Once upon a time, last December, I told you the tale of a sad little bung in North Toronto with crappy shingles and two dead cars outside. It’s nestled between two faux chateau baronial anorexic skinny pseudo-stone McMansions which sell for a million and a half. The little bung yearned to be tall and fatuous, too.
One day its owners listed it for $809,000, and suddenly the street filled with Ford 150s and cube vans. Contractors poured over the lot, submitted bids and made the bung feel special when it quickly sold for $843,000. Nobody had the heart to tell it the money was for thirty feet of dirt, and the bung would soon be landfill.
Two weeks ago a realtor (you can spot them by the BMW and the clipboard) and the guy who bought the place stood on the sidewalk staring at it. “Are you the owner,” my friend asked as her dog inhaled his leg. He said yes. But it hasn’t closed yet. “What are you going to do with it?” And he said he didn’t know, which was an odd thing for a guy who was about to drop $843,000 for a junker house.
Yesterday I heard there were more realtors around. Sure enough, the bung is for sale again. Sort of. Actually the agreement of purchase and sale signed three months ago is for sale – for $799,900. Says the new listing: “Drawing For New 2 Storey W/B/I Garage 4 Large B.R.2nd Fl. Laundry ,5 Wash Rms. Ready To Be Submitted To Committee Of Adj.”
Why would someone win a bidding war only to sell before closing at a loss? Maybe the owner decided it’s all too much work, pricing the bung ‘below market’ to engender another bidding war. It might be a clever strategy to get out unscorched, maybe even make a few bucks. Or maybe he’s just scared.
It wouldn’t surprise me. After all, tying up seven figures in debt and equity to build a spec house that won’t be approved and erected for at least a year might not be the safest way to make money, given the gathering storm. The denial of CMHC mortgage insurance to listings above $1 million has already tanked Vancouver and knocked 15% off last Spring’s prices in most hoods in 416. And now the news just grows more grim.
For example, the second major ratings agency in as many weeks is saying flat-out Canadian real estate prices are delusional, divorced from economic fundamentals. Last week Fitch concluded houses are over-valued by 20% as it studied how to rate mortgage-backed securities. And now Moody’s has taken all the hormonal fun out of spring.
“As with Australia, Spain and the U.K., we expect house prices in Canada to suffer the most due to the misalignment of current house prices with historic fundamentals,” it says. And what does that mean? Simply if there were a “severe economic shock” a la California or Nevada in 2006, real estate here could plop by 44%. The reason’s simple. Houses here are not worth what people have been paying for them, and price gains bear no relation to income growth.
But the good news? We’re not as screwed as Spain. Prices there could plunge 52%. And they molest bulls.
But maybe the contractor dude with the sad bung only listened to the local news today. You know, the story about “housing’s lost decade” that’s about to start any day now, according to the TD bank. Thanks to a spongy economy and far too many wrinklies, the bank figures house prices in Canada will grow at only the rate of inflation (2%) over the course of the next ten years.
Now that might not sound like a disaster on the surface, but imagine you bought a condo for $500,000 with 5% down and are 100% sure of renewing your mortgage in five years at double the rate. Yes, screwed. No capital appreciation on a unit you could have rented for half the cost while seriously growing your money in a balanced portfolio.
Or worse, hit the calculator, like one of our blog dogs did:
I read the article in the Vancouver Sun, and saw this: ‘TD expects prices to fall in the next two or three years, rising to average annual increases of 3.5 per cent after 2015 for an average annual gain of two per cent overall in the upcoming decade’
So I decided to run the numbers: what kind of a drop would prices have to see between 2013 and 2015, such that 3.5% increases from 2015 to 2023 net out to a gain of 2.0%? Starting with Vancouver’s proverbial Average Million Dollar house, I calculated that the property price would have to drop 22.5% by 2015, for the prediction to be accurate, best case scenario. If the purported average 3.5% per year gains are loaded toward the end of the decade, (as we have seen in the recent large gains in prices with the US recovery) that first big drop gets bigger. A lot bigger.
Well, perhaps the bung guy heard about Canada’s mortgage brokers, furiously lobbying F to rescue real estate in his coming budget. Broker boss Jim Murphy is pleading with Ottawa to reinstate the 30-year mortgage and to goose the tax break handed out to first-time buyers, now that sales have started to disintegrate.
As you know, February’s drop was 29% in Vancouver, 28% in Montreal and 15% in Toronto – the three biggest markets in the nation. And March numbers will probably be worse, since this month last year was the apex of hormonal silliness.
But relax. It ain’t Spain. A little bungalow can still dream.