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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 18, 2017 | The Turn

Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

Well, little doubt now that it’s happening. The correction. First we take Big Smoke. Then we take Vandelusia.

“I’m a Real Estate Lawyer in the GTA and have been an avid reader of your blog for some years now,” says Baqa, who thinks his job description deserves Capitalizing.

“We’ve heard all the headlines and posts like “SOLD 1000% OVER ASKING WITHIN 42 MINUTES” etc but we don’t hear the flip side. Today I had FOUR calls within a couple of hours with people trying to get out of their new deals. Each and every one of them said the same thing, they overbid and are now having buyer’s remorse.

“If these dominoes start falling we may have a crisis as early as this summer.”

Interesting that this lawyer works the mean streets of Mississauga, where the average house now costs $796,555, and a detached goes for $1.2 million. Yes, in Mississauga. Land of a million minivans, 12-lane expressways, giant malls, the Marilyn Munro skyscraper condos and a spidery web of soulless, tree-deprived cul-de-sacs. After a torrid early rutting season, sales last month slipped 7% year/year, but prices managed to bloat by more than 27%. But, as in the Kingdom of 416 down the road, listings are piling up. 25% more in April – and that was just the beginning.

In the last seven days another 10,500 properties came on the market in the Golden Horseshoe surrounding Toronto. All of a sudden the 48,000 real estate agents who had nothing to sell three months ago are overwhelmed. And, miraculously, the buyers seem to have stopped buying.

Bidding wars are now rare. Sellers have once again started to accept offers conditional upon a home inspection. Even on financing.

Agents have been holding offer nights but receiving none. Listings that would have been swarmed the day they appeared now languish for weeks. And, most of all, the choice is exploding with more than 1,000 or more fresh MLS offerings in the region every 24 hours.

This is human nature on parade. When assets rise and that’s all people talk about, everybody wants in. FOMO, or fear of missing out, was the primary market driver in February and March, when 416 prices rocketed ahead more than 30% year/year. Buyers fell over each other in a frenzy to “get in” at any cost – based on the belief that today’s price, even wildly inflated, would look cheap next year.

So, the more houses cost, the greater the demand.

As for owners, few listed because they believed the ascent would be endless. Why part with something that’s going up by a third every year? But many also felt trapped inside their wealth – since they couldn’t afford to buy their own house at market prices, let alone sell and move up.

In the past few weeks, that’s all turned. Now it’s a mad rush to capitalize on the greatest greater-fool real estate market in Canadian history, cashing in those windfall profits before they vaporize. Plus, the sudden prospect of a declining market has scared the crap out of an army of amateur landlords, flippers and speckers who leveraged themselves up the wazoo. New, universal rent controls make monthly losses on condos a virtual certainty while a flood of listings and Ontario’s anti-bubble program mean the potential for capital gains has gone pffft.

What’s next?

Busy lawyers, like Baqa. A slew of deals will be falling apart over the next few weeks, with thousands of people shocked at what the process is actually like. There’s no easy exit from a locked-in contract like an offer of purchase & sale, and the damages jilted sellers can claim will augment with each market decline.

Expect even more listings and fewer sales. The ratio will take a brutal turn, leading then to price reductions in the summer. The pace and depth are unknown. It could be as mild as 15%, as serious as the 33% drop when the last boom turned to bust or – if rates rise, Trump tears up NAFTA or more mortgage companies fail – worse. What the events of the last few weeks have suggested is that historic bubbles can have epic endings. And that is just what economists, ratings agencies, bankers, politicians – and a certain pathetic blog – have been warning. Anything that goes up 30% in a year with no economic justification can come down just as hard.

Finally, this is not a Toronto story. The GTA has six million people. The wider region adds another 3.4 million. That’s almost a third of the national population. The bubble’s bursting because average families can no longer afford average houses, just like in Van.

We flew too near the sun. Don’t count on a soft landing. No feathers left.

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May 18th, 2017

Posted In: The Greater Fool

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