Entries from December 2011 ↓

Suzi and her partner are teachers making a combined $90,000 a year with fifty grand idling in a GIC. “But we’re not horny,” she insists. “If we were house horny we’d be trying to get in the market – but we’re not stupid.” Still, this didn’t stop the two of them from writing me to ask if it’s a good time to buy a house in Victoria.

“Despite what the headlines are saying I have noticed that condo prices have dropped – a year ago there were NO two bedrooms below 400K and now there is quite a few to choose from. Is it a result of increased stock? Anyways just wondering what you think a reasonable price would be for a 2 bedroom? Also our plan B is to buy a house with my mom and dad when they retire (they have house in Victoria currently valued at around 850K) – should we just skip the condo and wait for mom and dad? Are we being smart with our money?”

Hey, Suze, you’re getting lustier by the minute. Sounds like Plan A is to buy real estate, as opposed to Plan B, which is to buy real estate, and get your poor retired, jobless parents to pay for it. B’s better (for you).

But first let’s leap back into the steamy little quagmire this blog’s created. This week has been devoted to giving you a realistic, real-world expectation of what will happen to Canadian real estate values. It hasn’t worked. At least among the 1% of daily visitors who actually deign to leave me a message. I guess the others have jobs. Or lives.

Most commentors decry my estimate of a coming 15% reduction in the national average, followed by a lengthy period of real estate decline. They want bloody intestines. They want it now. Phoenix is their idea of a good market (prices off up to 80% in some hoods). They relish the thought of screaming Boomers in white golf shoes clinging to a shard of granite c-top while a front-end loader turns their McManion into landfill.

As appealing as that may be, it won’t happen here. The thing Canadians need to fear is not an uncontrollable wave of mortgage delinquencies, foreclosures, bankruptcies, rampant power of sales, evictions or municipalities dozing abandoned homes, but simply negative equity. With nine of ten mortgage originations for first-time buyers in 2011 going to finance deals where the downpayment was 5%, for example, any real estate correction is lethal. The virgin owners are immediately under water and likely to stay there for many years. Eventually most will sell, but for less than they paid, sparking a downward drift in prices.

What took years to swell will take as long to contract. Remember, the US housing market peaked in the last few months of 2005, and is still correcting more than six years later. Those who believe house-heavy and investment-poor Boomers can ride out a decline are soundly mistaken. Sure, two or three years of denial are to be expected. But then you’ll see a generation in full-fledged panic, suddenly understanding what a dumbass idea it was to pay off the mortgage instead of feeding a fat financial nest egg. You may not be able to live inside an ETF, but neither can you eat pot lights.

A glacial economy, demographics, an ocean of debt, oversupply of homes, rising rates, property tax creep, tighter mortgage regs – the list of threats to real estate’s impressive. All of them will play a role in bringing prices back to the mean after what’s been a 13-year aberration in Canada. Once sales in an area slow (as they now are from the outer GTA to the inner Okanagan), owners eventually capitulate, and values erode. But it never happens in weeks. Idiot buyers engaged in bidding wars may establish new valuations for a street in just hours, but it takes months (or years) for sanity to return. Prices are sticky. Owners get greedy. But they always learn. If a property doesn’t sell, there’s  just one reason.

Yesterday I mentioned RBC’s forecast of a slowing market. Merrill Lynch, too. That came after the Bank of Canada warned. And TD called for an end to 30-year mortgages. Now Scotia is singing the same tune, saying our boom is aberrant, long in the tooth and disturbingly virile (sounds like me).

“Canada remained a notable outperformer, though activity here too shows some signs of cooling. Weak market conditions will likely persist well into 2012.”

By the way in the last few months (says Scotia), the US real estate market fell at an annual pace of 7.5%, Britain was down 6.7%, Australia off 5.7%, Spain lost 8.9% and Ireland crashed 14.7%. Can Canada be far behind?

But back to Suzi. Should she buy a $400,000 condo with fifty down (12%)?

Of course. The local newspaper says so: “Victoria’s economy is protected because this is a retirement town, a government centre with a strong high-tech sector and an attractive place to live, says the head of the Victoria Real Estate Board.”

That must be why the city will set a new all-time low this year for the number of new houses under construction. How else to accommodate all those new retirees, streaming into a city where the average SFH costs $592,000 and so far this year has received more snow than Halifax?

