Last year almost half of all the new jobs created in Ontario were in real estate. Agents, mortgage brokers, appraisers, sales assistants and the dudes who pound the signs in. There are 67,800 realtors in Ontario these days, plus 40 real estate boards. Across Canada more than 110,000 people work flogging houses. In Toronto alone there are 45,000. In Vancouver, 13,500 realtors toil the mean streets.
Housing activities directly account for about 7% of the economy. Add in the real estate financing component, and it’s double that. Manufacturing (all of it) comes to 11% of the GDP. Oil, gas, mining and pipelines (including the oil sands) is 8%.
Consumer debt is just over $2 trillion, with two-thirds of that being residential mortgages. Our loans are now greater than the entire Canadian economy. Never happened before. Just like the $1.51 million benchmark price for a detached in Vancouver. We’re breaking records all over the place.
By the way, did you catch this chart the other day in the MSM?
The blue line is the average Canadian house price – now above half a million (a record, of course). The red line is the yield on a 5-year Government bond, which is used to set fixed-term mortgage rates. You can see that real estate spiked because money dropped in price – not because there’s less of it, or it became intrinsically more valuable. This chart also clearly suggests – through impressive negative correlation – that when rates rise, house prices will drop. The debt, of course, won’t.
This is the time bomb at the heart of the Canadian economy. Wage gains over the past year, as explained here last week, are non-existent (after inflation). But borrowing and real estate values have risen consistently. Household debt-to-income just passed 170%. Gulp. Yup, another record. (In contrast, Americans owe about 113% of their incomes.)
Meanwhile surveys show how bad we suck at finances. Over 80% of TFSA money is rotting in interest-bearing stuff like GICs and HISAs. A quarter of us couldn’t find a thousand bucks in a pinch. Half of Canadians could not survive one missed paycheque without angst. RRSP contributions have plunged. Legions of people live in giant houses with lawn chairs in the living room and obese monthly payments. Diversification and balance are unknown in most lives. The cult of the house has delivered us to this moment. And 2017 may be the tipping point.
Now, to be clear, there’s no crash coming in the way people think of equity corrections – ten, fifteen or 20% in the course of a month or two. Housing doesn’t work that way because, unlike stocks, you can’t get out in five minutes. Besides, real estate’s way more emotional than financial assets. Prices are sticky. They shoot higher on speculation, greed, euphoria, FOMO and delusion. They crawl back down on denial. Nobody these days can fathom taking a loss on a property, after seven years of madness. Many would rather suffer behind the drapes than make a rational decision to bail.
But a crash isn’t the threat, nor a wave of mortgage defaults (won’t happen). No US-style foreclosures with bailiffs hauling kids and mattresses out onto the lawn. No Canadian city will end up looking like Detroit. But still, there’s hurt on the way. A crash in disguise.
This year the cost of borrowed money will rise. Lending restrictions will have an impact. Even all those realtors are expecting price declines. The economy’s barely growing, and as housing goes mushy so does a lot more. So the heady combo of rising equity and falling debt servicing costs will reverse. How could it be otherwise?
The likely consequence, given real estate’s stickiness, is a long, slow and relentless melt. The listings drought will end. Price appreciation with it. The erosion will take time, but erode it will. Some people won’t care that they missed the moment to make windfall, historic profits. Others will be bitter they gambled and lost. Many more will end up with faint light showing between their mountain of debt and the remaining equity, knowing the next mortgage renewal could extinguish it.
This is what keeps economists up at night.
Not with a bang, but a whimper.