If you recently bought real estate, this was one scary week. In fact, you might want to skip the rest of this article. Bye. For the scant few of you who remain, things are turning out for the Canadian economy about as I expected. Which is not well. A growing number of people get it, including the same gang of developers, promoters and pumpers who constantly tell property virgins there’s never been a better time to plunge into real estate. They’re doing the opposite. The latest numbers from RealNet Canada paint a picture of rapidly dropping confidence. In Toronto, Calgary and Vancouver purchases of residential development land plunged in the first six months of the year, at the same time sales of new houses and condos slumped by more than a third. Land buys tumbled 51% in Toronto, 52% in Calgary and 30% in Vancouver – a clear sign, say insiders, a big slump’s coming for housing. “This is definitely a major slowdown which will last for some time,” according to RealNet’s research guy, Richard Vilner. “It’s not going to turn around in the third quarter. There’s not going to be a major correction back to the high-flying land acquisitions of 2011 or the first half of 2012 because there’s still a huge amount of inventory to sell off.’ Ya think? In the GTA alone there are 19,394 unsold, new condos sitting around on the shelf (21% of the market), with another 57,461 already in the pipeline. Add to that 9,600 resale condos on MLS and thousands more being flogged on Kijiji or Craigslist, and you have the definition of glut. The developers know it, with many entering crisis mode. There’s no doubt mucho projects now aggressively marketed will never be built. “The slowdown began to happen in mid-2012,” says Vilner. “There was a big time slow down versus those robust two years pre-slowdown. The cranes you are seeing now are for residential land deals that closed a couple of years ago.” Now, there’s even more to worry about. Here are four reasons we may be entering a difficult time for residential real estate. Fewer jobs. Not only did the job numbers announced Friday suck, but the trend is deteriorating. In the last half of 2012 the economy was creating a meagre 27,000 new positions a month – hardly enough to make a dent in the 1.33 million looking for work. But in 2013 that’s collapsed to an average of 11,000 monthly. In the latest period we actually shed 39,400 positions, with the most pain being felt by the young. While the unemployment rate rises, we’ve had a year and a half of monthly trade deficits plus anemic economic growth. Governments are shifting into austerity mode and wage gains have now dropped to the same level as inflation – which means even working people aren’t getting ahead (more on that below). There’s nothing that kills a housing market more effectively than unemployment, except… Higher mortgage rates. Less than four months ago a five-year bank mortgage was 2.69%. Now it’s 3.59% to 4.99% – a massive increase. Worse, rates seem destined to rise further. Looks like the US Fed will begin turning off the stimulus spending tap as early as next month, promising higher bond yields. Since banks fund their home loans in the bond market, up she goes. Of course this is exacerbated by… Less mortgage funding. The big story this week, if you remember all the way back to Tuesday, was the latest move by CMHC to hose down the real estate market by taking away the cookie jar. Alarmed by a housing sales and price pop during July, the feds are now rationing the riskless funds being made available to banks to hand out as mortgages. This pretty much guarantees money will get more expensive, unless loan demand collapses. The consensus among economists: the move will add about half a point more. And why is mortgage financing so critical to the housing market? Simple. We have… No money. While 70% of Canadians own a house, 51% of them have less than $10,000 in savings. That was the shocking finding of a new bank survey this week done by Pollara Strategic Insights. When people were asked if they feel financially prepared to handle a ‘rainy day’, it was hard to believe the poll was conducted in a first-world country where thirtysomethings do bidding wars over $800,000 semis. Almost one in five people don’t have even $1,000 sitting around in a bank account. A quarter of us live paycheque-to-paycheque. And 84% couldn’t live six months without being paid. The conclusion’s obvious. Debt – not rising wages or robust savings – has fueled the real estate binge that’s driven home prices to historic levels. Yet debt has limits, which we’ve clearly hit. So as rates edge higher, job growth stalls and incomes erode, what possible backstop is there for housing? Yup. None.
Posted on: Fri, 09 Aug 2013 23:27:35 +0000
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