Down market Down Under

Housing sales plunge by a third in UK

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Hi Garth,
I am originally from Toronto and have lived in Australia for the last 10 years. As you would have heard Australia has had a huge real estate boom with record prices and we are also in a mining boom as well.

Our interest rates have been rising quite rapidly lately because the government is trying to curb inflation. It seems to have helped because house sales are down and house prices have dropped marginally. Do you see Australia heading in the same direction as Canada. Our interest rate is at about 9% and will it drop or continue to rise with inflation.
Patrick

Hey, I’m no expert on the Aussies or their monetary policy, but what I’ve read leads me to believe the country is in the throes of a real estate devolution, the kind just now emerging in Canada. Australia is unique for having almost everybody living in just a few cities, with big empty, worthless, spaces in between. That helped fuel the same boom that hit US cities, but it’s proven to be just as unsustainable because of stagnating personal incomes. Will high rates bust the boom? Yes, especially with a new government far fonder of spending than the last one.

Hi Garth,

Thanks for the book. I love the site, the anecdotes and your responses. I live in Vancouver and completely agree with everything you say. I cashed out of my house and income properties just before the government approved the 40 year mortgages. I lost whatever remaining faith I had in our government (which I voted for twice) at that time. Canada was already in the midst of a housing frenzy and I knew this would send prices into the next stratosphere and erode affordability further. Part of my is bitter that I sold too early. However, i’m renting now, saving thousands and investing in profitable Canadian industries.

I disagree with you on one point. You’ve said a couple of times that interest and mortgage rates are coming down. My “foolish” friends in Vancouver agree and cite this as a reason to buy real estate.

The benchmark lending rate impacts short term borrowing rates (i.e. lines of credit, etc.). Banks can borrow from the BofC and lend to consumers at a premium (i.e. Prime + X%). This spread goes straight to the bottom line. However, mortgages are long term products. Mark Carney has said himself that the Bank of Canada’s benchmark rate may not reduce borrowing costs for individual property owners. Mortgage and long term lending rates are based what risk premium lenders demand. Investors have realized that there are significant risks to lending. As such, they’re requiring much higher rates of return. Financial institutions must issue bonds to raise capital in order to lend. Investors require a greater return, thus I expect that the interest rates banks will pay on new debt will be higher. These higher costs must be passed onto the consumer in the form of higher mortgage rates. Simply, credit is harder to come by. The global investment community is continuing to re-price lending risk and I see rates going much, much higher.

Can you let me know, why and how, you expect mortgage rates to fall meaningfully? Remember, we should expect to see periods of very high inflation now that we’re no longer shielded from a rising loonie. Anyway you cut it, real estate is doomed.

Mike

Good points, and I cannot disagree with your basic logic. My comments about rates were aimed at the short-term cost of money, which I see declining, albeit more slowly. The US Fed has cut this week by another little slice, and the belief now is that American rates could be lower – only slightly – by the end of the year. In Canada, the Bank of Canada has crashed its prime lower by a half point, and I’d expect another half before we are at, or near, the bottom.

The reason central bankers are doing this is terror. They’re terrified of the consequences of doing nothing and, while lower rates will just feed the very asset inflation which got us into this mess, there are not many other tools available to them. But long term? You are right. We’re in the middle of a deflating credit balloon that took twenty years to swell and will collapse in a fraction of the time. Your view that credit may be very hard to come by two or three years from now is extremely credible.

Garth,

I read an article in the Calgary Herald today titled “Is housing influenza infecting Calgary?” The author referred to you and your book, both of which were new to me. I bought the book and skimmed through it. I found the book insightful and thought-provoking book.

My motivation is that my wife and I are considering buying our first home here in Calgary. We are 51 years old. We have avoided buying to this point mostly because we pack up and relocate to another part of the world for 2 years every 5 or 6 years. I also believe that investments in the stock market generally do as well or better than real estate. The reason we are tempted now is because our landlady who rents us the house plans to sell it. She is giving us first crack at buying it and I like the property.

The house is located just south of the University of Calgary. It is a 1474 square foot 4 level split built in 1966, with some upgrades. The appraisal we had done last week put the house value at $700,000 (down from an estimated value of $740,000 in June 2007). Three years ago it was valued at about $520,000. Our landlady would like closer to $775,000.

