Once a year, because cock-fighting and virginal sacrifices are now illegal in Ontario, the editors of an upscale Toronto mag invite me into a room full of realtors and economists. After a few hours of evisceration, you can normally collect me with a spoon.
In the Spring of 2011 I warned the housing market in general was living on borrowed time. Bank economist Sherry Cooper said that I wrote crap. In the Spring of 2011 I conjectured the correction was a lot closer. “Well,” she quipped, eyes flashing, “a stopped clock is right twice a day.” See how convincing I’ve become?
In the convo a year ago, condo king Brad Lamb was categorical. “If you really want to be safe,” he said, “I would buy a house because, frankly, you can’t replace it. We’re not adding any volume, so what’s that going to do for house prices? It’s going to drive them higher. Unless we increase the number of single-family homes, detached and semi- detached, prices are going to continue to rise dramatically.”
In a few days we’re gathering again. In preparation I have secured new body armour and put a lead liner in my squirrel hat. That should work. But Mr. Market has also strengthened my position, since what I told the bevy of experts to expect has now come to pass. In Toronto, of course, sales were down 19.5% in December from the same month a year earlier, while 2012 as a whole saw just a 4% drop from 2011. But worrisome was the fact sales declined on a year-over-year basis every month since about May. Meanwhile in the last quarter of the year condo deals crashed by 23%.
Prices? Up on the year, but also declining consistently after last Spring’s bidding-war frenzy – now regarded as probably the hormonal top of the market. For example the average 416 detached home topped out at more than $831,000 in April, yet finished the year at $722,393. Sure, prices fluctuate seasonally, but a 13% drop in eight months is more worthy of Cleveland than the Republic of Lamb.
Interestingly, this is consistent with what’s been happening in that other hotbed of housing horniness, Vancouver. Detached houses there also lost about 13% of their value between Easter and Christmas, with declining sales for each month and a 31% hollowing-out as the year ended. Coincidence? Maybe. But sales have also dropped in Montreal, Edmonton, Winnipeg and everywhere else local real estate boards say, “it’s different here!”
It isn’t, of course. The factors that led to this inevitable and foreseeable correction should have been evident to even realtors and economists. New mortgage rules kicked first-timers to the curb by shortening amortizations. Big banks were forced to stop giving away downpayments. And mortgage insurance was withdrawn from million-dollar homes (that alone was enough to kick Vancouver in the gut). So we’ve had an assault on all of those little condos – which are quickly turning toxic – and on upscale houses at the same time.
But it gets worse. Rising stock markets (the S&P gained 13% last year and a balanced portfolio grew by 10%) are sucking money out of houses and especially bonds. So, less demand for real estate at the same time bond prices are falling and yields rising. In other words, five-year mortgages will cost more far in advance of the Bank of Canada starting to raise rates this October.
My big question this year: how did we not see this coming? It was inevitable the US economy would stabilize and start growing again, that interest rates wouldn’t stay at 3%, that household debt would hit the wall and stupid house prices would quash demand. There’s no Canadian market that is different or unique. Only individual neighbourhoods – small micro markets where demand is consistent and supply limited – can claim that status. Cities and regions cannot.
A year ago the editors asked: If your kids wanted to get into the market, would you advise them to wait and see what happens, or jump in?
Said Brad Lamb: “I think we’re safe at these prices. I don’t think there’s any sort of risk with the prices we’re at, so if you ask me today, I’d say, Buy.”
Said Sherry Cooper: “What we will see in the housing price range and condo price range is a continued excess demand and prices rising. It’s just that they probably won’t rise as much.”
By the way, both of them sold their homes.