The obvious

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Now I’m worried.

I write six million tedious words on this blog warning housing is overvalued and Canadians are horny debt snoflers. Nobody cares. Then the Bank of Canada, no less, suddenly agrees with me. People, it says, are paying between 10% and 30% too much for real estate, and household debt is the biggest single threat to the economy.

Meanwhile this pathetic blog carries the torch for realism, arguing that house-lusty locals, not rich dudes jetting in from Guangdong, are mostly responsible for properties average folks can no longer afford. Our debt levels prove it. Your condo-craving twentysomething daughter proves it. Real estate has morphed from a cult to a disease, for which we are responsible. The Asian guy in the big house down the street did not make you do it.

And now Canada Mortgage and Housing, no less, says it agrees. And can prove it.

CMHC just issued a report based on interviews and site visits with owners, managers and supers of 20,000 buildings across Canada (which is probably more research than all the puffed-up bigots who hang around this site’s unsavoury washroom conducted) and the stats are in. Nationally, about 2% of investment condos are owned by foreigners.

In Toronto, it’s 2.4%. In Vancouver, 2.3%. In Victoria, 1.1% and Montreal, 1.5%. Concentrations are higher in downtown cores, with the tops being in 416 (4.3%) and the Burrard Peninsula (5.8%).

Seriously. Two per cent. This is even lower than data I have presented for the total of foreign buyers in all of Vancouver and Victoria over the past months. It puts all of those racist, anti-newcomer comments from people wanting to blame someone else for their own issues, in context. Canadian real estate prices are insane because we’re a nation of idiots. Get over it. You did this. Most people you know have a one-asset investment strategy which usually involves extreme leverage. I just hope events of the last few days are making them think twice about their choices.

What’s next, CREA sending me a Christmas card? Letting me use the word ‘realtor’ again without being sued?

Well, it’s time homeowners sobered up. Fast. Look at Russia to see just how quick a modern, advanced economy can circle the drain. The currency lost 19% of its value before lunch on Tuesday. Russian bond yields spiked to 16%. The central bank raised interest rates from 10.5% to 17%, but that did squat. The stock market shed 12% of its value. Russians are sucking their savings out of banks before they wobble and currency controls are leveled. The Moscow real estate market has frozen. And gold took a hit on the assumption the country will have to dump its reserves to survive, now that oil revenues have collapsed.

Nobody’s suggesting anything remotely similar will transpire here. But I wouldn’t expect normal, either. Even the MSM is starting to sound like me, without the attitude or the tawny animal magnetism. The Globe carried a column on why people should actually listen to the Bank of Canada’s warning on fat house prices. And CBC editor Don Pittis wrote, “A sharp decline in house prices could happen once rising U.S. interest rates begin to push mortgage rates higher. The longer we let house prices continue to escalate, the more dangerous it becomes.” His thesis: hey, if oil can lose half its value in six months, why can’t real estate?

That won’t happen. At least not in 416 or 604, or in smaller markets where people curiously think of real estate as shelter, instead of a futures contract. In those places, houses will stop going up, flatline, and then begin a descent later in 2015 as it becomes clear oil hurt the economy and rate will be rising. The toll could be far worse in Calgary, Fort Mac, Edmonton and the bigger cities in the flat provinces next door.

Today (Wednesday) the Fed makes known its current thinking on the US economy after a two-day meeting. It may signal a change in interest rate intentions, but might also wait until after the holidays. Nonetheless, it’s coming. The American central bank will start to normalize the cost of money in 2015. At the same time OPEC says it will likely take no action to stabilize oil until its next regular meeting, in June.

The year to come, with the world feeding on cheap energy, will bring more dichotomy. A big tailwind for the US, a boost for deflationary Europe, recessionary Japan and stumbling China, but a whack on the head for the producers – like Canada and Russia.

By the week before next Christmas, you’ll wish you had less house and a bigger portfolio.

The unicorns

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“We’ve dodged a bullet.” Says Janet. “And we have you in part to thank.”

