- the source for market opinions


March 7, 2017 | Time After Time

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.

Matt sent me this newspaper article. “Thought you’d find it interesting,” he said.

I do.

“Absolutely everyone from cab drivers to chief executives has a story about Toronto’s crazy housing market. Politicians and tenants’ groups have declared a housing ‘affordability crisis’ – again – and have called for a tax on speculators’ profits to cool down the frenzy. Dark words are muttered about how foreign money is to blame.

“In fact, the price explosion has occurred for simpler reasons. Mortgage rates are low… Residents of this huge, rich, expensive urban conglomeration have taken somewhat hopefully to calling their city ‘world class.’ But the price of being world class is ‘Manhattanization.’ Torontonians are getting a taste of the housing problems of the world’s major cities.

“Owning a house is now the investment of choice for most of the middle class. Because inflation has outpaced wage gains for most of the decade, salary earners feel they can gain ground only by possessing property. The equity in a house provides – tax free – a major portion of most people’s retirement nest egg. To cope with the high costs, it’s become standard practice for house-poor owners to build and rent out a self-contained apartment.

“For many Torontonians, the North American dream of home ownership has already faded, and they’ve joined the ranks of renters, probably for good. Those intent on owning will find themselves forced to think small.”

Not a bad assessment of  the situation, right? But wait. This was published in the Toronto Star (when people read newspapers) in July of 1988. Back then, by the way, I was a daily columnist at another Toronto paper, had a rock-hard body plus long sexy hair  and was warning readers the bubble would soon burst.

It did.

Here’s exactly what happened – which could be exactly what happens again. In a speculative, house-horny frenzy, Toronto house prices raced ahead 44.7% in just three years, peaking in 1989. (The average price in the last three years has gained 54.5%.) This was unsustainable, because nobody’s wages had increased by forty per cent and debt was getting out of control. So the market withered. It didn’t crash, but melted away.

It took seven years of annual declines for a bottom to be reached, and over that time prices gave up 28%. So a Toronto house in 1996 was worth the same as in 1987 – despite the boom. It ended up a lost decade for homeowners. Then six more years were required for prices to restore to the 1989 peak (that happened in 2002). So from peak to trough to peak again was a 12-year process. Hmm.

The lesson here?

Well, back in 1989 folks thought it was different this time because of global demand for Canadian real estate, the fact everyone wanted to live there, and the belief the government would never allow the market to shrivel like a gelding because citizens were so incredibly invested in it. But it wasn’t different. Never is. Get used to it.

Second, the market did not crash. Like Calgary and Vancouver these days, it just started to fade, and kept fading. Buyers are lusty when prices rise and reluctant when they fall. So reduced activity inevitably brought house prices lower, even though real estate values are notoriously sticky.

Third, there’s nothing quick or decisive about corrections. When it comes to property, they span a huge amount of time – usually twice the period it takes for values to rise. This is human nature at work – sheer denial that what has recently happened won’t continue, and a mistaken belief markets will quickly ‘come back’ after they’ve peaked. But they never do – not without scraping a distant bottom first.

Interesting that a similar pattern was at play in the US housing crash which started in earnedst in 2006. Prices rapidly rose over 36 months, then melted away over five years, losing 32% of their value. It took exactly a decade for values to restore – although many US markets are still below 2005 levels despite cheap mortgages and booming job creation. What history tells us is that once properties start to decline, after a period of rapid price acceleration, they tend to keep falling. Few buyers dare to catch a falling knife.

You might wish to share this with your hipster kids.

It's official: federal budget March 22

Drowning in an estimated $100 billion in fresh, steamy new debt over this mandate, the T2 gang is about to lower the boom once again on the perceived rich in its second federal budget to be unveiled in two weeks. Will there be a small-biz-busting Doctors Tax? A slashing of the capital gains tax advantage? Diddling with dividends? New measures to tame Toronto’s runaway real estate market? More Hoovering of the 1%ers? An anti-Trump economic strategy?

Check here daily for the latest wild, groundless, scary speculation, then tune in on Budget Night for a full report. A prayer vigil will follow.

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March 7th, 2017

Posted In: The Greater Fool

One Comment

  • kelly says:

    Never has one man been so wrong about one thing and hung in there in the hopes of being right one day. I admire your perseverance Garth.

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