Entries from October 2008 ↓

Half-time

Listen to Garth’s interview on the financial turmoil, here.

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Reno’d houses in Toronto’s Leaside have been fetching up to $1 million

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“You’re done, you’re screwed. It’s one of the worst times to be in debt.” — Laurie Campbell, executive director of Credit Canada.

“History has proven time and time again that real estate is a solid, long-term investment that appreciates at a rate of about five per cent annually.” — Michael Polzler, spokesman for Re/Max in Canada.

“We are getting more alarmed by the day (over Canadian housing market).” — David Wolf, economist, Merrill Lynch Canada

Lo, six months ago I started this blog. At that time I lamented the immediate future of real estate, even when experts said the markets were strong. I laid out my reasons that Canada would not be immune to the American contagion. I attacked 0/40 mortgages and warned the Canadian federal government was making policy decisions which invited the mess to slither north.

Half a year later, here we are. And yet there are deniers who earn consistently more media than the alamists. Every day the evidence builds that we are almost exactly two years behind the US housing market curve. This is why some time ago I forecast a minimum valuation drop of 15% in Toronto and 40% in the West. Both have happened, or are in the process. As I also said at the time, I am probably too conservative. And I am.

Half a year later, Ottawa has dumped the 0/40 mortgages, and yet the move was – also as forecast here – too late. In the next six months we will see the following:

  • Eastern cities, including Toronto, will have markets fall another 10%, for a peak-to-Spring decline of 25%.
  • Albertan cities will decline another 10% as well, for a rout of 30%.
  • Vancouver will crash 20%, taking the average price down 25%, on its way to 40% prior to the 2010 games.
  • Montreal and Ottawa will decline about 12% by Spring from the peak, while Maritime cities will escape absolute reductions, and merely flat-line.
  • Condo prices will erode the most, especially in Vancouver and Toronto.
  • Flashy new landmark towers in those same cities will never be built, while in Calgary they already know the score.
  • Large builders like Mattamy, now desperately cutting prices by more than $30,000 a unit and giving away free cars, could see their business volumes fall by two-thirds.
  • Recent, equity-less owners will owe more than they own, and enough of them will walk to generate shocked headlines.
  • Interest rates will crash lower, but mortgage rates decline far less.
  • Renters will trump owners.
  • Sometime next summer, maybe the fall, perhaps sooner, there will be major buying opportunity on certain kinds of real estate which have a sustainable future. More to come on that.

Finally, a word on ML’s David Wolf (whom I have not met) and Michael Polzler (whom I have). Wolf gets it – real estate is an emotion-driven commodity whose future course can only partly be gleaned by a chartist. If enough people perceive it’s a dangerous time to buy, they won’t. Supply accumulates as demand dissipates and valuations plunge. This is what will happen for some time. The charts do tell us far too many units have been built, or are in the pipeline; the headlines tell us credit’s no longer available for speculative real estate; and the word on the street (and this blog) says we have fallen out of love with houses. They are now seen as a destructor of wealth equal to the stock market. No sale.

Mr. Polzler, on the other hand, is a salesguy. Give him all the trust and respect he deserves. After all, he told a Toronto real estate conference this week that Canadian housing is solid in part because, “We have less debt than our neighbours south of the border.”

This is my response:

Debt-to-income ratio, Canada and US (Statistics Canada)

Painfully obvious

The next big story: Deflation

Calgary real estate still ‘safe haven’!

(You read it here first. Actually, after the Calgary Herald…)

This post below is from my current events web site. — Garth

Update:
TSX plunges 700 points in panic sell-off
Oil at $63 helped stocks to a 4-year low

Some visitors here have accused me of being a merchant of doom. You are accentuating the negative aspects of the economy, they cry! This is a global phenom, and not Ottawa’s fault, they admonish! Lighten up, they beseech!

Well, a few sober words of response.

First, the economy is going to crap and we’d all better get used to the idea. Stock markets continue to look for a bottom, and the depth of the global recession is yet to be known. There will be no quick fix, and not even President Obama will have one. In fact, his election may well make things worse for a while (if Washington tries spending its way out of this).

It’s expected that 200,000 people lost their jobs in the US this month (we’ll know in a week or so). We also expect Ottawa will have a deficit next year of at least $10 billion – which will mark an historic erosion in national finances of almost $24 billion since Mr. Harper assumed office in early 2006.

We should anticipate the US stays in recession for two to five more years. Stocks will not stop losing value until there is some glimmer of a recovery on the horizon. Commodity prices, including oil, will stay weak for the same reason, since global demand will continue to fall. Some industries – travel, consumer electronics, home furnishings, car sales and, of course, real estate – will be very poor indeed.

The consequences are painfully obvious. The oil sands, for example, will be in considerable trouble as expansion plans are cancelled, the cost of production exceeds world oil prices and Alberta goes from boom to quasi-bust (but with billions in the bank). Homeowners in every city will see their net worth take a hit and selling will be a painful, protracted experience. Unemployment will rise sharply as key industries (building and selling cars, new home construction) fizzle. But the collapse of the Canadian dollar – to as little as 70 cents US – will suddenly make some slagging exporters competitive again.

Public finances will deteriorate quickly as corporate taxes fall and the number of working people erodes. A deficit in Ontario has already been announced, and BC and Quebec will follow – accounting for 70% of provincial finances. As mentioned, the feds will be in the same boat with monthly deficits by January, at latest.

These are just routine assumptions, based on events which have already transpired. There is no doom involved in making them, and anyone who refutes these realities is delusional. We should all be preparing. The only real regret I have is that the election just passed was fought more on puffin poop, mangled English, sweaters and a far-off carbon tax than on a collapsing economy, plunging real estate, lost jobs and an immediate recession.

Now, if you want to get quite depressed, we could talk about how the destruction of our credit-gorged economy is coinciding with the inevitable effects of climate change, the arrival of peak oil and the advent of the greatest age wave in history. But that would beg a painful question: Why are our leaders not talking about this? Is there a plan? What is it?

Economy. Energy. Environment. Demographics. If you think things suck right now, wait a decade.

So, if leaders aren’t ready, are you?

Much more to come on this, whether you deniers like it or not.