End times for the boom?

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The following review appeared today (March 15) in Canada’s largest newspaper, the Toronto Star. It’s also the paper which carries the greatest amount of real estate advertising in Canada – at least three full broadsheet sections. And the review was written by the Real Estate Editor, who (I presume) knows which side of his bread the butter’s on.

Given that, a decent review. I never did expect the majority of people – largely homeowners – to agree with my premises. I just hoped they’d care enough to read and think. This guy did both.

Interestingly enough, yesterday the latest resale numbers came out from the Canadian Real Estate Association, showing a 6% tumble in sales activity across the country last month – which amounts to an annualized collapse of more than 70%. The realtors did not blame the economy, the global credit collapse, banking woes, the American recession, galloping industrial job losses or the ongoing housing misery in the States but rather – snow! Granted, it did fall from the heavens without remorse, but the same MLS disaster took place in January, when snow was normal. Meanwhile, sales in Toronto plunged 11% in one month.

The housing apologists can spin so hard they screw into the ground, but the reality is this signals changes which every person owning a house and a mortgage should pay rapt attention to.

Here’s the review:



There are many good reasons to read Garth Turner’s book, but economists don’t buy his doom and gloom

Real Estate Editor

Once upon a time, Garth Turner told a Toronto real estate industry luncheon that the local property-buying frenzy and soaring prices were doomed. Arguing that average families could no longer afford average house prices, he declared a correction inevitable, if not at hand.

It was 1987, and for his bluntness, the then-business editor of the Toronto Sun was pelted with buns.

Twenty-one years later, Turner, now the Liberal MP for Halton, is predicting another crash. But this time, housing industry people might want to hurl bricks.

Greater Fool: The Troubled Future of Real Estate will hit bookstores across Canada on Monday. By next weekend, it will undoubtedly have rattled a few readers, though a bit of a reality check might be in order for anyone feeling squeezed under the current “good times” climate.

Turner can expect to be branded as a fearmonger, especially by people whose livelihoods require that home prices keep rising. The rest of us might want to prepare for a barrage of reassurances that a U.S.-style market meltdown can’t possibly happen here, in large part because our economy is strong and our banks adhere to much more stringent lending practices than their U.S. counterparts.

To guess further about the fallout from his book would be foolish. The cautiousness stems in part from what is probably the book’s biggest flaw: Turner’s inability to resist making predictions – a long-standing trait, it seems.

Depending on how you look at it, Turner was right, wrong or ahead of his time back in 1987 (the book says 1989, a typo that won’t be fixed for the first press run). The 1980s boom did go bust, but it took a few more years, by which time he was a Conservative MP.

In the interim, as the market roared on, Turner was seen by some as proof that journalists shouldn’t prognosticate. As buyers lined up in all kinds of weather to purchase subdivision homes – something he now sees as eerily similar to recent condo lineups – Turner largely stuck to his guns, warning that all the signs of a correction or housing crash remained.

He’s good at seeing patterns and identifying potential trouble, even if he can’t tell how far off it is. He doesn’t pull punches either, blasting the media – real estate sections in particular – for letting industry people dominate debates about our housing market health.

He writes that a reckoning is imminent because we’ve been as greedy as Americans, who are enduring their worst real estate deflation since the 1930s. He takes issue with claims that our banks are prudent, arguing that zero-down mortgages and 40-year amortizations are useful only to speculators and people who can’t really afford to be in the game.

He also cites recent reports that personal debt levels in Canada are at record highs and savings rates at record lows, leaving many short on options should hard times hit.

“An anti-real estate mood has swept America. Within months it will be here,” he declares. He claims that suburban trophy houses in some areas of the GTA are lingering on the market and falling in value. He says the collapse will be widespread and long-lasting, in part because boomers will flood the market with houses to finance their retirements – especially since so few employees outside the public sector have much in the way of pension prospects.

His scenario gets scarier, if you fear that manufacturing jobs are in danger due to the strong Canadian dollar and the likelihood the U.S. will slip into recession. The logic is that it won’t take many deeply indebted, freshly unemployed people to trigger a wave of desperation selling. That, in turn, would drag down property values for entire neighbourhoods, leaving many people with mortgages worth substantially more than their homes.

It’s that situation that caused an estimated 1 million Americans to walk away from their homes last year, with predictions that twice that number will follow in 2008.

Frightened enough yet?

Article continues here.


#1 Bob on 03.15.08 at 7:36 pm

Mr. Turner

I picked up your book today and I cannot put it down. You have hit it right on the mark.