The truth is, Suzi, there’s only one direction for that market, and most others across the country. It’ll take years, not months, before the extent of the decline is known. The trip down will not be explosive or noisy, and resisted at every new price point by real estate druggies. But it will be relentless, remorseless and unstoppable.

So rent, babe. And get your wrinkly parents out, too.

No joy coming.

Yesterday I apparently wasted 801 words explaining what happens next to real estate. So I give up. You figure it out.

As I explained, a drop of 15% or so in national prices would be seismic. Some markets where prices have swelled slowly and houses are still cheap (relative to income) would see nothing. Others, where real estate greed has replaced sex, would be whacked. Overall, a drop of this size would shrink the national entire economy, boost unemployment and send deflowered property virgins screaming home to mama.

I patiently pointed out that the 50% drop most misfits on this pathetic blog cheer for would plunge us into a recession deep enough to make house prices irrelevant. Like they are in the States. But that disaster ain’t happening. I didn’t forecast it. You made it up. So live with it.

A major part of our collective problem is that cheap rates, HGTV and your MIL have turned housing into an entitlement. Since everybody expects a house (and a perfect one with beautiful faucets and crown moulding), there’s a massive sense of injustice when real estate turns unaffordable. Suddenly it’s the fault of the 1% or the Baby Boomers. So we have pissy little posters coming here to foment revolution, root for societal collapse and cheer for a crash in housing prices, just so they can get one.

Ironically, when the inevitable real estate reckoning comes, it will be more about GenXers and GenYers buying condos and towns with record levels of debt, than Boomers and their obese particleboard McMansions. And were it not for government-sanctioned 5% downpayments and engineered interest rates, neither the bubble nor the bust would occur.

After all, how many wrinkly 50somethings have you seen lined up outside a Mattamy Homes sales trailer overnight, sucking Starbucks and peeing in the planters? Is it a wave of tweeting Boomers snared by social media campaigns, flooding pre-registrations for the 400-square-foot condos to be built in cool neighbourhoods like former stockyards? And who, exactly, do cash-back mortgages and minimal downpayments target? Right. Young people without money. Who think they deserve a house.

This might seem, like, weird. But there’s a reason stuff costs money. Some things should be earned. Our debt today, and the housing reversal it’s about to cause, is the direct result of unbridled consumptive lust, usually by those virgins. Home ownership without equity is called renting, but without the freedom or mobility tenants enjoy. Those who will suffer the most from the coming correction – whether it’s 5% or 30% – will be the ones who couldn’t wait to buy, and traded their hormones for indenture.

Meanwhile, it grows closer. Look at the news.

RBC, maybe to atone for its idiot affordability surveys, now warns of a coming real estate chill. Even a 10% drop in prices, the bank warns, will shave 1% off the GDP – enough to bring on recession. The bank joins TD chairman Ed Clarke in suggesting the feds ban 30-year amortizations – which virtually every virgin now grabs.

And here’s the Canadian economists for Bank of American Merrill Lynch saying our market shows “classic signs of over-valuation, speculation and over supply.” Says they: “We estimate the housing market nationwide is about 10% over valued. Even so, the only way these valuations can be explained is by the record low mortgage rates. Under more normalized interest rates, home prices would actually look 25% overvalued based on current prices.”

Most at risk, according to Merrill, and the Bank of Canada, is (as this blog as pointed out for some time) the insane condo market. “Anecdotal evidence suggests the vast majority of pre-construction sales are to investors who intend to sell the units on completion or rent them out. As these condos in the construction pipeline are completed, this inventory of units will be dumped on to the rental and/or re-sale market just as sales momentum and housing demand ebbs. Our estimates indicate there will not be enough renters in Toronto to occupy these units as they are completed. As a result, some investors will be left holding vacant units. Since most investors are unlikely to hold onto negative-carry investments without a reasonable prospect of price appreciation; this will put downward pressure on home prices. We have already seen this dynamic play out in some smaller markets on Canada’s west coast where prices have corrected 15%.”

Not to be outdone, Canadian Real Estate Wealth (guess what it pumps?) just published survey results showing that 53% of its audience of speckers and flippers now believe the market is about to fall.

See what I mean? The correction’s inevitable. Worse, it’ll be followed by years of miserable markets in which a generation of naive recent buyers, drugged by their own desires, learn a property can be a prison. Fortunately, some will discover there are fools left.

And I know where they are.

(I can even recommend an agent…)

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Breaking news: US housing starts surge 9.3%. More here.