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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 9, 2016 | The New Abnormal

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.

 

Dylan and his wife make two hundred large and rent a two-bedder in the tony West End of Vancouver, where they moved from Calgary a few years ago. Everything was cool until their landlord told them he was selling. But how could he not? The dude was offered more than $2 million for the very dated 1,200-square-foot unit. Yikes.

“We’re on a fixed term lease that ends next month,” Dylan posted on this blog. “The new owner just informed us that if we want to stay the rent is going up 40% (to over $3000 per month with no upgrades or improvements). Our first reaction was naturally to scoff at that… however, having spent the weekend researching rentals here it’s clear that this may be the going rental rate for 2 beds in YVR. Worse still is that there appears to be bidding wars happening in the rental market too, with some prospective landlords telling us that the price has moved from what they had posted just days ago.

“We’re both well compensated professionals, grossing over $200k combined which for YVR is quite good but apparently not near enough to rent in the city! We have been pre-approved for a $1m mortgage, but can’t bring myself to even consider purchasing right now. In fact, we went to a few open houses on the weekend just to see and it was a zoo, people arguing over getting in to see the RE agent first so that they can make the ‘right’ impression (presumably in the hopes that their over asking bid is the ‘lucky’ winner). One person told the agent that she was willing to waive the inspection if that put her over the top. Sadly it appears none of us out here can avoid getting burned by this mania…let’s hope the coming correction comes swiftly.”

Lea and her husband have just given up on Canada, and moved back to the States. “Since coming back I have taken to surprising my fellow Americans with Canadian home prices,” she tells me. “Thank you for your blog. When we were living in North Van, it made me feel sane for being shocked at the prices.”

This week Bank of Montreal egghead Sal Gualieri published a small, three-paragraph update on the real estate market in Canada compared to that in the States, where prices have recovered about 50% of the loss they suffered in the pre-2008 meltdown. As you know, the average Canadian property price topped $500,000 last month for the first time in history. The average detached 416 price is over $1.2 million and the benchmark Vancouver price is $1.4 million. That last number is up 30% in a year, while the inflation rate was merely 2%.

As Sal reports, the average Canadian house (expressed in current Canadian dollars – which has gained a ton since February) is 41% more expensive than its American counterpart (US$384,402 vs $271,803). Of course the Yanks also have the ability to deduct mortgage interest from their taxable incomes, pay at least 30% less in personal tax (depending on the state), and can lock in a fixed mortgage rate for 30 years.

“That’s a big reversal since the start of the millennium,” he points out, “when housing was much more expensive south of the border (even before the U.S. bubble) thanks, in part, to the lowly loonie at the time and more reasonably-priced properties in Vancouver and Toronto. While these two cities in no way represent the national average price, they certainly have a major effect on it, as they now account for half the value of Canadian home transactions.”

CHART

This is dam about to burst. When is unknown. The outcome is not. Dylan and his wife make three times the average income and feel they cannot afford rent. They’ve been approved for a million-dollar mortgage, and feel they cannot afford to buy. Real estate has turned from shelter into commodity, the object of frenzied, obsessive activity by people who are speculating on fat, easy profits (greed) or desperate to buy while they still can (fear).

House prices, on average, 40% higher in Canada than the US is the definition of absurdity. Our economy is barely moving, the oil sands are burning, exports are toppling and debt is exploding, while the US stays in recovery mode with a 50% drop in unemployment since the recession and rapidly improving national finances.

All around us is evidence we’ve lost our collective minds. House prices have detached from the economy, and the social impact of million-dollar shacks is palpable. Average families are being forced to borrow massive amounts with little or no increase in incomes. Saving and investing is plunging as debt expands. Worse, we’re turning into a nation of xenophobes and racists, trying to blame others for the mess we’re all busy creating. Every study, report or new story with an anti-Chinese thrust is plastered all over this pathetic blog’s comment section.

Truth be told, lots of people have made lots of money in real estate over the past five years. The sellers, I mean. Not the buyers. With every new price plateau attained comes an elevated amount of risk. The greed and fear you see around you, which so complicate and bedevil the lives of people just wanting a decent place to live, are the harbingers of crisis.

Of course, I could be wrong. It might be worse.

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May 9th, 2016

Posted In: The Greater Fool

One Comment

  • Avatar Eric Oettli says:

    By changing the geographic references and substituting shale oil for dairy products, the article is uncannily applicable here in New Zealand , a pint sized economy of some 4.5 million inhabitants. Here, the level of frenzied speculation fueled by low interest rates and mainland Chinese capital flight has largely saved our economy from serious GFC fall out . However , I am totally with the writer regarding his dam bust analogy which , when ( not if ) it comes , will not be a pretty spectacle .!

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