The wall

Just over 4.5 million people live in New Zealand, a weird little place of beauty. That’s twice the population of Greater Vancouver which is, well, beautifully weird. In Auckland (1.6 million) the average house costs $800,000, and the average family’s median income is $91,600 (NZ$). That’s a ratio of 11.6 – seriously unaffordable by international standards.

By the way, the home ownership ratio in NZ is 63.2%, the lowest in 66 years. It’s not a happy place when it comes to real estate, especially with five-year mortgages at 5.7% and floating rates even higher. No wonder the new government got elected in part last autumn by promising to “do something meaningful” about the cost of houses.

Vancouver? Just over 2.6 million people there, with an almost identical rate of home ownership – 64%. The median household income in the region is almost exactly the same as Auckland ($72,000 C$), but the average property sold last month for $1,093,000. The ratio of price-to-income is 15. Off the charts.

One reason may be the dramatically lower cost of credit in Canada. Five-year mortgages are available here at little more than 3%, and floating-rate loans below that. However, the household debt-to-income ratio is almost identical for the two countries: 166% in NZ and 168% here. Of course when it comes to the GTA or YVR, we know the majority of people buying $1 million+ properties have a ratio topping 450%.

In short, both societies are addicted to real estate, speculate in it and seem willing to pickle themselves in loans to get it.

But there’s another similarity worth mentioning. The wheels are wobbly.

Sales have stalled in Auckland (830 last month) and average prices have fallen 2% year/year. Says the major bank, ASB: “Auckland continues to look more like a buyers’ market every month. We see a risk that annual house price growth in Auckland slips into negative territory as uncertainty and affordability constraints continue to crimp activity.” The decline has been attributed to tighter government regs, including lower alllowable loan-to-value ratios and curbs on speculation.

In Van, well, it’s a tough time to be a realtor with an Audi lease hanging over your head.

“Both average and median sale prices are now down 10% from a year ago, but it is the complete cratering of actual transactions – to the lowest level in DECADES – that is the real point here.  Remember, price leads volume…,” says local venture capitalist and blog dog Hans Knapp. “So… the back half of this year could be where reality finally overtakes the misplaced expectations of would-be sellers, and material price cuts ensue.”

The numbers tell the tale. Lately this blog reported the desolation, moaning and gnashing on the Westside. Elsewhere, the same. In Kits, sales have tanked 46%. In North Van they’re down 22% with average prices off $250,000 in the past year. In West Van last month there were 37% fewer deals struck, while listings are up 32% and prices down 11.6%.

Like NZ, tighter regulations (including the mortgage stress test) are taking a toll. But, mostly, houses are unaffordable to the average family, resulting in cascading sales and (inevitably) falling values – exacerbated by local and provincial housing taxes which are extreme by national standards.

Yes, there’s something else citizens of Auckland and Vancouver share. That’s a deep, ingrained, visceral belief they’re not actually to blame for the prices of houses they sell each other. Nope, it’s evil foreigners. In BC recent polls have found 80% of the locals think offshore buyers are ruining house prices, even though 95% of BC sales are among existing residents. In NZ the foreign buyer rate is 3.8%, but climbs to about 20% in certain Auckland neighborhoods (about the same as in select areas of YVR during 2017).

In both jurisdictions (BC and NZ) governments were elected in 2017 largely on a populist pledge to make homes affordable, and do so by wielding the blunt hammer of xenophobia. They catered to public sentiment – assuaged it, amplified it, milked it, and won. In BC the NDP-Green coalition goosed the tax on foreign buyers to 20%, extended its scope brought in a new speculation tax on non-resident owners. In NZ, as of this week, something more radical – a ban on outsiders.

All this is consistent with the times in which we live. The forces of nationalism, populism and protectionism are alive as never before in several generations. Many people crave walls, distrust those not of their tribe, and believe barriers will restore things that have been erased. Like one-career households or affordable homes on leafy streets. It’s at the very root of Making America Great Again, embodied by the us-and-them American president.

Will it work?

If foreigners were truly the main cause of too-expensive properties in Auckland or Vancouver, then probably. If they’re a sideshow, minor influence or shameless political scapegoat, probably not. The real estate market will go down if people expect it to, and vice versa. What will be indelible is the stain.

The illusionists

Is this news believable?

OTTAWA — The Canadian housing market is finding its footing after a prolonged stumble in the first half of the year, shaking off the impact of stricter mortgage rules and rising interest rates. Home sales increased 1.9% compared with June, according to the Canadian Real Estate Association.
The Greater Toronto Area led the increase in July, while more than half of all local housing markets reported an increase in sales from June to July. Compared with a year ago, sales in July were down 1.3% due to fewer sales in major urban centres in British Columbia.
The actual national average price for homes sold in July was just under $481,500, up one per cent from the same month last year. That marked the first year-over-year increase since January, CREA said.
“Supportive demographics and an undersupply of new homes in the GTA/GVA are underpinning prices, though poor affordability, a tougher borrowing climate and the non-resident buyers’ tax likely rule out a return to the earlier mania in these two regions,” said Sal Guatieri of BMO Capital Markets.

