The empty bubble

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All real estate is local. Markets can change in mere days. Statistics are routinely massaged. The media’s lazy and uncritical. Higher prices bring more risk. Common wisdom usually isn’t.

These are things to bear in mind when assessing the real estate market, as we begin to drift into extremes. Contrary to what most people are told by the MSM, housing is segmenting and growing unhealthy. Some markets (like Calgary) are on ecstasy. Others are hunting for the Prozac.

In Winnipeg prices fell about 5% in June and year/year homeowners have lost money as inflation trumped the 1.9% gain in values. In Victoria the average price of $599,734 is lower than last year. In fact, it’s lower than seven years ago.

In all of Nova Scotia there is now a 10-month supply of houses for sale, and a screaming buyer’s market. In Regina June sales tumbled 12% compared to last year, despite the fact we’ve never seen five-year mortgages offered for less, or more aggressively by the banks. Said the local board, “residential property values actually declined in Regina in the past year.”

And in Montreal – in fact, all of Quebec – a housing slump is now reality.

In case you live in, say Edmonton, and think everywhere east of Lloydminster is populated with unemployed auto workers and gay CBC copywriters who dwell with cats, you should know that this matters. Montreal alone has almost as many people as Alberta. Quebec has more citizens than BC and Alberta combined. And things here are not swell.

  • Overall home sales in Montreal (the second-biggest housing market in Canada) are sitting at the lowest level in 10 years
  • It now takes an average of 117 days to find a buyer
  • In the second quarter of the year sales were the poorest since 2004, and this was the third quarterly drop in a row.
  • Listings are up 10% in the city – the 15th consecutive increase.
  • At current sales levels it would take 14 months to sell all available condos. Anything about six months is a disaster.
  • The median house price in Montreal is just $285,000, and is not budging.
  • Quebec condo listings are up 13% and sales are down 3%. Ouch.
  • Sales of all properties across all of Quebec have dropped in seven of the past eight quarters.
  • In the last three months, 5 of the six major urban areas of Quebec saw real estate sales slide.
  • In Gatineau, across the river from Ottawa, home to vast numbers of government workers, house sales have crashed 18%.
  • In Ottawa, by the way, condo prices in June were down about 3% and the average property gain trailed inflation for the entire past year.

So what? If you live in Calgary or Kits, why should you care?

Simple. All real estate is local, and yet heavily influenced by pan-national factors. The fact that house values and/or sales have slipped or stagnated in so many markets (including the No.2 urban area) should give us all pause. This is happening at a time when the cost of money is excessively low, when bankers are happy to lend to anyone who can breathe and in year five of an economic recovery. Household debt is huge, and continues to grow. But, outside of Alberta, virtually no jobs are being created. Incomes are stagnant. Like house prices in Kingston, they are running below inflation.

This suggests families in many parts of the country are simply tapped. In Montreal over 50% of folks think this is a lousy time to purchase a house, even though the market’s floundering and buyers are in control. Despite ideal borrowing conditions, the confidence isn’t there. It’ll take an economic rebound and lots more jobs to change things – conditions likely to bring more inflation and higher mortgage rates.

My advice hasn’t changed. If not buying means finding a new spouse, go ahead. If you can afford to ride through a 15% drop in prices, with no quick recovery, then do it. If real estate doesn’t become too much of your net worth, no problem.

But if you’re a moist 5%-downer or a house-rich Boomer without a fat pension nest egg, you should ask yourself: am I nuts?

145 comments ↓

#1 Armpit on 08.04.14 at 5:07 pm

“In Montreal over 50% of folks think this is a lousy time to purchase a house, even though the market’s floundering and buyers are in control”

When people feel it’s a lousy time to buy….it’s time to buy.

#2 Armpit on 08.04.14 at 5:09 pm

or at least consider buying

#3 Shane on 08.04.14 at 5:10 pm

What about the GTA?

#4 Wildson on 08.04.14 at 5:10 pm

Wow, that’s one of the earliest posts ever. Your work is much appreciated. Thanks.

#5 Armpit on 08.04.14 at 5:14 pm

or maybe consider buying….. or think about maybe buying….

#6 totalinvestor.com on 08.04.14 at 5:25 pm

Maybe this is the top we’ve all been waiting/hoping for. :)

http://postimg.org/image/dc83rcstt/

#7 Fed-up on 08.04.14 at 5:26 pm

We’ve all seen these minor setbacks before and yet the markets continue to defy all rhyme, logic and reason.

Personally, I will not be remotely interested in any real estate found in the frozen north, until values are at least 40% lower than they are now…at least.

If in the miraculous event, that a significant correction never materializes (highly doubtful), I will sleep VERY well at night being certain that whatever Canadian real estate that I do currently own, was bought at far more sane valuations. This irresponsible government needed to stop intervening a long time ago and should have allowed housing to settle where it should be. We’d all be far better off.

#8 Cowtown Cowboy on 08.04.14 at 5:26 pm

Sacre Bleu!

It is hot in the southern Okanagan!!! Gonna check out a new dev called Skaha Hills, but it is on the side of a dry dusty hill and a stones throw from Boonstock I might need to reconsider, save the $$$ for my Mastercraft

#9 Bob Copeland on 08.04.14 at 5:28 pm

Right again.

#10 Alero01 on 08.04.14 at 5:46 pm

“But if you’re a moist 5%-downer or a house-rich Boomer without a fat pension nest egg, you should ask yourself: am I nuts?”

Garth, your wisdom is spot on for those who fall into either of these two groups.

May I assume that your advice for those of us who do NOT fall into either of these groups remains that of building a well-diversified portfolio and staying liquid to greatest extent possible?

And if my assumption above is wrong, can I please ask that you provide the same kind of targeted advice for those of us who do not fall into the aforementioned groups of people for whom your warning is most pertinent.

#11 15% on 08.04.14 at 5:47 pm

15% would put us back to last year here on the GTA. If that’s the only correction you’re expecting then why were you stopping people from buying five years ago.

It would return you to 2012 prices. During this time a balanced portfolio has made close to twice the return. Moreover I never stop anyone from doing anything. — Garth

#12 notagreaterfool on 08.04.14 at 5:48 pm

Talk to my about fortress Toronto. The centre of the Canadian universe, the Big O’s backyard.

#13 Freedom First on 08.04.14 at 5:48 pm

I was born in Toronto, but I have lived in 5 different provinces over the years. Presently living in one of the major cities in Alberta. A few observations living here: 1st) Albertans believe they are impervious to a housing correction, ever(oil country). 2nd) The huge # of new vehicles on the road, of which the largest # are either big pickup trucks, or SUV’s, and the majority of them being the large ones. 3rd). Astounding how many car plates read either Ontario or B.C. 4) Never have I seen anywhere in the world where people want to work so many hours, and do (workaholics) . 5) people who come to Alberta from other provinces soon begin thinking as the Albertans do, it’s all about RE and money. I am nowhere near being Albertanized, so my conversations with the vast majority of people here is really limited for my own peace of mind. I will say though, I find the weather in Alberta the best for me, and also, I find Vancouver to have the worst weather. Rainy cold windy days in Vancouver, of which there are many, is hell on earth to me, leaves me chilled to the bone and I can’t get warm.

#14 Randy on 08.04.14 at 6:00 pm

Can’t wait for 2017 and the new Ontario Pension Tax.

#15 Head Scratcher on 08.04.14 at 6:13 pm

Recently got a note in the mail from my investment company. They are ultra blue chip and very conservative. They want to allow the Big Five bank that owns them to “borrow” their shareholdings for “other purposes”.

Mega-size red flag on big market shorting coming.

#16 Van Isle Renter on 08.04.14 at 6:17 pm

GT said:

In case you live in, say Edmonton, and think everywhere east of Lloydminster is populated with unemployed auto workers and gay CBC copywriters who dwell with cats…
++++++++++++++++++++++++++++++++++++

You lie. I was born north of Edmonton and I know for a fact that drill for oil in SK and MB. Beyond there be dragons so you may be correct… but just.

#17 Slow Canada on 08.04.14 at 6:18 pm

“If not buying means finding a new spouse, go ahead.”

Go ahead and find a new spouse, or go ahead and buy? (wink)

#18 DreaqmingInTechnicolour on 08.04.14 at 6:21 pm

Expect a similar pattern to emerge and take-off across Canada – people cashing out of the bigger Cities where they are being taxed to death by local and regional governments – to move to small communities where the housing is a fraction of the cost.

http://www.nytimes.com/2014/08/04/business/affordable-housing-drives-middle-class-to-cities-inland.html?_r=2

#19 Mark on 08.04.14 at 6:24 pm

“Banks make their money by borrowing short term money at low interest rates and lending it out longer term at higher rates, exactly the opposite of what individuals should do. They can only keep going as long as they have access to short term credit including deposits. “

This comment was on the previous post, but is very worthy of response. Canadian “big-5” banks *do not* generally engage in maturity transformation, ie: borrow short, lend long. They merely collect fees and spreads for matching borrowers with lenders, and providing ancillary services like tellers and ABM’s.

This lack of maturity transformation in the Canadian banks basically insulates them from changes in the yield curve, especially rapid changes. Contrast such with the banks in the United States that, in many cases, were funding 30-year mortgages with overnight borrowing/deposits. When the curve inverted, they were de-capitalized. When the long-end of the curve blew out, they became extremely insolvent.

