Entries from January 2011 ↓

Everybody wants it

With Snowageddon  bearing down on central Canada (and 30 US states) this is probably the one time of year anybody in Mississauga or St. Albert ever thinks about Victoria. But Victoria, of course, thinks about itself all the time.

In fact, this little city on BC’s big island is a microcosm of what’s wrong with the country. At least its real estate market. And that irritating Canadian habit of believing you’re actually different (which really mans “superior”) to everyone else.

As this morose blog, populated with mouldy basement-dwellers, jihadist doomers, bullion lickers and people with an alarming attraction to underwear, continuously points out, we’re not different at all when it comes to screwing up finances. We may be slower, but we do it as well as anyone. Remember, there was a time (about 2005) when people bidding for real estate in southern California and Florida did so because, ‘everybody wants to move here.’ A great climate, unique scenery and boisterous economy shot housing values higher, as the Sun Belt swelled with northern exiles.

Today you can buy a condo on either coast for 40 cents on the 2005 dollar. Meanwhile home ownership in the US has withered from 70% then to 66% today, just as we’re going in the opposite direction.

Anyway, here’s Claire:

“What about condos in a city such as Victoria? Condos around $500,000 are half the price of a house, and both our residential unit and rental units are within 1-4 kms of the city centre, built within the past 5-10 years, not high end (as in no granite counter-tops!)  but comfortable in well-run buildings; one overlooks a golf course and the other overlooks the Gorge waterway above the Inner Harbour.

“We bought the residential unit in 2006 and the rental in the year you most warn about, 2009. Would not these types of units be appealing over the next 5-10 years for baby boomers who manage to sell in other parts of the country and want to re-locate to Victoria? And/or, the other scenario is if everyone takes the advice to sell now, and then rent, wouldn’t our units be desirable as rentals and worth hanging onto for the next decade or so?

Ah, poor Claire. Drank the Victoria Kool-Aid, bought two condos, and now as a million bucks tied up. Likely she’s getting a return of less than 2% on the rental unit, making it equivalent to life in the orange guy’s shorts. But at least with him, you’re liquid.

So what of her arguments (and those of people across the country who think rich Boomers, rich Asians or rich Iranians will flock to their hood)?

Well, unless you live in a world class city, such as London, Paris or New York, statistics pretty much indicate you can kiss goodbye this net migration theory. In Victoria, for example, 70% of all the people buying houses last year actually lived in Victoria. More than 85% of the buyers lived inside BC. And 97% were Canadian residents. Rich Asians? Nah. That’s how they stay rich.

Okay, so how about all those wrinkly, diseased Boomers flocking to enjoy the coastal monsoons? Apparently not. Just 14% of buyers in Victoria were retired. And what percentage of the Canadian population do retired people constitute? If you guessed 14%, you win a fabulous fun weekend in Cairo. Bring a stick.

By the way, how is it that Boomer refugees from Alberta or Ontario are going to move to the Floatie Capital of Canada and buy a $500,000 condo when they can’t sell their McMansions in the burbs for that much? What, exactly, will support Victoria condo prices other than the delusion of the locals?

As for the future of rental units, Claire, it ain’t great. There will be a downward pressure on rents equal to that on house prices in every major urban market in the country. Blame over-building, too much speculation, flippers, and tons of people who just can’t sell properties they own, and end up renting them for whatever they can get. As my last post showed, it’s already happening. If homeownership levels in Canada fall, as they have in the US, it doesn’t mean houses will go empty as condos are swamped. Methinks you’ve been inhaling those harbour vapours too long.

But, you’re not alone. There’s no city in the nation I have visited where ‘it’s different here’ is unheard. Houses will swell in Calgary and Edmonton for the oil, to Ottawa for the feds, in Halifax for the navy, in the GTA for immigration, in Skatch for commodities, in Vancouver for the Chinese and in Winnipeg for the dream climate.

Worse, Canadians think it’s different here just because we’re not Americans. It is the ultimate delusion.

So, Claire, if you can find a local greater fool than you, willing to give back your half-million in a market with a bad attitude, then sell.

The rest of us are too busy shoveling. We love it.

Underwater in Canada

On Toronto’s western waterfront sits a luxury condo building called NXT. To sell it last year the developer went nuts. People who signed up on a single night, for example, got a year’s worth of mortgage payments with just a wispy deposit. In fact, the cash-back paid for all of the down payment. So, the condos were free. You just needed to shoulder a mortgage worth about $500 a square foot.