The pros of the house using the criteria of your book would be – yard with garden, fairly close to city centre, a block from university, fairly close to shopping, transit, hospitals, etc. The cons according to your book would be that it is on a cul-de-sac (which I like), not cheap to heat, has 5 bedrooms (3 up, 1 middle, 1 down) and will cost about $700,000. With 2 teen kids, a home office and the occasional guest, the bedrooms are used. As our kids leave, we would consider taking on university student boarders.

We are looking at putting 25% down and having the remaining 75% in a 25 year mortgage. It looks like we will be able to afford the payments and perhaps pay off the mortgage early. If we buy, we still expect to pack up in a few years for a 2-year international relocation. We would plan to rent the house for those 2 years.

To buy or to find another house to rent? Any advice?

Don

So, you may live there for two years only, are happily renting now, and are willing to take on a half-million-dollar mortgage at the age of 51, when the real estate market is in the middle of a correction which could last two to five years? What am I missing? Are you on drugs?

Your landlady is giving you ‘first crack’ at buying her over-valued house because she thinks you are a greater fool. I think she’s right.

23 comments ↓

#1 Michelle on 05.01.08 at 1:33 pm

I just read in the Toronto Star that housing prices in some parts of Alberta are down 13-14%? Is this the beginning of the end or are we just waiting for more rope to hang ourselves? Monter Trucks + Monster Homes divided by Great Distances = Recipe for Distaster?

#2 Michelle on 05.01.08 at 1:34 pm

Sorry I meant to say Monster Trucks.

#3 Andrew on 05.01.08 at 1:59 pm

here’s the article you just read..

http://www.thestar.com/article/420148
sounds like these anaylist are starting to beat to a different drum these days.. humm

Alberta home prices sliding
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Ontario house market still robust, but experts predict an autumn drop

May 01, 2008 04:30 AM
Tony Wong
Business Reporter

Oil-rich Alberta may be the envy of Ontario – especially as economic conditions soften in Central Canada.

But there’s one thing that hasn’t happened here, at least so far: despite strong economic growth in the western provinces house prices have taken a dramatic fall in some Alberta neighbourhoods.

The drop raises the question of whether that could happen in Ontario, where the economy is weaker.

In south Edmonton, a 1,263 square foot bungalow that would have gone for $390,000 last year now sells for $337,000 or a 14 per cent drop, according to a spring, national house-price survey released yesterday by Century 21 Canada.

In Calgary, a two-storey, 1,850 square foot home that might have gone for $480,000 last year now sells for $420,000, or a 13 per cent decrease.

So far that hasn’t happened in Ontario, where a survey of 69 markets shows price increases in almost all areas, except four neighbourhoods.

One reason, of course, is that prices have gone up much faster in Western Canada, Toronto Dominion Bank deputy chief economist Craig Alexander said in an interview.

“Alberta has had such explosive price growth, it’s perhaps not surprising to see something of a pullback.”

Still, a report by the bank yesterday says Ontario is quickly becoming a “have-not” province as a high dollar and a U.S. economic slowdown are hurting the province’s export industries. Job losses mean fewer people will be able to afford homes.

“There’s no question the economic conditions are deteriorating in the province,” Alexander said.

According to the Century 21 survey, the cities that experienced the slowest growth in the province are those with a manufacturing base such as Windsor, where a 1,400-square foot split level home in the neighbourhood of Tecumseh is down by 4 per cent.

In Oshawa, bungalows and town-homes are up, but by only 1 per cent, or less than the rate of inflation. The impact of recently announced layoffs by General Motors of Canada Ltd. has still to be felt, with up to 1,000 jobs slashed by this September.

In Toronto, home-price increases are still strong, ranging from a 3 per cent rise in condominium prices in Thornhill to 20 per cent in a North York project.

In areas such as Toronto, which has seen “unsustainable, fast-paced price growth that has eroded affordability,” Alexander expects the market will cool this year, especially as the economy weakens.

One offsetting factor is that interest rates have been coming down.

“The debate so far has been not how high interest rates are going, but how far are they going down?” Alexander said.

“So that will have a mitigating impact.”

Some, such as BMO Nesbitt Burns’ deputy chief economist Doug Porter, have already declared the Canadian housing boom over after a huge decline in sales of 13 per cent in the first quarter nationally. Toronto, representing a quarter of all national sales, was the main reason.

