If the deviant comment section of this pathetic blog tells us anything, it’s that we live in times of extremes. Every day the doomers and the unicorns fight it out, one side saying we’re on the Eve of Destruction, the other expecting fat gains and long growth. The truth lies in the middle.
This much we know: our nation’s economy is weak, most people are debt slaves, financial illiteracy abounds and house lust still rules the land. It’s a given the majority will not be wealthy, and many will be insolvent. The real question, when the bulk of Canadians have adopted a one-asset strategy, is how bad it will get and what blow back will hit the rest of us?
That’s not doomer. But it’s not sunshine, either. It’s time we were more realistic about what 2016 might bring.
I noticed this weekend the guys selling Motley Fool were at it in force, saying “2016 could be very painful for Canadian homeowners.” This is based on a few key assumptions.
To wit, our housing market is massively overvalued based on what people here earn. So, we’ve become dangerously mired in debt, which makes us totally vulnerable. Our household debt level is greater than that in the US just before housing there blew up. Oil’s a disaster, as you know, and the effects are spreading. And now volatility in China has destroyed a lot of wealth, and BC house-buying along with it. Regional real estate markets are already plopping. So the conclusion: “With China’s main stock index plunging daily, much of this wealth is now disappearing. This combined with oil’s weakness now really being felt around the country could bode very poorly for Canadian real estate in 2016.”
Hey, all good points. But the Fool then goes on to tell you to short bank stocks, which is dumb (and self-serving).
Now here’s the CBC, with a fresh load of ponies and optimism.
A few days ago staffer Mike Crawley (a Toronto homeowner) penned his Five Reasons why anyone suggesting real estate may be troubled (including me) is a small-brained weenie. Demand for housing in the GTA (or YVR, for that matter) will never slacken. “There’s little room to build more single-family houses to increase the supply,” he said, apparently forgetting about Milton, Vaughan or Durham. Besides, Crawley added, houses keep going up even when the economy goes down, and mortgages may rise, but only slowly. No big deal. Mostly, “there is no bubble”, so how can it burst? And, finally, the poor people can always buy condos.
Mr. Crawley’s expert to support this is Sherry Cooper, chief shill for the country’s leading mortgage broker, and former bank economist: “Most people still want to own their own home. They may have to have a much longer commute to work and live in much smaller space but I don’t think the basic psychology is going to change.”
And she’s right. Most people will never come here, never read this blog and think I’m still a country singer. (“Hey, baby, whatever happened to Garth Brooks…?”)
So, realistically, let me spell out what we (the elite) should be wary of. Contrary to what the CBC says, I’ve not been calling for Toronto (or Van) real estate to ‘crash.’ That, along with the anti-America doomers in the comment section and the Motley Fool’s alarmism, is an extreme position.
No crash coming. No 50% or 80% drop. But one isn’t required to impact a huge swath of the population. Given oil, the economy, our tax-&-spend governments, the dollar, jobs and debt, only a modest decline can do the job. So just a normal housing ‘correction’ has the potential to bring far-reaching consequences – which few foresee. While most observers watch out for a speeding cement truck, they’ll be mowed down instead by a meandering Millennial on a fixie. Right up to the moment of impact, they’ll tell you all is safe.
The enemy is the unexpected. Virtually everyone in our bubble regions believes housing is immune from the commodity crash, job loss and financial angst around us. So they’re willing to absorb massive leverage to get in. Sadly, government is helping and encouraging it. For example, young buyers are being enticed into a new 84-unit condo development in suburban Port Moody (of all places) by both BC and the federal CMHC.
The deal is breath-taking. The developer says it will offer units for 8% ‘below market value’ which CMHC agrees will constitute a phantom down payment. That means the kids can get 100% financing with 0% down, and only have to commit to living there for two years – with all lending risk absorbed by taxpayers. Of course, the buyers believe prices will keep rising, and are actually told so by the developer. It’s like a free house. Free down payment. Free profits.
Here it is:
So what? So, simply, there’s no guarantee beater condos in the YVR hinterland, particleboard palaces in Milton or million-dollar townhouses in suburban Toronto will be worth the same in the future. Higher mortgages, US Fed increases, tighter lending rules, job stress and debt fatigue suggest otherwise. Therefore even a 10% drop in prices means an army of recent buyers – all property virgins with zero experience, inflated expectations and loans they never expected to repay – will be snorkeling.
If you don’t believe that will impact prices overall, you’re no student of history. In the US, 8% of property owners became distressed, causing a 32% decline in national prices, erasing trillions in middle-class equity. Canadian houses are now more over-valued and families more over-borrowed than was ever the case to the south.
There. Feel better?
Update, Jan 12: The CBC followed up on this blog post with a story on the phantom 8% down payment and CMHC’s complicity. You can read it here.