Months after the building was finished, vast numbers of units stand empty. Sold, but empty. Most speckers thought they’d be able to flip before occupancy, but no such luck. This market’s already dying. And the renters shall inherit the earth.

This ad appeared on Craigslist. A two-bedder sold for north of $600,000 can now be rented for $1,200 a month, which is 50% of the occupancy cost. It’s also the same rent as others are paying in the building for half the floor space – all the proof you need that rents are about to come tumbling down along with the value of real estate.

It’s turning into an interesting year, just one month in.

It may be a smouldering Egypt, a sputtering Europe, a divided America, an oil price shock or an unsolvable debt crisis that defines what comes next. As this new week dawns, crude is above $90 again, the safe-haven US dollar is bouncing higher and stocks are selling off. The contagion of political unrest could destabilize the Middle East causing higher energy prices as oil supplies are threatened. A pro-Israel Egypt could turn into an Arab foe. Bad news. All while there are wars in Iraq and Afghanistan and degrees of mayhem in Tunisia, Yemen and Lebanon.

What it means: lower condo prices in Toronto. Tears in Vancouver. And millions of house-horny people wondering what the hell they were thinking last year.

The connection between Cairo and Kitsilano is pretty simple: lower economic growth. For the past two years governments have blown their wad trying to rekindle inflation, stimulate consumer spending, spur mindless spending and blow endless sunshine up everyone’s butt. The result has been historic levels of public debt, guaranteeing higher rates and taxes in the future; a staggering mortgage mountain; wildly inflated real estate values; and an economy that’s barely moving, despite almost-free money.

Since the financial crisis two years ago, this apoplectic blog’s been warning that the inevitable would be, well, inevitable. People sucking up huge debts to buy assets at gasbag prices with money destined to grow more expensive, in the middle of a recession were taking the gamble of a lifetime. Soon, I’d say, they’ll start to understand this.

It may or may not be Egypt. Or $2-a-litre gasoline. Or the failure of Barack Obama. Or house-dumping Boomers. Or more export and job loss. Or higher rates and banks hoarding money in Brazil, India and China. There’s a growing list of perils, any one of which is enough to make you question the stainless and granite gods we worship.

While I have no idea what will happen (actually I do, but I’m modest), my best advice still stands: If you’ve been thinking about dumping your real estate, do it now. Today. You’ll thank me in June. If you’ve been trying to buy before the 35-year mortgage dies in March, change your Huggies and wait two years. You’ll get way more for way less. If you’re in debt, sell stuff and get the hell out. If you’re an investor, own things that pay you yield and give you balance.

And let’s really understand what can happen when people come to their collective senses.

Canada is not the USA. But people are people. Americans got house horny a few years before we did. They inflated real estate, dropped lending standards and borrowed too much. So have we. Then this happened:

It’s been five years now since the housing boom in Arizona turned to bust. Home sales started to decline in mid 2006, then tumbled a year later. In one section of Phoenix (Zip code 85009), the median home price declined from $160,000 in 2007 to $30,000 today. That’s 81%.

But less spectacular are changes most people believe are now permanent across the United States. First, there are vastly more renters – by choice. As home prices plunged, investors snapped up cheap property, which now forms a new stock of rented, not owned, shelter. It could be a generation or two before Americans trust real estate again, guaranteeing prices stay where they are. Houses, which most people saw as their wealth and retirement plan, are a failed asset.

Second, millions of families are trapped in their high-end homes because nobody wants to buy them. Typically upper middle-class, they’re eating through dwindling savings and investments trying to survive a bust which will outlast them. They’re among the staggering third of all households who now owe more than they own. Because this has not happened before, the outcome is unknown.

Canada is not America, as I said. There may be no places in this country where real estate falls in value by four-fifths. But a one-fifth decline could put tens of thousands of recent buyers underwater and create a mortgage or bankruptcy crisis. It would wound our economy, which is now 20% made up of real estate activity – repeating a blunder in California.

There was only one mistake Americans really made: assuming real estate values would continue to rise. Therefore they could justify small down payments, big mortgages and low interest rates they knew would eventually jump, since increases in home equity would keep them afloat and justify the risk. But, no asset swells forever. Only human greed.

I read on the weekend that average resale prices in Calgary will jump 5.4% this year, and 7% in Winnipeg.

Are we there yet?