As published, May 30th, 2008
Leave it to Garth Turner to throw cold water on the notion Canada can achieve a soft real estate landing, when history and the slump south of the border show that is a rare feat indeed.
The personal-finance author-turned-Conservative-turned-Liberal MP for Halton, Ont., was one of the first to warn of the 1990s property flop - albeit several years too early. Now he thinks Canada is facing precisely the same mix of elements that burst the U.S. real estate bubble.
“We are in a monumental denial phase,” says Mr. Turner, who’s book Greater Fool - The Troubled Future of Real Estate was published in March.
“My theses is now reality, we are starting to see substantial sales declines that were ruled out only six months ago as impossible,” he says. “But now people are saying prices aren’t moving down. They will.”
The figures do show a noticeable retreat in the Canadian housing market this year.
Nationally, resales fell 6.1% year-over-year in April, while price gains have slowed to 4% from around 10% in each of the prior five years. Calgary saw sales drop 31.2% over the year, Edmonton, 25.4% and Victoria 14.2%. Calgary and Edmonton also saw prices dips.
According to Urbanation, a condo tracking firm, the condo market has defied the trend and remained fairly steady through the first quarter, even as a several new buildings hit the market.
Mr. Turner says housing markets blow themselves out when prices rise beyond the reach of average buyers. This is what happened in the United States.
“To keep the party going, the mortgage industry, the credit industry, backed by the banks, decided to lower the bar to ownership,” he says. The subprime industry was born and home buyers with scant credit history and skimpy income were drawn into the market, enticed by no-money-down mortgages and interest rates that started out low, then ballooned to unsupportable levels.
Similarly, in Canada, prices have risen beyond the reach of the average buyer, Mr. Turner argues.
“What has been the response?” he asks. “The 40-year mortgage.”
Economists estimate amortizations longer than 25 years now constitute about 70% of all insured mortgage applications and about half of that amount is for the 40-year product.
Mr. Turner reserves his starkest warnings for sprawling suburbs mushrooming around Canada’s major cities. He says many new home developments have mortgage representatives onsite offering the same kind of no-money-down deals that dragged down the U.S. market. Buyers just have to come up with 1.5% of the house value to cover closing costs.
These will become the “particle board slums of the future,” Mr. Turner says, as smaller families and surging energy costs cause the suburbs to fall out of favour.
But the Toronto condo market is heading for trouble too, as overbuilding swamps demand, he says.
“We are classically at the end of a bull market,” Mr. Turner says.
Financial Post
jthorpe@nationalpost.com
On a day when the Canadian Imperial Bank of Commerce announced it dumped $1.1 billion in shareholders’ money on crap securities based on worthless mortgages, I scooped the above chart from Mish’s Global Economic Trend Analysis. Yeah, I know it’s just a mess of numbers, but they have a stunning story to tell.
This is a chart depicting the financial performance of a pool of mortgages worth almost half a billion dollars, which is in serious trouble. The securitized mortgage-backed security, if you can believe it, is full of loans all rated AAA just months ago. It’s one year old, and in the course of that year, it’s lost $16 million. But that’s just a small early indication of future misery.
Of greater importance - 22% of the mortgages are in foreclosure; 31% are delinquent by 60 days or more; and a further 27% are delinquent by 90 days or more. As Mish points out, this is why Standard & Poors Rating Services just pulled the plug on 1,326 Alt-A residential mortgage-backed securities, slashing their ratings. This affects a stunning $34 billion in residential home loans.
It’s this kind of garbage that ’smart’ bankers around the world, including on Bay Street, bought into. So, shame on them. Shame on the lenders and brokers who extended credit to people unfit to have it. Shame on the public greed that moved buyers to snap up assets they could not afford. Shame on those who sold them. Shame on the rating agencies who blessed this junk with triple-A ratings that led unwary investors on into the cesspool.
This, by the way, is why the world as we know it is unravelling. The one little half-billion-dollar fund gives a small example of the debt and credit crisis into whose jaws we have but started to descend.
