Entries from April 2011 ↓

Days from now will come hard evidence the fling is done. House prices have finally pushed past the point of sustainability. And that noise you are about to hear is moaning from the Lower Mainland – our own dank little subprime rain forest.

It had to happen, of course. No Canadian city can see the average SFH rise to $1 million, especially one where the average income is $83,130, and expect it to last. And all that stuff about the Asian Invasion being responsible for a permanent escalation in real estate values is so much marketing hype manufactured by creative dinks like Cam Good.

He’s the Vancouver marketing guru who’s been playing the supplicant BC media for the fools they are. He hired a helicopter, for example, to fly local Chinese-Canadian real estate agents over a new condo in White Rock, then spun it as a landmark aerial bombardment of Mainland Chinese dollars on the region. That’s exactly the story the TV reporters wrote, from the back of the Air Scare copter.

And days ago the Vancouver Sun ran a column he wrote castigating people for blaming rising prices in places like Richmond and Richmond Hill on the yellow peril – when he’s been the main igniter of conflict, envy and greed.

“If you suffer from real estate impotence, don’t blame Chinese people. Besides, getting all worked up about it will only make it worse. Have a glass of wine. Relax. Stop feeling sorry for yourself and pick up the phone to call a realtor or a mortgage broker, either of whom will be more than happy to show you how easy it can be to get your real estate groove on.”

But actually, you might want to wait. The market’s started to crumble. The Cam copter just ate turf.

These are internal stats (MLS) from the Vancouver Real Estate Board:

The Richmond market, ground zero for China frenzy, has died.

• Listings have exploded. The number has more than doubled since the beginning of March (going from 400 to 850).
• Sales have collapsed. In February, 250 properties sold. In March, sales were 260. In April, it looks like 120 – down 52%.
• Inventory is swelling. In February there were enough homes listed to last 1.5 months. That has suddenly shot up to 7 months.

And even on the west side of Vancouver, where ugly boxes built 40 years ago were overrun during open houses and have been selling for $1.3 million, sales volumes have just plopped by 30%. Across the entire Van area, it looks like sales volumes will be lower in April by 20%. So much for the Spring market.

Says my source, Deep Throb: “I would expect to see Richmond prices fall by 20% by summer. They had a super spike but the sales have now stopped.  Vancouver West – still showing effects from lack of inventory and some serious Asian money on the demand side.

“Inventory at end of April should come in approx 10% below last year.  We’ll see where this goes but the market is showing some signs of cracks at the fringes and people are tapped out for ability to pay.”

Of course they’re tapped out. It now takes more than 70% of gross household income to carry the average Vancouver property. Across Canada, it’s almost 50%. Factor in rising interest rates (the next Bank of Canada announcements are May 31 and July 19), higher taxes (that happens after May 2nd), an economy drop-kicked by a $1.05 dollar, structural unemployment and flatlined wages, and there are no economic fundamentals supporting the housing market. Only hormones. Media drivel. Marketing dinks. Delusion. Public hysteria. Your idiot father-in-law. And Chinese. It’s over.

And with that, we whisk to Winnipeg, where Jimmy the musician writes:

I’m an affectionate and fairly new reader of your blog. I’m not in a great position to take much of your advice, sadly, but I’d like to offer you (and maybe your readers, who knows) a different perspective on why I rent.

I’m a professional musician. Having just filed my income taxes, I am known to have made roughly $21,000 last year. Okay, so I’m not in house-buying territory in the first place, so the greater part of the Greater Fool blog isn’t of much practical use to me. Except, of course, that I am in house-buying territory. My partner and I pay roughly $900 in rent a month jointly, meaning that I could find myself holding the reins of a $200,000 mortgage if I so chose (according to certain banks), and replace monthly rental fees with monthly interest payments. And in Winnipeg, where I live, you can find a decent piece of real estate for $200,000. I don’t plan to, and I don’t want to. All financial considerations aside, here’s why:

I don’t have to worry one whit about taking care of this place where I live. I don’t have to cut grass, shovel snow, clean eaves, paint the walls, deal with flooded basements, renovate, rewire, call the plumber, fix the windows, or clean up after inconsiderate people’s dogs. I don’t have time for all of that. I’m a musician – my spare time is called for; I have to practice, to write, to run around the city to do my job (and to read blogs). I can’t be bothered to look after a house. My share of $900 / month is well worth the price.

