Entries from July 2016 ↓

How bad?


So, how bad could it be?

Given the Crash Tax turmoil in Vancouver and CMHC’s panicked over-valuation call on Toronto, what would actually happen if those housing markets plopped? After all, it sure looks like we’re getting closer. What next?

Some people like to shrug off corrections, thinking they’re similar to adjustments in the stock market. You know, like Brexit. A surprise event caused equities to tank by 6% and a week later they were all recovered. Whazza problem? Universally on this blog people shrug off real estate declines saying a 30% drop “would just get us back to last year” and that markets would stabilize and continue their advance.

Not so fast. If a Van crack shack appreciates by 30% from $1,000,000 to $1.3 million, and then declines by the same percentage, it drops in value to $910,000. Oops. Now it has to appreciate by 43% just to get back to where it used to be. Yes, math is hard.

Harder still is the realization that houses don’t move like financial equities. The trip up can be fast, but the trip down usually is not. First sales stagnant, followed by a plump in listings, then sellers sit on unsold houses for six months or so before they accept the reality of lower prices. It’s a lengthy process. Corrections take years. They can be very painful if you were unwise enough to buy anywhere near the top.

Here’s what I mean.

First, the GTA crash. The market peaked in a speculative orgy of multiple offers, bully bids, media hyperventilation and an ocean of hormones in the late 1980s before going into a funk in the early Nineties, bottoming in 1996 and not recovering fully until 2002. Actually when you factor in inflation, a buyer in 1989 did not get her money back unless she held on until almost 2005 – 16 years later.

Here’s the data:


You’ll notice that house prices (the average, not the median) were down almost 28% from the beginning of the correction to the trough – which isn’t far off the 32% decline that threatened to eat the American middle class a decade ago. That hurts. But the salient feature of the correction is its sheer length, which underscores that real estate turns illiquid when markets tank and (unlike a stock, bond or ETF) cannot be disposed of in any efficient manner. That sucks.

The Canadian slow-mo crash was not unique. Take a look at recent US experience. As of this week, it’s taken 11 years form prices to climb back to their pre-flop levels. The median home price in the States last month touched $231,000, 9% higher than a year ago and just about equal to the previous record of $228,000 which was hit in the summer of 2005.

(Aren’t those cute little prices, by the way? Just about exactly where GTA values were sitting in the late 1990s. While we’ve been pushing real estate costs into the unknown, Americans have just ground through more than a decade of zero appreciation. The good news? Most people there can afford a home. Household debt has shrunk every year. And they have no Chinese Dude Crash Tax.)

If history is any guide, it’s reasonable to expect a drop in the range of 30% in house prices in Vancouver (less in Toronto where the market is far larger and more diverse). It’s also reasonable to expect no recovery for at least ten years. If interest rates normalize during that time (count on it), then values could take a lot longer to restore. Deduct realtor commission upon selling, factor in a little inflation, and today’s 30-year-old Yaletown condo buyer could be thinking seriously about retirement before her unit gives back the money she first paid. In that period of time a balanced portfolio of financial assets should (if history is any guide) have quadrupled.

Good luck.

GreaterFool does Saturday

As a public service to those sad people with empty lives addicted to this pathetic blog, The GreaterFool will now be open seven days a week. Just like the convenience store down the street. Or the new Ashley Madison. Commencing this weekend there will be alternating weekly blog postings by Ryan Lewenza and Doug Rowat, who are fancy Portfolio Managers with Turner Investments, which is where I hide out from the comments section. These guys think they know everything. They have no idea what’s coming.


SUCKS modified

Everyone coming to this pathetic blog loves predictions, especially ones about the future. Here are a few of the latest.

Interest rates will rise later this year in the US, at least once. Twice is possible, but that depends on what the polls are looking like for the Presidential election in November. Next year is another whole story, when everybody should expect several increases. The implications for Canada are not cool.

Why would the Fed do this? Simple, growth. The economy is expanding sufficiently, corporate earnings are stable enough and the labour market’s in great shape. In fact, look at this:


Chart by Bloomberg. Click to enlarge.

The unemployment rate is currently 4.9% and has plunged from the oh-my-gawd days of 2009. But from here on in, the number of new monthly hires is expected to diminish, because America has reached what the central bankers consider “full employment.” That’s when most of the people who want to work are working – also called the long-term natural jobless rate.

So next up is inflation – in part from upward wage pressure as economic expansion makes labour more valuable. Containing and controlling that inflation is what the Fed is now focused on, even in a world where many countries are struggling with a battle against deflation. So, rate increases are a certainty.

Yeah, Canada will follow suit. But not until next year.

Meanwhile (here’s another one), oil is in for some rough times. Crude is slumping again towards $40 a barrel, and the world is awash in gasoline this summer. Refiners are freaking out, and the big oil majors which were hoping retail operations could save their bottom lines, now see that’s not gonna happen.

“It’s been a difficult year for consultants in Alberta,” says a life-long energy guy who bought a big spread of ranch land two years ago, “like a perfect storm, really, if you consider our political climate and if, like me, you are 1) in Oil and Gas, 2) work on projects and 3) contract out your services. As your last blog entry says – Alberta is pooched (until oil rebounds AND the socialist are gone, I think).”

The decline in Calgary real estate, and the decline in Alberta’s economy, could be remarkable over the coming year. Even cowboys can’t stay in the saddle forever.

Meanwhile, predictably, we’re heading for the housing wall in many places. CMHC’s historic warning this week, coming days after the bank cop ordered stress testing and the BC government created a giant tax, “to discourage foreign investment in the residential real estate sector” should not be ignored. After all (unlike the rest of us) those CMHC guys see the numbers. All of them. They know the quality of the loans, the volume and the locations.

The agency says 60% of major cities are dangerously inflated with problematic conditions – caused by overbuilding, overvaluation, overheating or price acceleration. At the top of the list is Vancouver, next is Toronto, and further down are Calgary, Saskatoon and Regina. “Price acceleration” is also advancing throughout the GTA and the Lower Mainland, spreading like an evil fungus from the urban plant.

We all know the reasons. People have bought beyond their means and financed those real estate purchases with historic amounts of mortgage debt. Meanwhile incomes have remained dormant and the economy is struggling. Now given the threats of rate increases imported from the south, weaker commodity values, an Albertan crash, a Trumpian surprise or sustained job losses, it won’t take much to push this sucker over. The feds understand, which is why a real estate task force was hastily mashed together last month.

The BC Chinese Dudes Crash Tax is likely this catalyst. Bad enough when it was arbitrarily introduced, it’s even worse today with confirmation is will apply to all legal transactions that have been negotiated, but may be months away from closing. The market interference is epic. The damage done to Vancouver, BC, the Canadian real estate sector and to our image as a stable, modern country is severe. After wobbling so incredibly high, the market has the potential to shoot lower – posing a dramatic equity shock in YVR, and helping make CMHC’s national 9-1-1 warning prophetic.

Seventeen days ago this blog delivered the final “get out” warning. The last of many. Too late now.