The real estate and financial cabal would have you think so. They want house lust. Need it. Live off it. Profit from it. Since residential real estate accounts for at least 15% of the entire economy, there’s no shortage of important people telling you that after a brief hiccup, she’s good again. Ready to roll. Uppa, uppa.

However at the same time we may know too much. Close to a third of all houses listed for sale in the GTA, for example, are empty. Why would that be? Simple – speculation. Over 7% of all families in the region own multiple properties, a huge number of them bought to play the market. Now that things have turned, many are listed. Empty, unloved and unsold.

We know mortgage rates have risen and the stress test bar is rising. We know the Bank of Canada will run up money costs another full 1% in a year. We know about the Trump tariffs. The 100,000 moisters punted from the market by the new regs. We’re wise to lower sales, motivated sellers, swelling listings and realtors who’ve moved nothing in a year. In fact, it’s estimated as many as 80% of large brokerages are currently losing money. This is a market that’s traveled from FOMO and panic-buying 18 months ago to FOPI now (Fear of being Priced-In – unable to sell or unlock equity).

So let’s ask a reasonable question: why would the housing market fall so slightly then recover so quickly after blowing the momma of all bubbly gasbags? Now that interest rates have risen considerably and a serious trade threat materialized, why would buyers rush back into houses at near-record levels? Household debt is still massive, and rising. Credit has been tightened. Taxes have risen. Why a real estate renaissance?

Or is this an illusion? A trap?

Veteran broker Alex Prikhodko thinks so. Here ‘s his note to me today:

“Let me give you my perspective on what is happening with a real estate market. I’m gonna refer you to THIS infamous graph:

“Indeed the prices have somewhat stabilized in some areas, but with 32,000 active listings and a new interest hike, this is a temporary situation. We’re currently somewhere in between the “bull-trap” and the “return-to-normal” stage, where some optimistic suckers are hoping the market will rebound.

“However, there are no reasons for such optimism. I’ll give you a few very specific cases:
1. The person who bought his property and then extorted $350,000 in cash back last year that you featured on your bog last summer, ended up selling it at a LOSS, is now trying to sell his personal properties, and is about to hit a divorce. He’s also being sued from all angles, including, unpaid contractors, real estate brokerages and just people who he borrowed money from, and that’s besides the CRA, which is questioning him claiming all of those properties as his primary residence and thus avoided paying property gains for years.
2. Another friend of mine bought a detached in Markham for what seemed like a reasonable price of $950,000 last year, even though her husband and I advised her to stay away from real estate for the time being. I advised her to sell that property immediately without proceeding with the renos. After completing the renovations 7 months later, she’s been unable to sell her house after multiple price reductions. She’s unable to carry a mortgage on that fantastic investment, so she will likely incur a significant loss.
3. There are several people I know who bought from the builder with closings coming up. They were all sure they would be able to sell their current residences at a healthy profit but currently unable to sell. These are a particularly disturbing group as they are FORCED to sell for whatever they can get as they borrowed equity from their current residences to pay the deposits to the builder. Some have borrowed so much, that they are unable to sell without going under water. I presume this is the main category of people that will force the market to decline further, since they have no other options.
4. Construction industry. I know a guy who runs a luxury kitchen fabrication factory. The guy used to snub jobs under $50,000 for a custom kitchen. This year he quoted $2m+ worth of work with only $70,000 in actual sales. This guy is not an installer, but owns a factory with over a million dollars in equipment and $5,000 in monthly lease payments. My other friend has asked the guy to provide a quote for a kitchen from this guy and, since he’s short on business, he decided to quote him 50% off, or about $20,000. My friend opted for an Ikea kitchen for $15,000 instead, which was of great personal insult to the kitchen guy, since quality of his products is significantly better than what Ikea has to offer.

“Long story short, here’s my prediction. Detached homes prices will continue to decline at an accelerating pace, as more mortgage holders (especially multiple property mortgage holders) continue to get squeezed.

“Condos are about to get hit hard, expect a typical $600,000 downtown condo lose $100-$125k over the next 12 months. This winter is going to be a nail in the coffin for overpriced downtown condos.

“A lot of brokerages are going to shut down. In the last 3 months we got a major influx of resumes from agents, coming from brokerages that have closed down operations. The latest victim is TheRedPin brokerage, which appeared to be healthy on the surface for a while, even though I seriously doubted their business model.”

Like everyone else with boots on the ground, this realtor knows the facts. They’re brutal. And a large establishment of people is doing all they can to gloss ’em over. The real estate market’s fuel is confidence, emotion and desire. If the propagandists can fool enough people, they can rescue the market. If they fail, the fools buying now may be the greatest.