Luxury home prices are faltering.
Four lessons of Mania
NEW YORK (MarketWatch) — Speculative bubbles, such as those in real estate and dot-com stocks, have happened through history.
The tulip mania that bloomed in 1630s Holland showed the way. And while a lot has been written about bubbles recently, the phenomenon is hardly new. Nor is the analysis. I’d like to cite an account of the most celebrated mania of all — the Dutch tulip mania of the 1630s. English-born Dutch historian Mike Dash’s “Tulipomania” is a nice 230-page summer beach read examining manias and how they run their course. It’s hard not to think of the recent real estate boom — or the dot-com stock bubble — as you read “Tulipomania.” Some things change, some stay the same.
The story in a nutshell The tulip originated in the mountains of central Asia and made its way west into the Ottoman Empire as a prized object of the sultans, arriving in Holland as a gift in trade in the 1560s. A virus (they didn’t know that then) created rare and exotic variations. These prized bulbs were sought by connoisseurs of the wealthy merchant class. The tulip trade had begun. Gradually the so-called “artisan” class — the early Dutch equivalent of the working class — saw the tulip trade as a way to make money. They jumped in as the original “florists” — dealers buying and selling flowers, often sight unseen and with no personal use or interest.
Prices went crazy in 1636 to early 1637. A single exotic bulb went for 5,200 guilders — about 21 years’ salary for a carpenter. With no direct trigger, prices suddenly broke in February 1637. Buying interest evaporated and prices plummeted some 95% in a few months. Some things never change Fast forward 370 years to the similarities:
1. Investible income. The Dutch “Golden Age,” built on dominance of world trade, produced one of the earliest middle classes. Prosperity brought investible income to the “artisan” class of carpenters, weavers, cobblers and smiths, who saw tulips as a way to invest for extra income — and saw others making lots of easy money.
2. “Flipping.” Florists — traders — bought and sold tulips sight unseen for a quick profit, often in the same day.
3. The mundane became the prize too. As traders saw fortunes made on high-end product, they bid up prices for ordinary stuff too, called vodderij by the Dutch — just as the can’t-miss real estate mentality spread to ordinary homes in ordinary subdivisions.
4. Largely unregulated market. There was a code of ethics among traders, but little outside regulation or accountability. Like the mortgage industry?
But homes aren’t tulips Differences: 1. Intrinsic value. Homes have value as a place to live, enough said. And it’s tangible and measurable against something else — like other real estate and other investments.
2. Little else to spend money on. No Ferraris in 1630s Holland and Rembrandt wasn’t dead yet, so there wasn’t much to invest in besides tulips. Not true today.
3. Tavern trade. Tulips were bought and sold in smoky, beer-sodden taverns of the day — not a public exchange or with professional assistance as in real estate.
4. 95% drop in value in three months. We’re not seeing that today. Good thing. Lessons learned Unless you’re an unfortunate homeowner, real estate or construction worker, or in the financial industry tied to the mortgage crisis, the boom and bust in real estate probably isn’t as severe. For that we can be thankful.
Still, important lessons bloom forth about manias and investing in general: 1. Focus on fundamentals. If prices are increasing, understand why. Is demand real? Are supply constraints or competitive advantages lasting and real? Could real estate prices really grow and stay at 7-10 times annual income or 30 times annual rent? Are market participants real or in the market to buy, sell, flip, and speculate?
2. Watch for “vodderij.” When everything starts to go up, look out. Like overbuilt, dime-a-dozen condos and tract homes or broken Internet businesses with no future.
3. Don’t invest in something just because you see others making money. Self explanatory.
4. Don’t wait for the tide to go out. Don’t be the last to sell, and don’t be greedy. Before or after reading “Tulipomania,” I also suggest the Wikipedia entry “United States housing bubble.” Find a nice chair, dab on the sunscreen, and learn to avoid the next mania.
