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Some weeks ago I shared with you bits of an email thread on the GTA real estate market between myself, BMO economist Sherry Cooper, TO condo king Brad Lamb, developer Harry Stinson and realtor-to-the-stars Elise Kalles. An edited version of this has just been published by Toronto’s Post City Magazine, a slick publication catering to the well-heeled Mercedes and Range Rover set. In that world, the sun never sets on $5 million townhomes with faux pillars and granite occupants. Or is it the other way round? Whatever. Here is it. — Garth

POST: When we met in the spring, you experts were optimistic about the future of Toronto real estate, and rightly so: the market soared through April, May and June. But July saw a major drop-off, with only 6,564 homes sold compared to 9,967 the previous July. So what’s happening? Is this just a seasonal trend, or is something more precipitous ahead?

Garth Turner: You say that the experts were “optimistic” about the future of Toronto real estate at the last chinwag. Not so fast, editor! I was decidedly grumpy at the event, forecasting that the second half of the year would see a substantial correction,with the possibility of a multi-year price melt after that, reminiscent of what has hit many U.S.cities.

And I was right.

Sales have declined now for a string of months, and prices have begun their descent. Listings swelled and have now contracted — and this all adheres to a classic pattern of spent markets. My only surprise is that anyone should be surprised. Give it up, expert dudes. You choked.

Sherry Cooper: Toronto’s housing market is merely cooling down. Home prices are just off recent record highs — some correction. Home sales are returning to more normal levels after hitting record highs around the turn of the year. Listings have gone up but not terribly so. The market is becoming better balanced.

Turner: Sherry, you’d have made a damn fine realtor. “Balanced” is the industry’s favourite word. I think David Lereah used that description in 2006 when he told Americans the market was correcting normally, home sales were returning to pre-boom levels and there was no cause for concern. Five years later the U.S. middle class is gutted … Surely you do not want a statement like the one you just made to go on your record? Just askin’.

Cooper: Garth, surely you aren’t comparing the housing situation in the U.S.to Canada. Since when did our mortgage lenders make loans to people with no income, no assets, no money down and no documentation?

Harry Stinson: While it has not been my historic behaviour pattern to agree with bankers, I would tend to agree with Sherry on this perspective.

Many of Garth’s points are valid, but overall I think that real estate, particularly in Canada, remains one of the more comforting places to invest.

Cooper: Our bank and all of the others qualify people based on interest rate levels that are significantly higher than current “teaser” levels. It is, however, true that a small proportion of homeowners with recent mortgages might be in over their heads if they lose their job or interest rates rise sharply, but there is a very low loan-to-value ratio in Canada.

Stinson: Even if Garth’s “facts” are correct, if there is one thing that Canadians are passionate about, it is their complete discomfort with passionate behaviour. You can yell “fire” in a crowded Canadian theatre and the audience will respectfully shuffle out in an orderly manner or possibly even wait for an official-looking person to issue instructions. I certainly recall the early ’90s slowdown (when Brad and I worked together selling condos). Indeed the market slowed down and prices did recede, and many people were disappointed that hoped-for riches did not materialize, but there was no sense of serious panic. Most people simply resigned themselves to holding on … And life went on.

Elli Davis: Perhaps I am not the “normal” realtor in the central core of Toronto, but I have experienced an excellent June and July and have several new listings in August.They are selling at about two per week and I am far ahead of 2009 sales figures. The HST impact was nil, as far as my business is concerned, and I feel that the “slowdown” is based on seasonal rather than economic factors.

Cooper: The recent clear signs of slowing in Toronto (and Canada) housing markets were in fact widely predicted by almost every mainstream economist out there through the spring (based on the tighter mortgage rules, the HST and higher rates). We saw a classic pulling forward of activity from the second half into the first half of the year, so just as the underlying market strength was exaggerated by the huge sales gains in the first half of 2010, the weakness is now being exaggerated by sharp sales drops from a year ago.

Turner: I appreciate Sherry’s attempted recovery, especially the part about “almost every mainstream economist out there” predicting a real estate correction long ago. In fact in this very magazine in March, when I was warning of a convergence of negatives for real estate, Sherry boldly said: “Frankly, I believe that Canada is going to be a real magnet for money. The money’s going to come in to stocks and bonds,but it’s going to come in to real estate,and it’s serious money. And we are seeing it already.” That sure doesn’t sound like a note of caution to me, and you are the quintessential mainstream economist … At least you are backpedalling now. That’s something.

Stinson: Well, Garth, I think you can cross BMO off your list of possible financing sources, should you ever need any.

Davis: This year has been much healthier than last year, and the listing inventory is low in certain pockets and certain buildings. The listings that are still on the market after 30 days need a price reduction and that is the best prescription for a sale. Toronto has always been price sensitive, and if the seller is truly interested in selling and will listen to educated advice, success will follow. The slowdown in sales in the carriage trade is more seasonal than economic.

Stinson: I totally agree. The general level of motivation is pretty slack during this season. There are far fewer clients looking around, and vendors are not taking the sales process as seriously

Turner: I admire people like Elli, and it’s obvious what the foundation of her success is. However, the economy is not eternal, and it seems clear we’re in a period of deflationary angst. Those with wealth may be more insulated than the average household, but real estate is a fairly integrated commodity, and the journey from Etobicoke to Leaside to Lawrence Park is dependent upon rising incomes and accumulated wealth. That chain is being broken by this economy. I would pay it heed, even when toiling on the carriage trade.

