The Excesses Are Plain And Clear To See
The Toronto Star reports from Canada. “A number of concerns now colour the condo market: A 30 to 40 per cent drop in interest by investors who’ve largely fuelled the Toronto condo boom since 2007; consumer frustration that new units are too small and too expensive at $600 or more per square foot; the rising inventory of unsold condos and fears over how many units bought in the preconstruction phase by people who intend to flip them to new buyers at a significant markup before having to pay final payments, including land transfer taxes. Veteran realtor and condo developer Brad Lamb has called that underground condo market (developer rules usually forbid listing assignments on the public MLS system) a ‘monster.’ One downtown condo realtor estimates some 6,000 to 7,000 assignments could come on the market in next year or two.”
“Even low-rise homes sales are softening. Bidding wars and bully bids are rare now, as homes that were selling in a frantic few days just last spring sit on the market for weeks. ‘Sellers have been conditioned to think they are going to make a killing, but the playing field is being levelled,’ says Coldwell Banker realtor Claude Boiron.”
From Reuters. “The 17.5% drop in new homebuilding will take a bite out of Canada’s economic growth, fueled by the housing sector, consumer spending and government stimulus since growth slowed in 2009. Some independent analysts see a very hard landing ahead. David Madani, Canada economist at consultancy Capital Economics in Toronto has consistently predicted a 25% drop in prices and a plunge in housing starts to just 150,000 next year as builders grapple with too many homes and falling demand.”
“‘The one symptom that housing bubbles always have in common is the over building, and I feel the banks play this down a bit,’ said Madani, pointing to recent housing starts well above the 175,000 to 185,000 pace economists say is needed to keep up with population growth. ‘We’ve been building above 200,0000 for several years. And we know we’ve been building above demographic requirements because the evidence is in the inventory data - it’s high, it’s not low. The excesses are there, it’s plain and clear to see.’”
The Financial Post. “About a third of Baby Boomers plan to sell their home to fund their retirement, according to a study that questions whether buyers will dry up as that massive segment of the population downsizes. Marlena Pospiech, a retirement strategist at the BMO Retirement Institute says the problem is compounded if prices fall. ‘[Boomers] could be in serious financial trouble if they are relying on their home, especially if they are highly leveraged.’”
“Don Lawby, chief executive of Century 21 Canada says there is little indication that immigration into the country is going to slow and, increasingly in places like the Vancouver area, where he resides, immigrants have more money to buy the singly family homes of the Boomers. ‘I think single family detached [homes] are becoming a bit of a luxury,’ says Mr. Lawby. But he says even townhouses and condos will continue to rise in price because of rising land costs. ‘They are not making any more land.’”
The Daily Beast. “The hidden story embedded in the Chinese economic ’slowdown’ is that investment-led growth is plunging. And the global implications are many. Another possible casualty of the slowdown may be high-end real estate in Vancouver. A long-standing Canadian policy has offered citizenship to foreigners willing to make substantial investments. But Jamie MacDougal of Sotheby’s International Realty notes that Chinese offshore buyers arriving in Vancouver spiked to truly unsustainable levels in 2011, during which bidding wars were regular events and property values rose by the week.”
“The current market, notes MacDougal, has changed from one in which Chinese speculators were trading among themselves to one in which the market is ‘flooded with inventory’ and ‘mainly Chinese sellers’ are responsible for the supply.”
“Like most people shopping for a new home, Andria Petrillo has to sell her old one first. And that’s where she worries. ‘The power is in the hands of the buyer – that’s what I’m feeling,’ said Petrillo, 32, as she and her husband toured a quiet open house in the heart of Toronto, where crowds and chaos once reigned over weekend home showings. ‘I’d like to sell now. I worry about selling because it’s a condo, and that market is cooling even faster than houses. We can’t sell it for a ridiculous amount of money any more.’”
“The last round of mortgage rule changes took effect in July, forcing home buyers to cut back on their budget and pushing many prospective first-time buyers out of the market entirely. Economists and real estate agents alike applauded the move. ‘It’s had a definite impact on first-time buyers. Money is almost free, but you shouldn’t give them too much rope,’ said Ron Carroll, a real estate agent in Toronto.”
“‘Personally I don’t see any revitalization of the market in the near future,’ said Victoria real estate agent Tony Joe, noting that investors have left the market. ‘Sellers will commonly say, ‘I’m going to wait until the spring, when the market is better.’ And I warn them that it could be worse,’ said Joe. ‘And of course buyers are saying ‘It looks like things are bad, I’m going to hold off until the market drops another 10 or 20 percent.’”
