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.

They’re young, smart, mobile and sat across from me after back-packing half-way across the western world. After all, school starts soon, and teachers are expected to shave and show up.

Soon our chat turned to real estate – which every young couple seems obsessed with. “We understand the risk,” they said, “but it’s the peer pressure that’s killing us. After all, you gotta remember that everybody our age thinks houses always go up.”

And then they reminded me. The last time real estate took a dump, they were in grade 7.

So, we began the lesson.

The first phase of this housing correction was more like a nudge than a slap. Over the summer the number of buyers melted away, sales levels dropped and excuses flowed.

Real estate professionals blamed rising mortgage rates, then tougher lending regs, the weather and finally the HST. The problem, of course, was that we’d reached a point of unaffordability and many were starting to see danger.

The second phase is happening now. This is the slap.

After three months of lousy sales numbers and wobbling prices, the risk in buying a house has just been underscored by the media. Suddenly, it’s in everyone’s face. A couple of pseudo-academic reports in the last few days have given reporters the third-party source they were looking for. Suddenly the bubble talk that frothed around here is on the front page, the six o’clock news and magazine covers.

And so the door opens for the third phase. This is all about behavioural economics. And it’s the same stuff that stock market chartists use in their technical analysis. It means one simple fact – that human emotions, not economic fundamentals, will now set the rules of this game.

As I wrote in my current book, Money Road, technical analysis measures how much fear or greed’s in the air. This is done in part by studying price changes, trading volumes and the amount of time it takes for patterns and trends to appear. Based on that, there are three assumptions made:

• History repeats.
• Trends persist, and
• markets move based on known facts. In other words, there’s no point worrying about information that can’t be known, since market action itself tells you all you need to know.

There’s another crucial assumption: one thing never changes about markets – people always think the same way. This yields a few more conclusions. When a trend shows up in a market, it’s there for a reason, and will probably persist. So, until it reaches an extreme point, smart investors should just follow until technical analysis clearly shows that extreme moment has been achieved (like Vancouver house prices right now). The extremes always have one of two things in common, which is fear or greed.  For example, stock markets reached maximum despair and capitulation in the winter of 2009 when the media was full of stories about a new depression and a collapse of the financial system. Conversely, they were euphoric and greed-bound in 1929 (just prior to the sell-off that October) and in 1999 (when dot-com mania swept us into uncharted territory).

Technical analysis says investors should not argue with an asset price or try to hedge against future movements, because it’s doing so for a reason. If more people want to buy than sell, the thing will rise and keep on rising, until investor psychology changes. And when it does, that will show up on the analysts’ charts, in their moving averages and in real estate board sales numbers in Calgary and Toronto. The key to winning, then, is to anticipate the herd.

How do you know when a bull trend is about to turn into a bear? When your profits will morph uncontrollably into losses? Why don’t more people see this?

Technical analysis says there are always levels of resistance, above which buyers won’t enter the market because they think an asset costs too much, and levels of support where investors think something is so cheap they must buy. By plotting prices and volumes, they seek to identify these points and therefore trace investor sentiment. If an asset price breaks out of an identified trend – and smashes above or below one of these markers, then that signals a new phase which can be either bullish or bearish. In other words, that’s the moment a buy or sell decision should be made. Despite the assurances of the market pros, investor greed had been shattered. It was all over. Zip. Get out.

For Canadian residential real estate markets, that moment is now.

In the coming weeks and months you will be hearing more about declining sales volumes, and then lower prices. As housing values fall, it will make no sense for buyers to grab a falling knife. After all, the price an anxious seller wants in October will likely be higher than the one a desperate vendor will accept in March.

And as more and more people understand real estate can fall as easily (and more swiftly) than it rises, then the fewer who will want to stand under it.

Out of this will come a moment of capitulation, when prices become so irresistibly cheap that fear reverts to greed. Panic becomes lust. The herd spins on a hoof, and thunders back up the chart.

That moment will surely come. But our American friends have been waiting five years since they experienced the moment we now taste. It’s estimated it will be 17 years before peak 2005 prices are seen again.

Teach your children.

Hi Garth ! I really enjoy your blog! As a pharmacist who moved from East coast to West coast, your blog is a therapy to all the in-law, co-workers, etc who are constantly asking why I am not in the market yet ! We were in Vancouver previously, but we have no future with our 150k total salary income to buy something normal considering we are now 30′s and we don’t picture ourselves in a million dollar slum in East Van.

