In March they migrate back to the well-treed hoods of North Toronto, flitting from property to property in a fecund frenzy. You can stand there, quietly watching, certain there’s but one obsession on their minds. Nesting.
These are the house hornies, the drivers of real estate in the GTA, as they are in Vancouver or Montreal. They create sales and set prices, and right now they’re molding a different market too few in the business seem to understand.
“Oh Garth,” veteran Toronto realtor Stephen McShane write me after reading a recent article, ”The sky is finally falling! How long has it been since you have been preaching that the real estate market going to hell in a hand basket….10 years? Meanwhile those who ignored your advice (I think I remember you referring to them as fools) and bought anytime in the early 2000’s have seen an appreciation of 75 – 100% of their property as well as built equity with their mortgage payments. And they have been able to do this with as little as 5% of the purchase price as a down payment.”
The guy makes some valid points. We all know what prices have done in the past decade. Let me come back to this in a moment.
First, be clear about the spring frenzy that’s been making some media headlines lately. As the snow banks melted in the demand neighbourhoods of 416 this year there were clogged driveways, busy open houses and multiple offers. But this was not a rerun of the Spring of 2012. A year ago the hot properties were those over $1 million, where asking prices constituted opening bids and the ‘lucky’ buyer paid 125% of list. At the other end of the spectrum, condo sales were fevered, hitting an all-time high as virtually every new development was sold out before a backhoe bit the dirt.
This year that house someone paid $1.5 million for a year ago is worth 15% less. The multiple bids are coming in lower price ranges, typically in the $700,000 zone (a 416 starter home in need of organ transplants). Meanwhile condo sales have collapsed, and prices are stuttering. In fact in February the whole market suffered a 15% year/year sales drop, with condos off by 20% and houses over $2 million decimated more than 30%. When the numbers are in for March, it’s hard to imagine the decline over the same month last year won’t shock.
Without a doubt, the market has changed. Sales are declining, household debt isn’t, buyers are tougher and prices under assault. This is what a correction looks like, as opposed to a crash. After all, Canada is not America and RBC ain’t Washington Mutual savings bank. It’s why I’ve told people for the past few years to ready for a price decline of 15% nationally (more in the frothy areas, less in demand pockets), then years of flatlining or decline as our demographics go negative.
The reasons are obvious. Canada’s economy barely has a pulse, despite 2.99% mortgages. Capital is flowing out of real estate, where profits are evaporating, into financial assets to ride the US recovery. Household and mortgage debt is at record levels, and 70% of families already have property. Millions of wrinkly Boomers are house-rich, cash-poor and poised to sell. So, where is this forever demand supposed to flow from?
Had the feds not engineered emergency interest rates for the past four years, greased CMHC with $575 billion (a 67% increase since 2007), encouraged bankers into excessive risk (legislating 40-year loans and 0% down), bought up bank mortgages to increase credit or directly subsidized real estate (home reno tax credit, first-time tax credits and fatter RSP drawdowns), homes might still be affordable. But they’re not. And the buyers bidding for those $750,000 fixer-uppers in Leslieville only exist because of interest rates which are destined to rise.
So, Stephen McShane’s right. Real estate ownership has benefited many who bought a decade ago. They were able to use extreme leverage and take a risk that paid off. But this is no guarantee of the future. Rates fell. Debt rose. Buying, and prices, reached an apex one year ago. Home ownership’s at saturation levels. The population’s aging. We’re not on the road to where we have been. Responsible realtors see that.
So, no sky falling. No going to hell. Just a steady grind lower, punctuated by the seasonal tweets of the hormonal. And the angry bleats of the floggers.