In short, Canadian banks have given up a lot of profit over the years because they do not behave as aggressively. But they don’t suffer the sort of balance sheet destruction implied by adverse shifts in the yield curve since their lending and borrowings are generally fairly tightly matched.

#20 zee on 08.04.14 at 6:24 pm

Hi

15% average correction in gta is nothing and will not do anything to change peoples view on real estate.

#21 Mark on 08.04.14 at 6:30 pm

“It will be in CMHC’s self-interest to accuse the lender of being negligent during the origination process. If they cast doubt on the lender’s due diligence during approval, they can deny paying out if they default, on the basis that the borrower shouldn’t have gotten the mortgage in the first place.”

CMHC messing with the banks who have been acting in good faith and playing by all the rules = a cessation of lending against CMHC insured obligations = much higher mortgage rates to the CMHC subprime sector, and hence, much higher claims against CMHC insurance (as a good chunk of CMHC subprime borrowers simply are way too highly leveraged!).

Denying the odd claim for very well-founded and materially fraudulent/negligent lending might work, but the housing market itself is so leveraged at this point that the CMHC is basically walking into a minefield that will cause themselves more damage if they try and fight the banks. The CMHC, as well, does its own due diligence through their “emili” process, so they’re at least partially to blame if a bad loan is written.

#22 Mark on 08.04.14 at 6:33 pm

“They want to allow the Big Five bank that owns them to “borrow” their shareholdings for “other purposes”.”

Securities lending is a practically risk-free way (as collateral, in the form of T-bills, is placed for over 100% of the value of the stock!) of picking up a few basis points of annual return, which can be applied against management expenses. You’re reading way, way too much into this.

#23 JimH on 08.04.14 at 6:36 pm

#15 Head Scratcher
“Recently got a note in the mail from my investment company. They are ultra blue chip and very conservative. They want to allow the Big Five bank that owns them to “borrow” their shareholdings for “other purposes”…”
—————————————————-
Are you talking about your brokerage company allowing the bank to borrow the cash in customer accounts? Is this more than just for an overnight sweep?

#24 Linda Mulligan on 08.04.14 at 6:47 pm

I have to agree with Garth that a housing correction is coming – has actually come/begun for many housing markets in Canada. Alberta is possibly immune due to the relatively roaring economy but – as anyone who has lived in Alberta for more than a couple of years can tell you, the Alberta economy can also hit the brakes with stunning force, leaving nothing but devastation in the wake of. So the ones who live & learn have been taking steps to prepare to ride out another sharp downturn. The ones who don’t will vanish like snow after a Chinook, leaving their repossessed assets behind them.

So the downy 5% or less buyers are very vulnerable. And if the seniors counting on selling their real estate to live well in retirement do so en masse, that by itself could be enough to make the correction become a meltdown. Obviously if huge numbers list their homes all at the same time the supply will overwhelm the buyers available & those who truly need to sell are going to offer the price drops required. For the shrewd who can buy & hold for decades, possibly a great buying opportunity. For those who must sell, ouch.

#25 Josh Renning on 08.04.14 at 6:48 pm

It has been about almost 20 years with most of Canada not having at least a 15% to 20% correction in real estate prices so it about time we get one.

To Randy #14

The Ontario pension tax or ORPP as they call it cost much more than most people think over the next 20, 30, 40 years.

Removing about $1,800 a year combined from an employee and employer earning $50,000 a year gross income.

I can see easily 3.00% annual increases on these annual ORPP contributions over the years.

You can then add a conservative, modest 4.50% annual interest rate, bond yield or rate of return on all this money and it will cost $228,000, $313,000 per person or spouse if put in TFSA’s over 35, 40 years respectively.

If they are RRSP’s, then $304,000, $419,000 for 35, 40 years respectively.

If you are looking at 5.50% annual rates of returns with 35, 40 year TFSA’s or RRSP’s then $274,000, $389,000 or $366,000, $519,000 respectively.

We all know that OAS and other pensions age eligibility rules are being increased which means 70 to 72 is probably a good probability age that the ORPP will payout.

No matter how you look at it, $456,000 to $1,038,000 is going to be in your family’s hands.

#26 Temporary Foreign Prime Minister on 08.04.14 at 6:49 pm

“….when bankers are happy to lend to anyone who can breathe and in year five of an economic recovery. Household debt is huge, and continues to grow….”
====================

Saw this movie played out in American theaters a few years ago. Didn’t really care much for the ending.

Never thought Chanadians would write the sequel. Then again, when you have a morally bankrupt government continually prostituting itself to narrow-minded, self-interest groups, anything is possible.

#27 Josh Renning on 08.04.14 at 6:55 pm

Correction to my last post above.

No matter how you look at it, $456,000 to $1,038,000 is not going to be in your family’s hands.

#28 Pablo on 08.04.14 at 6:59 pm

A good synopsis Garth. Bizarre really to think about. A share of BCE is priced the same in Ottawa and Vancouver, as is a Prius, a loaf of bread and an ounce of gold. Yet home prices have no similar correlation. No other investment acts like real estate. Which is why better regulation and transparency have been slow to come. And if one only buys or sells a few times in their lifetime, only those currently in the market really care. Which makes change slow to occur.

#29 Stacy on 08.04.14 at 7:00 pm

[Quote] In Winnipeg prices fell about 5% in June and year/year homeowners have lost money as inflation trumped the 1.9% gain in values. [Unquote]

Do you know the reason why? Nearly all women in almost every line of white-collar work are paid less than a man including women who have attended universities and colleges, attained masters degrees and worked the independent women lifestyle.

It’s true that women tend to cluster in certain fields such as teaching, nursing and childcare and men in others such as engineering, finance and hard labour, but the ones women dominate usually pay less, by at least 40% of every male dollar earned.

We can all agree that manufacturing jobs and engineering jobs are outsourced from Canada, resulting in fewer male dollars to prop up the housing market.

With rising male unemployment and exploitation of women in the workforce, house prices will slowly deflate unless the government takes action to enforce fair pay for women and eliminate misogyny by enforcing stricter prostitution laws, banning pornography, raising the age of legal marriage to 25 and criminalizing indirect sexual harassment such as staring and leering at women.

Canada needs to respect the rights of women and give women in the white collar jobs fairer pay.

Stacy = troll. Starve her. — Garth

#30 Shawn on 08.04.14 at 7:04 pm

The Mythical 2008 Canadian Bank Bail Out

Yesterday day Flawed said:

Yes….our banks are in such great shape they were bailed out 114 billion dollars in 2008 and moodys recently downgraded them.

Andrew Woburn at 169 responded to Flawed saying, in part:

“Every once in a while there is a financial crisis which dries up short term credit. Even though the banks are awash with assets they don’t have enough cash on hand. That is when the central bank steps in and lends them the cash they need until markets unfreeze. Then they repay the central bank. That is what central banks are for. It is not a bailout. Bailouts are only used when the bank actually runs out of capital.”
******************************************
I believe Andrew is quite correct. Certainly no Canadian Bank was bailed out in 2008 in the sense of having equity capital injected by the government.

What I understand happened is there was a credit freeze as Andrew says. As part of their assets, the banks owned (as they always do) a lot of mortgage loans guaranteed by CMHC. Normally they could have securitized those through CMHC. But investors were hard to come by in 2008. So CMHC and /or the government bought some CMHC (Canadian government) guaranteed mortgages from the banks and gave them cash. CMHC and or the government then went on to collect on those mortgages purchased from the banks and I believe never lost a dime. And if any of those mortgages were not repaid by the homeowners then CMHC would have had to cover that loss anyhow.

I am not sure what I describe is EXACTLY how it went down but I think that is very close and I am certain that it in no way shape or form constituted a bailout. Nor was it secret as some have accused.

And if the banks needed cash then absent this purchased by CMHC of CMHC insured mortgages then the central bank could easily have let the banks have extra credit at the central bank. The Canadian banks were never in any financial difficulty in 2008. It’s tough to get bailed out when you not even in a sticky wicket situation let alone in dire straights.

So let’s all stop pretending there was a Canadian Bank bailout in 2008.

And for gosh sakes consider buying some bank shares, perhaps in an ETF.

#31 Jordy on 08.04.14 at 7:08 pm

I have the solution, instead of borrowing vast amounts of money to buy the most expensive house you can, everybody has to live in what ever they can build. This way idiots would have to live in cardboard appliance boxes under overpasses.

#32 Texas twister on 08.04.14 at 7:08 pm

You chose a picture of Mels Lone Star Lanes in Georgetown Texas….where a nice house costs $50,000….makes ya think huh?

#33 Bob Rice on 08.04.14 at 7:10 pm

I have a fat pension nest egg, a very secure job (as does my wife) and I am still renting refusing to jump into this insanity… By the way, your point about the lack of confidence in Montreal seems to be the opposite sentiment is Tordumbto. Most people in the GTA haven’t a clue about the risks we are flirting with.. a colleague of mine insists I’m an alarmist. He’s a goof and there’s a part of me that hopes his equity withers away in a big juicy housing correction.

#34 Randy on 08.04.14 at 7:21 pm

Thanx Josh. Just a reminder. Don’t die before you reach age 70 or 72….You get NADA from ORPP….likely same as the CPP.

