Entries from May 2011 ↓

“So,” Raj says, “we all know that average prices are rising and people are getting priced out of the market (me included).  That explains the demand side of the equation, but what about the supply side.  No one is selling (at least in the GTA – Mississauga in particular), which is creating tight supply. Question is, why is no one selling? Why aren’t they putting their properties on the market, this is the time it usually happens during the year isn’t it?”

You’re right, Raj. Spring is usually real estate’s rutting season, when rivers of hormones make the streets slick, buyers thrust their offers and sellers lustily receive them. But this year, it’s all turned icky cold – and not just in the GTA – with both sales and listing down in many markets, as prices squirt higher.

In godless Toronto, for example, we’ve had almost a year of year-over-year sales drops, while the price of an average house has jumped by many times the inflation rate. As I mentioned recently, the average SFH in 416 is now one Hyundai away from $800,000.

But this is nothing compared to the sales slaughter and price romp taking place in BC’s Fraser Valley – distant burbs of Vancouver (where zombie Chinese lurch through the streets suffocating the locals in bales of currency). In fact, as the local paper reported days ago: “Realtors in the Fraser Valley are warning people in Abbotsford and Mission not to panic after property sales in the two communities dropped substantially in April.”

Panic?

Actually, digs these stats: Sales of detached houses dropped in Abbotsford last month by 33%. In Mission, down 42%. In fact, in that community deals collapsed by almost 50% from just the month before. Townhouse sales crumbled by 78% and condos tanked 71%. But prices, incredibly, have now soared 11.5% in a single year.

This experience is being repeated elsewhere across the country, as sales and the number of available houses shrink and average sales prices swell. It seems incongruous, but there are solid and disturbing reasons behind the phenom.

Demand? No wonder it’s down. And about to fall further. Unemployment is still way too high (8.5% in the GTA, for example), while household incomes are barely crawling ahead. Household debt’s now higher than in the profligate US of A. Corporate taxes may be falling, but not those slapped on families. In fact, it’s this tax fatigue in BC that has the new preem fighting for her political life, about to hack the HST and up the levy on small businesses.

Everybody knows rates will be rising this year. We also know the Harper feds will be cutting spending and probably the public service. We know Europe is toast, the US faces crippling debt, and Sarah Palin will soon run for president. The 35-year mortgage is dead, banks are finally tightening up on credit and 70% of us already have a house. So, why wouldn’t demand go flaccid?

As for supply, two reasons most people are staying put. The first I just spelled out – financial anxiety. The world is a scary place right now, with wars, bankrupt countries, earthquakes, killer twisters, floods, rogue nukes, no Oprah, street riots and mounting debts. It takes confidence to sell your house, then worry about moving and finding another one. And that’s the second reason. Most people are so bummed out over house prices – thanks to the numbnuts real estate industry constantly pumping them – they fear they can’t replace what they might sell. And as I mentioned some days ago, most sellers would never dream of shelling out for their own homes what they think somebody else should pay.

So, they sit. And this is human nature. People quiver and stall when they can get the highest price, then gush the market with listings as values start to plunge. Go figure.

Finally, price. Weak demand may be chasing weaker supply, but there are sufficient idiots left to punch average prices higher, be they Asian idiots or our beloved Canadian ones. They continue to be gassed by low mortgage rates, and believe Phil Soper and Don Campbell have been sent here to lead the rapture.

So, Raj, the best strategy is to chill. Take off the antlers, dude, and just wait. This will all make a lot more sense in the months to come. Even the OECD is reading this oversexed blog. It’s now warning of a weaker economy due to a litany of global crises, “combined with reduced spending from heavily indebted households dealing with softening housing markets.”

The best strategy is to invest in liquid assets within a balanced portfolio (I’ve already told you how), and get horny on mls.ca when the annual juices flow again a year from now.

In the meantime, zip it.

When I built my first house, at age 23, the contractor’s bill was $63,000. I paid much of that with a mortgage. The rate was 11%. I was making twenty-eight grand at the time. I was happy.

Today’s twenty-something homebuyer in, say, Toronto, would pay $440,000 for an average condo, finance it with a VRM at 3% or less, and earn about $45,000. So whereas I ponied up two and a half times my annual wages to get a two-story house sheathed in green aluminum, today’s kid has to fork out almost 10 years’ worth of earnings to get a concrete box.

Did towering mortgage rates decades ago help keep house prices in check? Is Pippa hot?

The fact emergency interest rates have been in place during the sharpest escalation in real estate in living memory is no fluke. Nor is it lost on Brother Carney. The more income that’s sucked off by houses, the less there is for spending on other stuff – like cars and adult novelties – which actually create jobs. But, ironically, as interest rates jump to temper inflationary housing expectations, billions more are flushed to the banks in interest payments.

Worse, higher rates which depress house values also kick the crap out of homeowners’ equity – making everybody feel poorer (and spend less). Yet without this brake on house lust, real estate becomes unaffordable and mortgage debt swells uncontrollably.

This is why, if the Bank of Canada calls you in the morning and asks you to be Governor, you turn the dudes down.

In any case, it’s coming. In one way or another, the air will hiss out of this housing gasbag. It might be a series of rate hikes alone, or a modest nudge in mortgage costs accompanied by tighter credit rules. But it’s now a matter of economic policy that Canadians can no longer afford to hand over an average of 47.5% of their pre-tax income for a roof.

Here’s why.

The average house in Canada (says CREA) sells for $372,544. The average household income (all the money a family takes in annually) is $83,010. So, the average house costs the average family 4.5 times what they make. This is exactly the point at which the US housing market collapsed.

Speaking of the Yanks, the average house price south of us is $173,000. The average household income (post-recession) is $64,400. So, the average house costs 2.7 times what families make. And hey! That’s about what I paid for my first digs.

In fact, the 32% decline in US house prices over the last six years has brought with it an outbreak of affordability. More people can afford houses now than at any previous moment. In the last 90 days, almost 75% of new and existing homes could be afforded by families making that paltry $64,400.

Of course, it took a financial crisis, a banking collapse, massive government upheaval and the onset of a global contagion to get there, but what the hell? I guess we could choose to go the same route. But higher mortgage rates and less credit would probably be less painful.

Those people who come to this nasty blog to assert rates will never rise because the government wouldn’t risk a housing correction better not be acting on their own advice. Of course the cost of money is going up. The consequences of the status quo – homes people can’t buy without indenturing themselves forever, shackling economic growth – aren’t on. Brother Carney and F know this in spades. Pricey real estate and the speculation it breeds (remember what I told you about Toronto condos last week?) are economy-killers.

We just learned US house prices are now falling at the fastest rate since the darkest days of 2008. The problem is not less confidence – people can afford houses like never before. Instead, the issue is a simple lack of demand. Real estate stung. The memory lingers.

There’s a lesson in here somewhere. Houses have no intrinsic value. They can go to $1 million. They can go to $1. They’re only worth what buyers are willing to pay.

When the twenty-year-olds learn that one again, stand clear.