Canada's Housing Bubble

Oct 06, 2010 Garth Turner GreaterFool.ca

While you can still buy a perfectly okay house in the belly of the Annapolis Valley for $250,000, people here worry. They, too, know change is in the air.

In fact, the average home price across Nova Scotia, according to the local realtor cartel, is $324,928. The average household income is $61,980. Which means the average home costs 5.2 times income – slightly higher than the national norm (5.1), close to non-affordability levels in Toronto (5.5) and of course higher than the multiple the US market hit (4.6) before it collapsed four and a half years ago.

Now, compared to Kelowna (7.2) or delusional Vancouver (9.3), this all seems quaint. But the reality remains that most of the people who sat in a room outside Wolfville listening to me last night have one big thing in common with those who packed a Vancouver ballroom some days ago – Re/Max wants to fool them. And so does every big real estate outfit in the country, it seems. And shame on them.

The facts seems to speak plainly enough. Last month house deals in Toronto, the country’s biggest market by far, were down 23% from year-ago levels. In Vancouver the drop was as predicted here days ago – 40%. In Calgary, SFH sales dumped 24% while condos crashed 37%.This is the fourth consecutive period of double-digit decreases in the major markets, which means 2010 will likely end with a string of six back-to-back losing months – the first, wizened old geezers tell me, in more than two decades.

This is a disaster. And although average prices are up in some places (in the GTA it’s ahead of last year by 5%, to $427,329) this has more to do with statistical anomaly than horny buyers. Real estate markers live and die on volumes, not prices. So when a market (like Victoria) has the worst sales in twenty years, it should strike fear into the hearts of those with the bulk of their net worth in one house at one address in one city, whether it’s Kamloops or Mississauga.

So how do you slap lipstick on this pig?

Well, start by calling the maquillage pimpers at Re/Max. These guys can make a corpse look hot.

Trading credibility for a headline, the company issued a full-frontal media release claiming the national real estate market is on a roll. “With the diminished risk of a W recession occurring, rebounding commodity and equity markets, and more positive economic data emerging daily, the outlook for the residential housing market has vastly improved over the past three months.”

While I have no idea where the ‘W’ recession thing came from, the ‘positive economic data emerging daily’ is a coarse fabrication. As I detailed here yesterday, even jolly little F is warning that any economic boom we might have had is kaput, while BoC government Mark Carney has gone all goth on us. Household debt is out of control, he growls. “This cannot continue.”

And while stocks markets may be prancing higher, with gold and oil, copper and potash all swelling in value, this means squat to the average Canadian household, when the bulk of net worth is sitting in a house. No diversification here. No asset allocation. No tax avoidance strategies. Just one paycheque away from holy crap.

Against this backdrop, realtors are disgracing themselves.

Says the Toronto Real Estate Board, trying to divert us with a shiny thing: “Simply considering home prices relative to incomes does not allow for an accurate analysis of affordability. The share of average household income going toward a mortgage payment on the average priced home in the GTA remains within accepted lending guidelines.”

Translation: So what if house price inflation has outstripped wage gains? These cheap mortgage rates mask all that. So where’s the issue, dude?

Well, these rates won’t last, of course, which means big troubles down the line in 2014 or so. Worse, sales declines now mean price declines later, which brings negative equity. What a shock to the army of young property virgins who were told real estate always goes up – mortgage costs doubling on houses which are worth less. (In fact, it’s  interesting to note the number of first-time buyers is tumbling around the world as housing turns turkey and demographics get decidedly ugly for real estate.)

By the way, I’m researching investment property later today along the coveted south shore of Nova Scotia. Gentle sea breezes. Craggy cliffs. Historic coves. New price stickers. Mermaids.

I’ll share what I find. Fins and all.

Hear Garth here:

Dartmouth
TOMORROW Thursday October 7, 12 noon, Burnside Best Western. Register here.

Halifax
Thursday October 7, 7 pm, Ashburn Golf Club. Register here.

Victoria BC
NEW SEATS AVAILABLE Wednesday October 13, 7 pm, Victoria Convention Centre. Register here.

Kelowna
Thursday October 14, 7 pm. Register here.

Surrey
EVENT FULL Friday October 15, 7 pm. SECOND EVENT: Friday October 15, 2 pm. Register here.

Calgary
Thursday October 21, 7:45 pm, Chapters Dalhousie, 5005 Dalhouse Dr NW

Toronto
EVENT FULL Tuesday November 9, 7 pm, Double Tree Hilton, 655 Dixon Road (airport strip).