But Alexander expects a spring pick-up this year, before the market starts to cool in the fall.

In the Toronto area, average prices continue to appreciate overall, up 7 per cent compared to the same time last year, to $399,117.

Analysts say prices continue to increase because sales remain a very high historically, and are coming off record peaks. But the U.S. economy continues in crisis mode – sales of single-family homes are down by 37 per cent for the year.

With 80 per cent of Ontario’s exports going south, analysts say Toronto will not be immune.

#4 Keith in Calgary on 05.01.08 at 2:18 pm

The technical sales numbers from the “REIC” say prices are down that much……..but in all reality…….asking prices have dropped between $100,000-150,000 (yes that is correct) in the last 12 months depending on the area of Calgary and property type.

I rent in the dowtown core, and track each high rise condo building…..listing prices are off that much since last summer.

When it comes to RE the truth is often best found from some other source than those involved in the RE community.

#5 Robert B. on 05.01.08 at 3:50 pm

@Keith in Calgary: other than home prices dropping, how are other parts of the local Calgary economy performing? I’m thinking that Calgary doesn’t have a huge influx of new immigrants eager to buy real estate unlike Toronto or Vancouver. This could be why home prices are taking a tumble. The vacancy rate for homes is something like 30% meaning that a lot of speculators bought homes and are now starting to unload them. This too, would explain the huge price drops. Finally, it could be that all the upgraders and other projects are nearing completion so people are leaving the city hence my question about the local economy. Your thoughts?

#6 Jace on 05.01.08 at 4:25 pm

The Alberta Advantage was cheap housing and high paying jobs. Now it’s just high paying jobs with high cost of living.

Immigration from other provinces is back to pre-2005 levels. Who moves here for a 10k a year raise when the cost of their home will almost double?

#7 Keith in Calgary on 05.01.08 at 4:30 pm

IMHO it depends.

Thre are lots of jobs here……but they are mostly “McJobs” as in $35K< service jobs.

The oil and gas sector is hit and miss as well….gas companies are getting killed, there is no drilling whatsoever going on in Alberta, so there is no oil service industry job boom anymore, and that is where the $25-30 an hour “out of province newly arrived” trades get their work from so they can buy new those houses.

New construction housing starts are off 40%……there is a ripple effect there. Property sales are off 30-40% for the last 6 months in a row. Our crash is starting…..

Landlord are not really raising rents anymore and there are several advertising rental subsidies to get new tenants for their vacant suites. Our high rise where I live (400 units) currently has a 5% vacancy rate.

The newly minted high rise condo towers are empty. Look at them at night and maybe 25% of the lights are on.

Alberta has a net migration LOSS now…….more people are leaving that coming in. The local U-Haul reports a brisk business of peopel leaving……for example, 3 monthds ago when I asked out of curiousity…..a U-Haul from Saskatoon to Calgary was 1/3 the price of one leaving Calgary for Saskatoon.

#8 Another Albertan on 05.01.08 at 5:40 pm

@Robert B:

I am heavily involved in the oil & gas and utility sectors. First, Calgary isn’t home to the industrial complexes. In Alberta, upgraders are either built adjacent to the the production facilities or the raw bitumen is piped to what is essentially the north-east corner of Edmonton and its outlying areas (providing it isn’t piped in its raw form right out of the province, as some companies would like to do).

Calgary is home to the decision-makers and much of the engineering, while Edmonton is where much of the fabrication occurs.

Specifically referring to your point about upgraders: in fact, many upgraders haven’t even broken ground. Why? Because cost projections were rocketing out of control in 2005 and 2006. (In 2005, many projects were factoring cost escalation at 15% per quarter – essentially doubling the cost in a 12-15 month interval) Also, in many cases only pre-engineering and scoping had been completed.

Right now, there is a TON of engineering work that is underway. At the current rate, the latter half of 2009 is going to see a bunch of new major industrial construction projects kick off again. This next round, if everything comes to fruition, is going to make 2005/6 look like the good old days. That two year period was barely sustainable. It takes a lot of physical and emotional effort to keep up the pace.

Personally, I believe a lot of people in Alberta are barely keeping up – both personally and financially. Anecdotal evidence has shown me that people still talk a big game but that an increasing number are having a more difficult time keeping their lives in balance.

