Those who stagger into this blog to learn when house prices will tumble are finally in luck. However understand that pricing is just part of the real estate cycle. First, of course, we need foreplay. With me that normally involves personal lubricants, Strange Advance and jumper cables. But don’t judge me.
To get cheaper houses we must pass through a period of languid uncertainty, then declining sales – often with rising prices (that would be now) – followed by even lower sales and tepid price reductions plus the first inklings in the minds of the masses that real estate is expensive and iffy. Often this comes with some hard news, like rising rates, federal spending cuts, stock market volatility, swelling energy and living costs, a new war, natural disasters, sovereign debt crises, US recession, or a tsunami and nuclear meltdown in an Asian country. Just picking random and crazy things out of my hat…
Shortly after some combination of the above, a few media articles appear expressing a contrarian view that real estate is screwed, while even some economists break the silent code and admit the emperor’s naked. Before you know it, sales slide again and all hell breaks loose. Young buyers stop camping out in bushes in front of sales trailers. Parents give up harassing and belittling their houseless loser children. Renters come out of the closet. Couples who bought with 5% down go into relationship counselling. HGTV stars look for work roofing.
We’re not there yet (and no two markets are the same). But we’re definitely on the path.
Like with that BMO Economics report yesterday, right?
In case you missed it, one of our big banks is now on record forecasting a fat drop in Vancouver, and a wake-up call for Toronto. BMO reminds that Vancouver has seen four crashes in the last thirty years, ranging from 15% to 30%, and since real estate’s soared by 188% in the last ten years, we are about due for the gasbag to rupture. How bad? No call on that. But if rates rise or HAM falters, think Biblical.
As for godless Toronto, houses have about doubled in a decade, now costing 6.7 times income (in 416, the multiple is eight). The last time this happened, the bank offers, prices took a 25% dump.
Of course, given the plethora of long-term risks now rampant in the world, plus household debt and the Boomers burn rate, my bet is these kinds of plops will form the dramatic first events in a long process of real estate angst. But, how is this not already evident? How can rational people believe in virgin birth, the House of Commons or endless price hikes?
Oh, one other sign the inevitable moves closer? Everybody you know’s in denial. And the rest are merely confused. Cue Kimberly:
Hello Garth: Firstly I just want to thank you for sharing your expertise with all of us insane Vancouverites rushing to jump off the cliff. Secondly I want to acknowledge that I do in fact know I am perhaps the greater fool to think you might actually have the time to respond to my personal e-mail. Nevertheless, it is my attempt at asking for help, perhaps you might call it a suicide call for help.
My husband and I (with two small children) are putting our home (townhouse) up for sale within the next month, in hopes to buy a larger house that will accommodate us. And we would like to stay in the same area. GASP! No more holidays for us.
According to your blogs we are going to kill ourselves. As I read more and more from you, I feel like we should still sell right now, but perhaps cram ourselves into an apartment and rent for a few months, until the bubble has burst! Yes it would be extremely challenging, having to pack and move twice, store everything, not knowing where we would be moving and when we
would be moving (children’s schooling etc). But seriously, sounds like it would make sense economically.
Any advice? And can you please let me know when exactly the bubble is going to burst, just a month is fine you don’t have to tell me the exact date. :o). Sincerely, Kimberly
Kim, Kim. Babe, you already know the answer. If you jump into a larger house, likely taking on a mortgage the size of Uzbekistan’s external debt, you may never recover. Sure, your mortgage rate will be 4% or less right now, but you’d better figure on 6% or higher upon renewal. And at that time there’s a damn good chance the place will be worth a fifth or a third less – wiping out the equity from your former house and leaving a gaping hole where your net worth used to be.
Why would you financially imperil your family, buying a house when one has never cost more, at a time of economic uncertainty, when rates will rise, your city’s unaffordable by galactic standards, a demographic tidal wave nears and real estate ownership is at saturation levels? Because you think it will go higher? Then, Kimmy, I have failed.
But if this is just about finding more space, what’s the problem? Sell your house to a horny Asian, invest the money, use the income to supplement your former occupancy costs and rent a $2 million house in Kits for two years.
So you move twice. So what? That could be worth hundreds of thousands once prices revert to their mean.
The bubble starts deflating this summer, Kim. The buying comes later. Keep your jeans on.