About the time slam-dunk economist Nouriel Roubini was forecasting a one-in-three chance of a global meltdown, Mike’s buddy was trying to close some condo deals. He works for a development company in hallucinogenic Vancouver, where a private event was held for 40 or 50 clients of a top real estate agent.
“My friend was helping with the admin work for the contracts for that day,” Mike explains. “He mentioned there were two couples that were on the fence to sign. So the real estate agent sat them down and told them to put down the 5% ($20,000) now and that later when the condo site is at 95% sold, she will do them a “favour” and resale it to another buyer for $100,000 profit. She told them they would make a $80,000 profit in one year. They signed.”
Speculation, powered by greed.
It’s a disease now, in case you hadn’t noticed. Recently I gave you evidence that between 40% and 50% of all new condo sales in the GTA are being made to “investors.” That’s the nice word for speckers and flippers, people whose sole motivation for buying a unit they can’t even carry with market rent, is the expectation of rising value. Worse, they expect the gains to be almost immediate.
Last week I sat with a guy who does nothing but design websites for new condo developments in Toronto – and he’s swamped. One client just started marketing a new tower in Scarborough – to be finished in two years – where 70% of the units are being sold to people with no intention of living there. “It is,” he said, shaking his locks, “a giant futures game.”
Sarah and her husband were walking home from the Canucks game late Friday night.
“We came across people who looked like they were homeless camped out in front of the Salt Condos sales office. We had a good chuckle and thought of you. Would have taken a picture, but it was too dark!,” she said.
“By ten am Saturday morning the line up had increased all the way up the block. The one thing these people had in common was that they were all Asian. So, is this true, is this foreign investment really the ones driving up the prices, or is Concord paying these people to line up in the middle of the night? Because if you’re lined up at 3 am you’re likely to be buying one if not more of these tiny condos! As we crawled into our cozy rental in downtown Vancouver we laughed at the greater fools falling into the trap…just will make it easier for us as we diligently stash our savings away to wait for it all to fall. Love your blog!”
Asian, Caucasian, foreign or domestic – that hardly matters, Sarah. What actually bound these people together, had them sleeping overnight on concrete, was the conviction they were going to make money. Raw speculation, with a tinge of panic and the patina of competition. Making otherwise normal people queue in the dark, buy real estate in five or seven minutes, and walk out with nothing but a sales brochure, a signed offer and a bucket of endorphins.
People who lie for a living often say our real estate market is distinguished from the scuzzy American one because we buy properties to live in, not to trade. They say it’s this lack of speculative activity which gives us stability and staying power.
This, of course, is crap. Sustained low interest rates and rising prices have created the same casino atmosphere which was rampant in Florida, Arizona, Massachusetts or southern California in 2006. People here routinely buy beyond their means, convinced rising prices will save their ass, or they purchase solely for the purpose of selling again for more.
That’s speculation. The inherent risk is that the conditions which created rising prices will change. Whether you’re buying shares in the Royal Bank, a five-ounce silver bar or a condo in Richmond Hill, it’s the same risk. But real estate is unique on three counts – it costs a hell of a lot more, most people today use at least 90% leverage, and when things change it can turn icy and illiquid. There’s always an instant market for stocks or precious metals. But a house can sit for months, or years, in bad times.
Could such times be on the way?
Nouriel Roubini says quite likely. He calls it the perfect storm – an American budget crisis, combined with slowdown in China, a European debt crisis and the destruction of Japan – enough to stomp out global growth. Combine that with too-high energy costs, rising interest rates in Asia and a $3 trillion stock market decline in the last six weeks, and it’s clear risks are piling up.
Roubini, by the way, forecast the 2008 financial crisis. He’s worth taking note of. If the guy’s right again we’re in for several years of stagnation, unemployment and disappointment. No crash or depression. Just a Japan-style melt. (Real estate values have fallen by two-thirds in post-bubble Japan over 15 years, despite zero interest rates.)
But you hardly need a Roubini.
Those people around you, in the queues, on the sidewalk, at family dinners, should be all the evidence you need. So much risk, so little disregard.
So many fools.