Brad says that “after much searching” he and his wife just bought an 1,800-square-foot townhouse near the downtown of Kelowna. “The place cost the seller $850,000 four years ago when it was new,” he says, “and we paid $250,000 less than this.” So far, so good. Trendy Kelowna, at 30% off. More proof of what happens when horny people lose their minds. “Not sure if this is the bottom, but since we will likely retire there in a few years, it’s not as critical.”
Whoa, Brad, baby. You spent six hundred grand in a fading BC resort town where there’s 10 cm of snow, and you’re not moving in?
“I’d appreciate your take on the Kelowna market – do you see it nearing the bottom? We currently live in a paid for downtown Calgary townhouse and we know that much of the Kelowna market is driven by Calgary which seems to be stable and even upwardly trending so far. We are very pleased with the Kelowna unit and the area but appreciate your candor – financially were we nuts?”
Yes.
I sure hope you have a couple of million stashed in an investment account somewhere because you’ve just made a major pre-retirement blunder. It’s that classic bear trap. Sure, it might look like a bargain compared to what the last dink paid, but in reality Kelowna’s plagued with huge oversupply, comatose economy, shrinking demand, and more wrinkly, old people per foot than should be allowed. Look deep into Lake Okanagan. There’s your bottom.
But this may not be the major problem. For that let’s turn to achy-breaky Cowtown.
In case you hadn’t noticed, Brad, the world’s in a funk which guarantees slow growth, a major retrenchment in Europe, structural unemployment in America, cascading demand and weaker commodity prices. Think oil. Many believe asset deflation could push crude prices down to the $80 range (or lower) and keep them there for some time. Meanwhile Keystone is kaput, and it seems the Yanks would rather gamble with another offshore disaster in the Gulf than give in to the ‘dirty oil’ lobby from frozen Alberta.
Calgary’s an over-priced regional centre. The average SFH at $455,399 compares with $207,353 in Dallas. Both cities have about a million people, and I hear they have oil, too. The Canadian premium placed on housing is unreasonable, unrealistic and unsustainable. Calgary prices may still be running lower than the peak three years ago, but to say the market is trending up is wildly optimistic. With a few years to go before you retire, you may have erred on both ends of a real estate play.
But don’t just take my word on Alberta real estate. Let’s saddle up and mosey 105 km down the TransCan to another fabled resort town, Canmore. Here a lot of other deluded people have bought into the real estate myth. In a burg of 9,000 people there are 350 realtors, 380 MLS listings and another hundred units currently being built. Like Kelowna, the key industries are tourism and condos. Both now suck.
Jenna lives there. Here’s her report: “The town condo market is now in freefall, the condos that were built in abundance during the peak can’t be given away at $200k. One development is now back to the pricing they were at in 2002 and they have only sold 2 condos since spring. There are several developments like this all next to each other in the same boat.
“However, the three sisters development, 7 miles from town, is in worse shape, condos sold a few years ago for $740k for a 970ft, 2 bed apartment (the 2nd bed has no windows). These now underwater by about $500k, even to have a chance of selling. Many of these are in the shadow of abandoned projects, tarp and wire fencing dominating the area devoid of residents. Rental prices for these places are about $1000 per month, if they can find tenants….. These “fine estates” have a long way to drop yet….. We were lucky, we just sold our place and are now being “smug renters” renting a comparable place for half the cost of owning. It was a lucky escape.”
And how did townhouses in Kelowna get to be $850,000, while condos in Canmore surged to $740,000?
Cheap money, lax lending, government meddling, all leading to a society where everyone felt entitled. Where the dream of home ownership became a reality, and where no family was barred entry merely because they could not afford.
The laws of economics were unfair. So they were repealed. Prices soared in Kelowna and Canmore as they did in Phoenix and Miami. But the laws are back. And coming soon to your town.
In Britain yesterday the prime minister fretted that banks, being prudent as Europe melts, are now demanding homebuyers have downpayments of 20%. “The housing market has got stuck,” said David Cameron. “We are determined as a government to unstick that market, to get the market moving.”
And so they pulled a Canada. The government will guarantee the loans of first-time buyers with just 5% down, allowing them to get 95% mortgages, and purposefully inflating the real estate market.
“You always remember that moment, if you’ve done it, when you get that key and you walk into your first flat, it’s a magic moment,” he said. “It’s a moment I want everyone in this country to have, not just better-off people. The dream of home ownership is something that should be achievable for everyone.”
We are so screwed.
