessly unaffordable. Where it takes six or nine times an annual income to get a home. Where young people, despite their inexperience and lack of money, are dangerously pushed into piles of debt. Where folks are told there’s a shortage of land, in a country that’s mostly empty. Where government has purposefully inflated real estate. Where anyone can flip on TV and see what housing excess did to the middle class in Britain or America. But where everything thinks it’s different.

And it ain’t Canada.

Two weeks ago a home buyers strike emerged in Australia.

Interesting, because the country of 22 million is in the throes of a housing bubble just like ours. Prices have raged higher since the economic crisis three years ago, fueled by low rates (now higher), easier credit and a real estate-horny government. Weeks ago The Economist figured Australian houses are overvalued by a withering 56%. And Demographia ranks Sydney among the most expensive cities in the world (9.6 times income), right ahead of Vancouver (9.5).

Speculation is rampant. Investors have snapped up properties, but (like here) market rent won’t even cover the cost of carrying them. And the MSM is filled with opinion pieces and quotes from politicians and experts saying there is no bubble – just a robust market based on economic fundamentals. Hic.

But at least some people aren’t buying it. Like Paul, who reads this pathetic blog. He writes me:

I’m a Gen Y and of all my friends here in Australia very few have actually bought a house, what’s more these few only bought prior to the start of 2010. The majority of my friends however (including myself) rent, and of that majority none of them want to buy a house at the moment. The interesting thing is, go back to 2010 and most of this majority wanted to buy a house at that time, so sentiment has changed fairly quickly (at least for my generation).

It also mirrors what’s happening in the US. Surveys show that while 85% of Americans thought owning a home was a swell idea a few years ago (in Canada it’s now 90%, says RBC), that number has now plunged to 69%. Worse, among people under 30, six in ten want nothing to do with real estate.

So, a group called Prosper Australia, which usually lobbies for tax reform, has issued a call for all property virgins to remain whole. Stay away from house deals, it says, before “the flip into a falling market” which is says is imminent.

Here’s the media release:

“When the Great Australian Land Bubble bursts – just as land bubbles all around the world have – the freshest buyers are totally exposed. They face financial ruin as house prices fall below their debt. The crippling mortgage repayments become pointless. We cannot help those who have recently bought, but we can warn prospective buyers – particularly first-timers whose innocence and heavy borrowing leaves them uniquely exposed.

Residential properties are trading at between six and nine times earnings – depending on assumptions. Historically, they have fluctuated between two and a half and three times earnings. A buyers’ strike is the only rational response to current land prices. Frankly, prices are ridiculous. How anyone can pretend Australia has a land shortage beggars belief!

Some argue prices have arrived at a new and permanently high plateau, but the historical record shows reversion to the long term average – in every case without exception. I remind you there are 1.3 million Australians with negatively geared rental properties. They are diverting all rents and some personal income to meeting interest payment in the hope of capital gains. When only capital losses are expected, investors will flood the market and overwhelm demand. Buyers will step back, making it virtually impossible to sell at any price.

Do not underestimate the scale and significance of the transformation that is about to unfold. Price falls are imminent – protect yourself. Don’t Buy Now!”

So, does the movement has legs? Has it become a media darling? Or is it viral?

“As far as I know,” says Paul, “it has had very little or no attention in the mainstream media. Politically this movement has not had any mention, however the green party is beginning to talk about the housing affordability issue, so if it’s going to get mentioned it will probably start with the greens.  As for the public consciousness I think once again it is too early to say, but it seems sentiment is really starting to change anyway.”

If you want to know more, here’s the Prosper Australia page, here’s the Facebook page, and here’s an online forum kicking the idea around.

As you browse this material, think of all the dewy-eyed, hormonal, brainwashed young bovines who stampede to every new home sales trailer in Milton or condo project in Burnaby, snapping up properties in less time than it takes to choose a flattering thong (I know). As this blog’s pointed out, the tiniest of real estate corrections is enough to throw tens of thousands of unsuspecting young homeowners into negative equity. Worse, a protracted housing slump (and it’s coming) would erase their savings, destroy their financial futures and saddle them with debt without the prospect of equity. In short, way worse than rent.

Let me leave you with a couple of facts that cropped up in the last two days – reminders of what a housing correction can look like.

• In the suburbs outside New York, it’s estimated housing values will recover – by 2020.
• It’s now believed US realtors have exaggerated sales of existing homes by up to 20%, meaning the current market is worse than that of the Great Depression.
• New home sales are the lowest ever. (Records have been kept for 50 years.)
• Las Vegas had one of the hottest real estate booms six years ago. A home that sold for $240,000 is today worth $80,000.

Go to your television sets. Now. Turn off HGTV. Rip it from the wall. Fling it into the street.