As a part of my therapy, I participated to the zombie walk in Vancouver in mid-August. My partner and I were zombie realestate agents (that’s me in the picture). I could swear you that each time I said to a stranger ”Buy now!” they all laughed at me (about 50 persons surveyed) . And they were not zombies.

I will be grateful if you use this picture for one of your posts. — Sophie

________________________________________________________

The summer ends with a flourish. Tomorrow the Case-Shiller home price index emerges from detritus of the US real estate rubble, and then we have the August body count from local Canadian real estate boards. C-S will show new price crumbles, while sales here melt.

All of this is proving too much for some realtors. They’re cracking.

And how can you blame the poor souls? It’s been brutal. A generational bull housing market from 2001 to 2010, interrupted by six months of dithering last winter. Prices rising during that time by 70%. A dumbass government that brought in 0% down and 40-year mortgages. A desperate central bank that dropped interest rates to 0.25% and plunged mortgages to 1.5%. A federal agency allowing 95% real estate leverage backed by taxpayers, so people without money can buy houses. Banks that awarded mortgages to anyone who could breath.

And now that Canadians are mired in debt, with the recession raging, jobs scarce, taxes rising and real estate priced out of reach, it’s that frickin’ Garth Turner’s fault.

I mean, listen to Agent Bob. He tells it like it is:

Ringleader Garth and his lynch-mob delight in mocking and ridiculing the predictions made by economists and the real estate industry. With his inflammatory language, he gleefully whips his blog dawgs into a frenzy, each one spurring the next to greater depths of despair and misery, as they stalk the internet for vulnerable victims. (Thankfully we have computers – the victims are subject only to cyber-lynching.) They terrorize the blogosphere and senior citizens. This comment is typical: “It would give me great joy to see a massive RE crash devastate all the OLD people financially and force them out on the street!” (Brian on 08.22.10 at 10:56 pm)

Garth can take credit for some accurate predictions, but let’s look at some of his other prophecies which were supposed to have happened by now…

Almost two years ago, Garth Turner said:

“Don’t be surprised if these things happen:
* Neighbourhood food shortages as just-in-time delivery systems are disrupted
* Electricity brownouts starting as early as the summer of 2009
* A pension crisis as retirees find out about unfunded liabilities
* Real estate prices in Calgary, Edmonton, Fort Mac at 50% of 2006 levels
* A wave of mortgage defaults. Yes, in Canada.
* Scaling back of 2010 Olympics in Vancouver
* Bankruptcy of major Ontario homebuilders
* Martial law in some US and European cities to quell protests of unemployed
* Seasoned firewood climbing to $300 a face cord”

It makes me think of this famous quote: “I’m an old man. I’ve seen many troubles. Most of which never happened.”

For a realtor, this is a pretty good piece of ad hominem. And I did make those, “don’t be surprised if this happens…” remarks when I wrote a book called ‘After the Crash’ in November and December of 2009. Some of them were reasonable (pension crisis, real estate values, Olympic money woes) while some are yet to come (mortgage defaults, builder bankruptcies) and some, thankfully, we avoided. You might remember those days – when the media was forecasting a neo-depression and financial collapse.

But what does this have to do with the current real estate mess? Right. Nada. It’s designed to discredit me. Fortunately that was done decades ago. So I’m now like the three-legged, blind, castrated, run-over dog called ‘Lucky.’ Nothing to lose. Why not bark the truth?

In any case, August sales were down almost 40% in Calgary, I hear, and the average home price fell $14,500 in a month. That’s 3.1%, or about 30% on an annualized basis.

I’d be cracking, too.

Frickin Turner.

(And here’s a frickin think tank report:)

‘Canada’s Housing Bubble: An accident waiting to happen’

(And a frickin magazine:)

‘The case against home ownership’

There’s a collective sigh of relief this week in the board rooms of the country’s big real housing cartels. Outfits like the Toronto Real Estate Board and the Real Estate Board of Greater Vancouver could not have timed it better – the release of their August numbers on the Friday of the last long weekend of the summer.

