History sucks

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“Many millenials are getting frustrated by how long it now takes to ‘get started’ in life,” Kirsten writes me. “In WWII, a young man of 16 was considered an adult, and able to find work/help support the ginormous brood his mother had given birth to. Student debt was unheard of, a car cost less than one year’s wages, and a house would cost you all of your savings. Now, we are almost considered children until sometime after we graduate university, we are graduating with debt, and buying a house will likely cost us mortgage payments for 15+years.”

Without a doubt, there’s a meme today we’re in uncharted times. Maybe we are. After all, in the 1940s 16-year-olds were enlisting. By the mid-Forties 37,000 Canadians, most of them kids, had perished. So, life was a bitch then, too, Kirsten. And nobody could tweet about it.

But while the Millennials whine, lots of Boomers gloat. Like Paul Etherington, the current prez of the world’s biggest real estate board, in Toronto. He wrote a piece for the mainstream media this past weekend – as a trusted real estate leader – telling people like Kirsten the longer they dither over buying a condo, the more impoverished their lives will be.

Are houses now averaging $550,700 overvalued, he asks? Dig this response:

“It’s easy to see how much of a strong long-term investment real estate represents by taking a look back at our city’s history. Looking back 18 years, to July 1996, the average price was $199,856, reflecting an increase of 175%… it does illustrate an indisputable truth: a sensible investment in housing provides strong long-term returns.

“Reaching even farther back, 48 years, to 1966, the average price for a new home was $22,500.  Today, a parking space in a downtown condominium can easily sell for more than the cost of a home in 1966… A Toronto home purchased 78 years ago, in 1936, could have been snapped up for approximately $8,000.”

See what I mean? The young feel bitter and disenfranchised they can’t have what they think their parents had at their age. Meanwhile the old farts just want everyone to be like them. So, buy the damn house, kid.

Let’s give some context to Mr. Etherington’s blatherings.

In 1936 there was a depression. The jobless rate hit 30% in 1933, there was no unemployment insurance and the feds operated relief camps for idle men. The average annual wage for a two-income household (which was rare) was $1,473, and the average Toronto house cost $8,000. In other words, it took 5.4 times annual income to buy – which by all measures was extremely unaffordable. The prime rate was 5.21% (almost double that of today), and mortgages were in the 7% range. And Paul Etherington says Toronto houses could be ‘snapped up.’

In 1966 the average income for men was $5,483 and for women $3,016. So a working couple making $8,499 was considered middle class and could buy a house priced at $22,500 with just 2.6 times annual income. In other words, affordability had soared with wages rising as the economy boomed. Real estate price increases were kept down, in part, by the average mortgage rate of 7.6%.

Thirty years later, in 1996, male incomes averaged $32,588 and for women it was $21,735. So with two incomes a couple pulled in $54,323, which made it fairly easy to buy a house costing $199,856. The multiple then sat at a reasonable 3.6 times family earnings. Mortgage rates were pretty consistent as well – pegged at 7.2% that year.

Today the typical Toronto family brings home $98,116, while average house prices in the Toronto area have soared to $538,530, in large part because 3% mortgages make debt easy to carry. But compared to incomes, real estate is just as unaffordable as it was in 1936 – at 5.5 times household income.

So what are the lessons?

  • History tells us houses are seriously too expensive. Most Boomers have no idea how much easier it was to score real estate three or four decades ago, or how low rates today are masking the idiocy of buying at these levels.
  • Clearly there’s a negative correlation between rates and prices. Low rates bring high prices. Ironically, interest rates are down today because the economy’s weak, keeping wages suppressed. The worst of two economic realities.
  • Today’s rates are probably an anomaly, the work of massively interventionist central banks. They will eventually revert to historic levels. In 1936, 1966 and 1996, that was 7% for a five-year loan – more than double current levels. Imagine what that will bring.
  • Therefore worry more about debt levels than ever-rising house values. They will be falling in the future. Wait.
  • Realtors like Paul Etherington, placed in a position of public trust and influence, are an embarrassment. Worse, they lead people into bad decisions with crayon economics and McFacts. To be kind, it results from ignorance. More likely, it’s greed. Unknown to this industry is the concept of duty of care. Leaders care for those who depend upon them for advice and knowledge. Predators do not.