Canadian Mortgage Trends. “Since 2008, the government has thrown the rule book at the real estate market. Its reductions to maximum amortization alone have increased monthly payments 26%, other things being equal. That’s on top of new refinance restrictions, stricter qualification rates, a prohibition on high-ratio insured rental financing, stated income restrictions, covered bond restrictions, stricter documentation rules, HELOC LTV reductions, withdrawal of liquidity (rationed portfolio insurance), elimination of insurance on high-end properties, debt ratio limits, and much more. Now, virtually every analyst in the country predicts a housing selloff of some degree.”
“The fact is, Canada’s economic fate is tightly intertwined with real estate. One in five GDP dollars result from housing-related spending. The average Canadian has 67% equity in their real estate assets. The average homeowner has equity of $214,000, with significant reliance on that equity for retirement.”
“Housing and mortgage activities create significant employment in Canada. They account for more than 1.35 million direct and indirect jobs - about 8% of total Canadian employment. The construction sector employs 890,000 people. It has created 425,000 net new jobs in the past decade and 18% of job creation from 2006 to 2011. Renovation spending in 2010 (latest data we have) was $45 billion. Reno-spending will certainly be curtailed by new rules limiting equity take outs (ETOs). About $17.5 billion of those ETOs were devoted to spending and investment in 2011. Renovations have been the #1 reason people refi to pull out equity.”
“At this point, normalizing interest rates or adding significant new housing restrictions could be economic suicide.”
NewsTalk 1010. “It seems more and more Canadians don’t have their financial houses in order and according to a new study, some have unrealistic plans when it comes to their retirement plans. The study commissioned by Credit Canada Debt Solutions and Capital One Canada found that one in three Canadians is counting on winning the lottery or getting a large inheritance to secure their financial future.”
“The survey also found that more than two-thirds of those surveyed revealed they spend beyond their monthly budget with most admitting temptation and reward were the biggest reasons they overspent. Food was found to be the biggest temptation for many. The study also found that more than 66 per cent of us have felt anxious or lose sleep thinking about their financial situation.”
“Financial adviser and NewsTalk 1010 show host Gail Vaz-Oxlade says the likelihood of striking it rich overnight is impossible. ‘You’re more likely to be hit by lightning twice so if that’s what you want then start banking on the lottery after the first time you’ve been hit by lightning.’”
“The excesses are there, it’s plain and clear to see.”
As is the denial. Do banksters hire special employees whose job is to make dumb MSM announcements to deny the obvious?
Bbbbbbut, it’s different in Canada!
Canada is at the phase now where politically important figures are starting to think about preserving their prerogatives, so I expect “no one could have foreseen this” statements to come into fashion. It worked here in the United States. We haven’t rethought our way of doing things in the least.
“‘I think single family detached [homes] are becoming a bit of a luxury,’ says Mr. Lawby. But he says even townhouses and condos will continue to rise in price because of rising land costs. ‘They are not making any more land.’”
Are Canadian used home sellers smarter, dumber or about the same as their U.S. peers?
“…‘They are not making any more land…”
Not only that, but as high-rises get taller, “they aren’t making any more sky”… says Mr. Lawby <;{
I’m not sure, but a lot seem to have come here thinking 600k instead of 1.5 million is some sort of cheap godsend….
As I’ve said before, people around the globe have been brainwashed into believing that housing is supposed to be utterly unaffordable.
“The current market, notes MacDougal, has changed from one in which Chinese speculators were trading among themselves to one in which the market is ‘flooded with inventory’ and ‘mainly Chinese sellers’ are responsible for the supply.”
Any thoughts on how soon the Chinese all-cash investors will flood the U.S. cities where they bought with inventory (e.g. Phoenix)?
“‘And of course buyers are saying ‘It looks like things are bad, I’m going to hold off until the market drops another 10 or 20 percent.’”
This market needs government-sponsored price supports fast, before a deflationary mentality sets in among would-be buyers.
So are Canadian banks going to play the shadow inventory game to create an artificial shortage in key markets like Toronto and Vancouver??
They are overplaying it, but Canadian bank regulations are tighter than US ones. I don’t know what that means in this situation, but the rules do have an impact on this - assuming they don’t just change the rules.
“Sellers have been conditioned to think they are going to make a killing, but the playing field is being leveled.”
“… conditioned to think …”
A perfect phrase.
No need to struggle to think on your own, we will do all your thinking for you.
Need an opinion? Not to worry, we will supply one.
You want to see research and data that backs our opinion? We will supply that too.
LOL cherry picked data…
“Since 2008, the government has thrown the rule book at the real estate market. … Now, virtually every analyst in the country predicts a housing selloff of some degree.
…
At this point, normalizing interest rates or adding significant new housing restrictions could be economic suicide.”
Sounds as though they already have enough significant new housing restrictions since 2008 to kill their bubble.
Without the all-cash Canadian or Chinese investors in the game, who or what financial entity will prop up U.S. housing prices?
Hedge funds flush with Bernanke bucks?
