July 17, 2012

A Pre-Existing Over-Exuberance

The Montreal Gazette reports from Canada. “In hockey-crazed Montreal, the Habs brand has been used to sell everything from school lunch boxes, to home insurance. But even with ownership perks like the chance to skate once a year at the Bell Centre, are Habs fans really willing to pay more than $500 per square foot – exact price yet to be determined – on a place to live? ‘I think you’d be surprised,’ said Riz Dhanji, the Toronto-based VP for real estate developer Canderel Property Management. ‘I think there will be more interest among hockey fans in Montreal than there was at (the Maple Leaf Square condo project) in Toronto.’”

“Condos at Maple Leaf Square, marketed in 2005 at a then jaw-dropping $475 per square foot, are now worth north of $700 per square foot – an appreciation in price that’s likely to be noticed by real estate investors in Toronto and other Canadian cities. ‘There’s some speculation that this (Bell Centre) project will follow suit. And that’s the speculation I expect the developer is going to try and drive,’ said Brian Persaud, a Toronto real estate broker and author of Profitable Investing in Condominiums.”

The Star Phoenix. “Toronto’s Maple Leaf Square has two towers of 50 and 54 storeys, respectively. At more than $450 per square foot, people in the industry were shocked at the prices the developers were charging when they went up for sale in 2006, said Ben Myers of Urbanation, a condo-market research firm in Toronto. But all the units were sold and now command resale prices upward of $650 per square foot. So what did Toronto hockey fans get for their real estate investment other than proximity to their favourite team? After all, condo owners had access to a private box at games but still had to pay for the privilege.”

“Maybe simply being at the centre of the action, which doesn’t necessarily have any measurable value. ‘Let’s face it: Hockey is king in this country,’ said Ben Myers of Urbanation, a condo-market research firm in Toronto. ‘People here want to buy into anything that’s associated with the Toronto Maple Leafs.’”

“Cadillac’s announcement comes amid a significant expansion in condo apartment construction overall in Quebec, which is raising concerns that prices are set to drop if demand slows. Economists at Desjardins said in a July 10 report that while the existing market in Montreal is balanced overall, there is already a surplus of units priced over $800,000.”

“‘The situation is relatively healthy,’ the economists said. ‘There are several signs, however, that construction has already reached excessive proportions in downtown Montreal, on Nun’s Island, in a sector in Laval and a zone on the south shore. If housing starts in these areas do not slow down, the risk of a local price decline is very real.’”

The National Post. “Canada’s housing stock is drifting toward the ‘European model,’ said McGill architecture professor Avi Friedman. ‘If you take the typical Canadian home and take out all the wasted space, you have a European home,’ said Mr. Friedman. ‘They’ll have the same number of rooms, the same uses, but they will all be smaller.’”

“Luckily, two decades of condo building have already steeled Canadians for the realities of tiny spaces. Last year, a slate of new Vancouver developments offering condos as small as 400 square feet. ‘In 2006, the market peaked and everybody got back to the idea of ‘We’ve got to make houses smaller and we’ve got to make them more affordable,’ said Brian Johnston, COO of Mattamy Corp., Canada’s largest builder of new homes. ‘I don’t think it’s a matter of personal preference, people just can’t afford to live in those big houses anymore.’”

“Except, of course, in Alberta. In the land of $85,000 median wages and dirt-cheap housing lots, young families are still snapping up giant, single-family homes like it’s still 1985.”

“Trying to sell a three-bedroom condominium in downtown Toronto is harder than selling milk to a cow, local developers say. A sample by Urbanation of new condominium projects shows developers sold an average of 1.4 three-bedroom units per month in the downtown core in the first quarter. The average condo project sold 23.9 units per month.”

“Space and cost are cited as the main reason why many families choose to live elsewhere. A 1,000-square-foot apartment can cost a family as much as $700,000. ‘For $700,000 you can buy a house [elsewhere] that’s 18,000-square-feet, that’s got a parking space, maybe a little bit of a backyard, [and] a basement,’ Urbanation VP Ben Myers said.”

“‘Developers would rather do what’s easy and not necessarily what’s right,’ said Councillor Adam Vaughan said. But developer Brian Johnston said condo designs are not solely based on what developers find easy. ‘Builders don’t have a bias against three-bedroom units,’ Mr. Johnston said. ‘It’s about what the market is telling me.’”

The Toronto Sun. “Deputy Mayor Doug Holyday said personally he wouldn’t want to raise kids in the downtown core and it was ‘certainly not the ideal place’ for families. Left-leaning councillors made political hay with Holyday’s comments Thursday, accusing him of trying to ban children in the downtown core and joking he’d soon try to ban sex too. Holyday stressed he was merely speaking out against ’social engineering’ and a requirement in a development application for an Entertainment District condo building to have 10% of its residential units as three-bedroom units.”

