If there’s one thing the last two weeks should have told you, it’s to get ready. Ben Bernanke said it when he promised US interest rates would stay in the dirt for two years. Markets are saying it with wild daily swings between fear and greed. Central banks are saying it as they cannibalize their own bonds. Politicians say it with their icy inability to cut spending, raise taxes, quell riots or please anyone.
The message: we’re stalled. Going nowhere. Flatlined.
Economies will crawl and jobs stay scarce in a low-yield, low-growth world now before us. The good news is there’ll be no depression, no collapse, no crash, no locusts. The bad news? Stuff is going to grow cheaper and if you borrowed money to get some, you lose. That includes houses.
Governments are about to make this worse, too. All this talk about attacking deficits and debt, austerity, slashed spending and running countries like households is noble, but toxic. Austrian economists, Tea Party nutbars, metalheads and the leaders who espouse the live-within-your-means doctrine have us two steps from deflation. This is why cash, financial assets and debt are all about to get a lot more valuable. Like I said, get ready.
Now this brings us the dangerous part of this post.
Yes, real estate’s the perfect victim of the world I’ve just described. Mortgages may be cheap, but without growth in salaries, jobs or businesses there’ll be no swelling equity for buyers. In fact, with less buyer demand count on lower prices.
So equity falls but debt does not. Suddenly buying a property with 5% down doesn’t look like such a hot idea. House lust fades and real estate gets harder to sell. Either prices fall more, or homes turn illiquid. Either way, owners end up in a vice. And you’d be amazed how many Canadian families will be under water if values trim by just 10%.
I guess this is why we just saw a stock-buying binge. In fact, more snapping up of equities by corporate executives just took place than at any time since the five days which ended on March 9, 2009 – the absolute bottom of the great panic. I guess this might also explain the orgy of bond-buying which has crashed yields and driven prices higher. If deflation does emerge, as some billionaires are betting, smart people will own debt, not owe it
So where has real estate created the greatest danger in Canada? Where have people collectively driven prices to unsustainable levels, assumed huge mortgages to get there, and now face the certain prospect of double-digit declines?
Most places, actually. Yesterday I named a few that are likely to be impacted in a lesser way. Today let’s review a half-dozen where the decline in home values could be devastating to personal wealth.
Richmond, of course. This desperately flat suburban mess south of YVR is so disadvantaged it has only 11 Starbucks. For most of the past year this was HAM central, ground zero for BC’s bubble, and the reputed destination of endless bales of Chinese cash. In January alone home sales jumped by a quarter and prices rose 43%. The average price hit $1,021,500 and perfectly ugly houses were bulldozed for immensely ugly ones.
But all that’s started to change. Sales tumbled more than 35% last month. New jetliners full of horny Asians are rare sightings in the Richmond sky and the people who sold six months ago can’t stop giggling. This market will be our Phoenix, our Vegas, our Lauderdale.
Kelowna, the Mississauga of the Okanagan. A textbook case of overbuilding and inflated egos. Too many cliff-hanging houses on the sides of dusty hills held down by dwarfed trees. More condos that can ever be absorbed and a city with no industry – just a the shameless and endless strip of Big Boxes and Harley dealerships lining the main drag. If it weren’t for the waitresses at Joey’s, I’d despair.
Edmonton, the oil surprise capital of Canada. A tepid America means lower consumption, cheaper commodities and sharply reduced demand for oil. No surprise crude traveled from over $110 a barrel this year to eighty bucks. That could look rich in a year or two, and suddenly northern Alberta will be known only for its deep cultural fabric and balls on Silverados.
Saskatoon, for similar reasons. House prices have risen 25% in the last three years, and while $305,000 may not seem like a lot to pay by BC or Ontario standards, this is a city of barely over 240,000 people in the middle of a wasteland province. But the real problem is attitude. Locals have been fed a steady diet of ‘tomorrow belongs to Saskatchewan’. Even swallowed the story house values are justified because this empty, vast, tabletop of a place is running out of land since everyone wants to move here. Until they get there.
Ottawa, yikes. It will come as a shock to denizens who think the nation’s capital is bullet-proof to see Austrian economics at work. Hell, it’s already started with layoffs at sacrosanct places like Environment Canada (700 jobs). Just wait until vampire Tony Clement gets his incisors into the jugs of the PS. The average SFH is just over $400,000, and the burbs are literally haemorrhaging with the best plastic boxes Mattamy Homes has to offer.
Vancouver, epicentre. Was it a coincidence this place saw the greatest jingoism in national history during that Olympic thingy, and then one of the sickest riots when the home hockey team choked? Vancouver has a bad tude these days, and insanely high real estate valuations have turned it into the house porn capital of the country. With the SFH average over $1 million and areas like the west side now utterly unaffordable to anyone not in the top 1% of the income scale, Vancouver is set to fall, and fall hard.
It will not be quick, with Global TV screaming every inch of the way, and as Michael Campbell and Ozzie Jurock blow sunshine up every orifice they can find. But, fall it must. Maybe one day when it gets both humility and a chemical-free economy, people will actually want to move there.
Bonus city: Victoria. Average price $581,000. One-month drop, forty-eight grand. Five thousand listings. One thousand realtors. Endless sobbing.
Houseageddon. Get ready.