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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

January 5, 2016 | Tale of two cities

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.

 

It was the best of times. It was the worst of times. And all real estate is local.

If there’s one thing last year taught us (or should have), it’s not to be complacent. The economy lost serious altitude along with oil. The dollar crashed. The central bank flipped out and cut rates twice. Debt raced higher while incomes didn’t. And people voted in an accidental prime minister just to get rid of the last bum.

Our stock market was among the world’s worst performers. Our currency was at the bottom on the heap. We lost 36,000 jobs in the last report. The economy was in recession. Yikes.

And yet Vancouver detached house prices rose by 24% year/year in December while for 2015 as a whole sales increased 48%. Compare this to an inflation rate of 2%, and wage gains in the area of less than 1.5% – and see what a bubble truly looks like. This is a market riding a wave of debt, facilitated by voracious lenders whose risk is being wiped away by a federal agency called CMHC.

When looking at the number of $3+ million homes selling recently in YVR, Bloomberg had this to say yesterday: “It’s one of the starkest examples of growing imbalances in Canada’s household sector that includes record indebtedness, inflated home valuations and over-investment in condominiums.” The world thinks we’re nuts. We are.

Worse, this mania is being exaggerated, fed and institutionalized by the BC government. The province’s BC Assessment office has become one of the most aggressive real estate-pimping outfits in the country, valuing properties at the extreme leading edge of the market. No wonder. The more housing is worth the greater the potential property tax bill municipalities can collect. And yet, perversely, homeowners (and the sycophantic BC media) cheer every bump higher, since it makes people with big mortgages feel rich.

The latest numbers are stunning. Total assessments for Vancouver jumped almost $100 billion, or 16%, in just one year. East Van (where the poor people huddle around barrels of burning newspapers) rode a 28% rocket higher, beating out the lousy 23% increase on the Westside (where the rich dentists live). Says the assessors, “Increases of 15-25% will be typical for single-family homes in Vancouver, North Vancouver, West Vancouver, Burnaby, Tri-Cities, New Westminster and Squamish. Single-family market movement in Whistler, Pemberton and the Sunshine Coast is less dramatic, with typical increases in the zero to 15%. Typical strata residential increases throughout the region will be in the five to 10% range.”

In fact for the entire province, where houses are now worth a collective $1.34 trillion, values soared last year by almost 1% a month. Bizarre. Unsustainable. Dangerous – in a country where the economy expanded by only 1.5% in an entire year, our trade with the world plunged into deficit and the national currency lost almost a fifth of its value. This is what house lust does. It foments delusion, pushing people to take on greater amounts of debt as they grow increasingly blind to the augmenting risk.

The most interesting thing about bubbles? You can’t see out of them. Thus people trapped inside the Nortel bubble, the Alibaba bubble, the Be-X bubble, the US sub-prime bubble or the East Van bungalow bubble think they’re being smart. Until they aren’t.

So, from the best of times to the worst. While the City of Vancouver’s houses became $100 billion more inflated last year, the Calgary real estate market shed $3.5 billion in actual sales. It was probably more, but these realtor-generated numbers are the only ones available. They show what happens when confidence leaves town.

Sales levels declined by about 7,000 while the supply of houses for sale increased 30%. There have not been this many unsold homes in Canada’s energy capital since the lights went out in 2008. The months of available inventory bloated by 76.3%, making this officially a buyer’s market. That would be great, except the buyers have stopped buying – fewer than 900 trades happened in all of last month. Meanwhile, “Economic conditions aren’t really expected to change much in 2016,” says the local real estate board, which can clearly see the writing on the wall.

Two years ago, Calgary was Vancouver.

Two years ago house sales in Calgary were growing by about 1% a month. Prices romped ahead almost 9% from year-before levels. . “Two consecutive years of elevated levels of net migration, combined with an improving job outlook and confidence surrounding long-term economic prospects, supported the demand growth,” said the board’s chief economist.

Of course, people in Richmond or Richmond Hill, Mississauga or West Van, believe a Calgary will never happen to them, because it’s all about oil. But it’s not. The key components are confidence and jobs – both dependent on economic growth even more than cheap money.

Let’s finish with a letter from Saudi Arabia, where Dean recently started reading this pathetic blog:

I was only a mere boy when I purchased my first home, a 22-year-old oil patch worker putting in 3500 hrs a year, out of town 25 days of the month, making cool money.  Thinking renting was a total waste and being reassured by the bank that I was correct I purchased a brand new condo in a low rise outside Edmonton. It was the fall of 2008 and prices had come down but surely everything was going back up soon so I snatched it up quick! $252,000. Zero down! 910sq/ft all to myself!

Worst decision of my life.

Lost my job six months later. Luckily I had savings and made the tough call to move back home (slept on the couch for about 5 months) while renting out my brand new, devalued place. I used this opportunity to enroll for post-secondary, thus lessening my risks of this happening again with another oil bust, I sure am happy to have done so now!

Anyway, fast forward about 6 years and this oil patch worker is now a fairly well-paid industrial engineer, salary, funded pension, double time overtime, now it’s time for granite and grandeur, right??

So I’ll float two mortgages for the short term, then have renters in the condo paying for the mortgage and everything should work out perfect? Not. Sadly a family emergency – my mother passing (funerals aren’t cheap), father’s health failing (of course he has zero financial backup) – and I’m back to funding two mortgages, and supporting a dependant father to boot.

All this rambling is to say I now see the point you keep nailing into people’s heads every single post (blog reader of only a couple months now). You are doing a great service.

Actually, Dean, I’m just trying to save people from themselves. And it ain’t working.

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January 5th, 2016

Posted In: The Greater Fool

One Comment

  • Avatar robert dixon says:

    What goes up must come down but that part is always forgotten.
    Here in Kelowna the average house price is $587 K
    When most people make $34K from work so that is an
    almost 8X multiplier versus an historical mean of 3X! People
    in Kelowna are seeing around 3000 families a year
    move here but we do not get anymore water…
    Houses in Kelowna are built with granite tiled toilets
    but almost no water conservation features.
    We live in a MobileHome designed for survival in
    a resources challenged world. We just bought
    a house then sold it 2 years later as the huge
    downside of ownership outweighed the benefits
    of us and adult children sharing a large house.
    Keep sounding the alarm, all prophets wailing in
    the wilderness eventually are recognized.
    Take care.

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