Entries from November 2009 ↓

Careful what you hope for


Orlando realtor Heather Joubran,
where zero rates don't help.

Some people have come by to say they see no reason Canadian interest rates can’t stay in the dirt for years. A la Japan. Others have asked me to comment on what might happen if they did.

Here are some thoughts.

First, it’s key to remember that today’s rates are not market rates. They are uninfluenced by economic supply and demand, the level of the currency, money supply or inflation. Therefore the Bank of Canada, in dropping its key rate to 0.25% and leaving it there, did a political thing.

This was not in the central bank play book, but rather a response to an emergency situation. It went hand-in-glove with spending tens of billions in tax dollars to buy mortgages from our big banks and plunging the country into the worst annual debt ever to bail out Chrysler Canada and GM and plaster ‘Canada’s Action Plan’ billboards everywhere. This is the most extreme form of interventionist Keynesian economics Canada has seen. Too bad it does not seem to be working, as Monday’s numbers show.

So, what we have are emergency rates. They’ll stay in place as long as an emergency looms. When the economy sputters back, inflation increases, borrowing demands push bond yields higher or people starving on their GICs mobilize, rates will return to market levels. As I’ve said, I expect that to take mortgages back to the 7% or 8% range by 2014-5 – just in time for renewals.

But what if they stayed unchanged? Wouldn’t that keep this real estate party going, protecting recent indebted buyers with new equity and goosing the economy?

Well, won’t happen. There will be no sustained real estate price increases until wages and incomes rise. Second, emergency rates have brought forward demand from the future, not created new demand. Third, rates are already starting to rise in other countries, and our central bank cannot withstand a widening trend. Fourth, the Americans will raise rates to support the falling dollar. And why not? Cheap money has done absolutely nothing to reflate their crashed housing market.

I was reminded of that when I read a report from Orlando, and condo owner David Burt. He paid $167,000 for his unit three years ago, and is hoping now to sell it for $37,000. The Florida city has seen a 56% drop in condo prices over the past year, and the median apartment now sells for just over $50,000. The closest disaster area in terms of price is Las Vegas, with a 46% annual plunge. Despite near-zero interest rates, lenders are not even financing empty units sitting in near-vacant builders with bankrupt condo associations.

But, despite the above, what if rates did remain near zero here? What would that mean?

In a word, it would mean desperation. Rates would stay low if demand for goods and services withered and we entered a period of renewed recession. Or worse. They’d stay low if business owners were facing imminent failure and laying off new legions of workers. They’d be low if the economy slipped back into contraction with unemployment racing past 10% on its way to 15% or more. If there was deflation instead of inflation. They would stay low if the Bank of Canada had absolutely no other weapons to combat a cycle of tumbling incomes and prices. In short, emergency rates would remain so long as we had an emergency. And there’d be little reason, I would imagine, why anyone would be out buying a house.

And then Toronto might smell like Orlando and Vancouver taste like Vegas.

So, I look for the cost of money to rise. And with it, hope.

Asked, $719,000.  Sold, $747,000.


Steps from the Toronto mega-corner of Yonge & Eglinton, 1,200 square feet with a front-‘lawn’ parking pad, on a 21-foot lot. The owners received almost $30,000 over asking after 6 days on the market. Many believe the real cause of the US housing crash was not dodgy lending, but foolish buyers.

Spec nation

'The prices went up $50,000 last night...'
Mark 1
...and here's why we all should care.

Does Garth Turner hate Toronto? Or just realtors? was the intriguing title of an article by a realtor (who else?) which a blog dog sent me yesterday. The reference was to the Saturday posting here on a condo called River City and its park-under-a-soggy-expressway-ramp concept. Oh yeah, and the 349-square-foot unit sans bedroom or closet, selling for $180K. Oh yeah, and the fact it’ll sit on toxic industrial land in a part of Toronto that is uninhabited for a reason. In any case, you can read here why I don`t know from nothing.

The sad truth of all this is that I hate neither T.O. nor realtors. But I sure don`t like what I`m seeing.

Young buyers tumbling into a mortgage to live in a broom closet beside a highway ramp with zero resale value shows me people are truly confused. The kids who would do such a thing, instead of maintaining their freedom and renting an actual liveable space. The realtors who defend this as some kind of worthy investment. The developers who would, in a country mostly devoid of people, design homes reminiscent of a Tokyo subway car.

But that`s just the start. I`m troubled by more. By this:

  • This morning the government unveiled numbers showing the recession is over. But it isn`t.

Third-quarter economic growth was tiny – less than one half of one per cent – but that will be welcomed as evidence the worst is behind us after almost a year of negative growth. Trouble is, the one bright spot the feds point to as the engine of that growth is housing. The only reason real estate is hot – a bubble, actually – is due to the emergency interest rates still in effect. If mortgage rates were at market levels, there’d be no housing boom, no GDP growth and no charade.

In fact, taking any solace from what`s happening in the housing market is a game-changing mistake. The toxic condos above are one example. Here`s another…

  • People camped out in downtown Vancouver over the weekend to be the first into the sales centre for ‘The Mark’ condominiums. This 40-storey building will not be erected for three years, and probably never.

But the worrisome aspect is not that 460-square-foot units were being snapped up for $324,000 – a staggering $704 a foot in a regional Canadian city of 600,000 people – or even that some prices were increased by $50,000 the night before units went on sale. The biggest worry is not that idiot buyers were slapping money down for what was basically a futures contract with a bizarre 40-month delivery date.

Instead it was that the frenzy over The Mark, like the lottery for River City and the elbow-throwing condofest in Toronto last week, all show we’re now in the final stages of a boom which will not survive thanks to one thing: speculation. Read these few lines from the Vancouver Province’s report:

“I’m here because they are selling Yaletown at today’s prices, but the speculation is [that] prices will go up after the Olympics,” (one buyer) said.

Steve Dhana was amazed by speculator interest as he watched investors rushing to place bids on units. “The prices went up $50,000 last night,” Dhana said. He hoped to buy a unit in the $500,000 price-range, and also expected prices to surge in February 2010.

The Mark 2

First we had greed over a rising asset. Then delusion it would rise forever. Then fear non-buyers will be priced out for good. Then herd panic. Now rank speculation. I have seen this movie before – Nortel, Bre-X, dot-coms and real estate. I know the ending.

  • Lastly, I hope many of you read the Globe’s piece on debt over the weekend.

As I’ve been harping here for months, there’s nothing that will affect your future more than what governments are doing now. There’s a tax storm coming, which is why I’m devoting a hunk of my new book to aggressive tax avoidance. There’s now zero chance we will be growing our way out of this mess. Look at the debt levels below, then realize the Boomers haven’t even started blowing their pensions-and-health-care hole in public finances yet.

There are effective strategies to weather this storm.

Buying a concrete box ain’t one of them.