If there is one thing I learned in my star-crossed political career, it was the news value of a dead Friday. With network newsrooms unplugged, print reporters in neutral, columnists buggered off and investigative journalists extinct, it’s the best time to announce what you want nobody to know. And the hours before the Labour Day weekend begins constitute the perfect zombie. Few people tune in over the weekend and by Tuesday, it’s all old news – hardly worth reporting.

Good thing. It’ll be ugly.

Indications from just about everywhere are that resales crashed over the past four weeks, especially in BC. In fact, the betting is that August numbers in most urban centres will be about 40% lower than the same month in 2009. In some regional markets, evidence suggests volumes are down as much as 70%. Two days ago I posted a letter from a Vancouver Island realtor lamenting, “the market has completely softened. The market is completely dead.  Brand new houses in Sooke, down to $299,900 from $399,900, no calls.”

Meanwhile in Edmonton, open houses are nap time for depressed realtors. In the GTA the condo glut has started in earnest as sales centres turn into ghost cites – with 19,000 units entering the market in 2010. In downtown Vancouver the blocks around the swishy world-class Millennium Water are deserted. The only cars on the street outside belong to agents.

This brings me to the dual questions I wish to answer.

First, often asked here: why are prices not falling as quickly as sales?

The answer has been stated before, but let me make it as clear as possible. Sales levels are set by buyers – they are the ones with the power to make offers, make deals happen. When buyers believe prices are too high, vendors are too greedy or the market is in decline and better values lie ahead, they stop buying. That’s exactly what’s just happened. So, sales crash.

Prices, on the other hand, are set by sellers, who also have the power to withdraw their homes from the market (which they are doing) if they see prices falling. Sellers are largely more delusional than buyers, who like to masquerade as bloodsucking bottom-feeders. In markets like this one, it’s not a good fit. Hence, sales crash, listings diminish and prices stall.

This will, however, change. Sellers who came to market in the last month or so are still hoping to snare one of those greater fool idiots who stumbled out of 2007. It will take 90 days or so on the market, languishing without an offer and barely any showings, for reality to set in. At that point – towards the end of the year (as I told you months ago) – the price reductions will start. And so will the fear.

That brings us to the second question: What happens then?

This is more important. It ‘s where most mainstream economists – those guys who insisted there was no housing bubble to talk about – are completely misguided. Projections from the bank towers that 2011 will bring a peak-to-trough price decline of 10% are worthy of chiselling into the sidewalk at King & Bay. In 2013 we can go there and smirk.

For some time I’ve warned that the American real estate experience could be repeated here – not as extreme; not a carbon copy; and not with exactly the same economic implications. But scary, nonetheless. After all, we’ve committed pretty much the same crimes. We overvalued houses through greed and speculation. We relaxed lending standards. We encouraged people without money to buy homes. We brought in teaser mortgage rates destined to reset much higher. We pigged out on household and consumer debt. We had bidding wars and HGTV. And we all bought into a culture of  conspicuous consumption in which a honking big house equated social standing. Now, how is Chicago so different from Toronto, San Francisco from Vancouver, Calgary from Houston, Kelowna from Phoenix or Miami from Victoria?

What does this mean?

Things get more serious in 2011.

For sellers, a brewing nightmare. In the US, prices have dropped from 15% in some markets to 70% in others. And still it’s taking an average of one year to sell a home. This is why real estate is illiquid, and a huge potential destroyer of personal wealth. With sales levels plunging, is it not reasonable to expect similar here?

For lenders and realtors and that part of the economy housing makes up, a crater. Mortgage rates could go from ridiculously low levels today to bizarre new microscopic numbers, and it would matter not a whit. This isn’t about affordability anymore, so dump the economics.

For buyers, a huge gamble. With unemployment rampant, the economy stagnant, taxes rising and confidence shrinking, why borrow a big pile of money to buy an asset that’s declining in value and people are desperate to sell? Wouldn’t it make sense to wait six months, or a year? Won’t homeowners be even more desperate then? In fact, why would you buy anything until you are sure a bottom has arrived and you won’t get creamed?

Right now, of course, it’s all exciting. Bursting bubbles. Dickhead economists. Realtor revenge. Granite and stainless Armageddon. Those people who wondered how 25-year-olds with no savings could afford spacious new digs now know the answer. They couldn’t.

But as I have said a few times, this is but the start.

Enjoy summer’s final hours.

The crowded streets of Vancouver’s swishy Millennium Water development yesterday afternoon.