Entries from September 2011 ↓

Leading indicator

In downtown Vancouver, in a premium building with the best view, he’s delighted to have finally received an offer for his condo. That’s the good news. The bad news? It’s conditional on the buyer selling his own unit in the same building. “And nothing’s moving,” he says. “The market just cooled.”

Across the ditch in Victoria, where the average house prices is still $600,000 and the average family income’s barely $76,000, an immaculate, updated mansion in the prestige Uplands area was just reduced in price. Again. It’s the fourth chop, from $1.8 million down to $1.3. “The vendor is quite flexible,” the listing agent says. “Just offer something within reason.”

In Calgary a 39-unit condo development, nearing completion, was announced as sold out weeks ago. Err, not exactly. This mass email just went out:

ANNOUNCEMENT OF A SPECIAL OFFER
For You, Your Family and Friends!

We only have a few units left at Varsity Landing and we want to present you with a special offer.

We will give you $2000 if a friend or family member purchases a home at Varsity Landing.  In addition, we will give your friend or family member six months free condo fees!

Simply register your friend or family member with our Sales Centre, and if they buy a home by October 31, 2011, our lawyers will send you a cheque for $2000 when they close.  It’s that simple!

Back in Vancouver’s hottest hood this year, the west side, a listing which hit the market two months ago at $2.6 million, with the vendor expecting freshly-arrived horny Asians to turn his front lawn into a bidding-war battleground, sits. No offers. No war. New price.  The owner sighs and says it all looked promising, until a flood of properties hit the market – and the buyers left.

Anecdotal evidence of a tectonic shift? Absolutely. Nothin’ scientific about this stuff. But then, that’s the thing about real estate markets. They’re 90% emotional and 10% economic. People buy when everyone else is, and the perception exists of a rising market. Then, just as emotionally, they stop when sure-thing price gains look illusory and everybody worries about all that debt. More than with any other asset (the possible exception is gold, down again Wednesday), buyers create their own market. This is why you can have dumbass prices in Surrey or Oakville, and yet crickets down the road in Abbotsford or London.

This week the establishment spit out new numbers to disprove any real estate slowdown. Here’s the Teranet-National Bank index, for example, trumpeting a 1.2% price hike across the country in July, from June. Annualized, that’s a blistering 14% increase, at the same time most other assets on the planet are being sold off.

In five of our six biggest cities, this report says, housing prices are at record highs. But at the same time, US real estate continues to crash. That country’s leading measure of house prices, the S&P/Case-Shiller index, is a morass. Says founder Robert Shiller, prices have 10-25% yet to go and will not bottom “for years.”

If this contrast does not make you question things, you’re not paying attention. Canada’s very economic health depends on two things – US demand for our stuff, and commodity prices. Last time I looked (a few minutes ago), both were about as robust as Michael Jackson. Not hard to understand why couples would now be reluctant to borrow hundreds of thousands to buy houses at record high prices. But it is hard to fathom how Teranet-National Bank, or CREA, or Scotiabank (a new report says housing is a ‘notable outperformer’) can ignore their professional responsibilities to put these numbers in context.

I don’t worry for the people who come to this pathetic blog. They’re already over the top. But I do fret for the young couples who believe the house-pumping puff pieces in the local rag, the misleading social media campaigns spread by developers or the push-up anchorettes on Global.

Stop worrying about equity markets, precious metals or forex. Real estate is now the most dangerous asset class in the nation.

In the real world, anecdotes are leading indicators. Indices lead astray.

Discipline

In a world where people with fat mortgages and no savings get to live in mansions and drive hot cars you might think there’s no justice. Dirt cheap money and runaway hedonism make savers, budgeters and investors look like pickled nuns. When the borrowers are enjoying the stuff others only dream of acquiring, what’s the use of saving?

A week or so ago I asked that question after a writer for Maclean’s magazine decided to use this pathetic blog readership’s as a research project. After all, what better collection of whiners, malcontents, anarchists, incendiaries, enviers and conspiratorials could one possibly assemble? Reading yesterday’s comments, for example, was an experience akin to combining an Amway convention and a Hitler Youth rally. Made me ashamed to admit I wept when Mufasa croaked. As I posted your blog messages, I had to hum ‘Feelings’ for eleven hours straight.

Anyway, the guy finished his piece and it’s published. Here it is. You can read about one or two of the people who post here, and I’d like to thank all the others who asked to participate. Boy, do we ever have a lot of pissed-off readers!

Why is that?

Yes, housing’s a big part of it. Your idiot brother-in-law who borrowed 90% of the price of a house you’ll never afford (and he can’t) and now flaunts his imaginary capital gain. Those young couples with better homes than their parents ever had, and who got them with nothing down. All the zombies on HGTV shopping for second homes in Martinique or spending $400,000 decorating their seasonal cottages in Muskoka.

That would have Gandhi flipping birds.

But there are so many other pressures. Like living so damn long. Stats Canada this week says not only is everyone’s longevity swelling, but guys don’t even get to check out at a reasonable time. Now women live an average of only five years longer, and (worse) anyone who’s made it to 65 will probably last another 20 years.

This means you have to worry about money for far too long. A million-dollar retirement nest egg at $50,000 a year is gone in two decades, and yet we know only 1% of Canadians will actually have that much investible money. How can somebody actually get married at 30, buy a house, send kids to college at 50 and have seven figures saved at 65? Especially if they read a dumb blog full of people telling them to invest in guns and tinned tuna?

And then there are the markets, the damn Greeks and all this talk about deflation, recession and economic turmoil. It’s now all but impossible for the average person to worry about a family, a job and their finances in the same day – or at least to manage all three. The stress is overwhelming, especially when you call your sister in her $1.3 million house bought with 8% down.

So, why not blow everything, join the masses and live for today?  In other words, why save?

The answer is simple. Because the world splayed out before you will not last. It simply cannot.

Intellectually, we know this. It’s impossible for real estate values to keep rising past the point of affordability, even though people borrow more and borrow debt. No asset class has ever done this, nor will. The correction will be sharp and painful for those who decided to play without any skin in the game.

The housing correction, arguably begun in key parts of the country, will obviously traumatize the people who bought with little or nothing down, and who will be thrust into negative equity. It will also pull property values in general lower, nailing those who sucked too much equity out – especially to buy a boat, a vacation or a cottage – as HELOCs.

Interest rates will not stay where they are forever, unless we go depressionary. But that won’t happen. And as mortgage rates normalize, borrowing costs soar and real estate values move in the opposite direction. Suddenly savers get the upper hand, while borrowers get the shaft.

The economic malaise will pass. America will recover. Countries deleverage. The Europeans will be less revolting. Global growth and corporate profits will stabilize financial markets, rewarding those who beavered away on their TFSAs, retirement plans and who made steady, regular investments. But in order to profit from the trip back up, you require two things – liquidity and conviction.

Days ago I told you one of the human traits holding so many people back right now is called recency. It’s the belief that what exists today will be replicated tomorrow. It could be nutty Vancouver house prices, or scary stock markets and doomers in Depends.

Get over it.

Failure is self-imposed. I have the blog comments to prove it.