Getting out

In Toronto if you don’t like the rent being asked, suggest your own. So many condos on the market, so many empty units, so many noveau landlords, so many failed flippers happy to get whatever they can to cover the costs on their mistakes. And this is but the start, as thousands of new condos in dozens of buildings guarantee 2011 will be spec hell.

In Calgary, a doctor making $400,000 a year bought a $750,000 house two years ago and pumped $150,000 into renos. He put down 10%, mortgaged the rest and stuck the home improvements on his line. Total house debt, he told me, is now north of $800,000 – and the place has just been assessed at $639,000. “If I wanted to sell it, which I don’t,” he says, “I’d be suing the realtor who got me into this.”

In Edmonton 18 months ago a couple helped their adult daughter buy a trendy downtown condo, co-signing the $220,000 mortgage as a favour to the twenty-something. She then used her savings of $30,000 to upgrade the kitchen, and four months later lost her job. The unit’s been for sale for more than 150 days and, at $179,000, there are no offers. Hell, no showings. The parents, in their late fifties and struggling, are despondent.

In the Gulf Islands off BC’s coast, Rick and Linda’s romantic piece of land with the old growth and water views closes next week. It sat on the market for nine long months, despite a series of price decreases, until they finally accepted selling at a loss. “We made use of it, camping there,” he says. “But I have learned two lessons. It is easier to buy than to sell. And real estate can be a prison.”

In downtown Vancouver, the symbol of real estate excess, big-city penal envy and delusion among the populace, sits unloved and now debased. What was once the Olympic Athletes Village, then Millennium Waters, and a billion-dollar nightmare for the taxpayers dragged into financing it, is repossessed, renamed, repriced and rejected. Condo units that were marketed at prices 30% higher than downtown Toronto will now be sold at up to half off. With scores of others, the receiver won’t even try, opting instead to rent them out.

What do these five little vignettes have in common?

In a word, illiquidity.

An illiquid asset cannot easily, quickly or effortlessly be converted into cash. Stocks, marketable bonds, ETFs, mutual funds, trust units, preferred shares – all are examples of financial assets you can sell in minutes and turn into money within a couple of days. They offer the ability to jump into the comforting arms of cash the moment danger is sniffed. The reason:  financial markets matching big institutional players and millions of individual investors with almost always a buyer for every seller.

In comparison, the real estate market is crude, tiny, inefficient and intensely local. You can wait months, or longer, for a single interested party to roll up your driveway or click on your little red dot on mls.ca. In fact, it now takes an average of 1.2 years for the average US house to sell.

So, this is a new danger for many homeowners. As the market declines further, and especially as the realization hits the media and the citizenry, many housing markets across the country will become astonishingly illiquid. As sellers outnumber buyers by a wide margin, there’ll be only one overriding factor when it comes to bailing out – price.

Sadly, many people will be unable to sell at any price. The young couple in Mississauga, for example, who bought a $400,000 home on 5/35 terms. A market correction of 15% means if they sell at $340,000, they have to show up on closing day with a personal cheque for $75,000 – just to get out of the deed. But they can’t. They have nothing. This is what happens when people without money buy houses. And in Ontario, they can’t even walk. Only bankrupt.

There’s no doubt housing values will fall this year and sales stagnate. The illiquid nature of this asset will shock many vendors. The bidding wars will be over. The multiple offers gone. The days of having to leave the house vacuumed and immaculate, endless. As I’ve said here often, only consumer sentiment drives real estate, and that can change on a dime.

I talked to a wise man last night in a town where everybody’s ape for houses.  He just sold his home – one week, eight showings, three offers, $2,000 over asking. “When I tell people I did it,” he says, “they look at me like I’m an idiot. And then they tell me how much my house is worth, and I’ll never, ever be able to buy in again.

“And it’s in that moment, I know I’m right.”