“‘If you look at condos in the downtown they are a lot smaller,’ said Councillor Denzil Minnan-Wong. ‘You don’t have as much room to live in the small condo because it is so expensive.’”

The Globe & Mail. “Vancouver’s housing market is cooling to the point that the balance appears to be shifting in favour of buyers for the first time in years. The average price of a home in Vancouver rose 90 per cent from 2002 to 2007, compared with 40 per cent in Toronto, according to TD. But Toronto has seen prices increase more quickly since the financial crisis, adding to the view that Toronto is lagging its western cousin.”

“Vancouver’s slowdown is ’striking, because nothing has really fundamentally changed in the market. It’s hard to pinpoint. Something has affected the psychology,’ said Toronto-Dominion Bank deputy chief economist Derek Burleton.”

“CIBC deputy chief economist Benjamin Tal agreed that the slowdown that’s underway in Vancouver will soon begin in Toronto. ‘We see less investment activity in Vancouver, and less Chinese money entering the city,’ he said. ‘This is just the beginning of a downward trend in Vancouver.’”

“Economists also say that the recent round of mortgage insurance changes that Finance Minister Jim Flaherty unveiled last month will accelerate softening in real estate markets across the country. The new rules, which kick in on Monday, will, among other things, cut the maximum length of insured mortgages from 30 years to 25. Eugen Klein, president of Vancouver’s real estate board, said he expected to see indications of a rush in activity prior to the changes taking effect, but hasn’t seen any so far.”

“‘We thought that people would see a fervour of activity from people trying to get in under the line of the due date, but members haven’t been telling us that that’s the case,’ he said.”

From Canada.com. “Did the Harper government blunder into overstimulating a housing market that it’s now in the process of squeezing at just the wrong time? The question springs to mind now that new numbers show that Canada’s housing market showed signs of significant softness in June. Warns economist Robert Hogue at the Royal Bank, ‘the risks are higher now than they were before.’ Hogue thought markets were cooling nicely even before the stricter rules came in. Now, he worries, ‘this may give a push beyond what the market needs.’”

“Douglas Porter, deputy chief economist at BMO Capital Markets, thinks the market will probably adjust without too much trouble — but acknowledges that he too feels a little tug of concern. ‘This may have been one turn of the screw too many,’ he says.”

“The irony is that it was under this same Harper government that Canada loosened its mortgage rules so much that by late 2006, you could borrow for 40 years with nothing down. The then-governor of the Bank of Canada, David Dodge saw this as so irresponsible that he broke the central bank’s usual rule against criticizing government policy.”

“It’s what foolish governments often do: curry favour by loosening policy too much in good times, only to have to tighten as conditions worsen.”

The Canadian Press.”Under the new mortgage rules, borrowers will be allowed to use up to 80 per cent of their property’s value as collateral for home-equity loans, down from 85 per cent. In addition, the maximum amortization period dropped to 25 years from 30 years for government insured mortgages. Flaherty also said government-backed mortgage insurance will be limited to homes with a purchase price of less than $1 million.”

“BMO deputy chief economist Douglas Porter questioned whether the lower home sales in June could be the ’start of the Big Sleep.’ ‘Even before the new mortgage rules kicked in, all signs suggest that the Canadian housing market was already cooling — the new rules will simply pull hard on a closing door,’ Porter said in a research note.”

“Porter noted that despite the drop in prices, about 70 per cent of Canada’s cities were still reporting price increases.”

“Early indications in June of a slowing market in some cities do not necessarily presage a U.S.-style plunge in housing prices. Forecasters have talked about declines of 10 to 15 per cent being possible, or just a period of drifting sideways. Without a surge in unemployment, it’s hard to see a real crash. Also, there are some good reasons why a decline in houses prices won’t be so bad.”

“Too many people are in the housing market today because they fear that if they don’t buy now, rising prices will keep them out of the market forever. And so they push themselves to do things that aren’t sensible or comfortable, like upping their offer to win a bidding war or borrowing close to the limit of what the bank will offer. An overheated housing market produces an auction mentality, where people almost think they’re in a competition to buy homes. Falling house prices take the adrenalin out of housing decisions. Buyers have a chance to reflect, and that means more rational buying.”

“Let’s not overstate the impact of condo and home buying by wealthy investors outside Canada, because definitive statistics are lacking. But there’s no doubt that in cities such as Vancouver and Toronto, money from offshore has helped bid up prices. We welcome foreign investment here in Canada, but in the case of the housing market that money has fed a pre-existing over-exuberance. It’s healthy for the market if that $1.2-million bungalow falls in price and makes other investors pause.”

