Sales of existing houses in the massive GTA market fell almost 18% in the last two weeks, compared to last year. However that’s not the real story.


More significantly, the price of a detached home in the key 416 area has declined 7% since June – partially accounted for by a seasonal dip. But sales have tumbled 41.5%, sliding by almost 1,000 per week from just six months ago. You could attribute this to snow and cold, but there isn’t any. It was 11 degrees today and 17 last week. The closest flake is in city hall. You could blame higher mortgage rates, but they’ve actually gone down, thanks to a new bank 2.99% promotion. The fiscal cliff? Nah, non-event. The stock markets buried that one on Monday.

In fact the only thing that’s really happened in the last six months – during which real estate sales from Vancouver and Victoria to Toronto, Montreal and Halifax have faded badly – is F’s holy War on the House. As you know, the 30-year mortgage died on July 9th. That was the same time CMHC stopped offering insurance on houses over $1 million, meaning buyers now have to cough up at least 20%. And last month the banks were banned from giving away down payments in the form of cash-back mortgages. Plus, borrowers have to meet tougher debt-ratio standards.

So are sliding housing markets positively correlated with the elfin deity’s full Monty on the MLS? Of course they are. I told you back in March, when F was preparing this package, that Canadian real estate would not withstand what was coming. That, you might recall, was when the average SFD home in Vancouver was selling for $1.2 million, and home sellers in North Toronto were routinely showered with a dozen offers, all for more than they’d asked. I suggested you be a seller, not a buyer. Now you know why.

How serious is this?

Enough to make forex guys horny, apparently.

“Canada tightened mortgage requirements in the summer and there are signs the market is cracking,” writes Adam Button, on “As I’ve said before, this has the potential to be the major CAD story in 2013 but probably not until the second half. Even when house prices begin to fall, the FX market can be slow to adjust, often waiting until it shows up in GDP or employment numbers.”

But what might make astute currency traders money, is also stealing cash out of the pockets of the entire real estate industry, and they are wet-kitty pissed about it.  For example, the mortgage brokers released a coordinated attack on F this week, spearheaded by their chief economist, Will Dunning. “The changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy,” he said, adding that a whopping 17% of all property virgin mortgages which were approved in 2010 would never have been funded had the new rules been in place.

Since 55% of all Canadian house sales involve high-ratio, high-risk mortgages (that’s the industry number – I suspect it’s higher), the impact is clear. It means one in ten deals wouldn’t happen – enough to wallop the entire real estate market, eliminating more than 40,000 sales nation-wide. Now add in the impact of all the wrinkly Boomers, house-rich and cash-poor, plus appalling savings investing habits overall and 30-year-olds underemployed while knee-deep in student debt, and you have the formula for a personal financial crisis. How will this not end in a mess?

And check this out: a year ago Dunning and his mortgage broker buddies were discounting the very notion of a real estate bubble in Canada. Now, he warns, “The U.S. experience has showed us that what starts as a small drop in housing prices can spiral into a dreadful outcome. This report is not concluding that the same will happen in Canada, but it is pointing out that the revised mortgage insurance criteria … is unnecessarily raising economic risks in Canada.”

Dunning also predicts a 20% collapse in homebuilding activity over the next two years. This is what happens when bulls morph into bears.

For its part, the Toronto Real Estate Board is singing the same anthem. The cause of lower sales? “The reduction of the maximum amortization period to 25 years translated into higher mortgage payments.  Some households will have to save more money for a down payment before purchasing a home, in order to offset these higher mortgage costs.”

Of course the real cause of the housing correction is not the feds. They just exposed it.  Instead, blame average prices that average people can’t pay, and can’t last.

How hard was that to figure out?


avatarGarth Turner - The Greater Fool posted Monday, November 19th, 2012.

1 Comment for “Capitulation”

  1. Wow, Garth, you were right!
    I didn’t listen, and now I’m screwed!
    Oh dear, I should have listened. What do I do now?

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