That’s it

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How to tell when housing boom’s running on fumes?

  • When the Globe and Mail appoints a full-time real estate reporter, who gets more stories published than the Ottawa guy. And is cute.
  • When 108,000 new condos are under construction in the GTA.
  • When more than 50% of all markets saw sales declines last month.
  • When politicians start talking about limiting foreigners from buying houses in Vancouver, after they buy less.
  • When a Toronto realtor I trust stands in my foyer and says, unprompted, ‘Things are going to really slow down.”
  • When new houses on ravine lots go on sale in suburban Ottawa and there’s a line-up – of seven people.When the Ottawa Citizens writes about it. And sends a photog.
  • When fixed-term mortgage rates slide under 3% and nobody cares anymore.
  • When it’s been five months since house prices peaked in 416, with the average a hundred grand cheaper.
  • When a Van developer thinks he can get $1 million for 700-foot vertical boxes on a clogged street beside a truck laneway in a former food store plaza with a rusty iron grate stuck on the front.
  • Then when he has to drop the price a hundred thousand. And change the name.
  • When big mortgage lenders like Northwood will give a cheaper rate to a kid with no money than a guy with 80% cash and a credit score of 800 because CMHC insurance wipes away all risk. “It strikes me as rather counter-intuitive to all that I have been taught from childhood about being diligent with money and staying on the straight and narrow,” writes James (not paying more). “The system is supposed to reward you, not penalize you!”
  • When a Canadian chain with 917 stores selling stuff for less than $3 sees its stock soar, sales jump 12% and opens 70 new outlets. Oh yeah, and Dollarama’s stock just split.
  • When nobody talks about the 1.99% mortgage offer. Because it’s gone.
  • When someone named Dominic emails me: “Could you please share your opinions in regards to buying cemetery plots in Vancouver (upright vs flat) as an alternative to buying a condominium. Side note is that the plot would be 0% financing for 5 years in which it would be paid off.”
  • When 39,400 people in Toronto are selling real estate.
  • When Moody’s, the OECD, Fitch, Morningstar, The Economist and Robert Shiller say we’re delusionally house-horny, and the finance minister shrugs.
  • When people in Vancouver need over 100% of after-tax income to carry a house they put 25% down on, and RBC cites, “widespread improvement in housing affordability across the country.”
  • When a house that has 72 offers in April and sold for $650,000 more than list hits the rental market, leasing for a loss.
  • When new condos in 416 and 604 routinely cost $700 a foot, while whole houses in the US average less than $100 for the same foot.
  • When 70% of us own houses, 51% would be in crisis if a paycheque was one week late and the savings rate’s just 3%.
  • When, by the 14th day of the 9th month, my too-gross-to-publish list of deleted Garth’s-a-douche blog comments swells to a record 209 pages, single-spaced. The end is truly nigh.

The robust bust

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“Why,” asks Dave, in a pointed email to me, “don’t you issue your own press releases? Seriously – then the Financial Post could recycle them.”

He was flamed by a late-Friday story about a triumphant Canadian real estate market. The immediate catalyst was the latest Teranet Composite House Price Index, a wobbly thing which tries to ape the authoritative S&P Case-Shiller index in the US. Said the news:

“Canadian home prices rose in August and the pace of 12-month home price appreciation accelerated, suggesting robust demand for housing is carrying through to the second half of the year. National home prices rose 0.8% last month, exceeding the historical average for August. Prices were up 5.0% from a year earlier, a pickup from July’s 4.9% price gain. August was the ninth month in a row in which the composite index did not fall. The price increases, on top of robust housing starts data in the spring and summer, have surprised economists who have been calling for a slowdown in Canada’s long housing boom.”

Wow. And that’s just the start. Dig this from the Globe:

“Toronto’s sizzling summer real estate market appears set to remain hot right through the fall. Low mortgage rates fuelled property sales in cities across Canada, with Toronto, Vancouver and Calgary seeing the most action, he says. Prof. John Andrew, who is the director of the executive seminars on corporate and investment real estate at Queen’s, predicts September and October will bring more of the same. “I don’t think we’re going to see a significant downturn in sales until we see an uptick in mortgage rates.”

Imagine that. A university professor in charge of real estate seminars. Now we know where all those horny college kids are getting turned on to granite slabs and bamboo floors, desperate to leap from the dorm into a mortgage.

But how could these stories about “robust demand,” “surprised economists” and “sizzling summer real estate” be so at odds with The Gospel as it appears on this pathetic blog? Who, exactly, is zooming you?

It’s a valid question since Canadians continue to get into real estate debt at one helluva clip. Mortgages swelled in the second quarter at the fastest pace in almost a year, while overall indebtedness is now growing again after several months of decline. Economists say they’re concerned but not freaked, since overall net worth is also on the rise. But wait. All that wealth increase has come from a single source – real estate values – as incomes and savings are in the swamp.

In other words, we owe more because we’ve gambled big on one asset. But it’s okay. The paper said so. And it’s, like, full of experts. Who give seminars.

The key is to know where a market’s going, not where it’s been. The average prices real estate boards report are notoriously unreliable leading indicators. In the United States, sales and demand started to fall apart in 2005, but prices kept rising into 2008 – when the wheels came off. In Canada, vast swaths of the country are currently real estate wastelands, with stagnant or declining sales and badly segmenting markets. Two days ago I gave you an indication of that growing weakness, from the second-largest urban area (Montreal) to one of the richest (Oakville).

More significantly, this dark, morose and devoid-of-all-hope blog has also been shoveling stats that should scare everybody. Tumbling job growth in Canada. One of three citizens screwed if their pay’s a week late. Subterranean Millennials. Mortgaged retirees. Half of us spending every nickel we make, saving ziltch. How can real estate “sizzle” and be “robust” when average personal finances are such a mess?

Debt, of course. People borrow what they don’t have, then count on house appreciation to wipe away the blot. It’s exactly the path that led to a real estate crash which ate the American middle class. This is why media reports (and professors) which use only one data point- average prices – are bunk. But it’s consistent with the carelessness of the modern press. No wonder it’s almost over.

Meanwhile, have you absorbed the latest interest rate news? Look at the 5-year Government of Canada bond yield:

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Sentiment is certainly growing that American interest rates will start to rise in early 2015, as the economy there continues to expand – the latest positive news being a surge in retail sales. The Fed’s expected to pull the trigger during the winter, setting in motion a gradual rate rise that could be years long. Whether the Bank of Canada follows soon or not is irrelevant, because the bond market will. In fact, already is. The anticipation of higher rates (as you cans see above) begets higher rates. Remember it’s the bond guys that set fixed mortgage costs.

I’d tell you this is a great time to sell your house. If, in most places, it weren’t too late.