#35 Joe on 08.04.14 at 7:21 pm

Prices aren’t dropping in Montreal because sellers refuse to sell for less and eventually buyers will give in, as they have done in places like Vancouver and Toronto.

Correct, but the other way around. — Garth

#36 Bob Rice on 08.04.14 at 7:24 pm

Post # 20 “15% average correction in gta is nothing and will not do anything to change peoples view on real estate.”

On an $800,000 property that’s $120K – probably more than many people have in equity in their homes! Wiped away in a correction… but I think 15% is conservative…. 25% or more is more like it.. We’ll see..

#37 Shawn on 08.04.14 at 7:24 pm

Banks borrow short and Lend Long?

Mark said:

Contrast such with the banks in the United States that, in many cases, were funding 30-year mortgages with overnight borrowing/deposits. When the curve inverted, they were de-capitalized. When the long-end of the curve blew out, they became extremely insolvent.

******************************************
I understand that is what happened and caused the Savings and Loan crisis in the U.S. in the late ’80s

This maturity mismatch, borrow short lend long is why it is essential for U.S. banks to securitise the mortgages and sell to investors,

A bank leveraged 15 to 1 cannot take the risk of locking in a 30 year mortgage funded by short-term debt. And they don’t. They securitize to pass the risk to an investor. The investor is typically not leveraged at all and can take the risk. Worse case he locks in a 3% yield for 30 years and kicks himself when rates rise. Opportunity lost.

The one weird thing though is that banks actually bought back some of the securitized stuff. Hopefully it was short term. Bank regulators encouraged this and allowed unlimited leverage.

I think the U.S. bank financial statements state that they DO NOT face much interest rate risk even if rates rise. Maybe this is just based on flawed financial modeling but I believe they would claim the risk is very well managed.

I am not convinced that the Canadian banks don’t do some borrowing short and lending long. Their financial statements I don’t think really show it very well. But I thought someone here pointed me to an RBC annual report and there was in fact some maturity mismatch going on.

If Canada had a strong program of mortgage securitization and if it was not run by CMHC and or the Feds then Canada too could have 30 year mortgages. All that is needed is to find investors will to accept 5% or whatever on 30-year bonds and willing to accept pre-payment risk. The investors are out there but the Canadian securitization market is over-regulated so it (30-year locked in mortgages) does not happen.

With record low interest rates it is a crime that Canadians cannot access OPEN 30 year fixed rate mortgages. Investors would fund these. They do it in the States. The government and regulators are the road block.

Maybe the U.S. banks could come in and do it? How about free trade in banking? We can deposit money in a U.S. bank but we can’t borrow mortgage money from U.S. banks? Not exactly free trade there.

#38 Andrew on 08.04.14 at 7:24 pm

@#20 zee

Actually it will make a big difference. Yeah 15% is not much of a correction (for some), but everyone will finally take a moment and realize that “damn, I guess even TO will not go up forever” and that will help cool the market in addition to the already-happened 15% drop.

#39 Shawn on 08.04.14 at 7:25 pm

Financial Free Trade

And Canadians cannot buy a true U.S. mutual fund, just Canadian domiciled clones. Who made that rule and why? Who benefits? No free trade there.

#40 Dd on 08.04.14 at 7:26 pm

Great write up. As for Victoria – easy 25% in last three years for basic $800k home. As for Waterfront lots and houses … Throw in a stink bid (a slaughter of up to 60% since 2007).

#41 Quick question about net worth and RE on 08.04.14 at 7:38 pm

Hi Garth, I have a question concerning this statement: “If real estate doesn’t become too much of your net worth, no problem.” I totally agree with this statement, but this is my situation. I bought a place down in Florida in 2011 for 180,000 and now its worth $400,000. I haven’t bought in Canada yet, but always planned too, the way I had originally planned was just to include the $180,000 as calculating our net worth, not the appraised value for the property now. We set aside the cash for the house here in Canada and will pay in full. Here’s my question as asinine as it sounds, which amount for the US house do I include as our net worth, the price I paid or the appraised. Our net worth is ~ 3 million, mostly cash and stocks.

#42 Smoking Man on 08.04.14 at 7:44 pm

Stacey, you just made my book.. You where in there anyway… Your character is called Claire….

Boy boy, do you get a rough ride…

#43 omg on 08.04.14 at 7:56 pm

Garth said

“In Victoria the average price of $599,734 is lower than last year. In fact, it’s lower than seven years ago.”
—————————

Yep, a bit lower than in 2007. But add just a couple of percent inflation over the past 7 years and you’re down an additional 15% in real terms and nobody even realizes it.

This is how the market will shave 40 to 70% off the value of houses in Canada over the next decade or so – flat prices in nominal terms but a steady erosion of real values by inflation.

Best thing is, nobody but those that stayed awake during “money illusion” lecture will realize what’s happening.

#44 Mark on 08.04.14 at 8:00 pm

“I am not convinced that the Canadian banks don’t do some borrowing short and lending long. Their financial statements I don’t think really show it very well. But I thought someone here pointed me to an RBC annual report and there was in fact some maturity mismatch going on.”

From what I’ve seen in the RBC disclosures, maturity transformation at RBC is minimal.

While we’re on the topic, here’s a relevant snapshot of TD’s interest rate risk:

http://oi55.tinypic.com/25553ex.jpg

$147B in short-term obligations is net off with $187B in short-term assets. The rest is negligible, and fairly tightly matched. Last time I looked, I found basically the same thing in RBC’s reporting as well.

#45 Mark on 08.04.14 at 8:02 pm

“And Canadians cannot buy a true U.S. mutual fund, just Canadian domiciled clones.”

Ummm, you’re a bit stuck in the past. I have owned US-based mutual funds, in the form of ETFs, for over a decade now. The only thing is, the US dealers are not allowed to distribute their product through the Canadian advisory channels.

#46 crowdedelevatorfartz on 08.04.14 at 8:02 pm

@#29 Spacey

Your “solution” for the looming housing price downswing is;( and I quote)

” house prices will slowly deflate unless the government takes action to enforce fair pay for women and eliminate misogyny……”

I’ll skip the rest of your rambling anti male diatribe and cut to the chase.

Grow up. Life isnt fair. Deal with it.

Oh , and say Hi to Ayn Rand for me would ya? She’s a hoot after a few vino.

#47 Mark on 08.04.14 at 8:05 pm

“With record low interest rates it is a crime that Canadians cannot access OPEN 30 year fixed rate mortgages. Investors would fund these.”

Actually most Canadian banks will quote you 25-year term money with 5-year cancellation without penalty (per the Bank Act). The product is available, but the rates reflect investors’ perceptions of long-term rates.

If you take a look at the US market, the only way they get away with that is that Fannie Mae/Freddie Mac take the interest rate risk. And those organizations are going to find themselves extremely insolvent as interest rates rise and interest rates go against them. The Canadian system at least places the burden of interest rate risk upon the borrower. Unfortunately, not many Canadian borrowers truly understand what higher rates would mean as most are too young to have experienced such.

#48 TO Renter on 08.04.14 at 8:09 pm

No jobs for young people in rural Ontario after the collapse of high-paid manufacturing – they have headed out to the oil sands, Kitimat, Fort Mac, S Sask. I understand the industry needs 100K+ more workers over the next 10 years.

We have more oil than we can ever use domestically. The US has found all it needs. So we need to transport it somewhere, far, to developing economies, and therein lies the risk. Nevermind the scrutiny on the carbon impact.

Considering Alberta has struck me as having two economies – ‘oil boom’ and ‘oh sh%t!’ – do they define non-diversified? Double whammy in waiting?

#49 Dean on 08.04.14 at 8:17 pm

Trouble Brewing Up North: Canada’s Giant Housing Bubble Cracking

The gap between Canadian and US home prices is at an all-time record, with the average price in Canada now 66% higher than the mean price in the US. Even when prices are adjusted for fluctuations in the exchange rate … Canadian homes are still 50% more expensive than the already expensive US homes. What gives?

http://davidstockmanscontracorner.com/trouble-brewing-up-north-canadas-giant-housing-bubble-cracking/

#50 Hunday Snotta Driver on 08.04.14 at 8:17 pm

Damn, looks like I’ll have a lot more clones driving the same car I do if this real estate thingy really hits the fan.

At least we’re all still way cooler than Kia drivers.

#51 Dean on 08.04.14 at 8:18 pm

This chart is a hair-raising picture of Canadian home prices that makes the torrid excesses of the US housing bubble look banal

Now all it takes to keep it going forever is a miracle, and a big one at that, but miracles are rare in the housing sector, and if they do occur, they don’t last long, and eventually, all bubbles do the same thing: the hot air hisses out of them, and the bigger the bubble, the worse the consequences.

http://wolfstreet.com/2014/04/30/this-chart-is-a-hair-raising-picture-of-canadian-home-prices-that-makes-the-torrid-excesses-of-the-us-housing-bubble-look-banal-2/

#52 GeorgeSoonToBeRetired on 08.04.14 at 8:42 pm

Ah, the pleasures of vultching!

Made my annual visit to the garden centre of my favourite supermarket this weekend, as I have done for years. A seasonal set-up, they only open for a few months each spring and then close up shop.

