Remorse

The bottom may fall out of the southern Ontario housing market a week from Monday. That’s the day local realtors, shocked, dismayed, in disbelief and caressing their A7 key fobs a final time, release the stats for May. Expect epic.

So far we know listings have exploded. Up almost 50% in the first two weeks of this month compared to last year. Sales are going in the other direction – down about a fifth. And sentiment is changing fast. Just two weeks ago this breathless blog told you that for the first time in the history of polling more than half the people expected house prices to keep on going up. Well, that was then. Now it’s a mere 45% or so – but a significant change in 14 days.

Suddenly the headlines are graphic. “Bidding Wars Turn to Homebuyers’ Remorse in Toronto,” yells Bloomberg. And remorse it is. Deals are falling apart all over the place as buyers who suddenly realize they were the greater fools – buying at the tippy-top of an inflated market in a FOMO frenzy – do everything they can to avoid closing.

Mortgage originations are drying up. Open houses are empty. Agents are starting to completely abandon (thankfully) the barbaric cultural ritual of staging blind auctions. Suddenly buyers have a wide choice of properties to browse, no pressure to make an immediate offer, the ability to demand financing or home inspection conditions, and can even make a low-ball offer without shame or ridicule.

How is it for sellers? Wicked bad.

A few weeks ago 94% of new listings were snapped up as they hit the market. Now that ratio has plunged to 52%, and could be on its way to the Credit Crisis low of about 35%, hit when the world was ending in early 2009.

There are two stories at play. First, the sellers. Another 9,500 properties came on the market in the Greater Golden Horseshoe area since last Wednesday. This is historic, with almost 30,000 active listings now in the region. As the meme spreads that the boom is over, tens of thousands of owners are trying to exit at the top, while scores of speculators, leveraged to their pits, panic and list.

Then there are the buyers. The sales decline was 16% in the first two weeks of May, and odds are it will increase. Why would people stop looking for a house just when there are more to choose from, with less pressure and the potential for a better deal? Because we move in herds. People are desperate to buy things that others desperately covet. We back off in hesitation when something becomes unwanted, smelling risk.

It suddenly became clear to many that this market was a total gasbag. And how could a sane person believe otherwise?

Not only did prices travel from the unaffordable to the delusional and into the criminal, but the news for real estate has been all bad. Home Capital, the biggest non-bank lender, laid an egg. Ontario started taxing foreign dudes. Universal rent controls were slapped on all condos. The major banks were downgraded. The media’s been filled with stories of a population shouldering record debt, one missed paycheque away from oblivion, with 70% unable to afford any mortgage rate hike – when higher rates are a certainty.

So, the next few weeks and months will be pivotal in the financial lives of millions of people with the bulk of their worth in residential real estate. Many who bought in March or April will find they paid far too much, may never recoup, and are courting years of agony and expenses if they try to walk away from their deals before closing.

Greed is morphing into fear. Maybe it wasn’t different here after all.

The miss

No interest change coming on Wednesday. How could there be? The Bank of Canada can’t raise rates yet because the economy – while doing w-a-y better than last year – is still slack, flaccid, limp and everything this manly blog is not. But it can’t cut, either, since we’re a nation of debt snoflers completely devoid of discipline.

HSBC knows that. The international banking giant has Canada in its crosshairs, since few peoples in the world sponge up borrowed money they way we do. The lender has just undercut every other bank in the land, offering a five-year fixed-rate home loan for the low price of 2.36%. “We want to be more competitive,” the CEO says. “I certainly want to have our share of the market…”

Well, 2.36% is a scant seven-tenths of one per cent above the current inflation rate, making this almost-free money. Without a doubt, within a year or two it will be. And it’s reasonable to assume HSBC will be handing out hundreds of millions before the offer expires.

So the Bank of Canada’s Stevie Poloz can’t win. In report after report and ad nauseum speeches he’s warned of excessive borrowing. Households are over-extended, he says, and vulnerable to shocks like rising rates. And yet he does nothing about it. The bank’s key rate has idled at 0.5% for the last two years. Poloz plunged it along with oil prices – which had a lot to do with igniting a real estate maelstrom in Vancouver and Toronto. The higher houses go, the more people borrow. A vicious circle.

So here we are. Households owe $2.08 trillion, which is bigger than our $2.07 trillion economy. Two-thirds of that is long-term mortgage debt, taken out at the lowest rates in history. That they will rise is a given. And then we’re in trouble.

The financial press, that dreary bunch of writers who cover basis points instead of Kardashian bottoms, was rife with fresh evidence this week of how close to the edge your neighbours, co-workers and fool relatives are skating. At a time when inflation is 1.6% and wage gains actually negative, Canadians added an average of 11% to their mortgage debt in the past year. Worse, almost three-quarters say they’d be somewhat screwed if mortgage payments increased by just 10%. That would come with a simple 1% increase in home loan rates. And, yes, it will arrive.

Manulife claims it worries for both the Millennials and the Boomers, who together account for 65% of the population.

“The millennial segment owes more than any previous generation and are not prepared to meet unexpected expenses. They’re homeowners, their furnace could go, they could need a new transmission on their car,” says the company. As you might expect, the kids are drowning in debt – with 86% of them in hock, compared with just 39% of the wrinklies. But Boomers have a special challenge – much of their net worth is locked into houses, so if rates rise and home equity falls (and the ability to sell), it’s a sinkhole for retirement finances.

Four in ten Boomers have at least 60% of their wealth in their house and another 21% say it accounts for more than 80%. Meanwhile the fact almost half of Millennials are getting loans from the Bank of Mom means Boomers are sucking out equity so their kids can become indebted. What a great strategy. If rates rise and real estate falls, they ‘re both pooched.

Back to Poloz. If raising rates means 70% of people start having trouble paying their debts, and may cut back on consumer spending, he has an even bigger problem. If lowering them means more economic activity, more borrowing and increased debt, then how do we ever get out of this quagmire? But if leaving them alone means more predatory and irresponsible sharks like HSBC swim into our beaver pond to cull victims in the name of market share, well, no good happens.

This is the legacy of bad monetary policy. The debt overhang may now never go away – at least not for a generation or two. The correlation between a mountain of debt and mountainous house prices is irrefutable and absolute. This is the reason (not Chinese dudes) why we are now have 86% of our young people sautéing in borrowed money they may be incapable of repaying.

My first house cost $66,000 back in the bronze age, and my first mortgage was at 12.25%. In the Eighties, when I was first elected to the House of Commons, my mortgage was 14%. But a great house cost less than $300,000. Today a fiver is 2.36% and real estate sets you back a million.

So much for progress.