Catherine and her geriatric but frisky squeeze are on the move. “We’re seniors from Alberta,” she says, “considering downsizing and moving to BC.” As you might expect, they not only follow the news about housing, but have been Googling up a storm.
“Who are these realtors trying to kid? Obviously people who have not read your blog or checked MLS listings!!,” she says. “I have researched the Kelowna area and Parksville/Qualicum Beach and I cannot believe the number of listings and the prices! There is so much to choose from it’s making our heads spin – and prices keep falling. When we mention this to friends, especially Kelowna they get a dumbfounded look on their faces and say “really?”. Uh yes REALLY.”
Really. It’s true. There are gorgeous, virtually new, West Coast beauties that have been on the market in upscale hoods north of Nanaimo for 250 days or more. Where once the wrinkly refugees from Alberta paid $900,000 for luxury digs, they can now grab them for seven. Wait six months, and the price will be less.
The theme of this pathetic blog this week has been ‘down’. As in prices, expectations, profits, wages and jobs. It’s time to get serious about deflation. I told you that in earnest a couple of days ago, after months of warning you it was coming. Catherine’s experiencing this first hand. And this week the Big Dog made it official.
It’s been longer than many can remember since the D-word crossed the lips of a central banker in Canada, but on Thursday Bank of Canada boss Stephen Poloz let it slip. We’re at risk of it, he said, and the economy won’t be repaired for at least two more years, during which time prices could fall, and a ‘sharp correction’ hit the housing market.
Inflation now barely registers at 0.7%, so Poloz worries. “Of course, when we are already below target, as we are today, we care more about downside risks than upside ones,” he said in a Montreal speech. “There is a risk that household imbalances could keep building and set the stage for a sharp correction down the road.”
To make the point crystal – that we are eight-tenths of one per cent away from deflation – the BD reminded what a downward spiral in prices can do to people. Like Catherine. As prices fall, they wait, expecting even lower ones in the future. That keeps money in the orange guy’s shorts instead of moving through the economy. Demand falls, jobs wither, wages and profits decline as a negative cycle takes hold. Poloz talked about the Depression (in Canada prices fell by 25%, the economy shed 40% and unemployment hit a stunning 30%), and the malaise now gripping Japan. He also expressed his fear: “a deflationary trap.”
Holy crap. So where does Helmut Pastrick get off? The credit union economist has just tried to out-BS Remax with a report predicting real estate will rise at 4% every 12 months for years to come, with Toronto housing prices doubling in a couple of decades. Yup, that would put the average property at $1.1 million, and the average detached 416 house at $1.7 million. Of course, Pastrick gets the headlines. The Bank Credit Analyst doesn’t. But major corporations pay a lot of money to get BCA insights. Right now it’s warning Canadian real estate is a time bomb.
“It is always difficult to spot a speculative bubble in advance,” says the journal this week, “but in the case of Canadian housing the weight of evidence is clear in our view.” That includes intense over-valuation compared to incomes and rents, residential investment at 7% of the GDP, “above the peak in the US and far outpacing population growth”, porcine household debt and a piggy appetite for more. “The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.”
If you can breath and find you butt in the shower, you should figure out this is not good. The herd blindly snorfles borrowed money and shovels it into inflated houses while the Big Dog opening muses about the Dirty Thirties. So do you believe the guys who score commissions selling mortgages and bungalows, or the dude in charge of money?
Catherine’s right. Houses in Wrinkly Acres will cost less in May. And that’s not the half of it.
Tomorrow: how to invest in a deflating world.