“Don’t torture yourself by measuring your house price gains from purchase to the high-water-mark price, which in some cities may have been already been reached. This happens with stocks all the time. The national average resale house price 10 years ago was $205,333 and the most recent tally was $375,605. That’s an annualized increase of 6.2 per cent. If house prices fall 10 per cent to $338,044, then that drags the 10-year gain down to 5.1 per cent. You’re still doing well here when you consider that the average inflation rate for the past 10 years has been 2.1 per cent.”

“If you only bought your home in the past few years, why do you care what housing prices do?”

The Daily Mail. “Americans may enjoy teasing and taunting their neighbours to the north but now the jokes on them. For the first time in recent history, the average Canadian is richer than the average American. The net worth of the average Canadian household in 2011 was $363,202 compared to the average American household’s $319,970 worth, according to data published in Canada’s Globe and Mail.”

“Before setting out his argument for Canada’s triumph,Stephen Marche, a Canadian novelist, simply states: ‘The Canadian system is working; the American system is not.’ He boils down Canada’s success: ‘the stability of Canadian banks and the concomitant stability in the housing market provide the clearest explanation for why Canadians are richer than Americans today.’”

“The Globe and Mail pinpoint Canada’s triumph on 2008’s economic crisis largely destroying the U.S. housing market making Canadian’s real estate more valuable by an average of $140,000. ‘Canadians hold more than twice as much real estate as Americans and, once mortgages are factored in, have almost four times as much remaining equity in their real estate. Americans’ liquid (non-real estate) assets are still greater than Canadians,’ they reported.”




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34 Comments »

Comment by Steve J
2012-07-17 08:46:07

I just wonder how stable those Canadian banks are going to be when real estate stops appreciating….

 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-07-17 08:59:48

“Early indications in June of a slowing market in some cities do not necessarily presage a U.S.-style plunge in housing prices. Forecasters have talked about declines of 10 to 15 per cent being possible, or just a period of drifting sideways. Without a surge in unemployment, it’s hard to see a real crash. Also, there are some good reasons why a decline in houses prices won’t be so bad.”

Keep whistling as you stroll past the graveyard, and maybe the housing market zombies will not attack…

Comment by AmazingRuss
2012-07-17 09:18:07

“there are some good reasons why a decline in houses prices won’t be so bad.”

Yeah… like not having to enslave yourself for the rest of your life to buy one.

Comment by Ben Jones
2012-07-17 09:55:37

Plus you can get that hockey condo for less…

Comment by Beer and Cigar Guy
2012-07-18 06:11:08

“Plus you can get that hockey condo for less…”

I’m saving my pennies for the ultimate can’t-lose investment: Hockey Condo-Hotels. Oh yeah, baby! Now THERE is an idea that simply can’t miss.

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Comment by Dave
2012-07-18 13:39:25

What is this hockey condo you speak of. I would like to subscribe to your newsletter.

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Comment by Diogenes (Tampa, Fl)
2012-07-17 13:32:00

Without a surge in unemployment, it’s hard to see a real crash. Also, there are some good reasons why a decline in houses prices won’t be so bad.”…….

Wasn’t that the same argument made here and elsewhere? Whenever people buy on speculation, the prices begin to drop when everyone starts to head for the exits.
No one will want to hold a property that they bought with 5% down as the price declines 10%, especially when they are using every available dime just to keep up the payments.

Comment by Cantankerous Intellectual Bomb Thrower©
2012-07-17 19:29:33

“Wasn’t that the same argument made here and elsewhere?”

Yes. And here is my counterargument:

I pull in resolution, and begin
To doubt the equivocation of the fiend
That lies like truth: ‘Fear not, till Birnam wood
Do come to Dunsinane:’ and now a wood
Comes toward Dunsinane.

– William Shakespeare’s Macbeth

 
Comment by Beer and Cigar Guy
2012-07-18 06:17:04

“Wasn’t that the same argument made here and elsewhere? ”

Well, of course! You see, ‘its different’ elsewhere. Just ask the Spaniards… Or the British… Or the Australians… Or the Chinese… Or…

What is that economic concept? Something like: ‘Anything that is over-valued will then be over-produced’.

 
 
 
Comment by doom
2012-07-17 09:07:42

Of course the simple solution was and is to impose a tax on any home sales from folks outside the US. The banks and developers created this massive house issue and desperate people do desperate things which affects us law abiding citizens.
All in all the 92% of Americans who work hard to pay their mortgages or paid off their homes continue to get hammered and will so in the many years to come. The losers who are in debt by their choice and the powers to be who want to save their back ends are the real culprits.

