Entries from September 2008 ↓

Media release

‘Inevitable’ housing mess inches closer, MP-author claims

Wednesday Sept 24 – After warning in a best-selling book published six months ago that Canada’s real estate market was ripe for a tumble, author and MP Garth Turner says a US-style housing mess could now be just around the corner.

Canadians should prepare for a drop in average home prices of between 15% and 40%, depending on the market, he says. Turner also points out prices in some markets, such as Calgary and Edmonton, have already plunged by more than $40,000, while the number of homeowners trying to unload their properties has soared.

“Today’s report by Merrill Lynch economists David Wolf and Carolyn Kwan is just further tangible evidence,” Turner says. “Canadians have taken on a personal debt load which is simply unsustainable, and has been encouraged by government policies in this country no better than those which allowed the subprime mess and the credit crisis in the States to develop.”

Turner outlines in his book, “Greater Fool, The Troubled Future of Real Estate” and again today that Ottawa’s decision to allow a relaxing of mortgage rules, resulting in 40-year mortgages and zero down payments had “a pivotal role” in turning a strong housing market into a bubble, now bursting. The federal government moved hastily several weeks ago to outlaw the longer amortizations, and zero-down loans, which allow first-time buyers with little or no cash to purchase homes. They will no longer be available after October 15th.

“While these practices should be ended, of course, the abrupt cut-off is just serving to accelerate housing’s decline,” Turner says. “Jim Flaherty could not have picked a worse time – as the United States teeters on the edge of the financial abyss – to have taken such an action. I warned of harsh consequences when it occurred, and they are now here.”

The average home price in Canada has dropped for the past three months, and is now 5% below year-ago levels. Turner says this decline will at least triple over the next year. At the same time, the number of resale homes on the market, as reported by the Canadian Real Estate Association, has hit an all-time high. Average prices are now dropping in virtually every major Canadian city, reflecting a US trend currently three years old.

American home prices are lower by an average of 18%, and the drop in some markets, such as California and Florida, has been in the 40% range.

“The American middle class has been walloped by the housing collapse,” Turner say , “and those who claim Canada is no different – including Stephen Harper – are simply misleading people. Canadians are carrying more personal and household debt than ever in history – even more overextended than families in the US or Britain. And our average home price has increased to the point where the average family cannot afford it.

“It is simply irresponsible for Mr. Harper to be sugarcoating a serious situation simply because there’s an election to win,” Turner says. “The last thing young couples thinking about a house purchase should hear is that everything is normal, and this is a great time to walk into debt that might end up being unrepayable.”

Turner also lays blame at the feet of the federal government for increasing middle class financial stress by refusing to consider income tax cuts, knowing what was brewing south of the border.

“The American housing disaster started in September of 2005, and was well-known to everyone who cared to look by the Spring of 2006 when Mr. Harper was forming a government. That mess has worsened for three years, and has now infected the entire banking system. For our government not to have prepared better, lowered income taxes and assured the integrity of the mortgage system was simply dangerous.

“Every Canadian family owning a home should be paying attention,” Turner says. “In this election, they should be demanding an action plan from everyone knocking on their door.”

Garth Turner is a best-selling financial author, Member of Parliament for Halton, and Liberal candidate.

For more information:
(905) 399-5114

– 30 –

How close?

The events of this time are historic, so remember them.

The American government has admitted that unless it spends $700 billion – an unprecedented gamble for taxpayers – there’s a good chance of a new Depression. For those unsure of what this means, it is runaway deflation. The value of money soars as the value of commodities plunges.

Wages fall as prices collapse, but debt remains static. That means financial obligations become harder and harder to meet, leading to widespread defaults, personal bankruptcies, foreclosures and bank failures. The whiff of this is already in the air. Bear Sterns, then Lehman, then Merrill, then almost AIG, along with Freddie and Fannie. This string of disasters is unprecedented since the 1930s, as is the current misery in the American housing market.

If the gamble to the south of us does not work, then the results will be worse than if Washington had not even tried. The government’s ability to manage the economy will have been discounted, the greenback will fall, foreigners will question the value of American paper, Wall Street will plummet, the financial sector will be decimated and it will take a decade for the damage to be even slightly repaired.

In such a scenario, Canada would be affected instantly – as it was in the Thirties. Canadians, after all, are just as indebted as Americans, with just as little saved, and just as much of their equity sitting in residential real estate. In fact, we are even more susceptible to grief, with a commodity-based economy and most of our product flowing south.

So, will the bailout succeed?

As I write this, it is unknown, although the massive rally on stock markets Friday showed many traders think it will. But then, they believed in Bre-X, too. Yeah, and Nortel and Cisco. US lawmakers are working hard to approve this deal before the bright light of public scrutiny can be shone from below. There are many who rightly question why the blood should flow on Main Street, amid foreclosures and erased middle class wealth, while the manipulators on Wall Street get bailed.

Rest assured, the entire governmental machine will be backing this rescue, including Obama and McCain. Trillions of dollars are now at risk, since Bush and Paulson have rolled the dice so dramatically.

Odds are there will be no immediate worsening of the situation, and a pervading sense the worst is in the rear view mirror. Bay Street economists will dance hard. Central bankers will pray. Political leaders will hope against hope collapse does not happen on their watch. Almost nobody will be telling citizens the truth. As a result, those Canadians even paying attention will breathe a little sigh of relief, and continue on as they have in the past.

God rest their souls.