The blame

Yesterday I wrote one line about FSBO sales. Don’t bother buying that way, I said. And the hate was on.

Why? Appears many people blame realtors for houses they can’t afford, as they rake off 5% of the purchase price in effortless commissions (or so it may seem). Hating real estate agents is just as easy as hating the Chinese (or the Iranians, or the Russians). Almost nobody blames their neighbour for selling at a crazy-high price, since that just makes your property worth more. And how about saving some venom for the feckless F, with his 0/40 policies which got the bubble puffed, or the Bank of Canada’s almost-free mortgages?

Nope, too hard. But the local Re/Max guy with his new Audi? Make my day.

As you may have heard, CREA is at it again. Home sales across the country last month dropped from October, but the average price has increased. Ottawa’s market-slagging measures which depressed things a year ago have apparently been forgotten, so compared to last November average prices have risen 9.8%. The typical Canadian house now costs the same as two of them in the United States.

Ultimately there’s nobody to blame but those who create the demand for over-valued assets. People keep buying houses regardless of the process, since they have an endless appetite for debt.  The only way they’ll justify this is if prices continue to rise, yielding capital gains which can make up for the huge cost of buying, owning and selling. My contention is that those days are ending. Not quietly.

A story in the New York Times a few days ago said this: “anyone in the market for property might want to avoid Toronto or Vancouver.” That came after the latest international study which found Canadian real estate is inflated by 60% based on the accepted practice of comparing prices to local incomes, or to what a house can be rented for. That conclusion means two things, of course. That people continue to buy homes they  can’t afford, and landlords heavily subsidize renters.

This is also an interesting comment:

“These data also underscore the dilemmas central banks face in various countries. Canada’s, for example, is grappling with a slowdown in its economy and a worrying stagnation in consumer prices that’s raising the risk of deflation. But sky-high house valuations make it difficult for the Bank of Canada to cut rates to spur aggregate demand.”

Hmm. Remember what we said here a few days ago, during Deflation Week on this pathetic blog?

Sure you do. The prices of everyday items – the cost of living, in other words – can relentlessly increase, as is now the case. But the economy – as measured by wages, industrial output, demand and employment – can deflate at the same time. It’s a grim scenario, especially if you happened to buy a house last year with just 7% down, and now your employer’s starting to wobble.

Since we’ve achieved another all-time debt record, with $1.2 trillion in outstanding homeowner mortgages (doubled within the last decade) and unprecedented line of credit and credit card balances, the central bank is handcuffed. If rates rise to chill house horniness and temper our piggish appetite for even more debt, it’ll push the economy into true deflation and ugly employment numbers.

But if CREA’s right, with house sales and prices even higher in 2014, things get even more dangerous with a worse ending. Which is why we should all expect more real estate thumping from Ottawa, early in 2014. Meanwhile, of course, we get closer to the US central bank announcing its intent to taper off stimulus spending – which will likely bring higher bond yields, and more costly fixed-rate mortgages. Some wags expect that announcement this week. Others bet it will come mid-March. But make no mistake, it will happen.

None of this is the fault of any realtor. Sure, CREA’s numbers are highly suspect (ex-real estate broker Ross Kay will be along tomorrow to tell you why), and agents routinely prey on the emotional weakness of buyers as well as the antisocial greed of vendors. But the market’s made of willing buyers and sellers, and those who think they’re immune from the laws of economics will learn otherwise.

Gosh. Who will we blame then?