You aren’t going to have a very pleasant experience trying to run a 26-mile marathon at the pace of a sprinter. This applies to putting together your own life and to building large-scale infrastructure and communities.

#9 Another Albertan on 05.01.08 at 5:46 pm

I see Keith has commented and I agree with him.

The conventional energy sector – especially the juniors – has been largely gutted in the last 18 months. We’re in spring break-up now. In early June, we’ll know what drilling will be projected for the rest of the year. In the interim, Ziff Energy Group was projecting up to 50k layoffs were possible in and around the conventional sector.
http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=acc9ee2f-530e-4fe7-96e4-df3dd693fa3b

#10 ariccio on 05.01.08 at 10:36 pm

The market for jobs is still really good in Calgary, especially in the oil patch. Companies are offerring their employees “referral fees” to attract talent. Calgarians are carrying too much debt just like everyone else in North America. Too many young couples have already spent their inheritances. There’s no reason why a two-income professional couple needs a $200,000 line of credit to live.

Virtually everyone has taken the equity out their house and either moved up into a bigger house (and bigger mortgage) or sucked the equity out to refinance debt. Now people are starting to realize even here that their mortgages are worth more than their houses.

#11 Jeff Riverdale on 05.01.08 at 11:53 pm

I found this interesting article in the Vancouver Sun:

http://www.canada.com/vancouversun/news/story.html?id=f3bc45da-1a34-4836-829d-967c2cceb1a6&k=65123

It mentions how according to Stats Can median wages in BC actually went DOWN from 2000 – 2005. Am I missing a little something well all the realators and their booster clubs keep talking about ‘wage growth’ as a way of sustaining increased housing prices? This data seems to point to things in an opposite direction.

#12 Robert B. on 05.02.08 at 7:21 am

Thanks to Another Albertan and Keith in Calgary for both of your comments. There are 2 reasons why I wanted to know about the job market in Alberta:
1. I personally believe that a correction in Alberta’s housing market will be the trigger that causes nationwide FEAR. Garth mentions this aspect in his book. Once prices start falling anywhere in Canada then it gets that much harder to peddle the line that “we in Canada are different from the US”. Thus begins the downward spiral, which I believe will start in either Vancouver or Calgary because those markets saw the biggest price gains.
2. My other reason for wanting to know about the housing market is that I want to move from Burlington, Ontario to Calgary next year. Oil is not getting cheaper and so Alberta won’t be as effected by an economic slowdown as Ontario will be when “peak oil” becomes as well known as “sub prime mortgages”.

#13 JD on 05.02.08 at 9:57 am

I think the new census data showing immigrants are increasingly making less $$ compared to Canada-born Canadians bodes badly for TO/Vcvr.. they simply can’t afford to even rent many of those condos going up!

From the Globe and Mail:

In 1980, recent immigrant men with some employment income earned 85 cents for each dollar received by Canadian-born men. By 2005 though, the ratio had dropped to 63 cents, the report said. Recent immigrant women saw earnings slide to just 56 cents from 85 cents.

Earnings disparities between recent immigrants and Canadian-born workers increased not only during the two previous decades, but also between 2000 and 2005, the report said.

#14 patriotz on 05.02.08 at 10:43 am

Sure does Jeff, in fact all of the important economic parameters in BC – declining real incomes, negative savings, personal debt, only growth in well-paid jobs is in RE – look just like the US.

Look out below.

#15 John on 05.02.08 at 11:51 am

This is going to be nasty. I wouldn’t cheer too hard about it. Have you been to a store or a restaurant lately? Remember when adults used to work in the retail sector and not the children that do now? Guess where all the adults work now. They work in RE related industries. When this goes down all those people will be on the street.

#16 Andrew on 05.02.08 at 12:05 pm

from golbe and mail may2/08

Credit crunch handcuffs bank, Carney says
Rising financial risks prevent consumers from benefiting from the reductions to interest rates: central banker
KEVIN CARMICHAEL

May 2, 2008

OTTAWA — In an unusual move, Bank of Canada Governor Mark Carney mounted a defence of his ability to set the tone for the economy, saying mortgage rates and other borrowing costs would be higher if not for the central bank’s efforts.