The last day, everybody knows, brings some nice deals. 50-60% off.

But few appreciate the rock-bottom deals of the last half hour before closing. They let me fill as many carts as I want just to clear the place out. For $5. Yep, five dollars. Today’s haul was $726 retail price, lots of beautiful perennials, fruit trees and other plants I can enjoy for years, all for five bucks. I’ll have the best front and back yards on the street, yet again.

Reminds me how I felt buying two GTA properties back in 1993, LOL.

And it’s good practice for buying a couple more Toronto properties around 2017 or so, I figure.

Hope everyone who wants to gets to cultivate some sweet deals then, too.

#53 Son of Ponzi on 08.04.14 at 8:43 pm

So, prices are dropping in Quebec, Winnipeg and in Atlantic Canada, where the locals have overextended themselves.
But holding steady in Vancouver.
How can this be, when the local Vancouverites earn less than the Canadian average?
Simple answer.
But mentioning it would be xenophobic.

#54 FormerSaskie on 08.04.14 at 8:51 pm

#32 Texas Twister

Checked Zillow for Georgetown Texas and even the pre foreclosures are over $100000.

#55 Shawn on 08.04.14 at 9:13 pm

Banking…

Mark responded to me

While we’re on the topic, here’s a relevant snapshot of TD’s interest rate risk:

http://oi55.tinypic.com/25553ex.jpg

$147B in short-term obligations is net off with $187B in short-term assets. The rest is negligible, and fairly tightly matched.

*****************************************
Mark I don’t see the $187 and the $147 is the net of deposits minus loans on floating. (They have far more floating deposits than floating loans/assets)

They are very closely matched in the total less than a year category. (Where there would not be much risk anyhow).

They are badly mis-matched in the 1-5 year range $118.8 billion in loans against $59.3 billion in deposits/liabilities. They are hugely mis-matched in the greater than five year with $37.8 billion in loans and other assets against $3.7 billion in deposits liabilities.

That’s how I read it.

Not sure what to make of the non-interest sensitive category…

Yeah, I think they ride the interest curve… to some extent

#56 Shawn on 08.04.14 at 9:24 pm

U.S. Securitization and Fannie Mae et al

Mark responded to me:

If you take a look at the US market, the only way they get away with that is that Fannie Mae/Freddie Mac take the interest rate risk.

******************************************
I’ve been trying to figure that out for years…

I was taught that mortgaged backed security investors usually take pre-payment risk. If rates fall and people refinance at a lower rate (allowed with little penalty in the U.S0 The investor get paid off early. If rates rise the investor is simply stuck with a below market rate yield investment.

I have never read that Fannie / Freddie take interest risk. They certainly take default risk.

Fannie Freddy got in trouble in 2008 because defaults were stupendously high. I don’t think it was because interest rates fell.

Canada does not have an affordable 25 or 30 mortgage rate with low or no penalty mostly because of a lack of securitization of that product in Canada. That is my understanding. CMHC and another federal agency strictly control what mortgages can be securitized and control whether investors take the pre-payment risk.

We need investors to take the interest risk and the pre-payment (early payment) risk. Apparently in the U.S. investors take these risks for very low long term interest rates as long as the default risk is guaranteed by Fannie and Freddy. CMHC already covers default risk so why can’t we securitize like the U.S.

I have not heard of the U.S. banks complaining about the system. The complaints and problems in the U.S. in 2008 involved defaults not interest rate risk

#57 Shawn on 08.04.14 at 9:33 pm

U.S versus Canadian House prices

Dean at 41 and the scary chart

Explanation: in 2008 the U.S had a major mortage and banking crisis and house priced fell. They bottomed in 2011 and are now tracking to catch up to Canadaa. When the two lines meet again it will be mostly because the U.S will rise. Canada may fall a little but the two lines will met again only when the U>S house prices normalize.

U.S. “used” houses are priced well below replacement cost minus depreciation, no? Think that is normal?

U.S. still has population growth… including from immigration (legal and otherwise). Demographics are not a big issue in The U.S. due to many young immigrants. Think house prices will stay low there?

Actually the US has a lower per capita immigration rate and ten times the boomers (76.4 million). Robert Shiller’s work shows prices now have actually reverted to the mean, and can certainly be considered normalized at 12% above the market trough. You don’t need to respond to everything, Shawn. Take a break. Creating facts is hard work. — Garth

#58 Nomad on 08.04.14 at 9:33 pm

It’s great to see a post that focuses more on Montreal. It’s a huge city center and yet we read about it very little in the Financial Post and the Globe and Mail, yet the market behaves very different than the one of Vancouver, Calgary and Toronto. A more interesting story these days.

If we see big price drops in a large city center, it’ll be there.

#59 Squidly on 08.04.14 at 9:38 pm

http://investmenttools.com/futures/bdi_baltic_dry_index.htm

It’s coming!

#60 Squidly on 08.04.14 at 9:52 pm

http://en.m.wikipedia.org/wiki/Baltic_Dry_Index

#61 Squidly on 08.04.14 at 9:52 pm

It does not bode well for Alberta.

#62 annek on 08.04.14 at 9:57 pm

If there is a correction of 15% in homes in TO /GTA, then I wonder how much recreational homes ( cottages) will drop?

#63 Son of Ponzi on 08.04.14 at 9:58 pm

You don’t need to respond to everything, Shawn. Take a break. Creating facts is hard work. — Garth
————
Right on, Garth.
And Shawn, while taking a break, calculate your Net Worth.
And finally let us know.

#64 PeterfromCalgary on 08.04.14 at 10:06 pm

This house price decline in Quebec is happening despite it having a pro federal premier. Makes me wonder what would have happened if the PQ was elected.

Is Garth seriously suggesting that is life east of Lloydminster? I though it was a wasteland full of abandoned factories and gay CBC employees.

#65 Brian Ripley on 08.04.14 at 10:17 pm

Garth said: “…outside of Alberta, virtually no jobs are being created. Incomes are stagnant… running below inflation.

Latest employment earnings data: Alberta are 23% above the national Canadian average, 22% above Ontario, 28% above BC and 34% above Quebec.
http://www.chpc.biz/earnings-employment.html

#66 george wilson on 08.04.14 at 10:18 pm

Hey Garth what about Toronto and the GTA and Vancouver?Looks like things are going nuts here still this bust will never happen ..!

#67 45north on 08.04.14 at 10:18 pm

In Winnipeg prices fell about 5% in June

In Victoria the average price is lower than last year.

In Nova Scotia there is now a 10-month supply of houses for sale

In Regina June sales tumbled 12% compared to last year

And in Montreal – in fact, all of Quebec – a housing slump is now reality.

the bubble is bursting in the outlying areas like it did in the US.

Dean : from your link : Second quarter GDP hasn’t been reported yet. But if hours worked are any indication, it faces a steep downside risk. And when Canada’s magnificent housing bubble implodes, it will be difficult to find cover.

sounds like it is imploding.

#68 joblo on 08.04.14 at 10:37 pm

#13 Freedom First

“5) people who come to Alberta from other provinces soon begin thinking as the Albertans do, it’s all about RE and money.”

What else is there? Oh yeah BOOZE!

#69 waiting on the west coast on 08.04.14 at 11:20 pm

#65 Brian Ripley

This is from StatsCan… YoY to May 2014 (note: I think inflation wasn’t accounted for since it wasn’t mentioned.)

http://www.statcan.gc.ca/daily-quotidien/140731/longdesc-cg140731b003-eng.htm

Here is the 2012 chart that shows how flat wage broth was since 2009 (this is net of inflation – basically stagnant).

http://www4.hrsdc.gc.ca/[email protected]?sid=8&fromind=1&submit=Submit&seriesid=12&seriesid=13&seriesid=14&seriesid=15&seriesid=16&chrtid=2&iid=18

On the HRSDC site, you will see that from 2006-2009, the country weekly earnings increased by about 10% (net of inflation). From 2009 – 2012, it was ~2%

Anyway – wages are not keeping up with the RE steamroller and whether or not a slow/fast correction happens soon, or will happen. There are only so many grandma’s that people can beg their down payment from…

#70 Ben on 08.04.14 at 11:27 pm

Garth! Thanks so much for focussing on Montreal. I sent my wife this post and she said “what the quiff head one?”. I told her no, the good looking guy.

Sorry Garth, she normally has good taste, like me for example.

#71 Confessions of a Greater Fool Loyalist on 08.04.14 at 11:44 pm

As much as I agree with all the reasons that housing is over priced in this country, I am in the process of buying in Calgary. Finally have a stable job and a plan to stay put for a number of years, so not even going to try to time the market. Have a good down payment. Not looking at it as an investment. With two cats we would otherwise be destined to continue renting the shitbox we are in at the moment. Rental market is stupid here and people are getting so greedy with the amount they are asking. For anyone who knows the city, there was a CARRIAGE HOUSE 1bed/1bath in or around Auburn Bay (which is waaaay the hell out of town if not familiar) and they wanted $2050. And the ad encouraged interested parties to inquire quickly because it would go fast… my god. Would post the link but I can’t find it now.

But I know Garth’s advice is not to just rent forever because it’s all going to crash an burn. It’s just to be sensible and not borrow above your pay grade thus sacrificing all your disposable income. yada yada.

