- the source for market opinions


July 21, 2015 | The Uncrash

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.

SOLD modified

About the time Michael was a little wriggler dodging serious traffic in the birth canal, things were not cool outside in the cruel world. Just months later the Canadian real estate market would nosedive from a record high level to a pit it would take 15 years to emerge from.

Now Mike’s 27 and a banker. Sadly, he reads this blog.

“I was wondering if one day you can shed some light on the symptoms and causes of the early 90’s housing crash and what it was like for Canadians,” he writes. “I’ve been trying to google it, but google is full of talk about our potential housing crash or 08 in the U.S… I was too young to remember or know better in the early 90’s.

“I have clients that lived through the housing crash in the 90’s and are under the impression that housing crashes are a thing of the past. I believe corrections are a regular part of history, especially since my girlfriend and I wouldn’t be able to afford anything until my income increases by about 300%. So, why is it that all of these boomers are so ignorant to history? BTW – they’re passing this ignorance down their kids, (my friends) the echo-boomers.”

Don’t you wish your banker was this smart, instead of cramming a bigger mortgage loan down your piehole? Now with house prices once again at nosebleed levels, and economic uncertainty building, the kid asks a serious question. Why did housing crater the last time, and are there many similarities? Could it happen again?

Well, in 1988 the average Toronto home sold for $229,635. That seems like nothing, but the market was on fire – prices had doubled in less than three years, and jumped an astonishing 21.4% from 1987. The fire continued, adding 19.1% to the average price in 1989. And then the lights went out.

The decline started slowly, before taking hold in earnest. By 1996 the average Toronto house had eroded in value by 27.6% – not that far off the epic 32% collapse in US real estate eight years ago. Prices retreated to levels of nine years before, and it was not until 2002 that the 1989 high-water mark was surpassed. In other words, someone buying when our little banker was a gooey swaddler had to wait 13 years to break even – not including inflation.

And note the above: we did not have a crash. It took more than six years for the housing market to find its bottom, before requiring another six years to recover. But despite the gentle slope on both sides, this was enough to destroy the finances of an army of middle-class families who bought into a property boom only to end up as greater fools.

So what happened to the market?

The incorrect belief is that high mortgage rates killed housing. After all, the five-year rate in 1988 was 12%, on its way at 15% the next year. But mortgage rates actually peaked at around 21% in 1981, and had fallen back into the 9.5% range by 1987. Despite the huge cost of money, the market advanced relentlessly – because everybody was horny, because “houses always go up” and if you didn’t bite the bullet and get into the game, you’d be shut out forever.

Sound familiar? It was speculation, house lust and greed which pushed prices ahead, encouraged people to take on massive debt and divorced real estate from the real economy. Like now, actually. Because when all is said and done, it’s people who create risk – driving markets to unsustainable highs because they’re emotional. They fear losing out on gains, then they fear experiencing loss. Booms always end badly. When you’ve mortgaged your derriere off, there’s no such thing as a soft landing.

Well, here we are, Mikey. Your wrinkley clients have forgotten those lessons. Their kids never learned them. They all think this time it’s different.

But it never is. Lots of warning signs exist, for those who look.

The commodity plop this gilded blog detailed yesterday is not just about crashing gold miner stocks, out-of-work engineers or the misery of trying to find a buyer for your house in Calgary. As mentioned, the Bank of Canada rate cut seven days ago was an admission of troubles. It would be really smart to pay attention.

Fitch, the ratings agency, has joined the throng saying real estate valuations in Canada, as they presently stand, are doomed. Our houses are 20% over-valued, it adds, and headed for a correction. “The price growth that has characterized the country’s housing markets for more than a decade will abate, with modest declines to follow,” adding there will be “no collapse”.

Nothing to sweat about, right?

Hmm. But there was no collapse when Mike was backstroking his way to conception, either. Just the start of a grinding year-over-year decline that would end up being one of the greatest robbers of wealth in Canadian history. And there weren’t even 5% downpayments, cash-back mortgages, zero-financing, 70% home ownership, nine million geriatric Boomers or interest rates so cheap they had only one path ahead. Oh yeah, and only millionaires had million-dollar houses.

What a relief it is that history is bunk.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

July 21st, 2015

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.