Ten things that will happen this year
The condo market will crumble.
While logic told us this long ago, so many ingénues continued to fall for the siren call of cheap downs and urbanity. Gluttonous builders, ravenous speckers and idiot buyers together formed the perfect storm for shelter which was meant to be a cheap alternative, but became an inflated infatuation. But the demise of the virile condo market is not just a condo story. Virgin buyers are the fuel for real estate’s continued fire, as young people discover it’s way cooler to rent the same unit for less more and more freedom, the entire food chain of housing will be affected. Consequently, this is a big story.
Vancouver will be so 2009.
There’s always been a premium to be a Left Coaster. For decades people have lived in often ugly houses amidst beautiful scenery and felt smugly distant. Over time Vancouver and its flatland burbs turned into a moist version of Mississauga, replete with Staples and Best Buy, but heavier on Starbucks. Then the insularity became its Achilles heel, as locals swallowed their own Kool-Aid and became as special as the snowflakes they fear. Now the region’s unlivable for average families, and real estate’s become the new porn. This year will mark the definitive end as the pendulum swings back. If you sold in the first four months of 2011, you were a genius.
Mark Carey will actually do it.
We all know all the reasons interest rates are supposed to stay cratered. Weak economy. Insolvent citizens. Bankrupt governments. And we’ve heard all the arguments that we’ll turn into Japan, replete with a lost decade and mortgages at 0%. But forget that. Rates will rise in 2012 as Brother Carney takes aim at the very thing which poses the greatest long-term threat: our piggy opinion of debt. The appetite for credit continues to grind higher by three times the inflation rate. Mortgage debt tops a trillion. LOCs are out of control. At some point the deleveraging becomes lethal, so Carney will step up and find the testo to move. Two quarter points in 2012. Not much, but enough to change everything.
Volatile markets will reward.
Last year the Toronto stock market gave up 11% but investors with balanced portfolios lost nothing. This year the market will be just as volatile, but end the year with a double-digit gain. Investors who ignore the ride will end find similar gains. Those rooting for the demise of America will be disappointed at what happens – rising consumer spending and business investment plus the narrowing gap between corporate profits and stock values. As more jobs and confidence return the US dollar will ease, helping trade and jumping commodity values. Rising gold and oil will grease the TSX. Diversified ETF investors will do best. Stock cowboys will need Depends.
Europe will bore. Greece will choke.
So what if the Euro zone slumps into a recession in 2012? Markets will barely notice. Ditto for the inevitable default by Greece on its semi-worthless bonds, its abandonment of the Euro and petulant, ego-centric act of leaving home. The big news is there’ll be no big bank failures, no currency collapse, no defaults by any countries that actually matter. Germany and France, along with Britain, will be on an austerity kick that last through the next cycle of elections and depresses the value of most everything. If you want a great deal on a country retreat in a stable country, go shopping in Normandy this summer.
Obama will win. US real estate hits bottom.
It might be job creation, rising stock markets, the end of the Iraq war, or maybe just the way American conservatives blew their big chance with vacuous candidates, but Barack Obama will stay president. Markets will anticipate this, and reward it with a fat year-ender. Democrats will stand for stimulus, largesse, pump-priming and economic hope. Republicans will be seen as hair-shirts bent on doing the right thing for the future even if it grinds up today. In a democracy, people vote for themselves, not their grandchildren. Won’t even be close. Within months of the re-election, the American housing market will finally hit bottom and start the long, slow advance.
House prices will fall.
Canada, of course, will go in the opposite direction. By every measure – ratio of prices to incomes, household debt levels, lax lending standards, asset inflation – we have equaled or surpassed the Americans when they hit their real estate apex. In the absence of solid economic growth or wage increases, and given a slight rise in mortgage rates and unemployment, house values will be lower in December than they were in January. The decline will be commensurate with local market conditions, but average up to 15% nationally. Some places will fall a little, some will be trounced. People who buy houses before they sell their old ones will need our loving support. Stop snickering.
In fact, all asset prices will fall.
Our times are defined by an epic battle between inflation and deflation. For a while this year, deflation wins. A glacial economy, falling real estate values, tightening credit – these factors and others will be bringing down the value of assets even as the cost of living rises. Houses, cars and iPads will get cheaper, at the same time the cost of gas, insurance and food rises. Asset deflation means what you owns loses value. Price inflation means what you make buys less. This is lousy news if the bulk of your net worth is in your house or a bank savings account. It will quickly separate the investors from the savers.
F will tighten.
Fools among us believe the government wants the real estate market to keep inflating, prices to keep rising and debt to keep growing. Well, they once thought that way – when H and F came up with the 0/40 policy which destroyed housing affordability for a generation. Since then they’ve realized current levels of debt are unrepayable and once housing values normalize vast numbers of people will owe more than they own. Hence, 0% down was dumped. Forty-year amortizations shrank to 35, then withered to 30. The next shoe may be in the March budget, knocking them back to 25 years. If the bubble continues, kiss 5% adios.
Most people won’t get it.
So the back story is one of falling asset values, rising markets, a moribund economy, higher inflation and commodity prices, declining real estate, tighter credit and few jobs. For most people this is a disaster – at least for those who spent their careers paying off mortgages (even when rates were cheap), fearing investments (they don’t understand), paying too much tax (with their TFSAs in GICs) and sticking their savings in the orange guy’s shorts. These folks end up losing money to taxes and inflation, giving up equity on their homes, and paying for more everything else. They’ll be in a funk. Be very careful. Especially around siblings and mothers-in-law. Few will understand 2012 marks the end of a cycle. Financial markets will anticipate this. Your buddies at work won’t. You know what to do. They will vex.
And there, but for the grace of God, goeth this blog.