Entries from December 2013 ↓

The iStorm

ice modified

Did every house in Toronto just fall a little in value?

Unlikely. But confidence probably did. After all, an ice storm which has a quarter million families freezing in the dark for what may be a week in the midst of winter came just five-and-a-half months after a shocking flood filled the subway and freaked commuters who watched water snakes swim around their train. This is not what people expect when they pay an average of $804,830 for a detached house in 416.

When the beleaguered CEO of Toronto Hydro faced the media Monday morning, with streets littered and wires strewn, he blamed the environment. As bad as it may seem, he said, it would’ve been worse if they’d not already been aggressively trimming trees and installing hardened cables, as part of an overall ‘climate change strategy.’

Yikes. What if he’s right? Is it worth a lifetime of indenture to buy a bung in Etobicoke if the lights keep going out, or pay $2 million for a so-so-place in Kits when it frigging snows? Maybe Canada is just a weird, over-priced place, like the rest of the world keeps telling us.

Maybe it’s already changing, says Nik Nanos.

The jolly pollster I got to know as I was flaming out of my political career (“You,” Nik said to me one day, as the prime minister threw me under the bus, “are in big trouble.”) now tracks consumer confidence for Bloomberg. The latest results are of interest.

Confidence has been dropping in all of the four areas Nik tracks – personal finances, the economy, job security and real estate. As of today the number of people who believe house prices will rise over the next six months has fallen to just under 35%, the lowest in a few months. Presumably that means two-thirds of Canadians think real estate will flatline or decline in 2014, which is a radically different sentiment than the realtors would have you believe.

For example, just last week Re/Max scored headlines everywhere saying, “Canadian housing markets are on solid ground,” and 2014 will being “exceptionally healthy” conditions yielding a 2% jump in national sales and a 3% spurt in prices. Why the gushing optimism? The realtors claim the coming year (that would be next week) will erupt with economic growth second only to that of the US and a rise in manufacturing, thanks to strengthening global conditions.

That would be news to the Bank of Canada, which is warning of potential deflation, and the IMF which is worried our manufacturing sector has shrunk more than an accountant after a polar bear swim. In other words, the Re/Max dudes are making it up.

More important, what do average people (who spend the money) think is going to happen? The number who believe the economy will improve in 2014, says Nik, has dropped to just 20.3%. So that means 80% expect the same or worse. No better is news just 18.8% of Canadians feel they’re better off financially than a year ago, while 66% feel “secure or somewhat secure” in their jobs.

That may not be surprising after the string of lousy layoff news we’ve had in the past few months, with armies of employees punted in the retail, energy, manufacturing and technology sectors. But it’s hardly the environment in which you’d expect people to be lining up to borrow $700,000 for a house buy in Scarborough or Surrey.

And what do you make of the latest report on Vancouver’s real estate market? Long-time analyst Will Dunning says it’s, “clearly in a state of transition, from an environment of very rapid growth of house prices to a period in which price growth will provide much less impetus to housing demand, and to job creation.” And how many net new jobs have emerged in the region in the last 18 months, asks Dunning? Zero.

Weak economic growth, revised mortgage rules and higher long-term home loan rates are an unhappy mix. “In combination, these factors amount to a substantial negative change for the housing market outlook in the Vancouver area,” his report says. In fact, Dunning expect condo construction to fall by half in 2014 – and not just in the Lower Mainland, but Toronto and Montreal as well.

So there you go. So much to digest. Like Rob Ford fighting climate change. Our first irony storm.

Redemption

HOMELESS modified

Devon says he stumbled on to this blog for the first time last week. “I’ve been reading post after post, and I wanted to thank you for giving me the greatest Christmas present of all, confirmation that I’m not crazy,” he babbles, his brain obviously turned into a bowl of slop after consuming multiple articles. The 30-year old rents a $1,900-a-month pad with his GF. And he has a tale to tell.

“Back in August, my girlfriend and I started looking for a home to buy, we’ve had enough of apartment living.  We were the EXACT horny house hunters you reference, staring at house porn every night trying to find our $550K SFH.  We got given the same old information from our realtor, on now is just as good as any time to buy.

