Eighty people just emailed me a column from Canadian Business. Damn. I was finally forced to read it, and immediately needed an Amazon.
As the point of no return nears for all those people who foolishly whacked the bulk of their net worth into a house (or worse, a condo), the wails of denial grow louder. Even from folks who get paid to be smart, except when they’re stupid. Like Larry MacDonald. He’s a former economist, apparently, who’s turned into a financial journalist and probably has cats.
This column is about why the Canadian real estate market won’t crash (five reasons). Here’s his assertion: “Canadians aren’t going to wake up one morning a year or two from now and discover their houses are worth 15% to 25% less.” That’s a throwaway line, natch, using exaggeration and hyperbole, which means he’d make a damn fine realtor. Housing markets seldom crash or collapse, and even when they do it takes months or years. Just pray you found out about it early enough.
Anyway, let’s go visit Susan for a dose of reality. Five years ago, whipped into a condo-horny frenzy by her Boomer parents, she bought one in a big Alberta city which will go mercifully unnamed, but lies north of Red Deer. In fact, her delusional parents even gave her a wad of down payment money, so Sue chunked 20% against the $215,000 one-bedroom unit. “Everyone,” she wrote on this blog a few hours ago, “parents, co-workers, friends were cheering me along the way…”
The mortgage rate was sweet. A prime less three-quarters variable that actually dropped after a while. So, being a good girl from a house-lusty family, she threw more cash into her equity. After all, real estate just goes up. Like Mr. MacDonald says, nobody wakes up one day and finds a 15% or 25% drop.
“Out of interest (or perhaps a desire to cause myself anguish) I often check to see the MLS listing for condos in my building. The similar condo (layout wise) down the hall is currently on the market for 168,000 and has been that way for a few months. Who knows, it may be a hell hole inside, but doesn’t give me much confidence. Seeing “my” place worth so much less is blow. Plus, given what I read here I wonder how much more will it drop.
“I like my place, don’t want or need to move, but it does make me feel trapped. When I do need or want to sell it will be at a loss.. it sucks. But the bed is made, and I am in it for the long haul I guess. My advice to those who are looking to buy… don’t.”
So a $168,000 unit on the market for months might sell for $160,000, or $152,000 after commission. That’s a $63,000 drop in valuation for these condos, or a decline of 29% from 2007. And during this time (a) mortgage rates plunged, making real estate more affordable and (b) oil prices basically tripled from post-crash lows, supposedly greasing Alberta real estate.
So ya see, economist Larry, life’s messy. Real estate is emotional, the most human of financial assets. When people eschew it, property grows cold and illiquid. As Susan’s discovered, it can be a wealth trap. But equally irrational is the mania land can engender, which takes us briefly to the west side of Vancouver and Dr. Jake, who sent this moments ago:
“An old junkie tear down two doors down from my urologist buddy goes on the market yesterday for 2.9M. Forty offshore families show up at the open and 15 offers later it sells for 3.7M in less than twenty four freekin’ hours. No wonder my younger colleagues are leaving and taking jobs elsewhere.”
So, Canadian real estate is a teetering, volatile and explosive commodity. The fact buyers are shut out in most markets, while others erupt in excess should warn us of precipitous change in the wind. This is Nortel cresting. It’s RIM and Bre-X and LinkedIn. And soon, FB. There’s no safety net under this asset, no matter how many arguments are made.
Speaking of which, Larry MacDonald’s don’t amount to much. The Bank of Canada will only raise rates when the economy is growing vigorously, he says. Then people will make more money and houses will be safe. But, of course, Brother Carney will smite that in the coming months, as he moves to contain our greatest economic threat – a credit bubble. (Did you notice this?)
Housing is fine, the author says, cuz we have froth in but a few markets and “many other places, like New Brunswick and Prince Edward Island—where average house prices are under $200,000—don’t appear to be overly frothy.” So what? Over a third of the country lives in just three cities – Vancouver, Calgary and Toronto. Do we care about Lobsterville?
Don’t worry, we’re told, because this real estate crash talk is overly inspired by looking at the US experience. Okay, so we’ll look at Britain, Spain, Ireland and China.
And it’s okay here because unlike the Americans, MacDonald claims, lenders can go after people who walk from their mortgages. Besides we don’t have subprimes. In reality, US states with exactly the same system as ours have seen housing swoon. And no subprimes? I guess not, if you don’t count Canadian banks slipping down payments to home-buying kids who have no money. Yes, it’s different here.
Owning real estate is okay. I do. You need someplace to keep the ammo and the Hummer. But this isn’t the time to jump in. Nor should you have too much exposure (remember my Rule of 90). Liquidity’s still king.
Above all, remember that the media is not your friend. The only oracle of truth and miraculous guidance – omniscient, omnipotent and omnivorous – is this pathetic blog. Did anyone write “PHHIRRRRRRST! Oh yeah, BABY!” after Mr. MacDonald’s column?
Pfft. I rest my case.