What Can Go Wrong?

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wrong

If you bought a detached house in 416 on, say, May 14th, you paid $835,522. That was the average, and that month 10,850 properties changed hands in godless Toronto. If you bought a SFH last week, you paid $694,619 – the current average. And we’re on track to see about 3,700 sales this month.

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So, that’s a 66% drop in sales and a 17% reduction in price, from the peak of the bubble market. This is Gangnam big, baby. Remember it took those tacky Americans almost four years to shave 32% off housing prices and crash sales by two-thirds. Are we on track to the same black hole? Hell, even the turgid Globe and Mail (now begging for 99 cents a month) ran a piece with the headline, “Struggling real estate market can have huge impact on Conservative economic narrative.” So, did elfin deity F really mess up the way the mighty Toronto Real Estate Board claims?

“Stricter mortgage lending guidelines, including a reduced maximum amortization period and a one million dollar purchase price ceiling for government-backed insured mortgages, appear to have had the effect desired by Finance Minister Jim Flaherty. Some home buyers have put their home purchase decision on hold,” said Toronto Real Estate Board (TREB) President Ann Hannah.

So, let’s compare mano-a-mano. In contrast to last December, there are 21% fewer sales across the six-million-strong GTA. Big, ugly drop. But a year ago the average SFH in the core was selling for $708,993, so the current price is but a 2% decline.

This means if you bought a house a year ago you’ve lost 2% of the equity, plus the 4% it costs to close a house deal there. That’s 6% of $708,993, or $42,500. Of course, if you bought in May, you’re down $141,000, plus closing costs, or about $170,000. I’ve obviously not added in the amount that seven hundred grand could earn in a year invested at 7%, which is another $49,000 in both cases. All to live in a house you could have rented for $3,000 a month, saving massively.

This may be extreme math, but I’m making a point here. The only way anyone who bought a property in the last year or so can escape meaningful losses is if we see a miraculous rebound in the fabled Spring market.

Will it happen?

Will I be appointed to the Senate?

Face it: sales have fallen in Toronto (as in Vancouver) for eight of the past eight months. This is negative momentum, even at a time when mortgages are available for less than 3% and the economy’s been inching ahead. The fact those mortgage and CHMC changes crashed the market is evidence (as I said yesterday) prices were too high and had to correct. The drop of 17% from May and 2% from year-ago levels is not the bottom. There’s more to come, even with a seasonal recovery when the pansies pop. A year from now, houses will cost less.

Of course, this is not just a single-family-detached story. In the GTA semi sales are off 35% while townhouses and condo deals have fallen 17% and 26% from levels of one year ago.

Without capital appreciation – year-over-year gains in the value of a home – real estate’s a losing asset. It’s been that way now for a year in the nation’s largest three markets where a third of the population lives, and it’s about to get worse. In the GTA, for example, it costs $34,000 in closing costs to buy the average SFH, and another $35,000 to sell it. So, it has to appreciate by 10% just to break even – and still costs at least $55,000 a year to carry, even with no mortgage (the earning power of the uninvested equity, plus property taxes and insurance). That’s 50% of the average family income, before tax.

If you want financial security, rent. If, on the other hand, you want a spouse, find another blog.

SFH

Hey, here’s someone looking for advice. Should his horny young boss take a one-year mortgage on her shiny, new inflated condo, gambling rates will go down? What say ye, merry blog dogs?

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I am one of the younger (18) readers of your (this pathetic?) blog, but I have a 30 year-old employer turned friend that bought an “in-construction” condo in Toronto for $475k, this was 3 years ago, so now as her time to move approaches, she’s seeking a mortgage. She has her own business but she only declares her income as $30,000 yearly. She had about $150,000 accumulated from business and savings for her down payment and the condo is now valued at about $512,000. Recently, I accompanied her to a score of banks and mortgage brokers to see what kind of rate she could get. Most wouldn’t even give her a quote, saying her miniscule yearly income makes it impossible to get a $300,000 mortgage. The lowest we got from these was 2.99% over 5 years, to then be readjusted. She opted out of that idea and got a quote of 2.59% from her local credit union for one year. She believes she could put more of her earnings next year or get quoted with a lower rate after her one year. This is concerning to me because I see the kind of bear housing market we are entering. I am not sure if the BoC will raise (to stem the growth of super bubbles like the Canadian housing) or lower interest rates (to allow irresponsible mortgage agreements and “house horniness” to continue “economic growth).
Your thoughts, or even some advice would be greatly appreciated.

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avatarGarth Turner - The Greater Fool posted Tuesday, December 18th, 2012.

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