Just another comment on Calgary though. 40k people moved here last year. I believe that was a record. The consensus in Canada seems to be that Alberta is booming, regardless of what is actually happening. Although atm it actually is booming. It will take a long time to change that “commoner sentiment” if you will. People who are down on their luck will continue to move to Alberta because that is where the jobs are. This immigration will continue to support the economy here, and the real estate market. jmho

#72 Cha Ching on 08.04.14 at 11:48 pm

Are we still talking about sales? All data clearly show that real estate prices in Montreal continue to go higher. Just like the rest of the country.

Since we’re still on the topic of real estate sales, let’s get some thoughts about a balance portfolio and their correlation with daily stock market trade volumes.

#73 Brian Ripley on 08.04.14 at 11:48 pm

To: #69 waiting on the west coast

Thanks for the Y/Y stats.

According to my calculation over the last 5.17 years since the Pit of Gloom in March 2009, average earnings are:

Up 27% (or 5.2%/yr) in Alberta,
Up 17% (or 3.3%/yr) in Quebec (and nationally)
Up 14% (or 2.7%/yr) in Ontario
Up 13% (or 2.5%/yr) in BC

http://www.chpc.biz/earnings-employment.html

Alberta employment earnings have been accelerating since the Pit of Gloom; not so much in other provinces.

#74 Victoria - the original on 08.04.14 at 11:54 pm

I was told by a RE agent that prices in Victoria are going to go back up in two years.

I asked “why”?

He didn’t know….

#75 Tom from Mississauga on 08.05.14 at 12:02 am

Is Lloydminster a good place to look for work?

#76 Carpe Diem on 08.05.14 at 12:14 am

Hi All,

I’m so busy these days and never take time for this blog.

The revenues are good and the Corp keeps increasing in cash. SM … I might a mentor session with you some day!

I’m ready to hire my first newbie and working out the details for co-op and new hires funding. For a small high teck business, it sure helps!

My investments are doing ok considering the last week and I’m now positioning to take advantage of the slip in markets.

Much better is that my landlord indicated he won’t want to move in his retirement home until his kid graduates from HS in about 4 years.

Yea!

I can stay in his awesome place for a fair price for that much longer!

Seize the day!

#77 Mark on 08.05.14 at 12:14 am

“Mark I don’t see the $187 and the $147 is the net of deposits minus loans on floating. (They have far more floating deposits than floating loans/assets)”

Loans/assets exceed liabilities by a substantial margin. Funding very short-term loans with overnight deposits isn’t a big deal. And those other numbers are da minimus.

The $147B net overnight liability is offset against $178B in less than 3 month maturity assets. Not a cause for concern. Yes, there’s a tiny gap, but its very tiny. Its not literally years like the US banks were running.

Canada does not have an affordable 25 or 30 mortgage rate with low or no penalty mostly because of a lack of securitization of that product in Canada.

Securitization is but a mere fancy wrapper on a mortgage, and has nothing to do with the willingness of a risk taker to buy a particular mortgage or a security. The only reason why the long-term mortgages are palatable in the USA is because Fannie/Freddie provide a plethora of guarantees against such, with Fannie/Freddie-backed mortgages now having the same theoretical credit-worthiness as the US government (prior to the crisis, there was no explicit guarantee, and the Fannie MBS prospectus stated such explicitly). There is no equivalent activity in the Canadian market, hence, long-term lending is truly a private sector thing.

The CMHC can be faulted for doing a lot of bad things with the Canadian mortgage market, but not emulating Fannie/Freddie in this regards is probably one of the rare good things they’ve done.

#78 Mark on 08.05.14 at 12:18 am

U.S. “used” houses are priced well below replacement cost minus depreciation, no? Think that is normal?”

No they aren’t. Not even close. The US market remains extremely inflated due excessive amounts of debt in the mortgage sector. Construction is relatively robust throughout the country precisely because prices are higher than depreciated replacement cost.

I have not heard of the U.S. banks complaining about the system. The complaints and problems in the U.S. in 2008 involved defaults not interest rate risk

A manifestation of interest rate risk *is* defaults. Subprime borrowers defaulted en masse when the rates applicable to low-quality debt soared, a function of interest rate risk.

And of course the banks are complaining bitterly. They went to far as to lobby Congress for things like TARP, and other bailouts instead of engaging in an orderly resolution and liquidation of their sector.

#79 Mark on 08.05.14 at 12:25 am

“Just another comment on Calgary though. 40k people moved here last year. I believe that was a record. The consensus in Canada seems to be that Alberta is booming, regardless of what is actually happening. Although atm it actually is booming.”

Not seeing that in Calgary. And while a lot of people may be moving there, it doesn’t mean that housing prices have to go up. In fact, with the industry now fully caught up with the housing demand, prices have been falling and will continue to fall. Over the past decade, an amazing amount of housing industry capacity has been stimulated.

#80 Mark on 08.05.14 at 12:27 am

“the bubble is bursting in the outlying areas like it did in the US. “

Also in the major centers, with prices in Toronto, Calgary, and Vancouver down over the past year. Only masked temporarily by a significant change in the sales mix.

The US playbook is very apt, and the deflationary forces are building. The BoC will have an awfully hard time keeping the dollar down soon. Businesses that are still expanding to serve falling demand could see themselves in significant distress.

#81 Andrew Woburn on 08.05.14 at 12:59 am

#62 annek on 08.04.14 at 9:57 pm
If there is a correction of 15% in homes in TO /GTA, then I wonder how much recreational homes ( cottages) will drop?
===============

It will probably follow the same logic as the major cities. The very desirable areas will stay hot or increase and the rest will decline. We have property on one of the Gulf Islands and local realtors say that average price properties are hardly moving but waterfront is moving steadily at increasing prices. My guess is that middle-income families in BC are increasingly so house poor that “cabins” as they called here are no longer on their radar.

It looks to me like the price outlook for mid and low range recreational properties is not that great even without a housing slump in the cities. Some reasons are:

– the ethnic mix in our major cities is tilting away from the joys of cottage owning

– city millennials without cars aren’t going to be joining the Muskoka lemming rush and how many masters of the smart phone actually know what a screw driver is for?

– early boomers are going to hit 70 soon. Loading up the car, driving three hours in traffic so you can climb ladders when you get there is going to get well, old, really quick. You might plan to die in your principal residence but the romance of wood fires, mice in the kitchen and racoons in the roof loses its allure as age creeps up.

– in the Fifties, Dad would drive Mom and the three kids to the cottage for the summer and come back every weekend. Do those people even exist any more?

#82 Freedom First on 08.05.14 at 1:17 am

#29 Stacy

There is a site you may find interesting. Just google “mgtowyoutube”. Enjoy.

#83 Oceanside on 08.05.14 at 1:42 am

The housing market here on mid Vancouver Island is just cooking as long as the home is priced between $350K and $450K. Parksville is filling up with little boxes with granite countertops of which many are being bought pre construction. 1,700 sq. ft. on a .13 acre lot with 6 foot fences all around, you pick your own counters and flooring….
Lots of Alberta buyers here but they are staying away from most priced over $500K, many on the market for over 2 years (re- listed several times)

Most are boomers and are watching their money.

#84 Calgary's forgotten 20% price plunge from 07-09 on 08.05.14 at 1:57 am

#59 Squidly

Do you have any information (charts, etc.) about Calgary’s foreclosure rate as prices plunged about 20% from 07 to 09?

#85 Humpty Dumpty on 08.05.14 at 1:57 am

Hey Stacy

This is for you darling….

http://www.dailymail.co.uk/news/article-2714321/NHS-fund-sperm-bank-lesbians-New-generation-fatherless-families-paid-YOU.html

#86 Wonder on 08.05.14 at 2:00 am

Hmmmm.

Prices stagnant in Atlantic Canada and Quebec and Victoria/Island.

Yet booming in Vancouver, Toronto…

Can’t mention the reason why here….

Search and you shall find.

#87 Wonder on 08.05.14 at 2:26 am

Post #71, @confessions…

You are doing the right thing.

People talk about inflation and housing values but they fail to realize that rents will be going up in the coming years. Your mortgage will stay the same more or less. Don’t believe the rate hike doomers.

#88 Patient in Richmond on 08.05.14 at 5:11 am

House in Fairfield (Victoria ) sold in 4 days on the market for close to 1 million $ close to 250.000 over assets value . Beyond my understanding …

#89 rick on 08.05.14 at 7:29 am

Accent fallacy.
“If not buying means finding a new spouse, go ahead.”

Go ahead and find a new spouse?

I love ambiguity. Don’t you? — Garth

#90 Italians love real estate on 08.05.14 at 7:47 am

On BNN right now :Cathy Fettke CEO of real wealth advisors quote ” Chinese investors are buying U.S real estate in droves.. Chinese investors prefer real estate over equities .. Buying in upper class neighborhoods all over the U.S .. Chinese investors buying in ‘ world class’ cities including Canada… China accounts for 19% of foreign real estate transactions in the U.S

Chinese and Italians ( not that order) lovers of RE .

#91 Centre-ville on 08.05.14 at 8:02 am

Thanks for addressing (and quite accurately depicting) the current situation in Montreal, Garth. It’s true that about 50% of people think now is a rotten time to buy. Sounds just about right, anyway. You should hear the other 50%, though. Fervor to defend real estate and elevate it above common sense borders on the religious. Makes use of the same psychological tactics, too.

