Once a year the editors of Toronto’s snooty Post magazines leave their luxe condos, drive their Mercedes to The Club and feign interest as a panel of egos discusses the housing market to come. Not that it matters. In their world everything goes up. But one must publish. Sigh.
For comic relief, I’ve been an annual guest, wandering along the rarified corridors, often mistaken as the fish delivery guy. And for the last couple of years I’ve told the likes of Toronto condo emperor Brad Lamb and BeeMo’s shrilly economist Sherry Cooper the market was unsustainable. They snorted, guffawed and gave piteous looks. I gazed off and thought fondly of turbot.
This year as the group assembled in splendour, I was in economy on the way to Halifax. Send me a question for Sherry, the publisher begged in an onboard email. So I did. “The average detached home in 416 now sells for 818,000,” I thumbed. “That’s 8 times average family income. Meanwhile household debt has exploded and incomes trail inflation. As an economist, having seen the US experience, are you not negligent not to be warning people about this bubble behaviour?”
Cooper responded that everyone was, in fact, being warned by the Bank of Canada, little F, CMHC, OFSI (the bank cop) plus her own bank. But, it’s different in Toronto (and Vancouver).
“So Garth is going to have to wait another year to be right?” asked one of the editors, with the correct amount of wry lip-wrinking and je-ne-sais-quoi insouciance.
Four weeks later, Ms. Cooper awoke and time stood still. Astonishingly, this was shortly after she sold her four-million-dollar house, so close to The Club one could actually get there in limo shoes. The transformation from apologist to bear was a swift one. And, as with everything which matters deeply to her, she called in the media.
“Sherry Cooper was reminded of just how devastating the U.S. housing crisis has been for families and the overall economy in that country after speaking recently with a friend who is having trouble selling his house in New Jersey,” a Toronto Star story reports. “Ms. Cooper, the chief economist at Bank of Montreal, is starting to worry about Canada’s housing market after refuting the arguments of the extreme bears in the past.”
The story she told was of a friend whose $700,000 mortgage free-home is now worth $350,000, but unsalable because of a flood of competing homes on the market. The family is torn up after hubs got a job in a distant city – a fine example of what happens when housing sheds equity, and turns stone-cold illiquid. Which is clearly coming to a Canadian city near you.
“Now Ms. Cooper is looking at the debacle in the United States and the blistering pace of the market here and warning people to tread carefully,” the story shares. “I’m not forecasting a crash landing but it would be foolish to ignore the lessons learned south of the border,” adds mama grizzly.
Nor has this blog been in the crash-landing business. Just consistently calling for a 15% national price correction, followed by a multi-year melt taking values wherever they land. In some markets, that will end up being multiples of fifteen.
The reasons should be clear to any economist. House prices have catapulted higher while incomes have fallen behind inflation. The difference is debt. Piles of it, accumulated largely while interest rates were at historic lows. We’ve suffered asset inflation while the economy flirts with deflation. Saving and investing have crashed. Home ownership has swelled. Family balance sheets suck. Horny young couples trade equity for risk. Boomers boast trophy houses yet have no money.
Mark Carney gets it. He’s a bear now, too. The guy who runs interest rates says he’s prepared to do just what this pathetic blog has been suggesting. He’ll raise interest rates to try and prick a massive and growing credit bubble. After all, Carney understands the economy could be road kill if debt continues to spiral higher, along with house prices.
In a not-too-subtle interview published just in time for the Easter weekend real estate orgy, the guy made it clear where this is headed. Like mama Cooper, he looks south and worries. “If a point comes where house prices adjust downwards, the question is how is that going to impact consumption behaviour. There is history in other jurisdictions where this has a bigger impact on consumption on the way down than it does on the way up. And the consequence of that is consumption slows, growth slows, income slows, debt serviceability deteriorates, etc, etc.”
So if a country collectively gorges on one asset class, using leverage to goose it wildly, when the party ends (it always does), the economy’s screwed. Of course, I’m being technical. Mr. Carney simplifies it, thus: “In exceptional circumstances, if there are issues that threaten financial stability, such as household debt … the bank could use monetary policy for that purpose.”
‘Monetary policy’ means interest rates. And he will raise them. Sooner than you think. The gov is telling you to prepare, because as the cost of servicing your debt goes up, the value of your home will fall. It means folks with lots of debt and no equity need to fix that. This, by the way, is exactly the intent of the new mortgage rules the bank regulator is circulating. They’re desiged to get people out of housing who should never have moved in – the 5% and 0%-down crowd being swept into negative equity.
Rates will rise. Mortgages will tighten. House sales will decline. Listings will jump. Then prices will fall. Incomes will struggle. Inflation hurt. Bears abound.
Sherry Cooper will again summon the media. ‘As I warned,’ she will say.
Do you smell fish, or is it just me?