My advice to Kirsten. Stay cynical, kid.

Who can you trust?

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Push-back? You bet. A bunch of realtors and condo-floggers were unhappy with me days ago when I pointed out the average SFH detached house in 416, the hotbed of Canadian real estate lust, has declined in value by 16.7% over the last five months.

But it’s true. At least as far as the official real estate board stats are concerned (yup, the ones they inflate monthly). What was just over $1 million in April was $843,138 last week. That’s a reduction of about $169,000, or darn near 17%. And while prices normally decline seasonally (making August a great time to buy), this year the plop’s been more than double the average.

Why? Simple. Ever since the feds punted CMHC insurance on houses over $1 million, sales have been quietly and steadily eroding, with prices now in the follow. Gone are the days when a high-income, cash-poor ditsy lawyer could waltz into Leaside and buy a boring $1.4 million faux baronial anorexic house with $70,0000 grand down on his gold card, adding the $48,200 in land transfer tax to the mortgage. Now that house takes $300,000 in cash.

In fact we have a million-dollar line in the sand, as far as most markets are concerned. On one side are the riff-raff, hipsters, minivan, kid-popping middle-class climbers, and on the other those who wonder where the buyers went, sitting on massive gobs of uncomfortably-illiquid net worth.

In the middle is the real estate cartel, deceiving as usual with no useful market analysis, plus broad statements like this: “Sales were up strongly for all major home types across the GTA through the first two weeks of August. During the first 14 days of August, the number of home sales grew at a faster pace year-over-year compared to the number of homes listed for sale. This means that competition between buyers increased relative to the same period last year, which explains the continuation of very strong average price growth in the GTA.”

See what I mean? Strong sales “for all major house types” and “competition between buyers” – it suggests anyone not jumping in immediately will be paying more. But the facts are buyers now, at least in a category where there are 2,800 listings in this one region, will be paying less. A helluva lot less.

Nor is this just a Toronto thing. Former realtor and housing watchdog Ross Kay has also seen this trend forming for some time. As of the middle of this month, he says, there was “a clear and measured change” in the market for houses which remain CMHC-insurable (below a mill) and those no longer eligible.

“While those sellers under $1,000,000 have increased their selling prices 4.91% since July,” he says, “when the homes over $1,000,000 are included in the average we recorded a 6.87% decrease.” Kay also claims that 75% of all houses listed on the MLS system nation-wide will end up selling for less than their listed prices.

So there ya go. A 17% drop in the average 416 detached house since April. And almost a 7% decline in national prices in the last 45 days. Seasonality plays a role, without a doubt, but if this trend continues unabated into the key autumn selling season, it is simply more evidence that peak house is behind us.

Now to Australia, where houses are sold by auction, and this anguished young man.

More than a week ago, as I dreamt of goats, I wrote about independent Aussi senator Nick Xenophon and his showboating campaign to create a Canadian-style Home Buyer’s Place down under. Here we call state-assisted retirement savings “RRSPs”, and (as you know), lusty young first-time virginal homebuyers can pluck up to $50,000 from their plans for a real estate down payment, on the condition they eventually pay it back. Sadly, a huge number do not – likely because they bought so much house with such bloated debt they have no money.

In Australia, such savings are called “superannuation” and Senator Nicky wants kids to be able to raid it the same way, because that country is also plagued with seminal horniness and houses people can’t afford. But, as I explained here, the HBP doesn’t work. All we have done is transfer $30 billion from savings and investments into real estate, allowing 2.5 million more sales, and helping jack prices to the point where we are the second-most-unaffordable country on the planet.

Suddenly (since my blog post) a movement of sane, mostly young people in the land of the billabong has erupted to stop Nicko, because they fear the plan would (as here) simply goose values more. They also suggest the senator, who owns eight investment properties may be working in his own naked self-interest. Imagine. Shocking, I tell you.

Well, here’s the petition, and I didn’t see anywhere that northern hosers are excluded from adding their voices. By the way, the young ‘roo warriors credit me with creating the HBP here in Canada. I did not. Too busy inventing trouble.

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