For the past half-century, real estate itself has amounted to an average of 5.8% of the national economy. Today it’s nicely above 7%. So what?
So, every time the 7% mark has been breached, the housing market’s taken a dive two or three years later. There is no reason to suggest this time it’s different, says finance professor and economist George Athanassakos. Expect a “severe correction.”
He even has a handy chart. Copy, paste and email it to your 25-year-old daughter about to buy her first condo with 5% down and daddy’s co-signature. This could save Christmas dinner next year:
In fact the Canadian housing market, one of the few in the western world still supported by endorphins and hormones, is gaining the attention of a few academics who think we’re, well, nuts. Like Neville Bennett, of Canterbury University in New Zealand, where they’ve had a bubble of their own. Cheap rates, lax lending standards and $85 billion in mortgages to people with dodgy credit spell disaster, he suggests:
“Any market fall would shake out the most vulnerable first, which would bring a flood of property onto the market and create a near panic and deep losses. A recent study by the Bank of Montreal found that 4 out of 10 borrowers stated they could not repay their loan if interest rates rose slightly.”
And Neville points out that the guy who called the US housing crash, Yale prof Robert Shiller, says Canada “is due for a US-style drop.” That would be a 30% price reduction, basically wiping out the equity of every 5%-down property virgin who bought since 2008.
In parts of the country (like Vancouver Island) this is already upon us. In others (like Toronto), buyers are willing to enter insane bidding wars, paying up to a 30% premium over asking prices to get title to a property. In some places (like Vancouver) sales and prices are falling but most people refuse to believe it means anything. And there are cities (like Calgary) where a local arrogance and media boosterism have people convinced a boom is just forming.
People like Dale:
“Your blog is really focused on GTA and Van, and I can understand how ridiculous it is there, but why no mention almost at all of other centers like Calgary? Right now Calgary feels an awful lot like somewhere between 2005 and 2007. Seeing many “sold” signs and a lot of cars with out-of-town plates, especially Ontario. And everyone is talking boom again. So do you think Calgary or Alberta is moving into boom times again? (Realtors here like to say the Calgary is an island within Alberta which is an island within Canada which is an island within the world). I have a rental house that I was going to sell (could get $400k, selling because $300k mortgage term is ending soon) that is barely cash flow positive. But with all the new blood in town and rental vacancies going down, I feel like I’m getting out just when things are turning. I guess my real question, is your housing Armageddon just for GTA and Van, or will all of Canada go down, even supposedly-booming Calgary? Or should I get out while the getting is good?
Actually, Calgary’s an interesting case. House prices are still less than they were during the 2007-8 peak. Most condo owners who bought within the last five years have lost money. Amateur landlords who grabbed a house or a high-rise unit to rent out are in negative cash flow. And since the GFC, oil prices – which are supposed to grease Albertan real estate - have climbed more than 300%.
House prices in Calgary are up from March, 2011, by 3.6%, which is slightly ahead of inflation over the last 12 months. Condo prices have slipped below increases in the cost of living – which, ironically, are fueled by higher gas prices. What this means is even with the cheapest mortgage money ever, even with $100 oil, even with cash-back mortgages, even with sunshine pumped up the public behind by The Calgary Herald and a few thousand realtors, housing is stalled in a city where everyone thinks it’s on fire.
Of course, Calgary is not different. Nor is Alberta. Or Canada. The same laws of economics which chewed up housing markets in most western countries didn’t get suspended here. We just think they did. And that keeps the party going.
So I’d say the world’s eggheads echo this blog, and are telling us something consistent.
- Better to sell now, than buy.
- Don’t put all your net worth in a house and expect a good outcome.
- Lock in to mortgage rates that simply cannot last.
- Get the hell out of the rental housing business.
- Don’t even think about specking or flipping.
- Avoid bidding wars.
- Need equity out of your house for retirement? Do it now.
- Never buy with 5% down and 95% leverage.
- And don’t get sucked in by hype.
Remember a simple truth. Real estate is no longer a financial strategy. It’s but a part of one. Abide by these nine points, secure in the knowledge your MIL will never get it.