Saturday, January 5, 2013

Macleans Magazine makes the housing bubble - and looming crash - front and centre

Macleans Magazine is starting out 2013 profiling that many believe 2013 could be the year our real estate bubble faces it's reckoning.

The cover of the magazine is sure to send chills down the spine of any housing owner:

In an article titled Crash and Burn, the magazine lays it all out. Here are some excerpts:
Vancouver home sales [have] crumble(d) to their lowest point in more than decade, with prices falling 3.5 per cent since hitting a high last May. The lesson? Recognizing a looming real estate downturn is more art than science; once it shows up in the numbers, it’s too late to do much about it. 

It’s not just Vancouver where realtors’ BlackBerrys no longer buzz. In Toronto condo sales are down by 30 per cent, while prices have fallen by 4.5 per cent. Even the Bank of Canada, which has helped inflate the bubble by tempting Canadians with years of rock-bottom interest rates, has issued a rare warning about the risks posed to the broader housing market of too many condo developers in cities like Toronto and Vancouver chasing too few buyers.

A housing correction—or, possibly, a crash—is no longer coming. It’s here. With few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect. Construction jobs will be lost. Homeowners will end up underwater. Consumers may stop spending. “I’m getting very nervous,” says David Madani, an economist at Capital Economics, who has been predicting a drop in housing prices of up to 25 per cent in Canada. “I know I’m a bear, but the housing market itself has the potential to put us in a recession, let alone what’s happening in Europe and the U.S.”

Canada could be setting itself up for a devastating one-two punch: a painful domestic housing slump just as Canada’s export and resource-driven economy is hit with falling global demand. The most acute threat is the U.S. debt crisis, which, if handled poorly, could tip the world’s largest economy back into recession, taking Canada along with it. Meanwhile, Europe remains mired in a recession and concerns about China’s growth persist. “I feel like Canada is in the path of a perfect storm here,” Madani says. Other than housing, “the key pillar of strength is our booming resource sector,” says Madani. “If you take that away, it’s just going to knock the lights out.”

The sudden cooling in Canada’s housing sector seemingly struck without warning. As recently as last spring, bidding wars were common in many Canadian cities as were the “over asking!” stickers agents slapped on “for sale” signs. The peak may have been reached in March when one Toronto bungalow made headlines after selling for $1.1 million, more than $420,000 above the list price.

Eight months later, the story has been reversed. And not just in Toronto and Vancouver. In Victoria, existing home sales were down by 22 per cent in November from a year earlier. In Montreal, sales were down 19 per cent last month. Ottawa’s sales were down nine per cent and Edmonton’s were down six per cent. With all those houses lingering on the market, prices dipped in 10 of 11 big cities across the country between October and November, according to the Teranet-National Bank index. It was the first such drop since 2009.

The weakness is also evident in new home construction. The Canada Mortgage and Housing Corporation reported a third straight month of falling housing starts in November. The trend is expected to continue next year.

With mortgages as cheap as they’ve ever been (five-year rates can be had for as little as 2.84 per cent) and no spikes in unemployment, there can only be one explanation: Canadians bid home prices up so high, and piled on so much debt, they’ve essentially spooked themselves. In Vancouver, for example, the cost of owning a home eats up more than 80 per cent of an average household’s income, according to the Royal Bank’s affordability index. In Toronto, it’s over 50 per cent. Overall, affordability remains below historical averages across the country, RBC says, with two-storey homes in particular causing “affordability-related stress.”

Some argue this is exactly what the much hoped-for “soft landing” should look like. Earlier this year, Sherry Cooper, the soon-to-be-retired chief economist at Bank of Montreal, likened the Canadian housing market to a balloon—not a bubble—that will deflate slowly and naturally in the absence of a “pin.” But such semantic distinctions gloss over a key feature of bubbles: psychology. “Bubbles inherently contain the seeds of their own undoing,” warns Madani. “They’re driven by overconfidence and expectations that house prices will keep going up. But at some point it just pops.” And that creates the spectre of a pendulum that swings the other way.

