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Reality bites

Garth Turner
By Garth Turner / November 25, 2010

I sat in the lobby, on a $5,000 mesh chair and watched a twentysomething in red high tops float across the marble floor on a skateboard. Minutes later I was on a tour. The lounge with the pool table. The server room packed with winking gear as chilled air blew from the floor. The employee cafe with the full-time chef. And then I went for a ride with the CEO, in his Viper to a lunch where he spent $1,400.

It was the Spring of 2000 and this company was burning its way through the latest $42 million it has just raised selling stock. It had no revenues. Little in the way of sales. No experienced management. But it did have a cool name with a dot-com on the end. And shares people some people couldn’t get enough of.

Sixteen months later, it was gone. The employees went home. The Viper went back. The stock went to zero.

This memory came back to me as I read the last Teranet-National Bank House Price Index. Yeah, it did register the first decline in Canadian national housing prices in 16 months. But bank spokesguys fell over themselves to explain that this was not the start of a US-style housing decline. “We do not think that a significant price correction looms in housing.”

You wish.

Speaking of the States, I hope you’ve noticed what’s going on at the moment. Sales of existing homes dumped 26% last month, while new homes also crashed. In swaths of the country it was the worst October in 20 years. And it dashed hopes anything is getting better or real estate is nearing a bottom, almost five years after the wheels came off.

Why? Because the only reasons the market was improving (in terms of sales, not prices) were government tax credits and lots of dirt-cheap foreclosed homes. Now the tax freebie is ended, and the supply of distressed properties has narrowed as banks hold them back. This has exposed a shocking reality: there’s hardly any demand.

Said a leading economist: “People aren’t buying houses – period.”

Meanwhile in Canada, it could hardly be more bizarrely different. For example, I told you two days ago about a new development in Oakville which had 9,000 registrants for pre-sales, and was mobbed with people wanting to drop a half million dollars.

Marco lives not far away and watched the insanity. Sent me this: “Detached homes were $670,000 in the morning and over $750,000 5 hours later because “sales were strong”. Yes, they raised prices on the same home (same model, sq.ft etc).  I simply can’t believe this is happening. One person from my office bought that model of home, and they make less money than me. WTF?”

Like the US, the GTA has a 10% unemployment rate. Like American families, Canadian ones owe $1.45 for every dollar they earn. Like them, we have household incomes which haven’t gained an inch in three years. Just like the Yanks, we live in a world in which Europe – a major trading partner – could be in financial crisis by Christmas.

Families in Ontario and Illinois make about the same incomes. Mortgage rates are roughly equal. The education systems are similar, just like life expectancy, literacy and car ownership levels. And yet houses on this side of the line cost twice what they do there, despite the fact Americans can deduct mortgage interest and property taxes while locking in borrowing costs for 30 years – all factors which should increase real estate values.

But demand is zero. While in Oakville nine thousand people were willing to spend a half million (or more) for unbuilt houses in a field on the ragged edge of town.

So, back to 2000. To dot-coms. To the chef and mesh chair. To a delusional, greedy herd of investors.

Despite what you read and are told, there is no economic underpinning for the Canadian real estate market. Current valuations are not supported by incomes, economic activity, household balance sheets or employment. Like profitless Internet start-ups with cool names and pimply executives, they survive on human emotion. When everybody wants something, everyone else does, too. When prices rise, we all want in. When demand exceeds supply, more demand is created.

Apparently the memory of wrecked RRSPs and lost fortunes a decade ago has been erased. Even the panic of two winters past is forgotten. People are busy being people. It’s why most of them fail.

You’ll never guess what that Viper went for in 2002.

About the author

Garth Turner

Honourable J. Garth Turner PC

  • Best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics
  • Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques.
  • Influential commentator on public and financial affairs through blogging, media, books and personal appearances.
  • Member of the Canadian Parliamant for nine years, serving as Member of Parliament, Cabinet Minister (in charge of Revenue Canada), national leadership contender (Progressive Conservative Party of Canada), House of Commons Standing Committee member and chairman (Consumer and Corporate Affairs, Finance), Special Advisor to the Leader of the Official Opposition. Member of the Privy Council of Canada. Medals recipient.

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