When a university student from China offered $1.1 million for a dinky Toronto house listed at $759,000 this week, the predictable happened. It was news. The media was all over it. “Is this the harbinger of a frantic Spring market?” the Globe asked. Smiling, if amazed, realtors said yes. Buy now, or buy never.
At about the same time, a second major bank quietly told the industry it’s getting out of the high-risk mortgage business. TD will shutter its non-prime lending operation, TD Financing Services, at the end of the month. This comes as CIBC formally announced it’s selling FirstLine mortgages, which for years has been shoveling out billions to finance mostly high-ratio loans made through mortgage brokers across the country.
TD says, “To remain competitive, it would have required us to increase (that) risk profile, something we’re not prepared to do.” Of course not. More risk is more risk, especially at a time when housing has hit an unsustainable orgiastic $1.1 million-for-an-old-bung crescendo. And unlike the people banks loan money to, they ain’t stupid.
Only in retrospect will these days find context. Like when Nortel was $120 a share and pension funds could not gobble enough of it. Or when investors sunk $82 million into the IPO of Pets.com, a company which had $619,000 in revenues, spent $11.8 million on advertising and lost money on every bag of dog food. Or Bre-X. Or (soon) FB.
In years to come, the annals of idiocy will be filled with pictures of Vancouver crack shacks listed for fortunes and, of course, the $1.1 million North Toronto bungalow snatched from the arms of 16 other bidders by a university student, for cash. Beside that will be a chart showing the growth of personal debt in Canada during a time when the economy was stuttering and employment waning. And the caption, “What were they thinking?”
Days ago I shared with you what’s happened with sales in Vancouver. In recent weeks, they’ve been disintegrating. And how can that be a surprise when (according to the Royal Bank) it now takes 86% of a family’s pre-tax earnings (and 106% of their tax-home income) just to afford a house there? Now compare this Canadian city with its closest comparable US neighbour – Seattle, with a metro area of four million people, long considered to be immune from the same real estate correction which shaved 70% off the average Phoenix house and 40% from that in Miami.
The average SFH in Van today is $1.1 million. The median home in Seattle is $320,000. That’s 4% less than last year, and 18.6% lower than in 2007. If Vancouver prices were to drop by almost 19% next year, there’d be thousands of underwater condo owners and an uncontrollable explosion in listings, taking prices much lower in the months following. And it would not stop in the Lower Mainland. And it’s probably coming.
This past week the Bank of Canada clearly signaled (if you paid attention) that interest rates will be going up. Hell, even the prime minister said it when touring Toronto yesterday. On Friday came the news the economy shed more jobs last month, even as the US added hundreds of thousands. And in recent days all the big banks have cranked fixed-term mortgage rates down to the lowest levels in history, even while two of them scramble out of the brokerage business, in a desperate battle for market share.
Put it together. This is not hard. How can central bankers allow a debt orgy to continue, knowing the economy’s swampy and housing’s a bomb? How can people believe their excess is normal? How’s real estate safer in 2012 than Nortel in 2000? How can it possibly end well?
The papers are right. Harbinger.