Was it only two sleeps ago you heard this?
“When it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself.”
Well, cue the fear. Seems like CIBC’s economics department may have a fail on its hands in a report clearly intended to keep real estate amped. Over the next few days realtors across the land will be reporting sales for October – traditionally one of the hotter months of the year for house buyers and sellers – and they will disappoint.
Meanwhile there’s nothing short of a meltdown taking place in the bosom of Canada’s biggest condo market. More hard evidence recent owners are about to be gored, while renters may rule. Here’s the latest:
- Sales of new condos in Toronto cratered 30% from the summer to the fall. There is one reason why – July 9th, the day F murdered the 30-year mortgage.
- Sales of used condos were even worse – down 32% from the summer. This is the beginning of a dark age of illiquidity for all those former virgins who took their moms’ real estate advice.
- The number of resale units listed for $400,000 or higher collapsed 40% from the summer, with a similar plunge in the sales of condos over a thousand square feet. Further stark evidence that a small change in mortgage amortizations can have a massive impact on the market. Imagine what will happen when mortgage rates normalize.
- There are 17,182 new, empty unsold condos in Toronto tonight. Another 56,300 are under construction.
- Of those, about half will be completed next year, and based on current sales levels, at least 14,000 will end going on the market as rentals. More condos, fewer buyers, lower rents.
Overall, new housing construction in this market of six million people has declined 64%. Resales of all properties fell 21% in August. All this because 30-year mortgages were snuffed, which had the equivalent of a 0.9% increase in mortgage rates. It’s irrefutable evidence prices are unsustainable – when buyers need not only mortgages under 3% with 95% leverage, but also thirty years to pay back the money.
And as of yesterday, it’s worse. The bank cop, OSFI, now disallows cash-back mortgages, has mandated tighter lending regulations and requires stricter appraisals. Meanwhile at CMHC, we move inexorably closer to the agency’s lending cap of $600 billion. When reached, the days of easy credit may truly be numbered.
This is not a Toronto problem, of course. It’s everywhere.
As I said earlier in the week, there is no need to have a ‘US-style’ housing meltdown in Canada for the impact to be widespread. All prices have to do is fall a mere 10% to plunge thirty thousand recent condo buyers into negative equity. By and large, these are first-time owners who absolutely believed they could take on a massive amount of debt since real estate always rises. Hence, no risk. How they respond to losing their down payments and shelling out twice the amount of money it would take to rent the same place is an unknown. But I wouldn’t bet on stoic.
Thus, the unraveling has just begun. Prices one year from now could shock.
Of course, millions disagree. Apparently the following was posted on MSN’s home page some hours ago:
One of the more opinionated pundits has been Garth Turner, who’s made a career out of forecasting disaster on the Canadian real estate front the last several years. He recently gave a talk in Vancouver and told his large audience: “The correction now decimating homeowners’ equity is real, and just starting. The 15 per cent price correction and 30 per cent collapse in sales foreshadows what is yet to come. By the time things trough, the average price will likely be forty per cent lower, with a return to 2005 levels. The impact on people who bought in the 28-month delusional period between late 2009 and last March, when I told you what was coming, will be substantial. Maybe life-altering.”
If you believe him, that’s not good news for the people who bought in the last three years. His message to Toronto earlier this summer was similar. It’s a forecast sure to terrify an impressionable homeowner into liquidating all real estate assets and heading for a bunker in the hills.
Real estate economist Richard Wozny has never heard Turner’s predictions, but as a consultant on major developments, he’s in the business of making predictions of his own. His clients need to know if and when they should build multi-million-dollar developments. And he sees Vancouver’s rising population combined with historically low interest rates as reason enough for the market to hold strong. Considering that Toronto is also seeing an influx of immigration, Wozny believes that market should theoretically hold strong too.
Perhaps it was Mr. Wozny’s advice that put 56,300 condos in the GTA development pipeline. If so, too bad. The impact of low rates has been spent. Nosebleed prices have capped new buying at all levels, in all markets. And if immigration didn’t save Chicago or Seattle from double-digit dips, it ain’t about to rescue Vancouver or Toronto.
But what do I know? The only enemy is fear.
By the way, Mr. Wozny did his MA in religion.