Canada's Housing Bubble

Sep 27, 2010 Garth Turner GreaterFool.ca

There are really, really, really a lot of lonely, sad people in Toronto who have yet to hear of eHarmony.ca. How else can you explain well over a thousand of them signing up to come and hear me on November 9th? Or are they all realtors? With weapons?

In any case, we’re now SRO, even after the hotel threw in another ballroom and 500 more chairs. So, registration is closed. I`ve sent notes to Springsteen and the Peas to see if they’d like to hot up the audience for me. Please bring disposable lighters, glow sticks and your own supply of Depends.

On a less serious note, let’s say you have the average Canadian family making the average income – about $70,000. You dwell in the average house, have average kids (1.2 of them), and pay average taxes. That means you have $54,000 left to live on for a year. Sadly, your house eats 48.9% of your pre-tax income, which equals $34,320 – which also means you have about $19,600 left. That’s $1,600 a month for food, clothes, car, vacations, school fees, insurance and your online connection to this pathetic site. Notice I did not include ‘savings and investments’ because, of course, there’s no money left.

And you think this is bad? Try living in a high-cost city like Toronto or Vancouver, where a house eats more than 50% and 65% of pre-tax family income respectively.

This is what happens when real estate speculation meets dumbass public policy, driving the cost of shelter absurdly higher. It’s a massive hidden tax on the middle class, sucking off billions which should be finding its way into a better life or a nest egg for the future. Instead, real estate now means sacrifice and debt. And danger.

So this week the latest Royal Bank affordability report was published, giving us that 48.9% average house cost number. But even that isn’t an honest figure. It’s based on buying a house at current prices with 25% down and a 25-year amortized mortgage. Trouble is, it’s a rare buyer now who has a quarter of the purchase price in cash, the average down payment being 7%.

Even so, this is a document which should have F and Mark Carney doing a dry heave. Families in record mortgage debt. Household liabilities now equaling 145% of earned income. Six in ten living paycheque to paycheque. Forty per not even trying to save. And almost half of earned income now feeding a house pretty much certain to depreciate.

This is what emergency interest rates, feckless lenders and irresponsible leaders have wrought – house lust. Whether it was the CEO of LePage, the economist at CREA or the minister of finance – all of them share in leading buyers into bidding wars and debt quagmires. They turned shelter into a wealth killer, while telling us the American real estate slaughter could never happen here.

Well, guess what?

Even RBC now says there are “red flags” over the Vancouver market. “While the Vancouver market is clearly vulnerable to a price correction, this does not imply that a collapse is imminent because supply (both in the existing and new home sides of the market) is well contained at this point.” What does that mean? If listings rise, of course, it means there will be “a collapse.”

In the GTA: “The deteriorating trend in Toronto’s housing affordability continued.” And the bank cautions that a “wild downswing” in prices was kept at bay only because vendors retreated. Which begs the question of how long that will last. As I’ve told you before, I expect this correction to be followed by a multi-year melt, as interest rates normalize and then those oxygen-sucking, walker-wheeling Boomers start trading houses for income.

Let’s face it. RBC is a bank. Banks in Canada have huge mortgage portfolios. RBC is also a major pillar of the economy and well understands its corporate responsibility. So when it cautions that the average family is being sucked dry by the average house, this is a big deal. Owning a home traditionally took a third a family’s income, not half. The savings rate in 1967 was 7% and in 1982 it was 20%. Today it’s negative.

It’s also worth remembering the US housing market collapsed when it took 4.6 times the average income to buy the average home. Today in Canada the number’s 5.1. In Toronto, 5.5. In Vancouver, 9.3.

Most people have no idea what they’ve done.

Do you?