Mr. Carney used an appearance before the Senate banking committee yesterday to highlight how the financial markets’ credit squeeze is posing a challenge for central bank policy makers.

His testimony comes amid growing concern that the global credit crisis has robbed policy makers of their ability to control the cost of consumer and business loans with the Bank of Canada’s target rate for overnight loans between banks.

Rates on mortgages and other loans haven’t fallen in lockstep with the 1½-point cut to the overnight rate by the central bank since December.

Print Edition – Section Front
Enlarge Image

Canada’s big banks also showed reluctance to lower their prime rates when policy makers dropped the benchmark rate by a half point last week.

When a senator asked Mr. Carney about the issue, the governor produced a 1½ -page statement, which he subsequently read into the committee’s record.

Rates on business and consumer loans haven’t fallen in line with the bank’s cuts because lenders are “repricing” risk in the wake of the collapse of the U.S. subprime mortgage market, which rippled through global credit markets owing to the spread of assets linked to the risky home loans, Mr. Carney said.

To offset the banks’ repricing, the central bank has cut its benchmark rate more than it might have otherwise, Mr. Carney said.

“The key point I am trying to convey is the difference between interest rate spreads and the absolute level of interest rates,” Mr. Carney said. “The former is determined in competitive financial markets. The latter is what monetary policy can and does effectively influence. Recent developments have not altered this fact.”

In other words, lenders misjudged the value of the asset-backed securities they were holding on their books, and now they are demanding higher returns on their loans to compensate.

Faced with some public frustration at the gap between the central bank cuts and posted lending rates, Mr. Carney was seeking to explain how credit markets are changing.

“He just wants to make things clear to people,” said Sébastien Lavoie, an analyst at Laurentian Bank in Montreal and a former Bank of Canada economist.

“It’s not like Carney has a magic stick.”

Mr. Carney’s defence to the Senate committee was more robust than the technical description of credit markets in the Bank of Canada’s Monetary Policy Report last week.

The central bank used the latest of its twice-annual assessments of the economy to explain that, while the gap between its target rate and the rates charged to businesses and consumers remains wider than normal, borrowing costs have nonetheless fallen from where they were at the start of the year.

Still, the report said credit costs would likely stay elevated or even rise because banks are paying more to borrow themselves.

That warning sparked a spate of reports, analysis and even letters to the central bank questioning the effectiveness of monetary policy.

Yesterday, for the second day in a row, Mr. Carney made the case for Bill C-50, legislation sponsored by Finance Minister Jim Flaherty that would eliminate restrictions on what the Bank of Canada can accept as collateral in auctions aimed at injecting liquidity into financial markets.

As he did yesterday at the House of Commons finance committee, Mr. Carney pointed out that the Bank of Canada is the only major central bank that faces such limits. That has hurt Canada’s ability to respond to the credit crunch because riskier securities such as asset-backed commercial paper are what struggling banks are trying to sell to keep the financial system moving, Mr. Carney said.

“This is very important,” Mr. Carney said.

“It is a matter of managing extraordinary circumstances. In Canada right now, these are extraordinary circumstances.”
***** so what is it exactly he’s saying give us more power because we are or aren’t affected *** sounds like the government of day white lies..

#17 Vinny on 05.02.08 at 12:23 pm

Here’s some of what I have seen.

Jobs: i work in the oil patch industry as an accountant. I moved here over two years ago for a higher salary and lower housing. The higher salary is something you cannot debate. I used to live in Sask and BC. My salary has doubled coming to Calgary as I DON’T even have an accounting designation and make close to six figures (before my bonus). YES Alberta salaries in our field can be that good. BUT! This really only applies to the oil patch. The accounting jobs in non oil are almost comparable to any other province. All companies are higher but they are much pickier now than two years ago. Two years ago they would higher anyone with a degree right out of university for a job that required a degree and 5 years industry experience. Now when they ask for industry experience they MEAN it but are willing to pay for someone who has it.

2. Our company just posted a Q1 6.6 billion profit and laid off about another 100 people this week. Companies are reluctant to hire more people just because they make more. In fact, they are laying off just to stay competitive.

3. The housing market here is definitely slowly dropping but you can tell it is more apparent in some areas vs others. In the suburb areas, especially SW, SE and NE they are dropping FAST. In the core, they are still holding but slipping a bit.

