Pooched 2


pooched 1

While a thousand suits were shuffling into a Toronto hotel ballroom Friday to hear bankers tell them housing in Canada will land softy, the world was hearing something different. It’s the burning question these days. After all, everyone knows real estate is pooched one way or the other. The question is how much?


We’re now about ten days away from the start of a flood of listings which will wash over markets like Toronto and Vancouver. Realtors expect the make-or-break Spring season to flower sooner than ever, simply because the autumn sucked and sellers held back, waiting for all those buyers to return.

Now, five months later, it’s a new game. Not a day goes by that the mainstream media isn’t yapping away about the latest evidence of a housing disaster in slow motion. The meme is out there. By the end of this year, mortgages will cost more and houses will cost less. Soon the big cities will be following the regions and the smaller centres, where housing deflation’s been a fact of life for months already and buyers have been voraciously vultching.

So there they were. The bank rock star economists. Each grabbing the mike at the Economic Club of Canada to tell Bay Streeters what comes next. It was a piteous sight, almost as indigestible as lunch, with a main message that the housing bubble nobody would admit to a year ago will slowly dissipate, rather than rupture. Of course, it will still bring pain. Construction jobs will start disappearing by the summer, says Scotia’s Warren Jestin. The nation’s entire economy will take a hit, says CIBC’s Avery Shenfeld. Echoing this pathetic blog, they opined that we’ve all let real estate become way too big a hunk of the GDP.

Nobody laughed or snickered, threw buns or even threw up, I noticed. Lost on the crowd was the fact Big Banks were giving away downpayments to young hornies with no money until two months ago, encouraging mindless borrowing with 2.99% Specials or routinely allowing liar loans and robo-appraisals. Lax lending standards in Canada, along with gutter interest rates, are the two reasons household debt has soared along with the cost of a bung in Red Deer – something not lost on others.

Like The Economist, which just blew the doors off the notion Canada is a prudent place where risk went to die.

The international publication has published a global comparison of real estate affordability. We fail.

The two measures used are the price-to-rent ratio and the ratio of home prices to disposable income per citizen. Price-rent for homeowners is like price-earnings for stock investors, roughly equating rents to profits. Remember the dot-coms with their high share prices and microscopic earnings? That’s like buying a $2 million house and only getting two grand a month from the tenants. Why the heck would you do it?

So how did we do? Hmm. Sucked. Housing in Canada is overvalued by a massive 78% – the worst showing in the world (Hong Kong is only 69% too expensive) – while Japan came in at the other extreme, with real estate undervalued by more than a third.


The US, interestingly enough, is still a bargain despite prices rising at over 4% a year. Houses are 7% cheaper than they should be, and 20% below fair value, based on American incomes. By the way, in terms of what Canadians earn, the analysis suggests real estate here should fall in price by 34%.

Overvaluation is especially marked in Canada, particularly with respect to rents (78%) but also in relation to income (34%). Mark Carney, the country’s central-bank governor, who is soon to jump ship to join the Bank of England, where he takes over from Sir Mervyn King in July, may have shown good market timing with his move to London as well as a deft hand in negotiating his lavish remuneration.

Of course, 34% is no soft landing. It’s a smoky hole in the ground with tail fin sticking out of it.

This is why real estate’s dangerous. People crave it when it soars and flee when it tumbles. They buy for emotion, not logic. They use extreme leverage and think it’s riskless. They get market advice from their mother, whose best-before date was 1988. They succumb to our cultural bias that a roof, even mortgaged and unaffordable, equates security.


It will be a Spring to remember. Fleurs du mal

avatarGarth Turner - The Greater Fool posted Friday, January 11th, 2013.

1 Comment for “Pooched 2”

  1. In Canada, it’s government policy to make housing expensive. In Ontario, the Provincial Government has a blueprint that encourages high population densities in the Toronto area, for example. (Some studies of government policy use the words: “restrictive land use” ) That crowding forces up the price of housing.

    The government thinking is that with people crowded together, the people will need less fuel to get to work (unless, of course, people can only find jobs far away from where they live, and unless, of course, the people sit in traffic, wasting fuel, because the city streets are so congested with vehicles).

    The government also thinks that by crowding people together, the cost of infrastructure is supposed more affordable because so many people are “sharing” that same infrastructure. For example, many people share the cost of a subway platform by being so crowded together that some are in danger of being forced off.

    Maintaining that “shared” infrastructure is a nightmare when the streets below the city are a maze of different pipes, wires, and tunnels. So reconstructing a subway tunnel, for example, means that perfectly good pipes and wires also have to be replaced; and just about any kind of reconstruction work causes traffic gridlock.

    Medical costs can be higher, when one person on a crowded bus sneezes, then a day or two later, a dozen other bus riders find that they have caught some nasty germs.

    But then when people bid-up house prices in those same crowded areas, the Province can collect more money in land transfer taxes.

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