 
Comment by snake charmer
2012-07-17 09:18:31

“Before setting out his argument for Canada’s triumph, Stephen Marche, a Canadian novelist, simply states: ‘The Canadian system is working; the American system is not.’ He boils down Canada’s success: ‘the stability of Canadian banks and the concomitant stability in the housing market provide the clearest explanation for why Canadians are richer than Americans today.’”
_______________________________/

You don’t need an economics background to be a respected commentator on housing-related matters, but triumphalism is a huge red flag. How many condos has this guy bought? If Canadians own twice as much real estate as Americans, the collapse of Canada’s bubble could be twice as painful. I doubt Mr. Marche has entertained that possibility even for a second, even though it might entail the political breakup of Canada.

Comment by Ben Jones
2012-07-17 09:54:13

Yeah, and they talk about how robust and strong the markets are, but look at them cry at the slightest tightening:

‘Hogue thought markets were cooling nicely even before the stricter rules came in. Now, he worries, ‘this may give a push beyond what the market needs’

‘Douglas Porter, deputy chief economist at BMO Capital Markets, thinks the market will probably adjust without too much trouble — but acknowledges that he too feels a little tug of concern. ‘This may have been one turn of the screw too many,’ he says.’

And then: ‘Porter noted that despite the drop in prices, about 70 per cent of Canada’s cities were still reporting price increases’

Comment by Realtors Are Liars®
2012-07-17 11:55:23

‘Porter noted that despite the drop in prices, about 70 per cent of Canada’s cities were still reporting price increases’

Which is the Housing Crime Syndicate’s way of saying prices are falling in more and more cities.

 
Comment by Al
2012-07-17 12:46:45

Lots of soft landing talk amongst those who can accept that prices are too high, but can’t accept a crash. With with all the historical examples of soft landings after bubbles, why shouldn’t they predict one now?

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2012-07-17 19:33:08

Mr. Marche is an arse. I can’t wait to laugh and laugh when the Canucks are even more underwater than U.S. homedebtors in a few years, after their commodities and housing bubbles simultaneously implode.

 
 
Comment by 45north
2012-07-17 10:32:33

The Globe and Mail pinpoint Canada’s triumph on 2008’s economic crisis largely destroying the U.S. housing market making Canadian’s real estate more valuable by an average of $140,000.

I’m Canadian. the Globe and Mail is counting its chickens before they hatch

Mark Hanson says that in a rising market, there are very few defaults - people just sell. CMHC Is a huge presence in the Canadian housing market. Under the new rules CMHC will no longer insure mortgages on homes that cost over a $ 1 million. I agree that the rules should never have been loosened in the first place. Better late than never.

 
Comment by JQ
2012-07-17 10:43:52

‘The Canadian system is working; the American system is not.’

One more reason to do away with NAFTA!

Comment by Dale
2012-07-17 12:47:00

It’s good to have a resource based economy (Canada/Australia/Brazil) when all the other economies in the world are booming. When the world slows down economically…..

Comment by Dale
2012-07-17 12:50:20

Oh yeah, And add to that the influx of hoards of dirt poor people. How long would Canada’s “oh so envied” safety net with stand that?

 
Comment by Ben Jones
2012-07-17 14:57:07

‘It’s good to have a resource based economy’

I’d bet a good chunk of the Canadian economy is based on construction and lending too. Texas had a energy based economy in the 70’s and 80’s, but we found out our banks and S&Ls were up to their neck in real estate loans. When TSHTF, all sorts of leverage went bad. Schools, local govt, you name it.

 
 
Comment by Diogenes (Tampa, Fl)
2012-07-17 13:36:43

It’s different in CAnada, Eh?
Very few things happen with perfect synchronicity.
What will Canadians do when prices drop?
Many will try to sell and buy American.
After all, we are very cheap by comparison.
But then, by the time they realize the game is up, they will have lost all that “equity”. so, a hoped for rebound here is probably not in the cards.

 
 
Comment by 2banana
2012-07-17 11:20:57

Yes - it is hard to pinpoint.

At 10X income for house - maybe something got crushed at 11x income. But that is kinda like fuzzy-wuzzy math.

Just wait until it drops to 2x income.

The Canadian RE has gone past insane. Especially when you consider all the open land.

“Vancouver’s slowdown is ’striking, because nothing has really fundamentally changed in the market. It’s hard to pinpoint. Something has affected the psychology,’ said Toronto-Dominion Bank deputy chief economist Derek Burleton.”

