Entries from September 2011 ↓

Here’s something to chew on. Not a single detached new home was sold during September on the west side of Vancouver. Until just weeks ago, this was arguably the hottest housing hood in the nation.

Of course, BC’s great HST flip-flop has something to do with that. Now that the province has announced it will kill the tax, which applies to new builds over half a million (for that, in VanCity, you get an ‘It’s My Potty” and an empty Best Buy box) construction has all but stopped as buyers wait for the levy to disappear. But that’s more than a year away. As you might imagine, it’s a disaster.

However, we’re talkin’ Van west here, where shacks on so-so-lots get $2 million and particle board McMansions have commanded twice that. Does a horny rich, jet-lagged Asian laying down four mill really care about a few hundred thousand more in tax? Or was all that HAM hype of last Spring just that? Realtor-created, media-infused, jingoistic marketing crap?

That’s what this pathetic blog alleged at the time, giving the razzberry to that Key Marketing nimrod in Vancouver who hired a copter, loaded it with ethnic Chinese realtors from Richmond and then conned the media into thinking it was Air Beijing. When it buzzed White Rock, Global TV had an orgasm.

But enough about Vancouver and the Lower Mainland. We’ll all get more interested in it as the body count rises.

Instead, a few words following up on yesterday’s post on the astonishing discrepancy between real estate values here and in the States. (By the way, I chuckled all day as I saw realtors and house-humpers attack the chart showing average Canadian prices and median American ones. These folks need to get out more.)

You may have noticed the gap narrowing on Friday, thanks to the Canadian dollar collapsing another cent. In a scant period of time our currency has lost an astonishing seven cents against the greenback, and it now looks like there’s more peeling to come. This instantly made Canadian real estate more affordable to Bill Gates and Lady Gaga. For Canadians, not so much.

This dollar thing is of great interest. Also on Friday came news that the economy grew in the latest monthly period (a surprise) and is now expanding at an annual rate of 2.3%. Not bad compared with America or Europe. But despite that, the loonie bled to death when such news should have bolstered it.

Why? Commodities. The price of the stuff that supports this economy – oil, base metals, wood products and precious metals, for example – is cascading lower. Oil is back below $80 a barrel, almost 30% lower than a few months ago. Gold has lost $300 an ounce, which is a bitch if you bought on the taunting advice of the metalheads who once came here (now too embarrassed). Copper – demand for which is considered a bellweather of economic growth – has collapsed.

Because Canada’s a resource exporter, with a stock market heavily weighted in mines and energy, our currency’s being laid low as global demand withers and economies flatline. Add to that the fact worried money flies into US dollars as the safest of havens, and the value of both commodities and the loonie suffer.

Of course, a 95-cent dollar is a heckuva lot more positive for exporters, tourist operators and anyone who sells stuff into the American market, than a dollar at $1.06. But with US demand weak and falling, and the absolute turmoil of a presidential election year looming – when the most powerful guy on the planet will be hobbled and skewered daily – there’s no reason to expect change. America could likely spend a chunk of 2012 in recession. Since we sell 70% of our exports there, currency traders are cutting the loon loose.

What does this mean on your street?

Well, a dollar that loses ten per cent of its value is not a good thing. Imports get more expensive, and food will take the biggest hit. Inflation will be pushed higher, and we will get a lot closer to the Bank of Canada budging rates higher. But more profoundly, falling oil and metal and lumber prices hurt the whole economy, costing jobs and halting new investment – most notably in the oil sands industry.

Falling national income is not a positive. Combined with record household debt levels and a near-saturation of real estate ownership, it suggests we’re closer to reversing house prices than at any time since the autumn of 2008. As I said here some days ago, this is now the most dangerous asset class in the nation.

Stocks and bonds, preferreds and REITs, small caps and big caps – they may all gyrate and take skill to master. But they’re liquid. Tradable any time. Saleable in 15 minutes. Turned into cash in three days. And destined to pay handsomely when the buds come out again.

Think about where risk dwells. Now say a little prayer for Van west.

As Bandit made a deposit on his lawn (I had a bag), my neighbour told me about his new house. “Bought a shack,” he said. I looked at his German muscle SUV and the wife’s exotic sports car and seriously doubted it. “In Florida. Cost a hundred and fifty. An 89-year-old guy died and I picked it up in an estate sale.” Turns out this is in south Florida, not far from Miami, and where the average house goes for $203,383.

So now my neighbour joins a burgeoning army of people – many of them Canadians – who have decided Florida is just too tempting-tasty to ignore. In fact it’s shocking but true: of the 43,200 condo units created and sold in south Florida since 2003, for example, only 13% are owned by people who actually live there. An astonishing 87% have been snapped up by investors.

And no wonder. Prices have just fallen another 7.6% in Florida from a year ago (not as bad as Nevada and Arizona, both down over 12%). One of the hottest housing markets on the continent (and the world) five years ago, the declines have been numbing – up to 70% in some overbuilt locations.

But this is even more quizzical when you contrast what’s happened there with our own mental market. Look at this:

Apparently the deputy chief economist at BMO Nesbitt Burns has discovered the jaw-dropping reality this pathetic blog has been pointing out for the last two years. Canadian houses now cost 200% of those in the States.

But, of course, most Americans are glorified Oakies, living on food stamps, unemployed and dreaming of glory days playing hand-me-down tuba in the high school marching band, right? Sadly, that’s what too many of us think, being the provincial snots that we’ve evolved into.

In fact the Canadian average family income is $63,800 (two or more people). The average US family earns $63,091 – virtually the same. Of that income, the typical family in Ontario hands over 31.15% in federal and provincial income taxes, not counting 13% sales taxes, health taxes and user fees. In Florida the average family making the average income would pay federal income tax of 25%. The state income tax rate is zero, and the sales tax is 7%.

We have 7.2% unemployed. They have 9.1% without a job. Are you getting my drift? Sure, people without employer health plans or government coverage pay health premiums. But then, American families get to deduct all their mortgage interest from taxable income – even their property taxes. Oh yeah, and 4% mortgage rates are locked in for 30 years. No rate roulette.

Most astonishing, the average US home costs $173,000. The average Canadian house (says CREA) costs $349,916. In Toronto it’s $454,194, and in zany Vancouver, $625,578. This, says BMO economist Doug Porter, “is not sustainable.” Adds the economics department at GreaterFool: “Duh.”

Porter figures there are three things that need to happen to narrow the bizarre gap. The loonie collapses (ain’t gonna happen). US prices recover (also a non-starter for at least half a decade). Or Canadian prices tumble (bingo). After all, logic dictates that in the US, with more than 300 million people, there’s a greater likelihood market forces have set real estate values at a more correct level than in Canada, with a tenth the people, more regionality and, of course,  Global TV.

And unless you are willfully blind, which pretty much includes Vancouver, it’s not hard to see the economic straits we’re in have already leveled real estate excesses in most of the western world. Canada increasingly stands alone as a weird place where seven in 10 families have a house and yet four in ten can’t pay their monthly bills. Anyone who believes this anomaly represents normal carries that secret Re/Max tat on their inner thigh.

But, I hear them cry, isn’t there a premium justified for living in the best country on earth?

Maybe there is, if we are. But what should it be? Ten per cent? Fifty? Is there an economic reason why the average Canadian is now paying 52% of pre-tax income to support a house (even with a 25% down payment), when Americans making the same shell out half?

Of course not. It’s hormones. Strip search the average Canadian and you’ll find a little ‘Royal LePage’ sign where their privates should be. We’re obsessed.

And it’s out of obsession that bubbles are born, and booms become busts.

By the way, my neighbour’s a smart guy. With very soft grass.