Plus, I’m doing better than the 40% of Canadians (apparently) who have no savings! I couldn’t believe that when I read it.  How can I be financially better off than people making five times my income? I manage to put away what amounts to a monthly pittance now, but if I do it long enough (and musicians don’t tend to have a fixed retirement date) will hopefully add up to something where I can continue to live as I do now into my twilight years.

So tell me. How is it that an apartment-dwelling professional musician clearing $21,000 a year is in a better financial situation than 40% of the country? And, honestly, how bad is it that I am?

Let me know if your blog ever needs a theme song.

I’m taking requests.

Months ago a guy building a house near the Bunker went bust. Word was his chain of retail stores faltered. The black Cayenne disappeared and the site went quiet. Weeks later work resumed when the jilted contractor took over. One day leaning out of his truck he said his strategy was to go high-end on the finishings. Soon after it was listed, still incomplete, for over a million. And so it sits. Five months.

In fact, the local paper, flung like a weapon at my driveway from a speeding minivan, is jammed with ads for million-dollar properties. So are the two glossy area magazines. Up front are the lavish, sensual, house lusty ads for spa bathrooms, pet photographers and ultimate kitchens. In the rear, page after page of executive homes, rambling estates, rural enclaves and custom builts.

This, by the way, on the doorstep of the GTA. Horsey country. One home five minutes away by Harley is on for 19 million. But that would now buy 19 perfectly nice excessive houses, all 40 minutes from King & Bay.

This is hardly unique to Toronto. The pattern repeats outside Calgary in the McMansions on the scrubby hills, and in the Lower Mainland of BC. Half an hour from the bidding wars on the west side of Vancouver listings languish loveless.

Real estate corrections don’t arrive like the weather. They materialize like a season. And they almost always eat from the periphery to the heart. The last declines in the three cities mentioned above snuck in exactly thus. Likewise, the American experience of 2006-2011 ended up being a train wreck in agonizingly slow motion. Six years of losses are likely, followed, if all goes well, by at least as many of recovery. Currents estimates are that 2005 prices just might be seen again in 2020.

But Canada is not the USA. At least that’s a key point in a current Canadian Business magazine article which argues that real estate bears (like me, it says) are wrong. No housing correction is coming here. Instead, real estate values will remain flat for a while “while incomes and jobs play catch-up.”

Oh, except Vancouver “which may indeed be headed for a bust” once the Chinese run out of drugs.

The argument is that inflated house prices don’t actually matter anymore, so we should all stop tracking how many multiples of average income it takes to buy the average hovel. (The US market collapsed at 4.6. Canada is now at 5.1. Toronto is 8 for a SFH and Vancouver is 11.) Instead, “a better yardstick is the percentage of average household income required to cover mortgage payments to buy an average priced house.”

Of course, this is 100% dependent on cheap mortgage rates sticking around.

Sadly a lot of people think the Bank of Canada won’t allow rates to rise because it will make people whose house horniness spawned massive debts squirm and capitulate. But actually the BoC cares far more about inflation – which romping real estate helps to fuel. So rates are going up. Soon.

But, like I said, the we’re-not-America card is the one housing bulls like to play the most. We don’t let people walk away from mortgages if real estate values fall, and we don’t give loans to people with low incomes, or who don’t have money. Both are false.

The US has both recourse (mortgages must be repaid) and non-recourse (you can walk) states. All were hit equally with real estate Armageddon. The issue was not defaults, but an unstoppable impression real estate had turned into a lousy place to put money. Once enough people believe that, contract law means diddly.

As for our mortgages, well, we routinely lend vast sums to people who don’t even have 5% to put down on a house. The government backstops the risk on these high-risk loans. And there is a thriving business in Canada which puts low-income people into high-ticket houses – the same recipe for disaster that they discovered in Phoenix and Erie.

For example, there’s this guy. If you make just $60,000 a year, he will put you into an $850,000 house. He’ll also get financing with no proof of income, and obtain mortgages for unemployed immigrants. And this guy. If you don’t have 5% to put down, he’ll get it for you from the Royal Bank. Yes, Canada’s largest lender.

The longer we kid ourselves that the real estate ponzi game can go on, that rates will never rise, incomes will swell constantly and a house is an entitlement, the more profound the consequences. This is a small but growing cadre of Canadians are working hard, and fast, to diversify their wealth.

You will know who they are before long. They’ll look like this.