I have been inspecting homes for 10 years and have seen first time buyers go way over asking (as much as $80,000)
and had to do repairs to it to the tune of upwards of $30,000 or more on top over going over asking. Sometimes there have been 3 or more inspectors at the same time doing the same house. I could go on and on with stories.

My wife has been predicting this for years. We are so overjoyed that someone has finally put it in black and white. I really hope homebuyers read your book before investing their present and future life savings in this insanity.

You are definitely not going to be praised by some, to put it mildly, for pointing out the obvious truth, but then again look at where it is coming from. Thanks for a very enlightening and enjoyable read.

#2 Huy on 03.16.08 at 4:08 pm

“But try to find a respected Canadian economist who buys into Turner’s pessimism. People at the University of Toronto’s economics department, the Ivey School of Business at the University of Western Ontario and University of British Columbia’s Centre for Urban Economics and Real Estate couldn’t find one for us.”

When have economists or analysts been right about anything? Wasn’t it the economists & analysts that said there was no real estate bubble in the US! That they had the Goldilocks economy! That it will be a soft landing! But they are always behind the curve.

The problem with academics, analysts and most journalists is that they live in a ivory tower. They have no clue what’s really happening. And then when it happens, its always an “unexpected….” or “no one saw it coming” and of course they don’t blame themselves because they were all saying the same thing. And that’s why they are academics or analysts and not true “investors” or even speculators.

If you really want to be a investor then you have to follow other successful investors. Investing is hard work, it takes a lot of time and a lot failures. But you have to read what Warren Buffett, George Soros, Robert Campbell, Robert Kiyasaki etc. etc. have to say. These guys are true, successful investors, not some economists, journalist or real estate agent. Real estate agents are sales people, they want to sell you a house, period.

I’ve not read Garth’s book, but I would definitely see what he has to say. He’s a real estate investor, he’s seen these cycles before.

As far as real estate in Canada is concerned, it’s going down. Same reason as why the US, UK, Australia, Ireland, etc. etc. is going down, cheap money. Liquidity breeds stupidity. Canadians have a “survivorship bias” mentality right now, this belief that it won’t happen to us or me. But they will be proven wrong.

I’ve been investing in Gold, Silver, Oil and commodities over the pass few years. And how wrong have the economists and analysts been wrong on that? A guy on BNN once said that “his grandchildren won’t see $500 gold”, that was when it was in $450’s. It hit $1007 on friday, will it go back down? probably. But its going to make higher highs and higher lows. That’s a bull market.

And one day in a few years, economists, analysts, journalists, and yes, everyone at dinner parties will be talking about gold stocks, oil stocks and commodity stocks and no one will talk about real estate. And that’s when the real investors will sell their gold stocks and buy real estate.

The cycle repeats, then it’ll be something else.

Thanks Garth for putting this site up so that we can have a real discussion on what’s going on. I am glad to know that not everyone is buying the medias BS about the economy, real estate etc.

#3 Lawrence on 03.18.08 at 5:20 pm

Five factors make a housing bust less likely.

1. The news out of the US and the impact on the share price of banks, investments, RRSPs has already had a dampening effect. You have to be Alice in Wonderland to blithly hold to the belief that we can ignore what occurs in the US. Your latest RRSP statement will make this argument better than I can. We are poorer than we were six months ago and this is a reality that impacts our psychology, plans for the future, and educates us about what can go wrong.

2. Mortgage interest in Canada is not tax deductable and so a greater percentage of homes (close to 50 percent) in Canada carry no debt against the title. Conversely, in the US most homes are highly leveraged to take full advantage of the potential tax advantage and to feed the famous greed that Garth has talked about.

3. CMHC insurance is mandatory on all high ratio (low downpayment) mortgages. This represents a second level of scrutiny on all higher risk mortgage applications in Canada. This level of scrutiny was never applied in the US and they are paying an enormous price for lending money to people with no capacity to repay. Canada cannot be compared to the US in this regard. CMHC has accumulated a total of 25 BILLION in reserves to cover off defaults so there is reasonable confidence in this self funded insurance program. The US has no comparable program. Sucks to be US.

4. Interest rates are falling rapidly. While the news is bad on a daily basis and the psychological effect of this news is real, the other reality is that interest rates are lower now than they have been historically. This causes a cash injection into our economy while it is still quite healthy. A housing bust is more likely in a rising interest rate environment.

5. The market hot spots have already cooled their jets. The Canadian housing market place is not characterized by massive inflation with the exception of places like Ft. McMurry and more recently Saskatoon. These are relatively small anomolies.