The concern is that the market is being driven by speculators, not families. Many condo purchasers buy off a floor plan—often borrowing against an existing property—and then sell or rent their unit once it’s completed several years later (units can also be sold, or “assigned,” to another buyer while a tower is under construction). “So far, the demand for units and supply has not been too far out of balance,” says Ohad Lederer, an analyst at Veritas Investment Research, citing estimates that investors comprise half of the Toronto condo market.
Lederer recently sent secret shoppers to several condo sales presentation offices. They made some disturbing discoveries: sales staff who didn’t ask for mortgage pre-approvals and who grossly misrepresented the demographic trends—namely the number of expected new immigrants to Toronto—that are supposed to keep units in high demand. But Lederer says he is most disturbed by the sector’s “shoddy mathematics.” By his calculations, many condo owners who rent their properties are realizing returns of less than four per cent. If rental rates fall as more units come on the market—Lederer estimates there are at least 5,000 too many condo units being built in downtown Toronto—those same investors will soon be losing money, prompting them to sell. “Being a landlord is already a negative cash proposition at today’s prices,” he says, adding that a bust in the condo sector will likely have a “trickle up” effect by reducing demand for starter homes.

Finance Minister Jim Flaherty decided he had seen enough last July. He dialled back mortgage-amortization periods for government-insured mortgages (required for anyone buying a home with less than a 20 per cent down payment) to 25 years from 30 years, the fourth time he tightened standards in as many years. Observers were quick to note mortgage rules are effectively now back to where they were before the Conservatives took office. A national experiment in lenient lending has finally come to a close.

Even with the market slowing, many experts believe Canada is unlikely to experience a “U.S.-style” housing crash. The riskiest mortgages are guaranteed by taxpayers through the CMHC, thereby insulating the financial sector from the sort of meltdown endured by Wall Street in 2008.

But a mere collapse in home sales—and prices—would be bad enough. 
A U.S.-sized housing slowdown could result in the loss of 370,000 jobs and push the unemployment rate well over nine per cent, compared to 7.2 per cent now. And that doesn’t include job losses in related industries.

Equally important is the psychological effect that even a moderate slump in home prices will have on consumers. As people watch their net worth crumble—at least on paper—they are less likely to spend money on everything from new dishwashers to automobiles. “We talk about having a strong housing market because we have a strong economy,” Ben Rabidoux says. “But it’s also true that our economy is strong because we have a strong housing sector.” He estimates that as much as 27 per cent of GDP can be linked to Canada’s housing market, a disproportionately large number compared to other countries, including the U.S. at its peak. “Take it away and that alone puts us into a recession, given where we are,” Rabidoux says.

In such a scenario, the homeowners most at risk are those who are overextended. Of the $570 billion in mortgages that the CMHC insures, about half are borrowers with less than 20 per cent equity in their homes. “If housing lands hard and affects the broader economy, many people will find themselves effectively underwater at a time when they would most need mobility to pursue employment,” Rabidoux says. “In this scenario, a house becomes a prison.” And it’s not necessarily condo buyers or those who paid over a million to live in a hot downtown neighbourhood who are most at risk. Rabidoux says people who shelled out for sprawling “McMansions” in the suburbs could be in particular trouble, as the demand for oversized homes is expected to fall out of favour when baby boomers retire and seek out smaller living spaces closer to the city. 

Flaherty is going to have a dilemma on his hands. Falling house prices don’t win votes. And there are already calls from the real estate industry to roll back the most recent mortgage rule changes. But most economists agree a correction is both necessary and long overdue. The average debt-to-income ratio of a Canadian household is now 164 per cent, higher than the pre-crash levels in the U.S. A recent survey by BMO found that one-third of Canadians have cut back on spending to make their mortgage payments. Seventeen per cent dipped into savings.