Comment by Diogenes (Tampa, Fl)
2012-07-17 13:41:17

It’s hard to pinpoint. Something has affected the psychology,’…….
Here’s a clue… really stupid people wanting to get in on the property game have finally realized that spending every dime they make on a 500sf flat is really, really stupid. Stupid cubed.
They’ve reached to breaking point……ccc..rrack.

 
Comment by Realtors Are Liars®
2012-07-17 15:41:08

Just wait until it drops to 2x income.

…. And it will…. in a big way.

 
 
Comment by Mugsy
2012-07-17 11:23:35

“Americans may enjoy teasing and taunting their neighbours to the north but now the jokes on them. For the first time in recent history, the average Canadian is richer than the average American. The net worth of the average Canadian household in 2011 was $363,202 compared to the average American household’s $319,970 worth, according to data published in Canada’s Globe and Mail.”

I’ve been waiting for Canada’s “jumping the shark” moment. This is it.

Comment by 2banana
2012-07-17 12:35:22

It would be interesting to know the net worth of the average American household at the HEIGHT of the American RE bubble (2005) to compare and contrast…

Comment by Cantankerous Intellectual Bomb Thrower©
2012-07-17 14:58:23

“The net worth of the average Canadian household in 2011 was $363,202 compared to the average American household’s $319,970 worth…”

It would also be interesting to have the correct figure for the average American household, as that one is clearly inflated beyond belief.

Comment by Cantankerous Intellectual Bomb Thrower©
2012-07-17 15:01:32

Maybe using the median, not the average, makes all the difference, as the average is pulled up by 1%er outliers (e.g. Buffett, Elison, Gates) while the median is not.

Family net worth plummets nearly 40%
By Charles Riley @CNNMoney June 12, 2012: 12:12 PM ET
Income and net worth fell from 2007 to 2010.

NEW YORK (CNNMoney) — The average American family’s net worth dropped almost 40% between 2007 and 2010, according to a triennial study released Monday by the Federal Reserve.

The stunning drop in median net worth — from $126,400 in 2007 to $77,300 in 2010 — indicates that the recession wiped away 18 years of savings and investment by families.

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Comment by snake charmer
2012-07-17 13:08:51

Being “rich” is tenuous when wealth is based on assets that are leveraged, or whose prices fluctuate. I was “rich” with stock options 12 years ago. Then I wasn’t. Periodically I laugh about this.

My view of the average American is somebody who can’t afford to miss a paycheck. With everything I’ve read about personal debt levels in Canada, I suspect the average Canadian will be in this boat shortly.

Comment by Diogenes (Tampa, Fl)
2012-07-17 13:47:27

I never am short of amazement when i see these comments about “net worth”, all based on an estimated asset price.
Based on fraudulent accounting, the Big Banks in America are “solvent” and have money to lend.
Based on the actual value of their assets, they are broke and need a lot of newly printed money just to stay in business.
How many people bought 5 houses here in Florida and considered themselves “millionaires” before the bust? Fantasy life is a happy life.
The “world is mine” was the world of Tony Montana in Scareface. That story ended badly, too.

 
 
 
Comment by MiddleCoaster
2012-07-17 13:31:24

Brewing trouble
There will be rubble
Canada’s ripe to
Pop! its bubble

Comment by Moman
2012-07-18 17:16:24

Right after Canada starts showing negative numbers, I bet it’s 3-4 months later that Phoenix goes back to negative territory. A very cold winter in the PHX RE market is brewing.

Comment by snake charmer
2012-07-19 06:56:04

Are you living out there now? Have you abandoned our fair city of Tampa? It is being prettied up for the convention in August, but as for net positive economic impact, forget it. The level of disruption will cost us at least as much as delegates and media spend here.

 
 
 
Comment by arit
2012-07-19 12:12:51

“$363,202 compared to the average American household’s $319,970 worth, according to data published in Canada’s Globe and Mail.””

I’d like to know how these numbers are calculated. Doesn’t seem to account for debt in my opinion.

“Before setting out his argument for Canada’s triumph,Stephen Marche, a Canadian novelist, simply states: ‘The Canadian system is working; the American system is not.’ He boils down Canada’s success: ‘the stability of Canadian banks and the concomitant stability in the housing market provide the clearest explanation for why Canadians are richer than Americans today.’”

I’d like to apologize on behalf of Canada for the verbal diarrhea coming out of the orifice under his nose.
Canada is just lagging behind the US, as always. Our bubble was/is actually bigger (here in Vancouver). The pain you have not recovered from after 7 years is just starting here.
I have toooo many coworkers who bought houses recently, while saving the difference between rent and mortgage since 2006.

Cheers

arit

 
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