Great blog post yesterday by Garth Turner over at www.greaterfool.ca
“Sure, I know the images are compelling. Long lines of young people snaking around a new housing development complex someplace in suburban GTA, Vancouver or Calgary. Camping out all night. Living off Tim’s. Peeing in the bushes. Desperate to get inside and buy a new house in 14 minutes. Then staggering into the sun in a post-coital HGTV kinda haze, sales agreement in one hand, mortgage doc in the other, feeling great about being ravaged.
The first-time buyer is the holy grail of real estate. Lenders like the big banks court them. Developers drool over them. A whole housing industry creates products for them. And politicians suck up to everyone, with the creation of misleading programs like the Home Buyers Plan.
Like the wood that fuels a fire, these hormonal young things give energy to an entire real estate market, starting the climb on a property ladder which ends up creating an endless chain of sales and sells. Well, endless until now.
There’s mounting evidence – despite the high-profile events where TV news cameras are always invited – that the kids may be taking a pass. In fact, this is a prime explanation for a phenom that’s tricked many people and which answers the question, why are prices going up when sales are going down?
You know what I mean. For the last six months, sales of houses in key markets like Toronto, Calgary, Vancouver, Edmonton and Winnipeg have tanked on a year-over-year basis. And yet average prices have held firm or even (like in the GTA and the Lower Methland) shot higher. Days ago I recounted the orgiastic grunts of pleasure which could be heard over Richmond and Surrey as the latest property assessment arrived, showing a delighted population that they’ll soon be paying more in taxes.
But how can prices swell like a gland while sales seek Cialis?
One explanation (not a bad one) is tumbling listings. As fewer homeowners put their properties on market, the competition between the remaining buyers results in average prices rising, even as sales levels fall. After all, prices are far more volatile on any market (including stocks) when trading is thin.
But here’s a better reason: a seriously declining number of young buyers is resulting in falling sales of cheaper (starter) homes, which leaves more activity (in relative terms) in the pricier end of the market. So, average prices rise. That this is a statistical quirk may be of no interest to most of us. But the fact realtors then beat the crap out of us with the same old stick – buy now or forever be priced out – is highly relevant. And wrong.
At least one real estate guy gets this, and I was alerted to his blog after he complained about mine. (See? I have a purpose.) Norm Fisher crunched the numbers in his Saskatoon market and found a big 18% drop last year in the sale of houses under $300,000, and a corresponding 13% rise in deals for places worth more than that. Of course, this would account for the fact that real estate had a crappy year in Skatch, and yet houses ‘cost more.’
But they haven’t really risen in price. Only the average price is higher. Lots of houses are falling in value, at the same time they remain unsold. And I think Norm has highlighted a situation which is now affecting every market in the country – certainly the ones I have done a sales analysis for.
This also suggests 2011 could well be the year the fire starts to go out. As I have been saying for some time, sales drop first, prices second – especially when the first-time buyers start to fade. And why would this happen? Let us count the ways.
First mortgage rules stiffened a bit in April, with first-timers having to qualify for five-year loans. Now it looks like F is poised to strike again at the urging of the big (scared) banks, who are having a few kittens over the 5/35 mortgages out there. (As I have told you, these high-risk loans now account for the vast majority of all new ones).
Second, interest rates rose in 2010 with the Bank of Canada hiking its key rate three times, jacking VRMs a similar amount. And while five-year money declined for a few months as bond yields tanked, all that’s now in the rear-view mirror.
Third, debt. We’re drowning in it, the kids included. In fact, young couples coming out of university today sometimes already have student loans the size of mortgages. Look for this to continue as the feds trim their contributions to education, a la Britain.
Fourth, this is the year Mark Carney slips the whoopee cushion under the middle class. Interest rates will be rising just as soon as the little nipper figures he can do it without murdering the economy. The central bank boss is determined to cut back on cheap credit, now that we’re all hopelessly addicted to it. Such a joker.
Fifth, the virginal young among us may have too many hormones, but they’re also totally wired. They can see and smell real estate deflation taking hold. With teensy down payments, they know any drop in prices can wipe them out in a weekend. Why buy now, when houses may well be cheaper in six months? Why self-destruct just like mom and dad? It’s amazing what six years of post-graduate studies can do to a mind.
So, yeah, I agree with Norm. Except he’s a realtor.
And he’s doomed.”
