Going local

So far in dreary November, sales of houses in Victoria have crashed 43% from this time last year. Ouch. In Calgary deals are down 13% from awful 2017 levels, listings are up 13% and prices have plopped 6%. Cowtowners have said no to the Owelympics and fuggedaboutit to housing, while in BC there’s a bad case of Dipperitis.

Face it, things are changing. World oil has shed a third of its value in three weeks. The price of  Canadian crude is a joke – thirteen bucks a barrel, over $40 less than they collect in Texas. Real estate taxes are rising in BC, and across the country mortgage rates have stiffened along with the central bank’s spine.

The gulf between what people say and do is yawning. A poll last week found a big proportion of the population (44%) think housing prices are about to shoot higher. And yet the stats show the opposite. So, are we lying to pollsters or just confused?

Here’s some fresh data. While the Teranet-NB house price index is questionable, the one published on Thursday was nonetheless a shocker. It showed a 5% annualized price drop last month, but here’s the big news: this was only the fourth time in two decades that real estate values fell during an October. Plus, for the first time in five years values of houses dropped in 10 of the 11 cities surveyed. Incroyablement, Montréal était la seul ville où nous avons vu le house horniness.

Everywhere else, regardless of how local realtors spin the numbers, a decline. In Calgary prices have dipped in 10 of the last 13 months. In Van, we’re now three for three.

And speaking of the housing cartel, this week brought the latest report from the Canadian Real Estate Association, also showing systemic weakness. Actual sales across the country fell about 4% from last autumn. The GTA, where a new rightist government was recently installed, did okay but plunging sales in YVR and the Fraser Valley dragged the national average down.

Said CREA, bluntly: “National sales activity lost momentum in October… This year’s new mortgage stress-test has lowered how much mortgage home buyers can qualify for across Canada…” As for prices, while Teranet records a loss, the real estate guys claim a win (sounds like Trump). The Aggregate Composite MLS® Home Price Index (MLS® HPI), better known as the Frankenumber, was up 2.3% year/year – pretty much because of condos.

What are we to make of this?

Well, supply and demand move all markets. When four in ten people believe real estate is the bee’s knees, price pressures increase. But that’s no longer enough to shove values higher. More consequential is the availability of cheap funds. Without a doubt, rising mortgage rates and the B20 stress test have reduced credit which will push asking prices lower in almost all cities. The latest stats from the Bank of Canada, showing a big drop in morons with 450% debt-to-income ratios, proves it. The party’s over. The punch bowl has been put away. The drunks are being rolled to the curb.

But the next few months will show just how local real estate is.

Calgary, Edmonton, RD, GP, Forts Mac & Sask plus other AB places are pooched for a long time. The price of Western Canadian Select is a disaster, driven down not only by its high sulphur content but by the elevated idiot count in Ottawa. Without pipelines to get our stuff to thirsty markets, it remains cheap and forgotten. As my buddy Ryan points out when not detailing his Porsche, this is costing Canada $90 million a day. And guess where that money is not flowing the most? Yup. So think twice before buying a house there.

Meanwhile the saga of BC has been detailed to death here. The province kind of (but not exactly) elected a socialist government now determined to destroy the real estate market thinking this will make homes more affordable. Of course, prices and sales are coming down together because (a) lots more taxes don’t make things cheaper and (b) falling markets scare people, so they don’t buy. It’s a classic lose-lose, the magnitude of which will only be seen in the rear view. So, yeah, lots more decline to come.

Montreal’s okay despite this being the second-largest market in the country, with prices still within the grasp of most middle class families. Plus urban Quebeckers feel the same way about real estate as they do marriage. No more comment required. The Maritimes, says Teranet, is looking a little bleak (but how bad can it be when the average house in NB costs just $175,000?).

So that leaves the GTA, where the outer fringes saw a 20-30% price drop for particleboard McMansions but there’s continued steady sales and prices in demand areas, plus the relentless condoization of downtown. What’s happening in Alberta, on the prairies and throughout BC will not transpire in southern Ontario. Sure, desperate sellers who over-extended will offer some bargains, but the market will prove more resistant to the credit drought than the rest of the country. This blog has said so for a few years. Nothing has changed. The boom is over in the Kingdom of 416, but don’t expect a bust.

