Pete and Val moved from Ottawa to civilization last year. “We sold in May at a good price and earned a healthy tax-free gain on the sale,” Val says. “But we’re going back to Ottawa this summer and must decide if we rent or buy.” Like so many others, P&V read this blog because doing so will make house prices come down. Everybody knows that. It’s guaranteed. Just like Regenerist Micro-Sculpting Hydrating Eye Cream and Lash Serum. All scientifically proven.
“In the last year, F killed the mortgage market and the wheels are supposed to be falling off the real estate market,” Pete tells me. “However, when we look at the MLS website, it seems like house prices have not changed since we sold! What’s up? Are you wrong on this real estate correction or does it not apply to Ottawa? What am I missing?”
Now here’s Ryan, growing concerned about the future because “my wife and I are hitting our 30s.” I am so sorry for you, dude. Here, have some lash serum.
“We’ve been renting for almost a decade and are patiently waiting for the market to hit the bottom. While we’ve sat back for years renting (and saving), at the same time, noticing the local housing market balloon to unsustainable numbers, sometimes when I read about your ongoing ‘real estate doom/gloom’ forecast (and albeit a ‘bang on’ forecast), the real question is this: Well, when is it the RIGHT time to BUY?”
In announcing last month’s unhappy sales numbers yesterday, Shelley Mann, boss of the real estate board in Victoria, put it this way: “Many buyers are still waiting for prices to drop, but it’s clear to me that sellers are in a holding pattern regarding the value of their homes.” And that’s about right. Rapacious buyers are battling delusional sellers. And the victims are sales. In Victoria, for example, the number of deals last month was 18.2% below year-ago levels.
In Vancouver house sales plopped a wicked 29%. In the Lower Mainland, the Fraser Valley board says realtors there took a 28% hit, compared with February of 2012. Saskatoon was down 18% last month. Montreal is down 14%. Toronto realtors this morning reported a market-rattling 15% dive.
In fact, falling sales have been a consistent story now for the past eight months, despite cheapo mortgages, rising stock markets and the outbreak of bidding wars, surging house prices and rising sales in the US. With few exceptions, tumbling sales presage lower prices, which we now have in Vancouver and Victoria, for example. So, do hopped-up, aroused wannabe-buyers like Val and Ryan just suck at being patient?
The big ratings agency has been investigating how to calculate the risk on pools of residential mortgages which lie at the core of some massive securities. Fitch is developing a new financial model which can estimate potential losses among Canadian mortgages if the housing market jumps the shark the way it did in the US.
The conclusion: Canadian real estate is overvalued by about 20%. In the last five years prices have risen dramatically, “when underlying fundamentals suggest that growth is unsupportable.” This, you might remember, is consistent with forecasts by outfits like Capital Economics (25% decline) and even the major banks (10-15% drop). It also echoes international opinion, as expressed by tomes like The Economist, now calling our market “the most overvalued in the world.”
So what gives? Where are the beefy cuts?
Well, check this out. Fitch says: “If growth halted and prices began to drop, it would be expected to take several years for home prices to revert to their sustainable values, depending on a number of factors such as government support and credit availability. With this time frame, the actual observed decline in prices could be as low as 10 per cent.”
In other words, no sudden, precipitous Phoenix-inspired crash. More like an erosion in prices stretching over years of flatlining in some areas and a slow melt in others. BC and Quebec are at risk for a 26% drop, the agency figures, while Ontario dips 21% and Alberta just15%. And within those provinces, as I’ve been harping all along, there will be huge difference between markets and hoods. Urban demand areas could get nicked for just 5%, while some McMansions in the burbs are crucified. In fact, this pattern’s already emerging in the GTA and the Lower Mainland.
In short, correction, then melt. An event that could last five or ten years as incomes and rents stagger to catch up with real estate values pushed higher by a tsunami of debt. And where does this leave purchasers and vendors?
Simple. The advice for buyers is ‘wait.’ The advice for sellers is ‘don’t wait.’
It took a decade for this bloat to happen, and it could take as long for prices to revert to the mean. Because most homeowners would rather eat bugs than take even a small loss, sales and market momentum must fall for months on end before asking prices seriously decline.
If you can’t wait, at least don’t whine. Go out like a hero.