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January 4, 2017 | Next Time, Duck

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.

Once there were three. Then there were two. Now but one.

There’s a lesson in the demise of two-thirds of Canada’s bubbly real estate markets. A few actually. First, any asset which swings too far above the mean will eventually swing back. Guaranteed. Second, you don’t need interest rates spiking to drive a stake through housing’s heart. Third, your idiot brother-in-law who says he’s made a fortune on his house and is therefore an investing guru, just hit some dumb luck. So that means, four, there are darker times ahead for real estate as the speculators and amateur landlords are hollowed out of the market. Fifth, no place (and I’m talkin’ to you, GTA) is immune.

The numbers out of Vancouver this week are stark. Here’s the chart.

As this blog said last summer, the YVR market peaked in March of 2016, months before the provincial government brought in the Chinese Dudes tax, the feds introduced the Millennial-killing Moister Stress Test or the city lost its way and said vacant houses would be taxed. Because of insane speculation plus real estate horniness on a grand scale, local prices were dancing high above local incomes for several years, forcing families to borrow excessive amounts. It was only a matter of time before the wobbling tower of excess tipped.

The actions of crazed politicians just pushed things along a little, and here we now are. Sales last month fell 39.4% year/year. Detached home deals have collapsed 52%, while condo sales are 25% lower and attached property transactions have given up 44%. The benchmark price for detached homes (still an insane $1.483 million) fell almost 2% in a single month, and houses in many hoods now cost 25% less than they did ten months ago.

At the same time listings are extremely few and far between, since nobody can afford to move. What an unhealthy situation. Worse, locals just got their latest property assessments – on which municipal tax assessments are based – and since they reflect values of seven months ago, they’ve skyrocketed by up to 40%. Ouch.

These are the twin legacies of a real estate market gone bad: property tax hell, and a debt overhang that can take years, decades even, to get out from under. Makes you wonder – what were people thinking? No asset class in history has ever gone vertical, without a plunge. Why would houses in Van be different?

Meanwhile, there’s Calgary. A doubling in the price of oil in the past year has not rescued that real estate market, because speculation, greed and cowboy arrogance (as opposed to West Coast delusion) created so much long-term damage. Sales last month were 15% below the 10-year average, coming atop a year when overall sales plunged 26% from the year before.

So when you combine 2014 and 2015, the contraction basically rolls the market back to the lowest sales levels since we all crawled out of the GFC. Says the local board’s fetching chief economist: “There was a dramatic fall in 2015, and the additional fall in 2016 is keeping sales at levels that are well below our long-term averages.” This has resulted in a price decline of about 4%, with detached houses falling through the $500,000 mark. It may not seem that severe, given the sales plunge, but this is not the bottom.

The problem in Cowtown is not oil, but jobs. The unemployment rate has jumped past the 10% mark, and until oil adds another twenty bucks a barrel (or more) nobody expects a big change. Of course, we also have declining or stagnant markets in Edmonton, Winnipeg, Saskatoon, Regina, plus all of Atlantic Canada. It’s estimated that 70% of Canada’s markets are going nowhere – and mortgage rates have not even yet started to swell.

Now, there’s nothing inherently wrong about owning a house, or wanting to. You gotta live somewhere, after all. But when residential real estate turns into an investment commodity, rife with speculation, excessive leverage and unbridled greed, it always blows up. And every single time, people are surprised.

So let’s end this with blog dog Jeremy, shaking his head in the Lower Mainland.

“I’m sure I’m not alone when I say that my holidays were filled dealing with relatives boasting about how much money they have made in real estate in BC. This year I was exposed to my brother and his wife (mostly his wife) constantly talking about how much their house has gone up in value in the last three years since they bought it, how smart they were, and how it was the best financial decision of their lives.

“Here’s the story. My brother is married and has a 2 year old son, with another on the way, and they bought a house in a bad part of a suburb of Vancouver. He and his wife both have government jobs, but the wife is a temp employee and due to recent government restructuring may be laid off within the next 6 months. To my knowledge they have no savings and no investments.

“They bought the house for $450,000 three years ago with 5% down and my sister-in-law was in my face most of the Christmas dinner about how much “equity” they have in their home. I think that I must have heard her say the word “equity” about 20 times. She also went around to my cousins and had the same conversation about “equity” and how they all should have got into the market when they did.

“I thought this was all over until in response to my Happy New Year’s text my brother told me that BC Assessments are now out and he has made a quarter million in one year! (His house went from $508,000 to $750,000, which I admit is an impressive gain).

“I know you are not a psychologist, nor do you teach etiquette classes on the side. However, do you have any advice on how to deal with family and friends who spout this nonsense ad nauseam?”

Easy, Jer. Send him here. We have a few suggestions.

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January 4th, 2017

Posted In: The Greater Fool

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