4 .However the condo market is taking a toll. So many condos were put up so fast and with shady developers and underfunded management that condo owners are getting hurt with Special assessments. These are often 1 time fees (that turn out to be more than 1 time) that condo owners have to pay without a certain time. They can be for repairs from 5000-25000 for whatever reason or they can be because the already sky high condo fees were not enough and they had to top it up for the year. Some ie) 25,000 was need for every owner in one complex to fix poor stucco resulted in mold and had to be redone. 25,000 for poor structure on the parkade and had to be redone. 1600 as condo fees of 450/mth were not enough for the year.

I have friends that but a condo at the peak last july for 285. two bedroom with two washrooms way up NW. Now there are several condos in that complex for sale. One similiar to theirs on the same floor is asking 257 and will be lucky to get 245.

#18 Coton on 05.02.08 at 12:44 pm

We are still getting articles like this in Victoria

Real Estate Still Hot!

http://www.canada.com/victoriatimescolonist/news/business/story.html?id=04636828-f098-40ae-a0bd-874227b2e376&k=79995

I have never seen such inventory in my life. I have the private client listing service and it seems every 5 minutes a new house is on the market and very little selling.

I wonder how long they are going to keep pumping?

#19 Crikey on 05.02.08 at 1:50 pm

Coton:

“I wonder how long they are going to keep pumping?”

You do mean pimping, I assume? ;)

#20 SMWhite on 05.02.08 at 3:02 pm

Did an archive search for just a bit of statistics from the USA 2005 RE market and there is an eerie similarity to the “prices up” & “sales down” that are being reported in Canada 2008 RE market this spring.

Go to google news archive and search for “USA real estate sales down”.

http://news.google.com/archivesearch?q=USA+real+estate+sales+down&btnG=Search+Archives&num=50&lr=lang_en&as_ldate=2005&as_hdate=2005&lr=lang_en

Most of these articles you require a subscription but it tells the tale of the beginning of the end of the market, of course, we’re Canada and we’re “different”.

#21 SMWhite on 05.02.08 at 3:25 pm

Lereah and Klump responding to the rise in inventory in the RE market, deja vu?

David Lereah – NAR Chief Economist – May 2006
“Coming off a prolonged period of record sales, housing is taking something of a breather this year. Even so, interest rates remain historically low, we’ve added about 2 million jobs over the last 12 months and the economy continues to grow – that will sustain healthy levels of home sales in 2006, but they’ll stay below the peaks experienced during the last two years.”

Gregory Klump – CREA Chief Economist – January 2008
“The Canadian housing market in 2008 will pull back from the breakneck pace set in 2007, but this is still forecast to be the second-busiest year on record in almost all provinces, with residential unit sales reaching an estimated 512,705 units. Average prices for MLS® home sales are expected to keep setting records in
2008, although prices will increase more slowly as the market becomes more balanced. In most provinces, the market will nevertheless remain historically tight; with the tightest markets being in Saskatchewan and Manitoba. Nationwide, the average residential price is forecast to increase 5.5 per cent to about $322,700.”

#22 patriotz on 05.03.08 at 3:42 am

In the suburb areas (of Calgary), especially SW, SE and NE they are dropping FAST. In the core, they are still holding but slipping a bit.

This was also the pattern in the US bust. Outer areas started dropping first, i.e. Riverside/San Bernardino vs LA/Orange counties. Granted the distances are greater but these are much bigger cities. One year into the US bust (which is where you are are now), the inner areas had not dropped at all.

But the inner areas have caught up in the last year.

Just wait another year and you’ll see the same.

#23 Faz68 on 05.18.08 at 9:51 pm

I just got back from Victoria, and besides Garth Turner plugging his new book on CFAX and saying the real estate boom is coming to an end you wouldn’t know it by speaking to any of the real estate agent staffing their booths in the local malls. Yes, they are still ‘pumping’ big time. Predictions by 3 real estate agents I spoke to conclude that sales of single family homes will continue to be strong and homes will rise in value due to general shortage.

I do hope that Garth’s predictions for the housing market are correct but I do believe there are segments of the Canadian market that are considered to be ‘destination markets’ such as Victoria and the Comox Valley and that any correction may be muted somewhat there.

I always hoped to move my family back to Victoria from Burlington but that seems to be a pipe dream at the moment:-(