Entries from May 2011 ↓

Patience

A hallmark of this blog is impatience. To be fair, though, it’s endemic today. Nobody can damn wait for anything. It’s why savingsless young couples expect a better first house than their parents ever had. It’s why consumer debt’s exploded. It’s why we’re doomed. At least the impatient ones.

Those who come here, read my words and expect house prices to plunge 20% by the weekend don’t get it. The market took about a decade to inflate, survived a bubblectomy in the winter of 08-9, and is now etched in the public’s mind. It won’t last, of course. But the deterioration will not be quick, nor will your idiot brother-in-law admit it until the evidence is overwhelming.

The likely scenario is a correction in prices this year – a classic trap. Impatient house hornies will jump in thinking they’ve scored a bargain at 15% less than the peak, only to despair at what comes next – several years of steadily eroding values. As house prices revert to their historic mean, adjusted for inflation and a sloth economy, the true bottom will be far lower.

The process has begun. It may be masked in the demand areas of Toronto and Vancouver where the population is deep and the gene pool shallow, where enough greater fools exist to trick the media. But the perimeter is already suffering. Check out recent sales levels along the south shore of Nova Scotia, in Muskoka, the Okanagan or Fraser Valleys – all traditionally demand areas, where realtors are now taking up knitting. And on a drive yesterday through 300 clicks of Ontario heartland, it was impossible not to marvel at a sea of languishing listings.

There are two very slow and immensely powerful forces which will see this malaise spread everywhere. More powerful even than rising interest rates (whenever they arrive) or the inevitable retreat of hot Asian money.

The first is demographics and the inexorably rising influence of millions of wrinkly old farts who will be selling their houses to afford aspirators, corneas and gas for their Harleys. Fact is, 70% of us now have no corporate pensions, with most Boomers thinking their houses were all the financial plans that they needed. Surprise!

This is an unstoppable influence on real estate values spread over the next decade. Not all Boomers will sell of course, since some will reverse-mortgage (those who hate their kids) and others will try to tough it out. But of the nine million in this cohort, more than enough will decide to bail to tank prices for years.

The more influential factor is debt.

Personal indebtedness has grown right alongside real estate values. In some places, this is the dirty little secret never shared. It’s why working families living in million-dollar homes in places like Vancouver have to keep tenants in the basement, and still eat into their lines of credit trying to cope with insane mortgage payments. It’s why we have more per-capita loans now than Americans, why the average down payment has shrunk to well under 10% and mortgage debt’s become an ugly trillion-dollar behemoth.

Fact is, borrowings are easy to get, and a bitch to get out of. Worse, when real estate starts to fall apart, houses get illiquid. It’s a lesson being learned again these days in Abbotsford, Kelowna, Brampton and Lunenburg. You’re next.

And the debt doubts are already with us. A survey done four weeks ago for IG canvassed 1,020 people and found 75% are in hock. Buying or renovating real estate accounted for 87% of that debt. Six of ten people are uncomfortable with their level of indebtedness, and 30% are losing sleep over it. Worse, 35% say they’ll be cutting back on spending to try to cope – which is how recessions start and house values crumble.

With wages static and unemployment stuck, how exactly are people supposed to pay off these fat loans? Will they spend five or ten years living on KD, clipping Wal-Mart coupons and riding bicycles, to make debt repayments? Or try to sell their costly houses to gain mortgage relief? And how’s either of those anything but negative for real estate?

Hard to see how this could be more obvious. Kinda makes you wonder why all the smart people aren’t selling to horny Asians or local house porn addicts.

Unless they’re not.

HAM & eggs

“Garth Turner has never been more wrong,” the note said. And attached to it was the latest pumper piece (above) from the house hornies who run GlobalTV in delusional BC. The vid is dished up as proof that real estate is hot since hordes of Asians are swarming West Vancouver, paying insane prices – like $1.5 million for a shack listed at $1.2. The experts who confirm this: one realtor, one juiced-up resident and one unintelligible recent immigrant-investor. Wow.

Of course, this rush into one area of Vancouver comes just as sales crash in another – Richmond – which two months ago was also overrun by little people with bags of money, presumed to be Mainland Chinese. And back in March GlobalTV (and the rest of the media) was forecasting ever-higher prices in Richmond which, of course, have started to fall. So now the west side is touted as infallible, just as hot Asian money (HAM) is believed endless.

Of course, this tells us nothing about where housing is headed. But it confirms human stupidity.

This is classic frenzy at the top of an unsustainable market. People rush to buy because others are buying. Objects take on added value because they’re coveted. Emotion trumps reason as valuations detach from reality. Bad decisions are piled so high atop other bad decisions that they start to look reasonable. Then somebody stands back and sees the whole rotten towering pinnacle of greed and want is without foundation. And down it goes.

This is Bre-X. It’s Nortel. It’s RCA. It’s Pet.com. It’s LinkedIn.

All the video posted here shows is how collections of humans can believe their own bullshit. It’s called mania. And it always ends the same way.

Why? Simply because manias create their own demand, so the fundamental reasons something should rise or fall in value, are swamped with pressing bodies. For example, when everybody in west Van or Leaside believes houses there will shoot higher in value, they try to profit. Homeowners sit tight on properties they’re convinced will appreciate wildly, while buyers clamour to get in at any price.

Demand outpaces supply. The crowd hears on Global about shacks selling for $1.5 million, and more demand bubbles up as greedy money moves in. No longer do economics apply. Houses don’t appreciate because of wage growth, consumer confidence, new jobs or economic expansion. They jump instead simply because people want them. Then fools rush this blog to loudly proclaim, “Holy crap, it IS different this time!”

Trouble is, people are people. There was a time, remember, when everybody wanted Tickle Me Elmo.

Others, I noticed, seized on a Friday mortgage rate cut by a few of the banks as more ‘proof’ housing will continue to swell. Oh, how wrong.

First, the banks are trying to squeeze every possible positive fluctuation out of the bond market. It’s called ‘marketing.’ As stocks wobble, money flows into the fixed income market, driving prices higher and yields lower. Two months from now, it could as easily be reversed. What really matters is the Bank of Canada, which will raise its key rate this year. Several times.

Second, let’s get a grip. The reduction was one tenth of one per cent. Oh. My. God.

Third, rates can rise or fall, but the impact on real estate will be moot. There’s no hope of sustaining this market in a nation where people have never owed more money, and have already pushed home ownership to unheard-of levels.

So remember these days. Listen to the voices.

Pray for Global.