Ominous Parallels

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On Sunday I told you to expect a 30% cratering of house sales in Vancouver when the realtors made their big reveal a day or two later. I was wrong. It was 29%. But November was so bleak that sales were 30.3% below the 10-year average. Anyway you cut it, this is substantial news. Even the financial guys now know it.

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Says BMO Nesbitt Burns: “Vancouver’s market is on the down slope of its historical roller-coaster ride.” When bankers start talking macho like that, you know what’s ahead. Minimum-wage hairdressers in East Van will have a nasty time getting million-dollar mortgages. It’s just so unfair.

Says veteran agent (and Van bad boy realtor) Sam Wyatt: “Anyway that you look at the pricing for detached Westside houses, they are falling… the lowest figures seen in nearly 2 years.  Some argue that there is “pent-up” demand and that as prices fall we will see a flurry of buying in the spring.  I believe that we will see large listing volumes in the spring and not enough demand to reverse the present downward trend.

“SELLERS:  Act decisively and price below the previous sales comparables.  In this market, a quick sale is the sale that will get you the most for your property.

“BUYERS:  You have a huge inventory to choose from and plenty of vendors willing (or those who are compelled by circumstance) to negotiate in earnest.  If you need a long term home it is a fun time to be shopping (though tiring with so much to see).”

Of course Vancouver housing is a proxy for real estate across the country. They just don’t know that yet in Calgary. The declines will not likely be as severe as they’ll end up being in The City that Mold Loves, but lower prices and sagging sales will be universal. And all the way down, real estate boards will probably lie to you.

For example, consider what’s happened to the price of a single-family home in Vancouver this year, sliding from above $1.2 million down to a still-unaffordable $1.053 million. It’s a reduction of more than 12%. The realtors, on the other hand, state Van housing prices are lower by only 1.7%, year-over-year. You can see from the chart below (provided in a weak moment by the Vancouver Real Estate Board) that (a) there’s an ominous parallel to 2008, (b) the reduction is real, and not 1.7%, and (c) SFH prices clearly hit a high in the Spring, retreated, retested the high and are now in retreat. If this was a chart of, oh, RIM stock, the exits would be clogged.

But why couldn’t prices rebound in 2013 the way they did in 2009?

Simple – mortgage rates. In 2008 a variable-rate mortgage was 6% and a five-year loan was 5.75%. The world fell into a financial funk, unemployment spiked, Wall Street banks imploded, carmakers crashed and the Bank of Canada rushed in emergency interest rates. By May of 2009 a VRM had collapsed to just 2.25% – the lowest point in history. With rates almost 4% lower than they’d been months earlier, and mortgage payments slashed by more than half, the collapse in real estate prices and sales was quickly reversed.

People in Vancouver, as in Toronto, pigged out on debt, took advantage of 40-year amortizations and 0%-down mortgages insured by CMHC, plus cash-back loans which saw banks put up 100% of the purchase price, and started bidding wars. Personal debt levels soared to historic highs. The savings rate at the same time toppled by 50%. We went ape for real estate, and this pathetic blog was born.

As you know, those emergency rates are still in effect. There will be no more declines. Ottawa woke up and eliminated 0/40 mortgages and has banned banks from handing out downpayments. Unlike 2009, families are massively indebted and have converted most of their savings into real estate. Unemployment is still north of 7% nationally (almost 9% in Toronto) and the economy has again slowed to a crawl.

No, we’re not headed for another 2008-style financial or economic meltdown. But don’t expect another 2009-style orgy, either. It’s over.

This is why realtors sound so silly and dangerous when they say things like: “People from all around the world still want to invest and live here. We don’t see a housing bubble because there isn’t much speculation. Prices haven’t shifted much.” (Eugen Klein, Vancouver real estate board boss.)

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Just as the next five years will bring deleveraging by households – people spending their money reducing debt instead of buying new stuff – so will they bring a meaningful correction to real estate markets drugged by the crack cocaine of cheap money. The peak was last Spring, which is why deep troughs in sales in Toronto and Vancouver this autumn are so indicative of what lies ahead.

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avatarGarth Turner - The Greater Fool posted Tuesday, December 4th, 2012.

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