Three days ago, on the 56th floor of a downtown Toronto tower, three dozen people waited expectantly for the CEO to stand and speak. It was a private event. They were about to hear from the guy who runs a major Canadian bank, which shall remain nameless but really likes burgundy.
“It was interesting to say the least,” says our blog mole, “and here is almost an exact quote…
“If I was to show you a chart of outstanding residential mortgages in this country, which were about 600 billion a few years ago, and now stand at over a trillion, you would swear you were looking at the growth of U.S residential mortgages before the crash.”
Just to refresh your memory, here is what has happened to American house prices since peaking in the summer, five years ago.
Of course, nobody expects this to happen in Canada, right? And maybe it won’t. But as I’ve oft said, we don’t need a US-style housing dump to have lasting consequences. Even a mild 15% correction is enough to put hundreds of thousands of people underwater.
BTW, folks in Britain also thought they were immune from a US-style plop. This week came news that 80% of those UK homeowners who bought since 2006 can’t sell. Why? Their houses are worth less than their mortgages.
Anyway, flash to Ottawa. Brother Mark Carney had another whiz into the wind this week, saying risks to the economy are now “elevated” because too many homeowners won’t be able to manage their debt loan once rates start to rise. And that could cause merry hell here, as it did to the south.
Or as he so pithily put it: “The growing vulnerability of this sector increases the risk that a shock to economic conditions would be transmitted to the broader financial system via a deterioration in the credit quality of household loans.” And that is exactly what that bank boss was referring to on Monday – Bay Street is preparing for a real estate crap storm, even while Main Street keeps borrowing.
But, of course, real estate’s local. The bust has already started to spread in some communities, while others are still pummeled by those greater fools. We have two live reports:
“I am a transit operator for BC Transit in Victoria. I can’t wait to see the real estate numbers for June. I drive set routes and so I see all the for sale signs popping up. I drive by hundreds of homes for sale and have seen 2 sell! I think F’s moves to stem the tide of lemmings (newbies) throwing themselves into the real estate market here has had an effect. Unfortunately, my friends thought I was crazy when I said we were in the final phase of a RE bubble. Many drank the Kool-Aid. One poor couple over bought and then decided to have a child. Well their child turned out to be twins! They put their place on the market soon after their blessed arrival and it sits languishing after 2 price drops. They think they are $50,000 under water if they sell at their new asking price. Sad thing is they haven’t factored in the cost of selling the place or moving costs.”
But in Toronto – at least some hot, sweaty parts of it – the virgins of leverage just won’t quit. Yesterday I told you about Drew’s buddy who moved from Vancouver, went house-hunting, and promptly found himself caught behind enemy lines in a brutal bidding war.
Drew gives this update:
“Here’s the follow up report from my friend who escaped Vanloser…
1. Agent just called… Final tally was 15 offers. Probably won’t know until tomorrow what the house went for, but we expect 100k over asking price. So I said SCREW IT and just rented a house instead.
2. Ok, so got an email from my agent this morning. The accepted offer was $120k over asking. Someone obviously got caught up in the emotion of it all and seriously overpaid.. crazy!
“Maybe he read your blog, or maybe I just have smarter friends than I thought.”
How do you know when the end stages of a market are at hand? I’d say wild swings like this are a tip-off, as the emotional pendulum careens from greed to fear. Some markets are cooling faster than Justin Bieber while others flame. In places like the Oakangan sellers can’t give properties away, while in pockets like Lesleyville desperate young buyers are waiving both home inspections and financing clauses, so they can buy shacks with SS and GC tops.
So, let’s summarize: Bay Street’s convinced homeowners will blow themselves up, and is stocking tunafish. Mark Carney warns of elevated risks and too many horny house buyers two weeks running. Buyers in hot markets grow more reckless while in others they vanish. Meanwhile in countries most like us, real estate’s achieved the popular status of gonorrhea.
Houses will surely become one of the worst-performing asset classes of this decade. The residue of this post-crash era will be mountainous debt and a mangled middle class. And to think it all can be avoided, with five simple actions.
That, and the winners of our weekend contest, tomorrow. Get your hair done.