So, there you have it. What my friend Garth has neglected to emphasize but the key elements to consider when you ponder Mr. “doom and gloom” :)

Well, I guess we’re okay then. Thanks for clearing that up. — Garth

#4 Lawrence on 03.18.08 at 7:58 pm

No problem Garth. Happy to help.

#5 SMWhite on 03.19.08 at 1:11 am

Lawrence those are all great points, they’re usually the typical comments I hear around the water cooler.

The same ones from that old guy down the street that keeps telling us “real estate never goes down”.

I mean, isn’t that why we all gave up day trading eight years ago, to become real estate moguls, it’s a can’t lose situation right?

US has the same 20% policy as does Canada so throw that argument out the window. If the loan goes bad insurance pays whether your north or south of the border. Mortgage insurance in the US is issued by a private company or by a government agency such as the Federal Housing Administration. So your wrong. Bear Sterns isn’t on the brink because of mortgage insurance… just mortgage backed securities! :)

Are you telling me that falling interest rates are a sign of a solid and stable economy? Monetary expansion does little but put smaller and weaker bullets into the consumers pocket. Its doing nothing to help people save because every extra dollar unnecessarily printed devalues the dollars I already have in my piggy bank, or in my home equity.

The market went nuts coast to coast, there isn’t a town or village that hasn’t had speculation run wild through it.

The reason real estate “used” to be classified as a safe “investment” is because it was forced savings. Why rent when you can pay 10% – 20% more and own? Well the ratio is more like 50% to 100% now. Most new buyers are now priced out of the market. Over half of the mortgage loans over the past two years were 40 year amortization. Does that not tell you something? We had to go to these loans because prices got ahead of the masses to quickly, pressure from our banks enabled the birth of the 40 year.

So usually after month 54 of 60 on your five year mortgage over a 25 year amortization you actually start paying off that house. I haven’t done the math for the 40 but guessing that you would have to be in a home for 8 years before you start actually paying off that initial loan on a 40 year amortization. That means you need 10 years in otherwise your still “upside down”.

Fundamentals such as the average Canadian income only going up 2% a year over this real estate ride but yet housing/shelter has managed to break every law of economics. There will be a correction, it might leave the market stagnant for 10 years like the 90’s but there will be one. There has to be otherwise anyone born before 1980 will never be able to afford a home.

Sentiment will turn and people on the selling side of the market will continue to wait for that “greater fool”… I totally believe in home ownership for the long term but for new comers like myself, why pay so much for “shelter” right now, all the speculation over the past 5 years has been priced into housing for the next 5 – 10 years.

#6 SMWhite on 03.19.08 at 1:12 am

There has to be otherwise anyone born before 1980 will never be able to afford a home.

Should be “There has to be otherwise anyone born after 1980 will never be able to afford a home”.

#7 Brenda on 03.19.08 at 1:35 am

All good points, Lawrence.

Learning what can go wrong can only make things better for us. I predict the new $5000 a year savings account with tax free interest will be a great success and make us a group of savers once more. Since most Canadians keep their savings in GICs the news is not so bad. At least our savings keep pace with inflation (unless you’ve locked in to a low interest GIC over five years).

But, at some point within the next 18 months interest rates could go up dramatically. This will be bad for those with most of their net worth in real estate and good for those who have cash.

On the bright side, inflation is low for now. But that could change.

Here’s some advice from a doom and gloomer. Rent or buy a house within walking distance from everything, trade the car in for a bicycle (better yet, take public transit because it’s tax deductible), tear up those rose beds and plant vegetables and buy everything you can second hand (and save on sales tax).

And if you’re living in a 4000 square foot home in the suburbs, sell it.

#8 Lawrence on 03.19.08 at 10:04 am

SMWhite assertions are easier to make than providing logic and facts, which are sadly lacking. There is no CMHC comparable institution in the US. There is no similarity in the level of scrutiny of high risk mortgages in the two countries.

Putting it bluntly, people in the US were offered mortgages they had no hope of repaying because it was believed that the market could absorb the inevitable losses.

Houses are selling now at less than their replacement cost. I have just closed on a three bedroom and three bathroom condo in Palm Springs for 50 percent of the cost of construction. It will bounce back in two or three years to something closer to the cost of construction and my low interest loan will allow me to profit from the greed and excess of the US market.

There are cycles in Real Estate and you have to be patient enough to wait for interest rates and house prices to make an affordable purchase. Using this strategy, I have purchased in B.C. in 1999 and in Manitoba in 2003. Both of these markets have rebounded nicely and I am happy to sell at today’s prices.