Robin says the real estate market in his part of the country (Sunshine Coast of BC) “is totally dead. So I got lucky – I’m free. I sold my house!” In Winnipeg, Jeff says he goes past a massive new subdivision being built and wonders what the hell’s going on. “At night, driving by on my way home, it’s a ghost town, few lights on and no cars crawling the streets
“There are 38 listings. And that’s just on MLS. Who knows about all the ones still under construction and for sale by the developer that aren’t listed?. It’s a ghost division and I don’t see how anyone in this city could argue that they’ll fill all those homes. $450k is out of the range of the vast majority of families in this city, where wages aren’t nearly as high as they are in other parts of the country, and yet developers, realtors and mortgage brokers keep trying to convince Winnipeggers that subdivisions like Waverly West are the only place to be.”
On the western flank of the GTA, Wendy’s house has been for sale now for 17 months, reduced from $2.2 million to $1.35. It’s breathtaking, but another price cut is coming. “There aren’t even showings any more,” she says. “I get a little shot of adrenalin when a car pulls into the laneway after seeing the For Sale sign. Then they leave.”
In reality, the Canadian real estate bubble’s over. The air’s been deflating from that giant gasbag for the last few months, as sellers in most places find buyers have disappeared, or morphed into vultures. This fact eludes the media, as usual, since all real estate ‘news’ in this country comes from Re/Max, real estate boards, CREA, Royal LePage, that wingnut cultist Don Campbell or economists from banks that make mortgages.
This is why blogs matter. Even this pathetic digital dishrag. In such venues, actual sellers, wannabe owners and smug renters share meaningful and accurate intelligence on what markets are doing. The message has been clear – outside of the moist property hothouses of 416 and urban Vancouver, where enough idiot buyers and kamikaze speckers remain to impress reporters – the housing decline’s gone viral.
First, sales stall. Then listings stale. Buyers quit competing. Markets crumble. Prices edge lower. Buyers wait. Finally values start to tumble.
It’s a pattern familiar to people living in the US, Britain, Spain, Ireland and a host of other places where they discovered house prices cannot be sustained when families are mired in loans or struggling with monthly payments. In Canada real estate and debt have soared together. Wages and salaries have barely budged. It’s only a matter of time.
We’re now about half way through the process of bubble to bottom (but every market moves at its own pace). Big price reductions are, as I said a few days ago, some months off. Those who have been waiting to buy, and jump at the first 10% or 15% reduction, will regret it. Bear market trap.
But back to Robin. He has a question. “What should I do with the house proceeds? Which areas of the stock market do you expect to be affected when the sub-prime crisis finally hits Canada, and house owners start dealing with negative equity and walk away from their home?”
Well, Robin, first understand that the housing correction in Canada will not be a mirror of the US experience. While oodles of people who bought since 2009 will fall into negative equity, since they coughed up ridiculously small down payments, it does not mean a wave of defaults, foreclosures or powers of sale.
The first response when real estate falls is denial. Most homeowners tell themselves the situation’s temporary and will correct in a few months. They do nothing. But in time it becomes evident the home is worth even less, so panic sets in. But because (in most of Canada) you can’t just walk out on a mortgage (the bank will hunt you down and eat you), the first instinct is to sell – and ask enough money to get out with as small a loss as possible.
The result is a new wave of listings, which helps supply overwhelm demand, dragging down sales and chilling the market. Within months, prices have to be reduced, and a vicious circle ensues. It’s a classic real estate death spiral. As values decline, all homes are worth less and middle class equity evaporates. Those without much of it see their net worth gutted. They stop going to Ikea and Best Buy. That’s when the economy takes a punch.
But because all high-ratio, high-risk mortgages in Canada are insured by the taxpayers, don’t worry about any banks going pointy-side-up. Profits may be curtailed and common share values affected, but there’ll be no disaster on Bay Street. If you think the banks have not already taken measures to slide through a housing correction, you visit too many puerile doomer web sites.
So, Robin, I’d invest my stash exactly where I’ve already suggested. Your portfolio should be balanced between fixed income (about 40% is good) and growth-oriented securities. Half of the fixed side should be in corporate, government, real return and high-yield bonds, and half in a variety of bank and insurer preferreds. The growth portion should have no equity mutual funds (too costly, too ineffective) and no individual stocks (too volatile).
Instead go for a few real estate investment trusts, energy trusts, sector and index exchange-traded funds. Balance these between Canada, US and international, durable sectors (finance, energy, pharma, for example) and between large, medium and micro-cap corps. Add a dash of commodities and precious metals, and you have a portfolio which will withstand market flushes, wilting realtors, media panic, Euro diddling, downgrades and your desperate neighbours.
In the next two years the only thing that should surprise you, Robin, is that people are surprised.
It was all here.