Of course, 905, 519 and 705 are different stories. You have more in common with Burnaby, Richmond and Langley than you ever dreamed possible. And no, that’s not good.

No hard thing

With five rate hikes in the bag and likely as many to come, Big Bro says it’s working. The central bank this week dumped data showing the proportion of greater fools and total idiots borrowing 450% of their income is falling.

Incredibly, it used to be an average of one in five households snorfling this amount of debt back in late 2016. In truth, that meant 0% in Timmins, Fredericton, Windsor, Lethbridge or Kamloops, and 100% in Vancouver and Toronto. The Bank of Canada began to gag with news that most households buying properties for more than seven figures were diving deeply into debt to do so.

So, the universal mortgage stress test came in. CHMC stopped insuring mortgages on million-dollar properties. And the cost of money started rising.

The result: now 6% of new mortgages equal more than 4.5 times income. Of course, this is just fresh borrowing. All the previous loan piggies are still in place. That makes the economy vulnerable, says the bank. But ‘loan quality’ is going up, “which puts the economy on a more-solid footing to withstand future adverse economic developments.” That’s so comforting.

While the urban uber-borrowers are dipping less as rates rise, a poll shows it’s the moisters who are freaking out the most at the swelling cost of money. Nick Nanos’ latest survey claims 51% of the 18-34 crowd believe what the Bank of Canada’s doing is having a negative impact on their lives. That’s a serious jump in the last three months. No real surprise here, of course, since most of this group’s debt is in the form of mortgages. Big ones.

Remember what banker boss Stephen Poloz told lawmakers in Ottawa when they queried im on exactly this topic:

“I have children who are adults, and I think they don’t understand this, because they’ve never experienced the kinds of interest rates that you and I have in our lifetime. It shouldn’t feel difficult. It shouldn’t be a hard thing for people to service their debt at those kinds of interest rates.”

Nah, it shouldn’t. My first mortgage in the 1970s was 11.75%. When I lost my mind and was initially elected to Parliament in 1988, Dorothy and I were paying 14%. In fact the average home loan over the last three decades has been pegged at 8%. So why are the kids moaning and gnashing over borrowing at 3.5% which may rise to 4%?

Simple. They borrowed too much. And they had to, because as rates fell houses inflated. But because rates are now rising, real estate will eventually follow – yet the debt incurred will not be reduced. And that, simply put, is the best argument possible for renting until this tightening cycle is long over.

Now, in fairness, the hipsters may have a point about real estate.

Millennials appear to be the most urban generation… ever. Just drive across the Granville Street bridge or downtown on the Gardiner and you can see what’s happened to Van and 416. The wall of condos is astonishing. Tens of thousands of little boxes piled atop each other in a density which is at odds with all of the rest of the country. This is moister ground zero, where developers have responded with bicycle elevators, buildings without parking and coffin-like cool cement ceilings.

Of course all that competition has jacked prices. So while detacheds are out of favour and losing value in many hoods, condos have continued to appreciate, even as sales are weakened by the stress test. And now comes some official confirmation that the city kids – many paying $1,000 or more a square foot – may actually know what they’re doing.

CHMC, no less, now says moving to the burbs to get a cheaper house price may not be worth it, once the cost of commuting is factored in. Looking at Toronto, where a stunning 2.6 million commute. Most of them (almost 70%) drive, which explains what TTC stands for – ‘Take The Car’. A million of these people spend 45 minutes travelling, and close to 40% of them take an hour to reach work. So, yeah, it sucks living in Milton, Halton Hills or Clarington where all the minivans go home to sleep.

It also costs a fortune. Like $800 a month when traveling from those places, compared to a fraction of that cost for city-dwellers. And not included is parking – which can easily be three bills in a downtown lot, bringing the commute bill to $1,100. Add in daycare (a median cost of $1,750 in Toronto) and you need about $44,000 in pre-tax income just to have a car and a kid. Ouch. Hard to afford tats and lattes when you’re shouldering such a load.

So while real estate costs less in the boonies, living might not. Guess where prices wither first?