Entries from January 2016 ↓

Shudders

FOR SALE modified

Patrick’s had a bad week.

“Our IT company shut down its entire Canadian branch office today with no warning,” he tells me. “All employees terminated, myself included. It’s not a great situation to be in, but with no debt (rent, no mortgage) and your recommended portfolio I think we can see it through. I shudder to think what people with mortgages and debt do when they’re called into a room and suddenly…”

Interesting times, aren’t they? Federal housing analysts this week said there was “strong overall evidence of problematic conditions” in Calgary. They added that there’s a strong “risk of correction” in Toronto, Saskatoon and Regina. Oh, and there’s a “risk of overvaluation” in Montreal and Quebec City. And in Halifax, prices are now running 7.5% lower than last year and the average days on market is a difficult 137, up 10% from a year ago. In Edmonton, sales are down 9% annually and listings have exploded – up 66%, says the local board.

Hmm. Calgary, Toronto, Saskatoon, Regina, Montreal, Quebec, Halifax, Edmonton – all generating expert concerns, or lousy stats. And most people think the whole country is in a Love-It-or-List-It real estate group orgy, for which you can thank Realtors© and their sycophantic media groupies. The truth, apparently, is that a significant number of markets now suck.

Quelle surprise. Even the T2 gang are running snout-first into economic reality, as Poor Bill Morneau prepares that critical first budget. National Bank economists this week concluded the Libs so misjudged the health of the economy that the next two years will bring $50 billion in deficits and new federal debt. Growth is far weaker than anticipated which means tax revenues are tanking while big infrastructure spending takes place. So it was probably a dumb time to pare middle-class taxes and tell voters that soaking higher-income earners would make up for it. We now know that was a fib. Another $1.4 billion in the red.

The bankers claim the potential for growth in the economy is “seriously curtailed,” although the pop-up in oil prices over the last few days helps. “We knew when we were campaigning we were facing a slow-growth environment,” Morneau says, begging the question of why Canadians were promised a tax cut, more special spending, a balanced budget in four years and lots of sunshine.

Oh well. Politics. Ya tell folks what they want to hear in order to gain office. Alberta’s NDP did the same. No news there.

Let’s get back to Patrick. He rents in Vancouver. And while so many Canadian real estate markets are entering into a more-or-less orderly correction, YVR is a time bomb with the potential to blow up and spray everyone. The last few days have brought more evidence the entire region is going moronic.

Below’s map shows you clearly. The green properties are valued over $2 million. The red ones are between one and two million. The blue ones (can you find any?) and under seven figures. Just look what cheap rates, house lust and popular delusion have done to a once-livable city…

VAN modified

This is the work of analyst Andy Yan who illustrates an incredible fact: in less than a year the number of homes assessed at $1 million or more in Vancouver has increased from 65% to an historic 91%. More arresting, these numbers are six months old, and prices rose another 4-5% since then.

Says Yan: “The low cost of borrowing over the last decade, the effect of global capital entering the residential market, a growing city population, speculative purchase behavior, a cultural and financial predisposition to home ownership versus renting and generational wealth transfer have all shaped the values of residential property.” And while people are quick to say it’s all the fault of offshore buyers, the fact remains that 95% of all trades are local-to-local. The blame here lies squarely on the shoulders of those who joined a speculative fever at odds not only with the rest of the country, but the national economy.

So, it spells risk. Not opportunity. “The economic, social, and cultural consequences in this environment of housing unaffordability has implications for the years and decades to come,” adds Yan, correctly. Anyone buying into this market is gambling. Anyone exiting is a genius.

The above should remind us that millions of Canadians are one paycheque from discomfort, and one job loss shy of disaster. Patrick will survive. Others, not so much.

Deja vu, baby

DOG-KID

“I was cleaning out some of my dad’s papers,” Audry wrote me this week, “and I found this. Imagine.”

Imagine indeed. It’s the receipt for a $5,000 term deposit from 1981 that her father arranged with one of the big banks. The length of time the money was tied up for was a mere 59 days. And the rate of return? Grab something. It was 14.5%.

1TD

Now let’s remember that the inflation rate in 1981 was 11.3%, and in August of that year the five-year residential mortgage rate topped out at 21.75%. Today, of course, inflation is just under 2% and a fiver can be yours for about 2.5%. Term deposits? A 59-day note at BMO these days will pay you two-tenths of one per cent interest. Can anyone still count that low?

So, as noted here a few days ago, ours is a world which seduces borrowers and bitch-slaps savers. Those who eschew any investment with market risk and opt for the predictability of interest-bearing assets better have a big pile of money, or else risk running out. On the flip side, in 1981 when savers were making almost 15% for just breathing, people renewing residential mortgages were facing a massive personal crisis. Many banks suspended long-term home loans and would only go variable (also in the 20% range), while real estate prices were going nowhere.

In 1981 the average Toronto house price was $90,200, and sales volumes plunged. The market recovered as mortgage rates declined to a more affordable 14%, and the average price peaked at $273,600 in 1989. Then, thanks to a deteriorating economy and mounting job stress, prices started to head down, bottoming in 1996 at $198,100. From peak to trough took seven years and shaved 27.6% off the average price – not that far off the 32% decline which collapsed the US middle class ten years ago.

By the way, it took until 2002 for prices to regain the level they achieved in 1989 – thirteen years. If you add inflation into the calcs, a buyer in 1989 did not get her money back until waiting more than sixteen years. During that same time, you might be interesting in knowing, the Toronto Stock Exchange’s main index increased 163%.

The past is no road map for the future, of course, but it’s instructive nonetheless. A couple of decades ago people with cash or liquid, invested assets were the cocks of the walk. Homeowners were shackled with often-illiquid and steadily depreciating, costly assets. The real estate and housing boom of the late 1980s in most Canadian cities was replaced not with a crash, nor a bust nor a cataclysmic economic event, but rather with a relentless melt.

Rising interest rates didn’t trigger the bust, since the cost of a mortgage fell steadily – from 14% down to 7% – during the period that houses were unloved. And still real estate lost almost a third of its value from the speculative, house-horny peak of the late Eighties. The reason was simple: recession.

Today Canada is in the grip of an oil collapse, as you know. Job loss seems epidemic. What started in Fort Mac spread to Calgary, the Martitimes, southern Ontario suppliers and now Bay Street financials. Our economy will be lucky to expand by 1% this year, and may slide back into negative growth for many months. The new government in Ottawa is about to plunge us into deficit financing and the Bank of Canada cut rates twice in the last 13 months to stave off an even bigger backslide.

Despite this, Canadians have been seduced by cheap money, increasing debt to 170% of income and pushing the price of houses in Toronto and Vancouver into territory that five years ago would have seemed breathless. Like hormonal teenagers, homebuyers now think they’re invincible, untouchable, incapable of injury because “houses always go up,” or “the government would never let bad stuff happen.”

So here’s a prediction for you: as far as savers go, 1981 will never return. Not in this lifetime, anyway. But for the house-crazed masses, a darker day likely lies around the bend. The past has a way of returning. If you don’t remember it, at least learn it.