“My entire family,” she said, “thinks we’re freaks.”
She made the word “entire” into three fat syllables. I could just imagine a long, groaning holiday dinner table packed with siblings, nieces, uncles and inlaws, staring in abject disbelief as Wen and Patrick made the announcement. “We sold our house.” Big pause. “We’re gonna rent.”
They all live in a distant Toronto car-clogged suburb where there’s a 92% home ownership rate, the average sold price last month was $860,632, and 38% of the population is of Chinese heritage (27% are Caucasian). In other words, this is the gold standard of house horniness, where real estate means wealth. The bigger the digs, the better. The more fluted columns, imported tile, ensuite bedrooms, bathroom granite and knobs on the stove, the more fortune loves you.
Right now, says Wen, they’re fighting the numbers. “We started at eight-fifty and gave up once we got to more than a million,” she says. “It made us sick to our stomachs to think of paying that much for the crap people are trying to sell. We’re done. It’s too stupid.”
But while that might be a perfectly logical conclusion to reach, since house prices have disconnected from both incomes and the economy, it’s not what everybody in Markham believes. They watch the news. They read the paper. They talk to the neighbours. Housing is hot. Everybody knows that.
Priming the pump, of course, is the realtor class. Toronto Real Estate Board spokesguy Jason Mercer says a 11% price jump in the past year for detached houses, “makes sense given the fact that competition between buyers increased last month.” And why have bidding wars come back? One big reason is a 12% drop in the number of listings – a lack of inventory which, along with sustained low rates and an endless appetite for debt, has pushed prices beyond stupid.
So the theme of our pathetic blog this week is risk. It’s on. And growing. Risk to most people means losing half your RRSP in another 2008-style stock crash. But the odds of that are miniscule, and the fear irrational. Besides, a balanced portfolio bounced back entirely within one year. Today most people should worry about 1991. That’s when Toronto real estate, coming off a bull market with rising prices and falling listings, plunged by up to a third, before taking more than 20 years to recover.
By the way, less than 15% of people have stocks. More than 70% have real estate. Imagine the consequences of the next housing correction.
Former realtor-turned consultant, gadfly and official CREA bug-up-the-butt, Ross Kay, is out with a new warning. Never in the past 20 years, he says, has there been this much risk in having the bulk of your net worth in a home. In fact he’s plotted what he feels is the Toronto market’s relative vulnerability over the past quarter century. The bad news? It’s starting to feel a lot like that time you used to sing along with Milli Vanilli and Maxi Priest, and worried about zits.
Kay’s formula for risk assessment is to take current market values and subtract what he calls ‘sustainable valuation’ – a reasonable appreciation based on “replacement costs, historically normalized appreciation expectations, inflationary factors and comparable rent costs, that all are relevant to the location the real estate is located in.” If current values exceed sustainable ones, Kay says, risk is created. “The financial risk in purchasing real estate can be measured by the surplus valuation. The higher the amount of surplus valuation the more risk is associated with the purchase.”
The peak moment for risk was in 1989, when his index topped 40%. It took seven years for a correction to turn into a crash, with houses trading at a deep discount giving “arguably the best acquisition window in the history of GTA real estate.” The next correction started in 2007, but was whacked by government intervention. And today, adds Kay, we have “the highest risk exposure in 20 years.”
Only the rear view mirror can verify this. History alone will show if Wen and Patrick were geniuses to bank their down payment and avoid an asset plop everyone should have seen coming, or freaks who missed buying the trend, and bitterly disappointed their moms.
That’s the thing about the obvious. Never is.