None of it bodes well for the country’s ability to absorb another economic shock. When the financial crisis hit, Ottawa responded by buying up $69-billion worth of bank-owned mortgages, encouraging financial institutions to keep lending. After a brief dip, the housing sector bounced back and carried the economy on its shoulders. But today consumers are tapped out just as a new round of macro-threats has emerged.
Bay Street is getting nervous. Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce, recently warned Ottawa to “be careful what you wish for” when it comes to winding down the housing market. He argued in a report that “a five per cent per year drop in housing prices, for example, would shed roughly a half-point off GDP growth through its wealth effect on consumer spending.” He added: “That makes it even more urgent that the global economy is healthier come 2014, when the full bite of a housing slump on domestic activity will be felt.”

It all amounts to a dramatic reversal of fortune for Canadians, albeit one we brought on ourselves. Back in 2009, our hot housing market acted as a life preserver in a sea of economic uncertainty. Now it feels more like a cinder block tied around our necks.
Macleans says that "with few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect."

The question now is whether that 'fear' leads people to list into the Spring Market in an attempt to bail before it's too late.

It's getting more interesting by the day.


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  1. No msm outlets have been this direct in calling out the truth - we're inthe early stages of a collapse. Everyone else treats the bubble with kid gloves and does their readers a disservice. Hat tip to Macleans - they have been all over this for a while now.

  2. Scotiabank already said it last year- it would be a decade-long slide. Why would it not be? The RE bubble in Vancouver has been a whole decade in building and 4 years longer than the massively painful US one.

  3. As usual, the general press when trying to get into the specifics of a particular industry without any detailed knowledge of same creates eye popping headlines which are of more relevance to its business than to the target of its supposed study.
    True the average observer may have had his head in the sand in Vancouver, but the market has already moved down some 25% depending upon the particular sector and being right in the middle of it, I detect a renewed vigor among buyers as of the end of November. Many listed properties in our market are owned by sellers who do not have to sell and skew the sales to active listing statistical ratio. I see prices holding firm and buyers coming back in. The effect of all this now, is that garbage will not sell as fast as it would have and properties will have to be better prepared for the sale.
    Frankly, from the inside of this industry, I think MacLeans missed their call by about 8-11 months in the west coast market, and, short of producing additional fear into the market by their article, signals to me that additional opportunities can be reaped in the existing climate by betting against broad brush articles with incendiary pictures produced by newsmaking press.
    How about producing actual new data to back up the hype?

    1. Spoken like a true used-house salesperson!

    2. "I detect a renewed vigor among buyers as of the end of November."

      I believed this is called a "Bull Trap". Look at the US data, there was lots of vigor too before and 18 month free fall occurred.

      "Many listed properties in our market are owned by sellers who do not have to sell"

      Sorry to tell you this is all it takes is the total inventory minus "the many", aka those desperate to sell, to pull down the market.

    3. "The effect of all this now, is that garbage will not sell as fast as it would have and properties will have to be better prepared for the sale."

      Who is left to buy them? People who think the purchase will be a good investment? Why would people buy 'better prepared' garbage rather than the numerous new or nearly new properties that are for sale?

    4. Enough.
      Stop it. More than a decade now that we have to endure this delusion, even if we always knew where it would lead us.
      How can buyers who burn 60-80% of their total incomes on their mortgage "come back" ? There is only one way : More credit. Our debt-income ratio is 164% already.
      Its over, Sir.

  4. Well all those letters after your name did not convince me of your point of view, Arnold. So lets take a look back at the basics of credit creation and how it impacts an economy following a period of exuberance. I have a nicely written piece by Robert Prechter that was produced in 2002 that sums up the dangers quite well...have a read....the article speak for itself.

    From "After the Crash" by R.Prechter (PDF Format)

  5. "I detect a renewed vigor among buyers as of the end of November"

    2nd worst December in at least a dozen years and over 30% below December average. That capped off what I believe was the worst year in total sales in 20 years with the 2nd highest inventory and this all happening with record low mortgage rates.