Prices don’t need to be propped up. Volume does. The Bernanke Gambit (government sponsored $40B/mo securities sales) will cover that. That’s $40B/mo in guaranteed mortgage originations.
Prices Will Continue To Decline
“The survey also found that more than two-thirds of those surveyed revealed they spend beyond their monthly budget with most admitting temptation and reward were the biggest reasons they overspent.”
Are Canadians using liberated home equity to do this overspending, as Americans were up until circa 2006?
Obviously yes. Canada’s had a bit of an oil boom, money wise, but otherwise when you can’t see the reason for increased spending, then it probably came from housing equity during a bubble. And Canada is definitely in a housing bubble.
From the original post:
“Housing and mortgage activities create significant employment in Canada. They account for more than 1.35 million direct and indirect jobs - about 8% of total Canadian employment. The construction sector employs 890,000 people. It has created 425,000 net new jobs in the past decade and 18% of job creation from 2006 to 2011.”
And there, people, is the problem. The economic activity is certainly there, but the underlying demand is not.
1.35 million direct and indirect jobs - about 8% of total Canadian employment. The construction sector employs 890,000 people. It has created 425,000 net new jobs in the past decade and 18% of job creation from 2006 to 2011 ??
Sound Familiar ??
And remember, they have this lopsided result even with a booming natural resources sector. What percent of the new jobs would it be if you excluded the extraction jobs that are part of the giant new infrastructure build up (not keeping stuff running once the new infrastructure is built - those will be around for a while)?
‘I’d like to sell now. I worry about selling because it’s a condo, and that market is cooling even faster than houses. We can’t sell it for a ridiculous amount of money any more.’”
Oh, so people KNOW it was ridiculous amounts of cash, they just don’t CARE as long as they get rich. It’d probably still sell for ridiculous amounts of cash, anyways.
Speaking of condos, I just saw a one listed for 1.7 MILLION dollars in Pittsburgh, PA. The average income/price of a home is far below even 500k. Who the heck would buy a condo in Pittsburgh for 1.7 million dollars….
There are a few old money enclaves in P-burgh that would make your jaw drop, Fox Chapel and Seweickley among them. Any municipality that maintains its own hunt club (as in riding to the hounds) can’t be all that impoverished.
I concur with ahansen. Fox Chapel used to be one of my favorite bicycle riding destinations. It was quite the experience, such wealth and opulence less than 10 miles away from the inner city I lived in.
I know about both of those places very well. I always thought they were very expensive, but that some people could afford it. However, I just kind of gasped at the 1.7 million, and the fact it was a condo! Luckily, there are homes in all price ranges there.
Heck, people are still paying over $300k for 500 sq. ft. cabins near Lake Tahoe. This thing is far from over.
Even with the brakes put on the Canadian prices were still going ballistic in Toronto - until the rest of the world stopped buying.
Does this mean that the US, even if it had applied the brakes, would still be in the same position?
Germany too was a big buyer (probably the biggest of commercial) of Canadian RE. Now they have slowed as well.
Slowing incoming cash, slow down in foreign real estate gambling; next will be a reducing manufacturing capacity utilization rate.
Then possibly another recession.
OMG, history does repeat
“The average Canadian has 67% equity in their real estate assets”
This means only one thing. The average Canadian is going to impoverish in a couple of years. It is strange, but in Vancouver, despite the situation described in this article, the price drop is really slow and home owners, flippers etc. are not going to sell for what they feel is lower value.
But I think this will last only for a couple of months and then this whole situation is going to explode. Especially in the case of condos, I´m scared that this time is coming:
“The analytical branch of the Central Bank suggested that if these overly produced units are not absorbed by demand over the next 18 to 36 months, the demand-supply imbalance might become a more pressing issue than ever”
(quoted from Condo Situation in Toronto)
With regards to all the babyboomers planning to sell their home to “fund their retirement”… how idiotic is that? You work to pay off a place to live and then, just as you’re retiring and downsizing your income, you’re dependent on selling your housing at precisely the time you know a) you’ll never have to move for a job again, b) you’ve probably locked in low property taxes because of homestead property tax laws and c) you can finally enjoy the place on a full time basis and make use of the pool, the sun room, the big garage, etc.
This mentality strikes me as almost exactly backwards.
The only way buying a house should help “fund a retirement” is by dramatically reducing one of your more significant recurring costs (shelter). You are dead on right…
The elderly have been selling their homes to fund retirement for decades. But they were selling a paid-off $150K house up north, buying a condo or tiny house in Florida for $50K, and living off $8K in interest + SS plus whatever pension is left.
But now they are “highly leveraged.” That means no paid-off and no profit. How are they going to fund their retirement?
They’ll sell the house for an even higher price to someone desperate to stop renting.
Don’t challenge the government to solve that one, since I can imagine that government-backed investor plays might start cashing these Boomers out at the asking price.