Three months ago Evan and Dawn asked me for the name of a killer realtor in downtown Vancouver. “Made some good money on this condo,” Evan said, “and now we think we should get out.” Smart kids, I said. And I sent them the name of a woman whose fingernails stop traffic.
They listed the two-bedroom (low-rise) unit for $489,000. Nice, since they’d bought it for $310,000 in 2005. A week later there was a conditional offer for $476,000, which fell through. (The buyer had unit in the building, and couldn’t sell.) Then, crickets. Evan was shocked at the way the market seemed to be unraveling, so he and Dawn dropped the price.
Yesterday it sold for $465,000. After commission and costs, the gain is $126,000, or 40% over six years – 6% annually, about what a balanced portfolio would have returned. And this was during what was arguably the frothiest period in the house-horniest city in the history of Canadian real estate. Just imagine what happens to condo values when reality visits. Like now.
“I’m happy with the outcome and the timing is perfect,” says Evan. “I’ve attached 2 pictures for you that tell the story. One is when we listed, the other is yesterday. There are now 3 more places listed for sale in my building. Listings have exploded in the last 3 months. I feel lucky to have sold at this time.” And so he should.
Here’s a shot of Evan’s building on listing day (left), and yesterday. Imagine what it will look like in April, when the listings flock back to Capilano.
A few more words to add to yesterday’s post about condos – the sex toy of choice for flippers and speckers. Between six and eight of every ten purchases over the past year in Toronto have been made by people with no intention of living in the concrete boxes. They’re the ones you see in the newspaper pictures and on the six o’clock news lining up like zombies outside an Apple store. But instead of shelling out a few hundred bucks for an i-whatever, they’re desperate to secure a unit selling for hundreds of thousands.
Many will never close the deals, assigning them before buildings are even built. Others will close, mortgage to the hilt, search for a tenant, and suffer a few years of negative cash flow because (of course), ‘real estate always goes up.’ And often it does.
But this rampant speculation is a leading indicator of HouseAgeddon.
As a new report this week from Capital Economics concludes: “We believe overly-confident investment behaviour explains rising house prices and the strength in new home sales and turnover rates in resale markets. The sharp rise in house prices, however, has meant that longer-term housing affordability and excessive household debt are now major downside risks to future economic growth.”
Sound familiar? You bet. This is exactly what Mark Carney’s been preaching for months now (and most recently, this week), plus the IMF and anyone else without a hand down the pants of the housing business. Household debt, thanks to real estate lust, is the thing you most have to worry about. Yes, it may swamp the economy. Worse, it will kill the market – with dire consequences for those who have put too much of their net worth in a home. Actually, it’s already started.
(By the way, bury the notion that only irritating cities like Vancouver and Toronto are at risk of a housing plop. Capital Economics also found prices have jumped sharply this year ‘from already elevated levels’ in most places – like frostbitten Winnipeg and irrelevant Quebec. It means the entire market could be at risk. That’s right. Nowhere to hide.)
But too many amateur investors and flippers do more than just make real estate unaffordable. They can also murder it on the way down. At least that’s what a new US Fed study finds – and Americans should know. US real estate is still groping for bottom.
“Optimistic investors – speculators – used low-down-payment, nonprime credit to place highly leveraged bets on the housing market, perhaps facilitated for some by reporting an intention to live in the house,” says the report. “Because they didn’t have to put much money at risk, these investors were able to continue to buy housing even as prices rose further.”
But when the bubble burst, these same people were the first to leap from the Hindy. They defaulted on loans or walked away from minimal downpayments, “accelerating the rate of decline and feeding the collapse.” At the peak of the US real estate orgy, the report notes, one in three new home purchases was made by an investor.
See the parallels? Nothing to do with sub-prime mortgages or differences in banking regs between countries. It’s all about human nature. We lunge to buy what’s rising, and panic to unload what’s not. It’s why condo marketers hire people to line up. Soon there are hundreds behind them.