Ahh, that’s so sweet. Especially coming from a couple of 30-year-old virgins in poor Edmonton. She says they’ve been renting a one-bedder downtown for a mere $850, have a hundred grand saved and make $180,000 between them. Jealous yet? “So in Oil Country,” she says, “we’re unicorns.

“When our landlord told us they needed to move back in, I’m ashamed to say we thought about buying. For about a minute. We never thought we would be seduced by a 4BD / 2.5BA but after years of sharing a small space and wanting a baby, we were tempted. And hey, what do you know? Housing prices had come down a little.

“A quick read of crude news, a dose of reality from your blog, and a sharp reminder from my dad (a retired oil fielder) on what is coming, and we avoided a cataclysmic mistake.”

Janet says they just found a whole house to rent, for about two grand a month, “to rest in for the next year while poop hits the fan. Hopefully our jobs survive (my husband is in IT but I work in public service so my resume is ready to go). I could be vengeful and rub this in the faces of everyone who told us we’re “throwing money away” renting just to make themselves feel better, but it seems pointless. They’ll just blame the oil, like no one could have possibility seen this coming.”

Smart. The fact is, we can see a lot coming. Not only will Janet and her squeeze be able to save serious money by renting, but they might be positioned for a Big Vultch by about this time next year. On Monday oil prices fell again (by another 4.3%, to just over $55), and the ripples are showing up everywhere. Russia’s central bank bloated its key interest rate to a withering 17% (from 10.5%) to try and stem an oil-induced collapse of its currency – now at a 16-year low.

Meanwhile cheaper energy and more jobs are igniting the US economy. Industrial production soared last month by the most since 1998. Confidence among homebuilders is now at a nine-year high. “With consumer demand and business demand strengthening together, it is self-reinforcing,” Laura Rosner, a U.S. economist at BNP Paribas in New York and a former New York Fed researcher, told Bloomberg. “The gain in production sets us up for a solid pace of growth next year.”

So, count on an increase in US interest rates in 2015. Maybe sooner than expected.

And, like Janet says, the yahoos buying particle board palaces in Edmonton and Calgary maybe should have seen this coming.

OIL DEMAND

The thinking now is that oil will be $50 of thereabouts for most of next year. After that, who knows? But this is plenty long enough to destroy the Alberta government’s budget, cause a mess of layoffs, probably cancel a raft of energy projects and reshape the real estate market. Not just in the prairies. Everywhere. Energy is a big chunk of this country’s economy and an even bigger piece of our exports. Consequences will be inescapable – as we are already seeing as our currency (like the Russian ruble) takes a major dive. By the end of Monday it was in the 85-cent range, taking a hit along with commodities in general, including gold.

So, this all hurts the Canadian economy, while cheaper energy boosts the US. As I have said here before, if American interest rates start to edge higher in a few months, then our currency is due for a major dump, given the oil situation. Will the Bank of Canada have any option but to edge up money costs here as well (like the oil-producing Russians) in order to stabilize the currency? And then might we not have the perfect storm for Janet – oilageddon and fatter mortgages, just when most people are steeped in debt?

By the way, did you catch the latest numbers? StatsCan says our collective debt just set another record. We borrowed almost $25 billion in the last three months in fresh mortgages alone, and the rate of new debt surpasses growth in disposable incomes. That’s right. Every single day Canadians are borrowing against the future to finance what they can’t afford now.

That might be okay if we had steady, strong growth, lots of new jobs, inflation and good markets for the stuff we sell. But we don’t. We’re struggling. Says TD economist Leslie Preston: “The recent collapse in oil prices likely to have an adverse effect on Canada’s growth over the next year, and particularly on incomes in oil-producing regions. Now, household debt risks are heating up once again.”

Ten days before Christmas this is not what a lot of people expected. But how many are preoccupied with the holidays? How many are in denial? How many remain too house-horny to see straight? And then there are the billions who don’t read this pathetic blog and think I play guitar.

Janet feels smug now. Just wait a few months. She’ll be insufferable.