It is not rocket science but much safer when compared to the many pitfalls of equity and security trading around the world.

I also concur with Brenda. Keep it simple and stay within your means. Be prudent. Be Canadian.

#9 SMWhite on 03.19.08 at 8:46 pm

Wow, I’ve just been zinged by a guy that is buying real estate in California! I’m sure its a niche market so I’ll lay off the sarcasm but it sounds like you just called the approximate bottom of the US real estate bubble in your above post? :)

Lawrence all those statements are based on fact, minus maybe the 5% – 10% speculation already priced in, its probably more like 10% – 20%, but then again its a red herring, because you being a real estate speculator you already know real estate speculation has run ramped in the Anglo-Saxon countries and we’re running out of credit to continue to fuel the fire.

My point is affordability is deteriorating…


An average family making $70K buys the average home at $290K and has to pay $1700 a month for a mortgage on a 25 year amortization. Thats almost HALF their post tax income and we haven’t even factored in bills and maintenance.

So what about little Billy? Do we dress him in potato sacks? The majority of Canadians on the southern side of the median age are now priced out of the market. The $5000 savings account I believe is too late in this real estate cycle to help those already committed to large mortgages(cart before the horse) and is a smoke and mirrors show from Jimmy Flaherty. Its around 1/3 of Canadians are actually utilizing RRSPs. I’m guessing that will only go lower if real estate prices don’t stabilize and people have to continue to throw money at 40 mortgages.

Housing speculation takes a great deal of research, capital, timing and brains(not balls). The fact that you even state that its safer then trading equities is absurd. A bad year in the stock market can’t cripple you like a bad year in real estate, or being that “greater fool”. I applaud that your able to be in position to take these sorts of risks, but its not for everyone, timing is key and ain’t no reward without risk?

As your point about CMHC and an American counterpart, well Fannie Mae and Freddie Mac have been packaging up MBS as has CMHC. Would I rather have a CMHC loan versus a Fannie or Freddie, well the fact the National Housing Act backs those loans in Canada. Isn’t much different then the federal reserve in the US printing off 345 billion dollars in the last month for financial institutions and tax payers to “inject” life into the US economy.

PS TD Bank is here to save the day!


#10 Lawrence on 03.20.08 at 11:21 am

Overall, I believe that affordability is returning to the market as interest rates fall, markets moderate across the country, and fear about the U.S. economy causes everyone to pause and re-evaluate.

Every one needs a roof and in retirement the key determinate of your future financial health will be whether you own property. Garth will agree I am sure.

With diligence it is possible to buy a house, save up extra money to pay it down ahead of schedule, and establish an equity position. I know because I have done it with a 12 percent mortgage not today’s five and six percent mortgages.

The stock market has been characterized by one debacle after another. Conversely I find the Real Estate market much more predictable. They call it Real Estate for a reason. It is a tangible asset compared to paper and promises.

#11 Lawrence on 04.04.08 at 11:37 am

Check out the videos in the link below. Half of all new home purchases in California, Texas, and Florida are by Canadians.


#12 Lawrence on 04.09.08 at 1:25 pm

Headline – RBC predicts gradual decline in Canadian currency.

Hmm, this is souding good. I made my US Real Estate purchase at the end of February and bought US $ at .98 cents C. Low and behold, the recent news suggests that US real estate market activity is picking up! Bus tours of foreclosed properties are the lastest marketing method. Multiple offers are driving up the closing prices in California. Mortgage applications are up 4.8 percent this week. The stock markets are experiencing less volatility. Bond rates are starting to edge towards the Fed Funds rate indicating that stability is emerging and that the efforts of Ben Bernacke are starting to establish confidence.

Mr. Greenspan predicts house prices will start to rebound before the end of 2008.

Here is your hot tip. Buy US real estate today and make 50 percent return on a currency play and a recovery in house prices that are currently sitting at less than replacement cost.

Here is the RBC report released today:

“The Canadian dollar continues to trade around parity with the US dollar on the back of increases in commodity prices and with short-term Canadian/US interest rate spreads holding at around 100 basis points. We expect that the currency will remain around parity in the early part of the year but that support for the US dollar will emerge around mid-year as markets anticipate a turnaround in the US economy and a cessation of Fed easing. By the end of this year, we expect the loonie to average 90.9 US cents. This depreciating trend will extend into 2009 with the currency dropping further to 87.0 US cents by the end of that year.”