The nightmare scenario goes like this: a nation of house hornies spends four years Hoovering up all the real estate it can absorb at ever-higher prices. Wages and salaries flatline, but mortgage rates are cheap, so household debt explodes. Before long seven in ten families own property. This has never happened before.
Everyone says house prices will rise forever, but they don’t. They wobble and start to reverse. Saddled with fat mortgages and new fears, people trim spending, and punt that new flat screen. In an economy 60% comprised of consumer spending, the consequences sting.
And that brings us to this week: 900 jobs lost and 15 stores shuttered at Best Buy. Another 700 people on the street at Sears.
Why should anyone be surprised? Some things are so predictable.
And the real estate recoil has just begun. The newest numbers from Toronto’s forest of condo towers are just dreadful.
- In the last three months of 2012 sales of new units crashed 47%, from the same period a year earlier.
- There are now 18,366 brand new, never-lived-in, unsold condos for sale.
- At the same time, 207 new projects containing 56,866 more units are currently under construction.
Supply is overwhelming demand, sales are falling off a cliff and inventory is stockpiling. How is this not a formula for lower prices in the months ahead?
In fact, it’s already happening as thousands of formerly virginal, first-time sellers meet Mr. Market. A year ago there were 216,000 existing condos in the GTA and now there are 11,000 more. But sales are falling – by a significant 26%. That means more supply yet less demand, and prices are already cracking, down 3% in the last four months.
In fact a resale condo that was worth $400 a foot in 2011 when a lusty young couple bought it is now priced at $397. That sounds like nothing until you realize that buying a $400,000 unit in Toronto costs $10,000 in closing costs, while selling it takes $20,000 in commission. So, count a minimum loss of $30,000 on a unit often snapped with 5% down – which means the virgins lost 150% of their money and paid more to live there than a tenant would have.
That’s quite a shock when your mom (who gave you the down payment) told you it was a great investment.
There’s no question where this is taking us. I told you more than a year ago to expect asset deflation (real estate, cars, smart phones, gold) at the same time as price inflation (food, gas, daycare, insurance). This coincides with a societal redefinition of wealth – a shift from stuff, to liquidity.
Old school is thinking the best financial move is to buy a house and pay it off as fast as possible, trash the mortgage and let your equity grow. New school is knowing your equity will probably shrink and 3% home loans are stupid cheap. So better to invest in a balanced portfolio, make 10% and be diversified. Better still, rent a condo and let the landlord subsidize you, then stick the difference in your TFSA.
The days of routinely making big capital gains on houses are gone. In fact as the virgin sellers in godless Toronto are discovering, their ‘investments’ can turn illiquid fast. A year ago the sales-to-listing ratio for condos was 52.4%. Lately it’s 40%. Imagine that – pay more than the renter next door to live in an identical unit on which you have lost tens of thousands, and can’t sell. Now tell me why workers showing up at the Best Buy store in suburban Victoria Friday morning were shocked to find the doors locked.
Why should anyone be surprised?
It was hardly a fair match. There was Brad Lamb, le Roi des Condos, all seven magnificent, macho feet of him. Almost a high-rise development on his own, dressed in designer black. Two floors below us in the private club’s garage was his hand-built $250,000 automobile. A few miles to the south, on a dozen downtown corners and sprinkled throughout the trendiest of 416 hoods, were Brad Lamb buildings.
He strode in, saw me. “I see Mr. Turner is here,” he said to his phantom entourage. But I was also hard to miss, smelling vaguely of poutine and complimentary beer nuts after 36 hours of Porter Airlines, Trudeau International and the bar babe at the Aloft. Besides, I wore my best squirrel hat.
As I may have mentioned, it was time for the annual real estate slugfest, sponsored by a hopelessly trendy, self-absorbed and condescending chain of urban mags covering the wealthiest enclaves of Toronto. Merely owning digs in a postal code where one of these publications deigns to circulate is a game point at the hair salon where I have my tail done.
Besides the King and I, panelists included some rock star real estate brokers, three major developer dudes and a woman who sells $4 million houses to Iranians. (She waved a copy of the current Canadian Business magazine, festooned with the headline “How low will house prices go?”, and said she was disgusted. She then looked at me.) Sadly, newly-departed BMO chief economist Sherry Cooper, who used previous roundtable chats to tell me, “you write drivel” and “clocks are right more often than you,” could not attend due to an emergency. I fantasized about that a little.
After a photo shoot involving a temperamental photog, four assistants, props, blank spaces for Cooper to be digitally inserted, and enough lights to fool Pentecostals, we began. For the next two hours every possible argument proving I’m not only wrong, but dangerous, spewed forth. The spring market has already started strongly. Interest rates can never rise because the government needs inflation to reduce its debt. Toronto is different because all the Chinese want to move here. If prices fall, people just won’t list their homes, “because why would they?” Stock markets are scary and volatile while the people love and know real estate. And my fav (from Brad): “Everything would be absolutely fine with housing if it had not been for the government involved in that blatant market manipulation.”
(Of course it was cool for F and the peckerettes to blatantly manipulate prices higher with 0/40 mortgages, unlimited CMHC coverage, first-timer tax breaks and lax lending standards – not to mention ‘emergency’ interests for five years.)
Lost on everyone, save for one pathetic, aromatic blogger, was the fact this convo was happening in a city where sales have suffered year/year drops for eight months, the average SFH has fallen 12% in price, new home construction just crumbled 53%, a condo tsunami is about to hit and the real estate board routinely manipulates its stats. But my bleatings about household debt levels, unaffordable prices and lagging incomes, plus falling market momentum, sidelined first-time buyers and price-to-rent ratios went unheard. Or maybe not.
“Okay,” the King said after the medics had finished my treatment. “I agree the market has been unsustainable. There is no way we are going to sell 25,000 condos this year. In fact, we’ll probably never sell that many ever again in a year – twelve thousand is more like it. The market was on steroids. This was not reality.”
Through my bloodied gauze I could see he was staring at me, awaiting reaction. The room fell silent. Editors laughed nervously. The still and video photographers circling the table looked at the sound technicians in wonder. Could this be an admission that sales and prices would not, in fact, rise without end? Did the emperor just duff his Calvins?
It was marketing. The thing you must excel at to sell $7 billion worth of properties and build $1.3 billion worth of concrete boxes in the GTA, Calgary, Ottawa and Montreal. Not for a moment did I forget this is the guy claiming investors buying his units can earn 280%, or that his free lecture at Toronto’s Sheraton Centre on February 23rd will tell you, “How to become a Multi-Millionaire through Brad J. Lamb’s POWER Investing.” If he were peddling stocks or bonds, he’d be ripped. But in real estate, he’s not just legal, he’s royalty.
Everyone at the table knows the market has slowed dramatically. Some see it as a lull. Others block it out. But Lamb smells an opportunity. Tell people what they fear, then show them how to play it. In the end, in his world, greed always wins.
Not sure, but the Hummer may have nicked a Rolls on the way out. Rich people have no idea how to build parking garages.