#35 Joe: “…sellers refuse to sell for less and eventually buyers will give in…”

Nope! Désolé.

#92 pbrasseur on 08.05.14 at 8:19 am

And in Montreal – in fact, all of Quebec – a housing slump is now reality. Garth

No doubt about that one. But that fact has not yet been acknowledged by the MSM nor by the political class. Although they surely know, for example when they were still in power the PQ was complaining about households saving too much (!) and begging the feds not to impose more CMHC restrictions. One of the first thing the liberals did after the election is to implement a new tax credit for renovation.

The public might not know yet but the people who count the beans do… They know consumers are tapped out and they know how important (even disproportionately important) this sector is for jobs and the economy. At the same time the public sector has to stop throwing money around because is in a deep hole and while it tightens its belt (or raise taxes) is in desperate need for economic growth.

Growth when both the state AND household are tapped out? Good luck with that, together they must represent at least 80% of the economy… It is obvious that troubles are just beginning.

Yet all that looks like a general repetition before going to the big stage: Ontario.

#93 takla on 08.05.14 at 8:46 am

Id like to know Canada/U.S net worth….assets compared to liabilities.Me thinks if these two countrys were individuals theyed get a Big fail from Garth

#94 crowdedelevatorfartz on 08.05.14 at 8:54 am

@#90 Italian-canadians Love Real estate

Hey pisano!
Check out da link.

http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=5&cad=rja&uact=8&ved=0CDgQFjAE&url=http%3A%2F%2Fwww.economist.com%2Fnews%2Ffinance-and-economics%2F21592646-monetary-policy-may-call-end-house-price-party-castles-made-sand&ei=Y9PgU4mxKJPjoATMsYCQCg&usg=AFQjCNH7PFO-BxfiedWcbdJub7OC3905zQ&bvm=bv.72197243,d.cGU

Please note that Italian real estate is at the very BOTTOM of da list. In Red.

Ciao.
Love
Mangia-Cake

#95 Shawn on 08.05.14 at 9:08 am

Ponzi asked to see mine…

Ponzi, since you need to know, $1.8 million in investment accounts and about double that when the house and two DB pensions with about 25 years in each are added in. No debt.

#96 Innumeracy Chick No More on 08.05.14 at 9:23 am

Garth when are you comming to the GTA to do one of your talks?

#97 Sonny Kang on 08.05.14 at 9:47 am

Does anyone know if there is a REIT for Ivanhoe Cambridge?

http://www.ivanhoecambridge.com/en

#98 maxx on 08.05.14 at 9:53 am

#31 Jordy on 08.04.14 at 7:08 pm

“I have the solution, instead of borrowing vast amounts of money to buy the most expensive house you can, everybody has to live in what ever they can build. This way idiots would have to live in cardboard appliance boxes under overpasses.”

Idiot borrowing indeed, especially going forward, however I’d much rather blame the highly destructive egos and simplistic formulations of the Pied Pipers of Interest Rates, FIRE and flippers.

Canada could well end up a global laughing stock.

Can’t say they didn’t warn us.

#99 maxx on 08.05.14 at 9:58 am

#35 Joe on 08.04.14 at 7:21 pm

“Prices aren’t dropping in Montreal because sellers refuse to sell for less and eventually buyers will give in, as they have done in places like Vancouver and Toronto.”

Inventory, inventory…………..

#100 };-) aka Devil's Advocate on 08.05.14 at 10:22 am

#1 Armpit on 08.04.14 at 5:07 pm

“In Montreal over 50% of folks think this is a lousy time to purchase a house, even though the market’s floundering and buyers are in control”

When people feel it’s a lousy time to buy….it’s time to buy.

EXACTLY!

#11 15% on 08.04.14 at 5:47 pm
15% would put us back to last year here on the GTA. If that’s the only correction you’re expecting then why were you stopping people from buying five years ago.

It would return you to 2012 prices. During this time a balanced portfolio has made close to twice the return. Moreover I never stop anyone from doing anything. — Garth

Just as REALTORS® never force anyone to do anything.

and…

What if GTA real estate doesn’t “correct” 15%? How then would that balanced portfolio have performed in comparison?

#20 zee on 08.04.14 at 6:24 pm
Hi
15% average correction in gta is nothing and will not do anything to change peoples view on real estate.

To the Bears it is HUGE and, should it happen, it will stir a battle cry from them that it is the beginning of the end. That (15%) is about how much Central Okanagan real estate capitulated in 2008 – which was a pretty tumultuous time with a lot more shit going on than normal. This next correction, barring some “black swan” event, will, I am sure come but it will be a typical correction, more of a market cleansing, and not nearly so severe. After the more recent gains a 15% “correction” will indeed be “nothing” especially when looked back at after the future gains I expect over the coming market exuberance.

Price always follows volume, up or down. The recent increase in unit sales volumes has not yet been reflected in sale prices which are sure to follow. Could happen this fall but it’s likely Spring of 2015 that will make the Bears heads spin. I wonder what Garth will say then…

SHIFT happens. Real estate, like any investment, is a long term strategy.

#101 rosie "moving forward" in the knowledge that, "this won't end well" on 08.05.14 at 10:29 am

Just given’er out Albertski way. Although they say starting over is much easier when your young.

http://www.theglobeandmail.com/report-on-business/economy/housing/albertans-see-household-debt-soar-as-home-prices-surge/article19911550/

#102 maxx on 08.05.14 at 10:42 am

#36 Bob Rice on 08.04.14 at 7:24 pm

“”Post # 20 “15% average correction in gta is nothing and will not do anything to change peoples view on real estate.”

On an $800,000 property that’s $120K – probably more than many people have in equity in their homes! Wiped away in a correction… but I think 15% is conservative…. 25% or more is more like it.. We’ll see..”

I agree. Seller arrogance is evaporating in much of Canada and the gta is not immune to downturns.

Some really don’t get it- an acquaintance is scratching his head in amazement after repeated price reductions on his suburban waterfront over the past year and counting. He and his wife are incapable of assimilating that their little Taj Mahal is not igniting re lust.

Keynes said that markets can remain irrational longer than you and I can remain solvent. Fair enough, but the reality is that balance of life-time remaining, with the needs associated with advancing age and the good old bucket list, is also a huge variable in that equation. Not to mention job loss, separation, divorce, reversal of fortune, illness, re ennui, etc. So, the markets can also remain irrational longer than you and I can remain alive.

Waiting on the sidelines and keeping money tucked away has never felt more comfortable.

#103 JimH on 08.05.14 at 10:46 am

#93 takla

“Id (sic) like to know Canada/U.S net worth…. assets compared to liabilities.Me thinks if these two countrys were individuals theyed get a Big fail from Garth”
====================================
I took a quick look at this question as it pertains to the USA while computing my net worth. Here’s what I came up with; I’ll leave it up to you to do Canada.

USA balance sheet liabilities: ~$16 trillion
USA ‘Unfunded’ liabilities: ~$30 trillion
USA total liabilities: ~$46 trillion

USA balance sheet assets: ~$3 trillion
USA total Fed. Gov’t. fossil fuel resources: ~$150 trillion
USA total Fed. Gov’t: “National Forests and Lands: >600million acres.
USA total Fed. Gov’t. land Real estate: ~41 million acres.
USA total Fed. Gov’t. Bldgs: ~3billion square feet.
USA total Fed. Gov’t onshore mineral rights: ~755 million acres.
USA total Fed. Gov’t offshore lands & mineral rights to 200 miles: ~1.76 billion acres.
USA total Fed. Gov’t total mineral estate holdings: ~2.515billion acres

Total dollar value of all this? Beats me.

But… it makes the liabilities look pretty puny, doesn’t it? (Remember… you asked!)

some good reads on the subject:
http://instituteforenergyresearch.org/analysis/federal-assets-above-and-below-ground/
http://pragcap.com/the-us-government-is-not-16-trillion-in-the-hole

#104 Bottoms_Up on 08.05.14 at 10:48 am

In Victoria the average price of $599,734 is lower than last year. In fact, it’s lower than seven years ago.
————————————————
Garth, that’s a powerful statement as at 2% inflation that’s a loss on real estate of 15% over 7 years, and at 3% inflation a loss of 23%.

#105 miketheengineer on 08.05.14 at 10:52 am

Garth et al:

This is interesting, saw this on the web. Seems like Toledo is in some trouble over the water situation.

“No bottled water for 100 miles away from Toledo Ohio! This is a RED ALERT! They are selling water for $2 a cup in some areas of the city! This is being totally kept off the news! This is the result of illegal runoff into the river that has polluted the water supply! They are being told there is no end in sight to this water shortage! Closed stores, closed restaurants! Huge lines trying to get water! Everything is shut down! Huge price gouging for water – $30/case! Get the word out! Share on all facebook walls, twitter etc!”

Here is the link:

http://beforeitsnews.com/alternative/2014/08/breaking-no-water-for-100-miles-around-toledo-ohio-people-dying-3005566.html

Do you not read MSM newspapers or watch network TV? This was a huge story all weekend. Water now potable. — Garth

#106 maxx on 08.05.14 at 10:56 am

#37 Shawn on 08.04.14 at 7:24 pm

“With record low interest rates it is a crime that Canadians cannot access OPEN 30 year fixed rate mortgages. Investors would fund these. They do it in the States. The government and regulators are the road block.”

