Michael was in the lounge at Pearson. “Hey Garth. Sitting here at YYZ on my way to Orlando,” he iPadded me.
“Right next to me a d-bag mortgage broker with TD. On the phone with his client coaching him on how to somehow get his gf on the loan app to make the numbers work.. Then remove her later and leave him with the $800,000 loan he needs on his commission-only income. But of course you already know about all if this…”
You bet. Sadly. The country is drowning in credit, creating an epic catch-22 for central bankers. On one hand, the economy’s slow-walking as nobody expected. Yesterday’s news of 1,000-person layoffs at BeeMo and Potash – two of the signature corps in Canada – were great examples. While the US economy rebounds (new home purchases just popped the most in 30 years, while exports surged) we’re unwinding when it comes to jobs, GDP, balance of payments and the currency.
This week Stephen Poloz, the new Bank of Canada boss, made a point of citing ‘greater downside risks’ when it comes to inflation. In other words, it’s gone. We actually have disinflation, which can morph into deflation. That’s the economic equivalent of ED, which means nobody goes home happy (of course, I wouldn’t know).
No inflation means no growth, making higher interest rates lethal. It’s a surprise how things have fallen apart in the six months since Mark Carney left to cavort around London on his million-dollar salary as head of the Bank of England. After spending two years warning Canadians to stop borrowing or he’d whack them with higher interest, Carney now watches his poor replacement standing helpless before a giant, swelling credit bubble.
So that’s the catch. Raise rates and trigger a recession. Or leave them in the ditch and watch people balloon on loans. The first is no option, since we’ve never actually recovered from the last downturn (unemployment’s still 7%). And the second choice is worse. Giant heaps of debt will suck off family income for years, ensuring even more layoffs at Best Buy, Sears and Sun Media. Worse, for borrowers, dirt-cheap money is like crack to a mayor – totally irresistible. And we all know what that leads to…
Which brings us to the latest housing numbers for places like Toronto and Calgary. According to the realtors’ cartel (so be careful) resales last month climbed 14% in the GTA and 19% in Cowtown. SFHs in 416 jumped 24% and the average selling price overall increased 11%. In Calgary, prices are 8.5% more than last year, where the average detached costs almost $471,000. (In Vancouver, prices are flat for the year, and appear to be dropping even as sales recover.)
Detached houses now average one SUV less than $900,000 in urban Toronto, while they remain just above $1 million in Vancouver. How can citizens whose incomes have not really budged in six years afford such things? According to RBC, they can’t. It takes more after-tax income to carry a house in Vancouver than average families earn. Across Canada 43% of gross income (or close to two-thirds of take-home pay) is gobbled by real estate. No wonder Sears is closing stores and Sun Media’s shuttering 11 newspapers for lack of ads.
This is the Poloz Problem. Home ownership’s a total cult and 70% of the people living here are bombed on the Kool-Aid. Every month total debt rises, and even more money is diverted away into the burgeoning FIRE sector – real estate and the financial services supporting it. Relying on diversified consumer spending to spur the economy is no longer an option. That means recovery has to be export-driven – which makes us reliant on growth in other countries. That sucks.
As I wrote here yesterday, risk on. In a regular world, rising unemployment and a slackening economy would bring motivated sellers and cheaper houses. People would worry more about job security than Moen faucets. They wouldn’t buy anything with 95% financing, let alone real estate. They’d be liquid, flexible, debt-trashing, concerned savers. That’s normal.
This will not end well.
Jake’s three years away from retirement, eight years on this job, way short of pension, with a house just north of Edmonton. What’s it worth, I asked?
“About four-fifty,” he says, “I hope. They all used to be more than half a million a couple of years ago, before the slump.” Jake works on a massive oil upgrader, making $150,000 in a blue-collar job. Not much saved, since his strategy was to dump everything into the house, plus his cabin. All of a sudden that’s not looking too cool.
Talk of cutbacks and downsizing slices through the oil patch lately. Jake’s wife, Penny, fights to keep the house until it’s time to retire and move. But Jake worries there could be lots more lost equity ahead. “For years all I did was shovel money into this house to pay it off,” he told me. “So basically it’s everything I’ve got. You’re going to tell me I screwed up, right?”
Of course not, I say. We all make choices. You have more now. You should sell. Get liquid, invest and let the returns pay the rent until you retire to the cabin. Cut the risk.
Sadly, risk’s making a comeback. It was hard not to think about that if you were in Saskatchewan yesterday, learning that giant Potash is punting 18% of its workforce and closing two mines after prices have plunged by a quarter. Add these thousand jobs to those being offed at Encana, Heinz, Sears or Blackberry. And today, Sun Media (after all, why do newspapers need expensive reporters?).
Even the titans are squeezed. This week Bank of Montreal let slip it’s turfed almost 1,000 people in recent weeks, mostly in Toronto. This is the deepest cut since the aftermath of the financial crisis in 2009, and even though it’s a public company with an obligation to fully disclose everything, BeeMo chose to stay quiet. The news drifted from a call chief operating officer Frank Techar made to analysts following release of the bank’s earnings (it made $1.09 billion last quarter).
Risk. Our economy is slowing, obviously. You know that when even Royal LePage worries a little.
The real estate marketing gorilla this week released a study admitting there are way too many condos being built in Montreal, Vancouver and Toronto, so we should all expect “turbulence.” The surplus is pegged at between 36% and 68% – a massive amount – as developers wildly overshoot the market. While demand is expected to be between 26,000 and 32,000 units a year for the next two decades in the three cities, folks like the legendary and scary Brad Lamb have been sausaging almost 44,000 of them.
The report says this is no condo bubble, and demand from renters will stay high. “It is likely that future construction will slow to levels that are more in line with the growth rate and evolving demographics of the population.” And, “there may be some instability.”
It may all be bad news for crane operators, especially given the 40% drop in new condo sales over the last two years in the GTA, but the real toll will come on property prices. Just imagine of what a surplus of 36% to 68% could do to the value of the ubiquitous, one bedroom-plus-den, 700-foot concrete box that you paid $429,000 for last year? Yes, the one you can’t rent for enough to pay the carrying costs.
Risk. It’s not just an elevated stock market. This week some of the most awesome unions in the world were unable to stop a judge from agreeing that Detroit can renege on billions in public sector pensions. Imagine that. What a precedent.
Today (Wednesday) the Bank of Canada announced no change in interest rates, but there’s talk on Bay Street boss Stephen Poloz is starting to mull the unthinkable – a rate drop. Inflation has cratered to comatose levels and the economic recovery’s in a stall. Weak global growth is hurting companies like Potash, while tapped-out borrowers are eating into BeeMoo revenues. It looks like the Iran deal could unleash an oil glut, with falling prices that won’t be good news for Jake and his buddies. And now a dangerous hunk of the economy comes from building condos, which LePage hints is about to blow up.
The best-case scenario may be that which TD strategist David Tulk just outlined: “It feels like it’ll be a repeat of the 1990s, where house prices just move sideways for about 10 years.”
But I doubt it.