    "Many listed properties in our market are owned by sellers who do not have to sell and skew the sales to active listing statistical ratio"

    So this is the only time in history people have had listings on the market they did not need to sell? Interesting. How about all the people who need to sell but pulled their listing for the time being? I think you are missing a B.S. at the end of your name - by the way, putting "MBA LL.B B.C.L" at the end of your name makes you come off a little desperate to impress people.

    "signals to me that additional opportunities can be reaped in the existing climate by betting against broad brush articles with incendiary pictures produced by newsmaking press. "

    What a fancy sentence

    "How about producing actual new data to back up the hype?"

    You mean like MOI, Debt Income levels, Price Rent Ratios, Price Income Ratios etc. We're clearly in a bubble based on every metric, the last 6 months have shown some of the most dramatic hits to an HPI anywhere in a 6 month period and MOI continues to sit in the double digits. But of course you backed up your opinion with data... oh wait you provided none.

  6. I really know this bubble is over when guys like that Arnold dude start spouting off.

  7. I really appreciate Arnold Shuchat MBA, LL.B., B.C.L. and his comment. Not sure what the letters mean, but Arnold represents the current narrative in the business. In July I was an IT guy at a window wall manufacturer, and Arnold's assessment is almost incredibly bearish for a guy in the biz. The people at this company; the "guys" were all heavily invested in real estate, real estate is their coffee in their morning, real estate is fire in the belly. To these guys being desperately dependent on RE, having been through 08, they cannot imagine a scenario without a quick rebound. My bearish outlook was treated with panicked expressions, I had to cut it out ASAP. Saying RE bubble is equivalent to farting in an elevator, or fighting words. So thanks Arnold!

  8. Village Whisperer, I posted something you might find interesting - maybe Arnold Shuchat MBA, LL.B., B.C.L. will find it interesting as well.

    An Observer

  9. MacLean's is always predicting a housing crash, year after year. Eventually they are bound to get it right. Crumbling 3.5%, I had to read that a few times to make sure it wasn't 35%. Sales down 30% in November... could it maybe be the tightening of lending regulations? Maybe even the fact that you near Christmas and winter. People don't tend to buy houses during Nov, Dec, Jan...

    Just funny to see this magazine predict this same doom and gloom year after year...

    1. This guy is clearly a dumdum. haha

    2. Dumdum maybe. I just believe everything I read. Statistics can be spun any which way to prove any point. Everybody and their mother has been on the real estate band wagon. So do I think it'll crash - yes- harder in certain areas than others. Just like stocks, if your barber starts talking about buying real estate, its a bad sign.

      That being said there is still great real estate investing deals out there now. There will be better deals when the prices start coming down. If you really want to be an investor, you too are hoping for a crash. Here's a tip, buying a house to live in does make you an investor.

      Do I think this year is the big crash? Don't know. My point is, MacLean's has been predicting a crash year after year after year. One year they will be right on the money.

    3. MacLean's may have been predicting a "crash" for years now (your words not mine) but if that's so, they are basing it on the whacked fundamentals we can all see. Just because their timing was off by a few years doesn't make it any less true, all it proves is it's hard to time any market. Of course, with Real Estate agents, any time is a good time to buy (and pay a hefty commission).

    4. Haha timing off by a few years. I bet you make a fabulous day trader. I guess they are entitled to be right once in a while. I wonder when they'll start writing articles about reaching the all important bottom. I'll make sure I use that as a buy signal ;)

      I read these articles by experts for "entertainment" value. Plus if he were so smart, he'd be retired as opposed to writing doom and gloom articles.

      And don't get started on agents. They are great for doing paper work and leg work, but try to explain real estate investing, oi.

    5. Yup, I'm probably a fool, and me and my money will surely be parted. You missed my point though. Markets go up, markets go down - constantly, so predicting it'll come down year after year is kind of obvious. They'll sure to predict it will be going up to.