Yes indeed. For many, this dream of a term would be one of the greatest wealth building engines ever. Parallel to paying down this tax-deductible gem would align incredible potential for saving and investing.

#107 Kevin on 08.05.14 at 11:00 am

There’s a simple reason why the market may have stagnated in Montreal — prices are too high.

Prices in this city are not in sync with the rest of Canada. After being flat for a long time they rose — suddenly — from 2008 to 2013.

And it’s taking its toll on evaluations and taxes. Owning a home in Montreal became a lot more expensive in recent years — and most people here who would like to buy have decided it makes more sense to save their money and rent instead, since rents are about half the cost of a mortgage.

#108 miketheengineer on 08.05.14 at 11:03 am

Garth et al:

Nice picture to show how much algae is in Lake Erie, near Toledo….

Here is the link:

http://www.dispatch.com/content/stories/local/2011/12/15/algae-danger-grows.html

The picture shows a massive area that is green water in contrast to the blue water….amazing photo.

#109 Sheane Wallace on 08.05.14 at 11:04 am

I am sorry, 15 % correction brings back the prices to the levels of roughly 2 years ago.

We are talking about bubble in the last 5-6 years, to be precise in 2009 prices dropped 15 % from the top levels at that time and then ‘recovered’ thanks to the 125 billions for the banks (under the table) courtesy of Jim F and thanks to CMHC and their ‘prudent insuring’ of sub-prime mortgages – 0 down, 40 years amortization.

If we are not flip floppers, wishy washy, turncoats,…
we might realize that the correction should be really north of 50 %, more realistically 60-70 %. Otherwise we simply state that we had no bubble 5-6 years ago. Based on the same logic if interest rates stay low for the next 4-5 % years despite the inflation which is a very likely case and the idiots continue to ‘insure’ mortgages we could easily have 10-15 % raise of prices in the next 2-3 years which itself (if we continue to talk about mild decline of 15 % from the top) would render the current prices as normal (non-bubbly) which is clearly an absurd.

You can’t fix credit bubble by more credit, we could be few steps from a severe decline (possible total annihilation) of our currencies.
And the case of severe inflation and almost no interest rate increase should not be excluded. If they would like to kill the dollar to render the debt affordable they can and will, it is actually dream scenario fro the corporations – cheap and abundant labour, trimmed government services (somebody has to cover the government losses), eventually paid health care… stream of freshly unemployed out of colleges and universities who will bid down the wages, all this coming soon to a neighborhood near you.

There would be truly recovery for the corporations and rich at the expense of the middle class and the poor. This is just skipped in the context of the upbeat news.

#110 };-) aka Devil's Advocate on 08.05.14 at 11:24 am

#66 george wilson on 08.04.14 at 10:18 pm
Hey Garth what about Toronto and the GTA and Vancouver?Looks like things are going nuts here still this bust will never happen ..!

Give it time, it always does as SHIFT happens. Probably won’t be as soon and not likely nearly so strong a bust as most here believes, but happen it will. All in due time.

#111 Smoking Man on 08.05.14 at 11:40 am

As I patently wait for MSM to deliver finding of MH17

Do the cockpit voice recorder match the ATC tapes that the Ukrainian secret service removed from the control tower..

Do we hear one boom, shrapnel from a missle or machine gun 30 millimeter rounds hitting the cockpit….

I think the story is going to get barried with the remains of MH370

This is not a Malaysian Airlines conspiracy blog. Stop it. — Garth

#112 Long Time Lurker on Here on 08.05.14 at 11:52 am

Garth, I don’t understand how these builders work. They knew the market is heading down. They knew it is hard to sell new condos. All of these builders are pulling out new tricks on marketing. They pay RE agents big incentives to unload inventories. The question is, why are they still building new condos? Do they truly want to dance until the music stops? I see new pre-constructions coming out left and right.

#113 Macrath on 08.05.14 at 12:04 pm

#105 miketheengineer

Mike its about +/- 100 billion liters of raw sewage per year. Add the manure and phosphorous runoff from farms and you have a real problem. The big US cities are bankrupt so the EPA can`t enforce anything. Detroit can`t even bury their corpses. They are piled up like firewood in morgues. It might garner some attention when they come floating down the rivers like the scene from War of the Worlds.

Recovery full steam ahead !

#114 Herb on 08.05.14 at 12:13 pm

#30 Shawn,

I would feel better about the non-existent bank bailout if the government publicly had bought viable mortgages and announced this as its “Economic Action Plan”, vice its camouflaged “Harper Government Marketing Plan”.

The lack of fanfare leads me to suspect that the government bought dogs no one else would have, and that we indeed had a “Tarnished Assets Relief Program” amounting to a bailout.

#115 triplenet on 08.05.14 at 12:16 pm

Shawn #57
U.S. “used” houses are priced well below replacement cost minus depreciation, no? Think that is normal?

…then your depreciation analysis is in error. Or your RCN schedule is in error. Or both.
A property may only have one value. That is normal.

#116 mathematically challenged? on 08.05.14 at 12:25 pm

Hahaha!
In Victoria the average price of $599,734 is lower than last year. In fact, it’s lower than seven years ago.
————————————————
Garth, that’s a powerful statement as at 2% inflation that’s a loss on real estate of 15% over 7 years, and at 3% inflation a loss of 23%.

—>. You guys believe this drivel? The original debt gets inflated away if there is inflation. The higher the better if your a homeowner. Has anyone on this blog passed Math 10?

#117 High Plains Drifter on 08.05.14 at 12:51 pm

I apologize to E.Queen types as I meant to say W.Queen in a comment I had made about tough neighbourhoods. It is Toronto’s west that the loverly Mimico Corrections is, you know the place where A.Eagleson of N.H.L. fame cooled his jets. Ancient history. On the high plains most of the garbage dumps are on the eastern side of town. Water and air tend to move east or downhill if you will.

#118 Suede on 08.05.14 at 1:01 pm

Shawn, you should go buy a cool sports car with that money. I can see you in a Ferrari F430, but you’re probably more of a 6-speed vs F1 transmission guy.

I know I am.

The 360 Modena seem to have hit a stall in resell value around the $80-90k mark here. Major maintenance is a killer.

Fiat equity just doesn’t seem worht it at the moment.

http://www.google.com/finance?q=OTCMKTS%3AFIATY&ei=gw3hU8iUG5O1iALJrICoAw

#119 };-) aka Devil's Advocate on 08.05.14 at 1:03 pm

Regional? Yes

In the Central Okanagan unit sales volume is up over 30% this year to date compared to last year and last year as a good stable year.

Price always follows volume, up or down.

Inventory is way down.

I don’t care what anyone says, barring some significant black swan event, prices are poised to CRANK up with a vengeance.

Will there be a correction? Of course there will, eventually. But, that correction is not likely to wipe out even half the gains, probably not even a quarter the gains, between now and then as it never does.

SHIFT happens… and yes it is regional with a national and global influence.

#120 Italians love real estate on 08.05.14 at 1:17 pm

94 crowdedelevatorfartz

Why do you keep posting info about RE demand in Italy and the attitudes towards it there ? I have already agreed with you that attitudes are much different there in a previous post you made.

For your benefit from now on when I refer to Italians loving real estate , I am referring only to those first and second generation residing here in the GTA

Compreso?

#121 Chickenlittle on 08.05.14 at 1:19 pm

Way back when, Canada used to have exports and that was what propped our economy up. Our dollaer was also in the tank, but that was all part of the game.

Now we don’t have exports (well, not like we used to), and we use our own money to “bail out” the government. So instead of the gov’t comming up with creative solutions, we have to go into debt and become slaves.

Why?!?!?

#122 Smoking Man on 08.05.14 at 1:36 pm

This is not a Malaysian Airlines conspiracy blog. Stop it. — Garth

I’m trying to draw attention to the evils of MSM, on my recurring thesis that the real estate market is driven by MSM.. The influence it has over the herd..

How else can you explain the insanity of the market, I was using MH17 as an example on how these buggers operate.

#123 Macrath on 08.05.14 at 1:51 pm

Mike~ here is the scene in case you missed the movie
https://www.youtube.com/watch?v=zioZjEPmOXg

I thought you engineers were going to turn the sewage into Bio-fuel, for the newline of KIAs. $hit into gold alchemy as it were.

#124 Harden on 08.05.14 at 2:11 pm

Wow, we’re often told it’s virtually impossible to track foreign investment activity in Canadian RE, but evidently not so in the United States. Check out this infographic:

http://www.realtor.org/infographics/2014-profile-of-international-home-buying-activity-infographic

#125 Doug from Victoria on 08.05.14 at 2:19 pm

Like Garth says, the biggest fear should be running out of money. Very real for some today.

http://www.montrealgazette.com/touch/story.html?id=10088489

#126 Bottoms_Up on 08.05.14 at 2:24 pm

#116 mathematically challenged? on 08.05.14 at 12:25 pm
———————————————————-
For debt to get inflated away, wages have to match inflation. So you have somewhat of a point, however the fact still stands that the house purchased in 2007 for $600k and now worth $600k in 2014 is in effect a real estate loss.

