Kool-Aid

An unhealthy divide has formed over the fate of Canadian real estate. And somebody’s going to be terribly wrong.

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On one side are the apologists you’d expect – realtors, developers, mortgage lenders and (of course) CMHC. On the other is a growing cadre of economists, global analysts, academics and (of course) the social misfits, basement dwellers, doomers, contrarians, iconoclasts and squirrel gourmands who hang around this pathetic blog.

One group claims real estate is healthy, balanced, and cooling off before it comes in for a soft landing. The other says, no.  We’re screwed. No boom ever ended well.

As the week faded, the debate spiraled higher.

Here’s syndicated business columnist Jay Bryan, for example, spokesguy for the status quo, explaining why this is no bubble:

First, a true speculative bubble requires impressive levels of irresponsibility from banks and regulators, something that took a long time to develop in the U.S. Canada never matched this achievement. A mere 10% or so of overvaluation, which is roughly what we have in Canada, is no bubble. Second, homeowners are very reluctant to sell what’s usually their biggest asset at a loss, so many will hang on like grim death rather than sell into a devalued market, making it unusual for prices to drop rapidly.

And yet business professor and author George Athanassakos was the star of yet another Bloomberg piece on the dangerous thing called Canadian real estate. His argument: so much of our GDP is now housing-related, it is simply unsustainable. A bubble.

Canada may be on the cusp of a “severe” housing correction as real estate investment surges above a tipping point relative to economic output, according to George Athanassakos, professor of finance at the Richard Ivey School of Business.  “Eventually, everything boils down to demand and supply. Whenever this ratio goes over 7%, it signifies overinvestment in housing and two or three years later, we have a severe correction.”

Canada’s housing market is booming as historically-low interest rates fuel purchases, driving up home prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8% over the last 50 years and is currently at about 7%, based on Statistics Canada figures as of the third quarter of 2011, Athanassakos said. Housing investment includes spending on new homes, renovations and real estate transaction fees.  “We have experienced bubbles and busts before in Canada, it’s nothing new,” Athanassakos said. “I don’t know why this time would be different.”

Who to believe? You’d probably be wise to look at the motives behind the comments. For example, Bryan trots out bank economists who dis talk of a correction. A soft landing, he says, would be “hard on the reputations of would-be prophets of doom, but excellent news for everyone else. At a time when job growth in Canada is throttling back, as consumer spending slows, we’re going through a delicate transition that could be badly derailed if there were a hard landing in real estate markets.”

In other words, let’s not talk down the housing market because (a) keeping real estate values where they are is “excellent news” (he must have a mortgage) and (b) let’s not make a stuttering economy worse by warning people about  buying at unsustainable prices. Welcome to the new journalism. Give readers half the facts and you double your chances of convincing them.

It’s hard to understand how anyone can argue houses are just 10% overvalued when prices have risen 80% in six years while wages are up by one fifth and every indicator of debt is flashing red. The jobless rate is swelling and GDP’s falling. Exports are a mess, pensions are under stack and governments everywhere are swamped in unfunded liabilities. In other words, what kind of fools would willingly walk into a lifetime obligation to buy something which has never before cost so much, at a time of such risk?

Obviously Mr. Bryan would. And he sure hopes you don’t blow it.

This is a fundamental trait of real estate. Its true value hangs by gossamer threads. When there is confidence and faith, it rises. When there’s doubt and fear, it falls. I’ve told you often this is the emotional asset. As we’ve seen to the south, it matters not if houses are the most affordable ever. When they’re perceived as scary, they go unloved and unbought. Those who are caught in the decline suffer mightily. Those who saw it coming, far less.

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There should be no mystery why the MSM drinks the property Kool-Aid. It’s there in George Athanassakos’ numbers. Thanks to the real estate industry, cheap rates, voracious bankers, HGTV home pumpers and your granite-loving MIL, new home spending equals 7% of the economy and all residential real estate accounts for a staggering 27%.

This is more than double the entire manufacturing sector. So clearly we don’t need the ‘collapse’ or ‘US-style crash’ that detractors scoff at as impossible, to have a crushing impact on families. Having said that, bubbles don’t slowly deflate. Hot markets don’t gradually cool. When people stop coveting houses so much they’ll pay more than the asking price, it doesn’t mean they offer less. They just fall out of love, get dressed, and go away.

Someone asked me in a tweet today why I don’t take my message ‘mainstream’. And I said that would be irresponsible.

I just want to save you.