      I'm sure you are an expert real estate investor as well - and probably an expert in equities. I bet you are an expert at everything ;)

      And you can compare real estate to the equities market - they both go up and down - think about that for a second :)

    6. Oh, and I bet you always want the last word as well. So, let's see your next post.

    7. "the same doom and gloom is predicted year after year" because house prices are unsustainable.

      "Unsustainable" means that they will eventually have to adjust to the reality.

      When ? Eventually. (it looks like 2013 is a good guess).

      Same as a very heavy drinker. Eventually, his liver will shut down. When ? Eventually.

      Doom and gloom ?

      How about "common sense" ?

  10. Citing that the demise of real estate could be attributed to credit tightening, boomer demographics, disappearance of asian money are all very credible. But here's another one: here in Richmond BC, I'm constantly hearing of the school board citing dropping enrollment of students in the upcoming years. Instead of worrying about building new schools, as a city would if it were growing, they are decided which schools to be closing in the near future. Fewer kids, declining population, no use for more homes. Makes sense, non?

  11. The loaned money are on the balance sheet, even if they probably don't exist anymore (they've gone poof!). The interest money, however, do not exist anywhere physically because they have not been loaned into existence. This turns out freaking badly mathematically, but when you have a bunch of speculative manias on top of non-existing interest required to pay back the loans, it it turns pretty freaking unbelievably badly, as we are about to notice pretty soon.

  12. Interesting to hear all the viewpoints and self interest that creates them.
    I am hopefull this consolidation of prices is gentle and" soft". Sadly , realtors have no training as to what valuations should be , beyond " comparables". Realtors I talk to cant even calculate a proper cap rate that includes all expenses , including deffered maintenance. They have not had to . It's been a spec rally for over 9 yrs.

    How can our prices be 3 x higher than Seattle for example on comparable properties .I've lost count on how many fortune 500 employers are in Greater Seattle. We have Lululemon and an economy dependent on real estate hype and weed..

    Vancouver is one of the worlds most desirable places to live, however, that reality was baked in the pricing long ago.

    I genuinely hope too many households are not broken up by the financial reality that is coming to the lower mainland as we speak and for the next 3-6 years conservatively.

  13. Now you have all done it. Spent your time responding to alphabet Arnold instead of enjoying the day....he got what he wanted, attention.

    Worst of all I believe....

    "He'll be back...."


  14. I've enjoyed this over priced rain forest as best as I can today.. Arnold will be back. Hell try to show he's not as clue less ,as he's demonstrated already, for every one to see.

  15. Alphabet Arnold schat all over this forum and then posted it on his blog for all to see.

  16. Arnold Shuchat? More like Arnold Asshat if you ask me. You can give him all the raw, unfiltered data you want and he'll still find a way to spin it in a positive way. Worst sales in over a decade? That's a plus for RE in Vancouver!

    Stick a fork in it. It's done.

  17. Always love real estate agents who say they are a "Group"... Schuchat Group... Andrew Schuchat and his pet gerbil working out of his basement.

  18. My strategy is i left some reserves. I dont take it all out.

  19. The Trolls and bubble deniers are coming out in force now. The game really is over.

  20. “It all amounts to a dramatic reversal of fortune for Canadians, albeit one we brought on ourselves.” Good article but this statement is wrong. “We” had no input whatsoever in the decision to greatly reduce credit restrictions which is the prime cause of this disastrous bubble. Instead it was a decision reflective of the incestuous relationship between the federal government and a tiny coterie of Canadian finance capitalists. Despite the momentous impact of such a decision, it was done in the back rooms with no democratic input whatsoever. Once the policy was in place, the vast machinery for selling loans and real estate was brought to bear with the full support of capitalist media acting as, with the odd exception, mouthpieces for the banks, real estate and development interests.

  21. Awesome article. Good to finally see it coming out.