Entries from November 2008 ↓

Why they do it

One day I had a tour of the big house factory which sits in a former farm field an hour’s drive west of T.O.’s core. Every day this monster turns out one perfect home from specs ordered by its new owner. The wiring and plumbing are finished. Paint and tiles are on. Dining room chandelier is hung. It’s a done deal when spit out the end of this massive building and onto a vehicle that looks like a cross between a flatbed truck and a crazed bulldozer.

The thing is then transported to a waiting hole in the ground a kilometre or two away, and planted. The advantage of indoor building is that it’s never halted by weather, the workers don’t get cold, there are no construction delays, more materials can be recycled and the whole thing runs like a just-in-time auto assembly operation.

These days, as you might imagine, things are slowing down a tad. The builder used to attract young buyers because all they needed to afford one of these showhomes was 1.5% down. For that, they got all the bells and whistles, plus mortgages too large to actually think about. But in a rising market, who cared?

Now that down payments have rocketed to 5% and 40-year amortizations have been slashed to 35 years, the builder’s offering the same homes for up to $70,000 less than last year. And still business is slow, I hear. Who would ever have thought selling expensive new houses to people without money would work out badly? Oh well.

The larger point worth considering is the place where these things end up – the burbs. Do they still have a future? After all, suburbs have been called one of the greatest wastes of resources in human history. Months ago I posted an article here from the Atlantic making a compelling case for the burbs becoming the slums of the future, rife with crime, largely abandoned by the middle class and worth pennies on the dollar.

I’ve also been following an interesting series on the suburbs over at The Oil Drum, where the focus is on what kind of life we’ll all be leading in the peak oil era soon to be upon us. Will energy shortages and rampant gas increases be the final death knell? Or has society sunk far too much into these sprawling mega-communities to ever contemplate their depopulation?

In decades to come, will these factory-made houses stand the test of time? After all, subfloors are particle board now, while joists are composite and soffits made of plastic.  Will an energy crisis put an end to any desire to live where it takes a litre of gas to get a litre of milk? Will years of economic hardship simply overwhelm owners with no equity, convincing them they’re better to bail instead of to sink? And if the economy actually spirals into deflation or depression, will the suburbs be the worst of all worlds – no urban community or transportation grid and likely fewer government services, like policing?  Will these near-city dwellers have total dependence on wavering utilities and yet be without enough land or resources to become self-sufficient?

Or, more hopefully, will the suburbs become communities where people carpool, telecommute, patrol their hoods and turn patchy backyards into communal gardens? Will they eschew the garage door remote and understand that when whole blocks of people are in the same economic boat they have to row together?

Well, nice thought, but I doubt it. I’ve walked too many of these streets and banged on too many suburban doors not to understand the prime motivation for people moving into these kinds of houses. Stuff. They want stuff. Granite or stone or glass countertops. Hardwood floors. Marble sills, columns, media rooms, stainless appliances, hot tubs and paving stones. Lots of stuff, and lots of credit to finance it. That is the current suburban dream, which is why it has no future.

If this mess continues (and I am forecasting it will, with a second wave of real estate declines next year plus a worsening economy and rising unemployment), I’d say the last place you want to be is anywhere near that housing factory, or a similar development.

The best place, of course, is clear. The exurbs.

Waves

As I complete the manuscript this week for my new book, I’ve reached many conclusions. One is that, whatever happens with the Obama Miracle Rescue Plan, residential real estate here and in the States has four istrikes against it:

*        Price: It took the market eight years to inflate, and it may take just as long to deflate. How can anyone expect that a 15% dump in Toronto or Calgary prices can balance out prices which doubled in many areas between 2004 and 2007?

*        Affordability: No matter what the dollar cost of a property is, the key factor is the ability of a buyer to afford it. When unemployment goes up, affordability goes down. This recession (or whatever it ends up being) will be with us for a few years. Millions of  families will require a long time to pay down the debt they walked in to so casually during the bubble years. Going forward, they’ll be cautious about making the same mistake again. This is a key reason housing prices could stay dramatically lower for much longer than most experts (and all realtors) expect.

*        Demographics: The downward drag imposed on real estate by the Boomers is just getting started. When these folks understand their RRSPs and 401(k)s are not going to rebound fast after the crash, they’ll be trying to unload houses. For all of us, this is uncharted territory. For the first time in Canadian history we will experience a third of the entire population hitting retirement age simultaneously.

*        Energy: Oil prices may have crashed along with stock values in 2008-9 (and will be rising again in the inflationary times to come), but energy consciousness is here to stay. That has changed real estate tastes, and will continue to do so. This is why natural gas-sucking five-bedroom McMansions with hot tubs and three car garages are so, so 2006. The years are at hand when people will need to worry not only about their job security, but also weather events and food. Climate change and energy can take a back seat to economic distress for a while, but eventually the impact of peak oil, food inflation, stable power sources and environmental refugees into Canada will seize us.

In total, we have a perfect storm blowing down house prices. A battered real estate sector in turn becomes a massive anchor on economic growth. It erodes family wealth. It makes us feel poorer. It collapses discretionary consumer spending – bad news in an economy which is more than 60% dependent on people shopping.

But it’s only started – important news for anyone who’s been thinking of selling.

By the time this deflationary bear market in real estate is over, we’ll see that it came in two waves. The first started in the US with the popping of the housing bubble in the beginning months of 2006, and was followed in the Spring of 2008 in Canada by a dramatic decrease in sales, leading to a gradual but steady slide in prices. The second wave came in the States with the explosion of negative equity and corporate layoffs that followed the stock market crash of 2008, and in Canada is likely to begin at the end of 2009 or the spring of 2010 as we all understand there is nothing unique about the country, and no northern antidote for housing contagion.

– Globe and Mail