That goes against the widely held belief that real estate always goes up.

Now explain that away to me.

#127 Bottoms_Up on 08.05.14 at 2:29 pm

#111 Smoking Man on 08.05.14 at 11:40 am
———————————————–
SM, have you ever stopped to think that perhaps the missile exploding caused those holes? I mean, this is a finely engineered rocket, intended to explode quite a distance from it’s target, yet hit it’s target with a bunch of pieces of quarter-sized shrapnel. Given the speed at which the rocket moves, and the way it is engineered, easy to see how you can mistake the holes for bullet fire. Funny that people will make conspiracy theories out of anything.

If I’ve learned anything in my short time on earth, is that $ hit happens…and that that is usually the best explanation for things. Perhaps naive, but that’s where I’m at right now.

#128 Realties.ca » The empty bubble on 08.05.14 at 2:55 pm

[…] Source: http://www.greaterfool.ca/2014/08/04/the-empty-bubble/ […]

#129 Mark on 08.05.14 at 3:09 pm

“The lack of fanfare leads me to suspect that the government bought dogs no one else would have, and that we indeed had a “Tarnished Assets Relief Program” amounting to a bailout.”

The CMHC was legally obligated to pay up on the subprime mortgages anyways. So the banks would have liquidated them (and crashed the housing market) if they didn’t have access to such facility.

Yes, if you’re a housing bear, that might have been preferable. But in no way was an unnatural outcome achieved for the Canadian banks by way of the government’s actions during the ‘financial crisis’.

#130 saskatoon on 08.05.14 at 3:25 pm

#121 Chickenlittle

dude…you know the answer.

coming to terms with the answer…though…that is the difficult part.

#131 Lurcher on 08.05.14 at 3:44 pm

#87 Wonder:
People talk about inflation and housing values but they fail to realize that rents will be going up in the coming years. Your mortgage will stay the same more or less. Don’t believe the rate hike doomers.

Well, rents are determined by wages while house prices are determined by interest rates and credit availability. There is no direct correllation between the two. If wages stagnate, rents will not increase regardless whether your RE investment expenses increase. You will not be able to pass your ownership costs along to renters via increased rents. The market trumps your desires.

#132 Ben on 08.05.14 at 3:59 pm

Garth – think my last comment got deleted – what time period does the “condo listings up 13%” refer to please? Thanks.

Start here. — Garth

#133 Mark on 08.05.14 at 4:06 pm

“For debt to get inflated away, wages have to match inflation. So you have somewhat of a point, however the fact still stands that the house purchased in 2007 for $600k and now worth $600k in 2014 is in effect a real estate loss.”

But presumably you received the benefit of living in the house, which is probably worth between 2 and 5% as a contribution to total return, based on RE pricing in Canada.

A mistake I see far too often from the RE bears is that they just look at the price of the house and neglect the rent, either real or imputed, that could have been derived from such as part of the return on the asset.

Of course, RE bulls are often equally guilty of exaggerating RE’s total return by neglecting reasonable depreciation and maintenance expenditure. As though neighbourhoods never turn to ghettos, and wood never rots.

#134 Herb on 08.05.14 at 4:26 pm

#127 Bottoms_Up,

begging Garth’s indulgence, there is a bit of physical evidence the rocket hypothesis does not explain: entrance and exit holes in the same hunk of cockpit. The proximity-fused warhead with multiple uni-directional explosions has not been invented yet.

Smoking Man does have a point: if the truth is inconvenient to western interests, we’ll never see it in western media.

#135 Big Ed on 08.05.14 at 4:29 pm

#131 Lurcher on 08.05.14 at 3:44 pm
Well, rents are determined by wages while house prices are determined by interest rates and credit availability. There is no direct correllation between the two. If wages stagnate, rents will not increase regardless whether your RE investment expenses increase. You will not be able to pass your ownership costs along to renters via increased rents. The market trumps your desires.

++++++++++++++++++++++++++++++
Lurcher or should I call you renter. You are wrong up until your last sentence “The market trumps your desires.”
Rents are determined by supply and demand for the most part. Throw in some govt regulations and there you have it.

#136 Bill Gable on 08.05.14 at 4:41 pm

33% of Americans are running from the debt collector.

Record numbers of Americans depend on Food Stamps, and a horde of people are looking for non-existent jobs.

Is this the fate of Canada, minus the food stamps?

Record debt is killing people – and when Mortgages get serious, already tapped people are going to hope the Ford is a comfortable place to sleep. Oh, sorry, it was leased, right.

NOTICE? There is very little mainstream media coverage. Oh sure, we get a puff piece, but unless you find someone like Mr. Turner who just tells it like it is, you are running down a dark alley, without a flashlight.

Frankly, it is downright terrifying.

#137 Ben on 08.05.14 at 4:57 pm

Garth – thanks. It would be great to have a blog one day listing your primary data sources.

#138 Bill Gable on 08.05.14 at 5:23 pm

Annek:
“…..If there is a correction of 15% in homes in TO /GTA, then I wonder how much recreational homes ( cottages) will drop?…..”

Bottom line, a disaster. How to crater your future. FOR HEAVEN’S SAKE….RUN, do not walk….RUN from Recreational property – the implosion has started to pick up steam.

Before the Bulls jump all over me – yes, some places sell – but the average ‘cabin’ is a drag on the family bottom line, just at the wrong time.

Look at the stores closing in the Muskokas! What is that telling you.

Here in navel gazing BC – Whistler, and nearby Pemberton have been chopped to ribbons…but there will always be someone with more money than brains.

They are called = greater fools.

#139 Bingo on 08.05.14 at 5:39 pm

#114 Herb on 08.05.14 at 12:13 pm

The lack of fanfare leads me to suspect that the government bought dogs no one else would have, and that we indeed had a “Tarnished Assets Relief Program” amounting to a bailout.

Herb the Banks determined which Mortgages the Government would get of they were dogs, woof woof.

Pity the taxpayer and working folks for no matter what happens they will get the majority of the debt caused by run away banks and government.

Good Luck everyone!

#140 Entrepreneur on 08.05.14 at 6:19 pm

“…no jobs are geing created…Incomes stagnant…”

Where do people turn to, start they own business. Some bloggers have started their own business and would like some advice. No one in the comment section give advice to them but overall feeling is small business is fading out. In other words “good luck” or “don’t go down that path.”

Maybe print an article on small business then let the comment section give some advice. I would be interested who gives advice, what advice, and any new ones. This would help some that are starting their busisness.

No one has mentioned a site to go to so I assume there isn’t one.

#141 Happy Renting on 08.05.14 at 6:20 pm

#41 Quick question about net worth and RE on 08.04.14 at 7:38 pm

Include what you would realistically net on the U.S. property were you to sell it today.

#142 rainclouds on 08.05.14 at 6:43 pm

Tons of nice props here in NB NS PEI
I expect Italians and HAM to hoover Em up

Where is the Oracle of Lunenburg? Elbow deep in lobster…..

#143 };-) aka Devil's Advocate on 08.05.14 at 7:38 pm

#122 Smoking Man on 08.05.14 at 1:36 pm

”This is not a Malaysian Airlines conspiracy blog. Stop it.” — Garth

I’m trying to draw attention to the evils of MSM, on my recurring thesis that the real estate market is driven by MSM.. The influence it has over the herd..
How else can you explain the insanity of the market, I was using MH17 as an example on how these buggers operate.

The MSM merely fans the flames, by the time they catch wind of it it’s already pretty well established.

The MSM likes to report the emotion igniting subject increasing prices. An increase in unit sales volume, which precedes price increases, is boring and little understood for what it represents … the arsonist. It’s the arsonist that drives the market more than the MSM and the arsonist is greater fools who come to the market in a panic for fear of being priced out of the market when there is little left to choose from. So they buy what they think they must and pay top dollar for it. That is sexy newsworthy stuff – interviewing someone who got outbid on a $1mil crack shack.

We’re not there yet. That ain’t nothin’. Soon though… you will see it in the MSM.

#144 };-) aka Devil's Advocate on 08.05.14 at 7:55 pm

#131 Lurcher on 08.05.14 at 3:44 pm
#87 Wonder:

People talk about inflation and housing values but they fail to realize that rents will be going up in the coming years. Your mortgage will stay the same more or less. Don’t believe the rate hike doomers.

Well, rents are determined by wages while house prices are determined by interest rates and credit availability. There is no direct correllation between the two. If wages stagnate, rents will not increase regardless whether your RE investment expenses increase. You will not be able to pass your ownership costs along to renters via increased rents. The market trumps your desires.

Sorry, I got a real problem with these Landlord subsidized rentals everyone and Garth talks about on this blog. Landlords are, by and large, not stupid people. Generally Landlord have more of a “business” mentality than renters. If there is no upside in being a Landlord… well soon enough there will be no Landlords from which to rent until such time as there IS an upside to being a Landlord. Generally speaking that upside can be translated into a very clear equivalent monetary profit.
Bottom line… rents ARE on the rise and if you want to maintain that roof over your head you’d best be prepared to pay the price – rented or owned.

#145 stevie on 08.05.14 at 10:03 pm

Garth,
What is your take on rental property (duplex, triplex,4-5-6 units etc…specifically in montreal