Brad Lamb: As usual, Garth chooses the end of the world scenario, which is right only once … You really need to listen to what consumers of all levels of real estate are saying. We are seeing the market ease off the accelerator after getting ahead of itself.

The HST is causing prices to rise this year by a few percentage points. While resale volume is down from highs, it shows that there is tremendous liquidity in the market with a mid-6,000 unit volume and 33 days as the time to sell.

Sixty-six hundred July sales would normally indicate an 85,000 sale year, which is a strong annual number … All in all, the market is fine and will continue to chug along without any real incident. Garth, I think you’re wrong here; however, sometime in the future, I am sure we will see a real estate correction in Toronto. It is unlikely that will be any time soon.

Elise Kalles: We are still optimistic in the market. An 85,000 sale year is definitely a strong year.I agree with Elli: we’re still experiencing bidding wars this summer, and if there is a slowdown, it’s seasonal, not economic. The summer is slow historically, and the attendance to open houses for new properties has diminished to less than half. My only worry is that buyers read Garth’s predictions!

This article appears in the September 2010 issue of Post City Magazines

“It wasn’t until dad died,” he told me, “that the state of the family finances was revealed. We were shocked.”

“And I’ll tell you one thing for sure now,” he said, his voice dropping lower, “there’s no damn way I’m lettin’ that happen to us.”

As I found out, father passed in his sixties, at which point the kids discovered their parents had no savings, no pension and no investments. Just a bungalow in North Toronto worth maybe $350,000 – meaning mom would have to survive on CPP and a part-time job in a retail store. Gross income: About $26,000. In Toronto, that’s called poverty.

Of course, the bung’s now for sale. No takers yet. And the only hope the over-mortgaged siblings have of seeing their mother financing the next 25 years of her life is for a quick sale and then plowing the proceeds into income-producing assets maybe lifting her back into a middle class existence.

But in a deflating housing market, it may never happen.

This is a story being played out in countless families. Boomer parents who thought buying a house and paying it off constituted the only retirement they’d ever need. They feared investing, eschewed tax shelters like RRSPs, threw every available dollar against the mortgage, and figured a buyer would always be at the door with a bucket of money. Worse, untold numbers of people in their 50s and 60s are now living in move-up trophy houses with fat loans against them.

Tony in Calgary made this comment hours ago in an email lamenting his parents’ situation: “They currently own a home on the far-outskirts of the city which was purchased in the $450,000 range a few years ago and now is valued in the $550,000 range (by realtors, for what that’s worth).  They are both around 50, and due to some health issues my father faces, I suspect he will look to early retirement or at least semi-retirement.  They owe $250,000 – $300,000 on their mortgage and will not have the house paid off before they retire (I believe it is amortized over 25 – 30 years at this point, with payments in the $1,700/mo. range). Sadly, they will not even talk to me about selling.”

For the sake of an army of middle-aged, house-rich, cash-poor, indebted, investment-starved and delusional Boomers out there, I seriously hope I’m wrong. But I doubt it.

The last real estate dive in Toronto, by the way, starting in late 1989, built to a crescendo in the early Nineties, and prices did not recover until 2003. So anyone who bought near the peak had to wait more than decade just to get their money back – not including years of mortgage interest, property taxes, closing and selling costs and inflation.

If this correction is as intense (and why wouldn’t it be?), then it could be 2020 or beyond before residential values equal those seen in, say, 2009. Which is a bitch if you’re a 60-year-old Boomer with no pension and the bulk of your net worth in a house. Of course, it helps if you like KD and Alpo.

But, as I said, I could be wrong. There are certainly groups who think so, like the CD Howe Institute. This week they unveiled a report saying there’s no bubble and housing will not dive, just a day after another report called real estate ‘an accident waiting to happen.’

“Many of the concerns about the Canadian housing market are motivated by recent U.S. experiences,” says economist Jim MacGee, author of the Howe report and an associate professor of economics at the University of Western Ontario. “A comparison of housing market policies in Canada verses the U.S. suggests that there is a little likelihood of a U.S.-style surge in foreclosures or a collapse of house prices in Canada.”

And what is this optimism based on?

“Banks north of the border did not engage in the same volume of risky loans. Low documentation, interest only and adjustable rate mortgages were driving sales in many markets. During the U.S. housing boom, both private insurers and government sponsored enterprises facilitated looser underwriting standards.”

Well, now I know we have problems. First, foreclosures are not our enemy and this is but a red herring. Instead, it’s negative equity – when house values fall below mortgaged amounts – which leads to a drought in consumer spending, economic slag and more lost jobs. Second, our banks and other lenders have certainly engaged in the business of putting people into houses they could not afford without a lowering of the lending bar. How is a 5/35 deal, made when house prices are the highest and mortgage rates the lowest, possibly responsible? It’s a speeding car without brakes.

But mostly, as I told you, this market’s cooked because people are fagged out. Too much debt. Too much house porn. Too high prices. Too few jobs. Too little confidence.

Who cares if there’s a “US-style” crash or not when any prolonged, garden-variety housing correction can wipe out the equity of legions of young couples and trap struggling Boomers in their illiquid homes? And when both of those things have the potential to screw the economy for everyone else?

This is the property’s secret shiv. The sooner we see, the better.

Teach your parents.