“There was always something nagging at me, a voice in the back of my head constantly questioning.  It kept saying “Are you really gonna shell out a 50 grand down payment on a house built in 1912?”  or ” What part of spending 600 grand on a house you don’t need, outside of downtown, and then spending an hour and a half/day commuting, do you really think this a good idea???”

“That voice…I now know, was common effing sense.  But where do you get validation on a thought process like that, when all of your house horny friends, or parents, constantly give you that “ohhhh you’re still renting??”, like you’re some kind of failure in society?  They’re like a god damn cult.

“I remember every house we walked into with our realtor (and bless her heart, she is a very nice, honest, and good person just doing her job) kept saying “this place is GREAT for entertaining”.  I kept thinking…”why the hell should I care so much about entertaining??  Why would I spend this much money to have a great place to entertain my friends??”  Besides, all my horny friends are mortgage broke and can’t go out to enjoy the city they live in…

“And here’s the part that was really driving me crazy; I make $240,000/year after graduating from med school.  I have zero debt, and almost $100,000 in liquid.  On top of that, my girlfriend makes ~50,000/year.  How could we not afford to buy a reasonable house??? We’ve since decided to never go on mls.ca again.  We’re going to rent one of those downtown houses built in 1912, and if the roof caves in, then great, not my problem.

“Thank you so much for your blog Garth.  I’m literally amazed reading it.  I feel better than ever about my future plans to continue renting, and socking away as much money as possible into investments while still spending money on the things in life that bring true happiness like travel and experiences.  Merry Christmas Garth, and thanks for the Christmas present.”

Ah, that’s so cute. Young doc making a quarter million a year discovers the true meaning of life three days before Christmas after reading a pathetic blog with disturbing sexual undertones. I knew I was sent down here for a reason.

Actually there’s a point to this post other than serious ego-stroking and nauseous self-promotion, as if that were not enough. It’s about attitudes – the kind that have led those folks I wrote about Friday to start a hedge fund betting we’re all going to blow up over real estate. In many places around the world analysts and financial players look at Canada and see a country with a middling economy and record debt where 70% of everybody owns the same thing, which costs twice as much as next door in the US, an economy ten times larger. Duh, they say. This is classic asset inflation, divorced from economic fundamentals. It’s a bubble unsupported by local incomes, especially in BC. It shall not last. It cannot. Especially now, in the Age of the Taper.

Most Canadians, unlike young Dr. Devon, aren’t even listening. Prices and sales inch higher, so each month we grow more overweight in real estate. The amount of net worth people now have in this one asset class is staggering, at an estimated 85%. Is this not the very definition of risk?

Many Yanks think so. In fact, almost seven years after the American real estate market peaked and crashed – even though prices are now recovering at an astonishing 1% a month – families there aren’t about to make the same mistake twice. The Canadian mistake.

Earlier this year a survey done for the MacArthur Foundation came up with some telling findings:

  • Almost 60% of adults believe ‘buying has become less appealing,’ even though prices are still a firth below 2005 levels and 30-year mortgages are cheap.
  • 54% think ‘renting has become more appealing.’
  • Nearly half of current homeowners (45%) believe they’ll become renters at some poin, and are okay with it.
  • More than 60% believe ‘renters can be just as successful as owners at achieving the American dream.’
  • And two-thirds (65%) say the role of government is to equally promote renting and owning, not to favour one over the other.

All the way back to Bill Clinton, Washington (like Ottawa) has had a blatant pro-real estate agenda. Federal politicians even called it ‘the Ownership Society’ with the twin goals of ‘economic liberty’ and the ownership of property. It’s why both countries subsidize mortgages, baby first-time buyers and maintain outrageous gifts like mortgage interest deductibility (US ) and tax-free gains on housing (Canada). The result was a wealth-killing bust in the States, and popular delusion here.

Whether we’ll rewrite economics and, for the first time in history, have an asset that rises forever, is out there. Your mom thinks so. I don’t. Dr. Devon almost did but, verily, he is saved.

Yes. It’s a miracle.