Stand there, and scream: ‘We’re mad as hell. We’re not gonna take it anymore. I’m on strike!’

Buyers, not sellers, set prices. Pass it on.

Ten days before the last federal election I knew I was toast. Voted in as a Conservative and vowing to promote digital democracy, I’d pissed off Stephen Harper with my independence and my lip. I blogged. I posted video interviews with people from other parties. I let my constituents vote online, then followed their wishes. When reporters asked me questions, I answered. In other words, as an MP, I sucked. I was doomed. And I got dooced.

After sitting as an independent for a few months, I learned the true nature of irrelevance. So I asked the Liberals if there was room for a Progressive Conservative, then joined. It was clear the morning I walked into a barrage of cameras in the new caucus room that I was unelectable. But at least I figured there was a structure to fight for my policy initiatives – pension-splitting, the creation of the TFSA and more damn freedom in the House of Commons.

Ten days before the vote. Twenty-nine months ago. Ignatieff calls. He was then second fiddle to a guy he believed had unjustly defeated him for the leadership (anyone remember Dion?). And he shocked me with his comments. It was a stark reminder where naked ambition can lead a man. I kicked the door shut, grabbed a pen and recorded the conversation.

After failing as a Harper Tory because I wouldn’t muzzle, I was now disheartened to know what lay ahead for the Grits. I can understand people who fight for conviction, but not those who kill for convenience. Mr. Ignatieff could have waited a week and a half before knifing his leader.

So I mention this as personal background. I was in Parliament nine years. I’ll never go back. Both main parties have lost their way. Conservatives have become Liberals. Libs have failed the middle class. Socialists are spent and Greens have squandered. This election is a good example. It’s about nothing.

But will the outcome have any impact? That’s what Michael in Calgary writes:

The election is now a certainty. This will now ensure that the BoC must put off their interest rate hike, the one Mark Carney is so horned up on, until later this year. I am interested on your thoughts on what this means to the housing situation. Obviously it kicks the can down the road somewhat for all those homeowners who are holding the VRMs which are set to blow up once we get back to normalized interest rates. I am a cynic at best, so I am almost tempted to think that Harper foresaw this and wanted the government defeated so that he could not be blamed for the impending collapse. So where do things go from here? Do the leaders of the short-bus parties form a collation and then when the brown stuff hits the fan implode, giving Harper his much sought after majority? Or do you think the Conservatives are strong enough to get a majority this time around (I sure hope not) and then it doesn’t matter what happens from that point? I am unconvinced that they have enough strength to win a majority at this point in time, but am concerned that there is not enough of a strong opposition that this could well happen. Before this digresses into a political discussion I will shut up and await your comments on what this means to housing and our economy at large.

After Mr. Harper spends six weeks scaring the crap out of people about a Lib-NDP-separatist coalition, the likely outcome is another Conservative government. That’s the end of (a) Ignatieff, (b) Layton et (c) Duceppe. Minority or majority, I think the impact on the economy will be the same. Clearly Mr. Harper is happy about this election, and worked hard to provoke its calling. Voters couldn’t care less about contempt of Parliament, because politics is all about them. By forcing this now, the government shields itself from some of the inevitable events to come.

Higher rates are one. Yes, the Bank of Canada is hot to normalize rates and will still be adding 1% to the prime rate this year, and lots more after that. Absolutely this will have an impact on people who bought houses with no money – but the consequences are now a political eternity away in late 2011 and 2012. There will be no Mark Carney thunder until after May. Ironically, rate hikes later this year may be stiffer as a result.

Then there’s the austerity. Be assured if the next budget is a Conservative one it’ll start making government smaller, trimming the civil service (except CRA), winding down the stimulus spending and sticking it to the provinces. Lots of people will applaud this. Look at the Rob Ford factor in Toronto. But it will also slow economic recovery, and help topple housing.

As for a coalition government, seems more than remote. Already the negative spin has hit the international financial media. Said Bloomberg: “Opposition lawmakers toppled Canadian Prime Minister Stephen Harper’s government, triggering an election that may result in an alliance to reverse his corporate tax cuts and overturn plans for more military spending.  While polls show the governing Conservatives would likely win the most seats in an election, the main opposition Liberal Party may seek to form an alliance or formal coalition to govern if Harper, 51, doesn’t win a majority…”

And what of Mr. Harper’s threat an election will murder the economy in a time of risk?

Forget that. Markets don’t care.

In the fall of 2008 as the financial crisis swept over us, equities plunged, jobs washed away, real estate tanked and investors freaked, Stephen Harper promised if we voted for him there’d be no recession, no deficit. And Michael Ignatieff was telling me it was all about him.

Days later, my defeat. It tasted like freedom.