The awakening

The average detached house in Vancouver touched $1,002,000 in December. At the same time inflation in Europe turned negative – that’s called deflation. Bond yields dropped to historic lows. House prices fell in 65 of China’s 100 biggest cities. Oil plunged. And that was just the start.

This month Russia is close to collapse. Currency markets are in a twist. Oil’s now lost half its value and a wave of layoffs have hit Canada – almost 20,000 last week. In Calgary (as of Friday), real estate sales have collapsed 28.6% and listings are up an unbelievable 61.68%. There are now exactly 1,000 more properties on the market than a year ago (3,229 versus 2,235), and For Sale signs are sprouting everywhere.

In Toronto, prices have turned negative – something most people in the business considered impossible. The average detached 416 house is down 4.2% from a year ago. At $859,672, it is $100,000, or 11%, cheaper than it was in April, nine months ago. Over the entire GTA, listings this month have swollen by 17.8%.

The realtors are in denial. Says the local board: “The average selling was down slightly in comparison to the same period last year. A change in the mix of home types sold this year compared to last year during the same period accounted for the dip in the average selling price. “A constrained supply of listings for singles, semis and town houses coupled with balanced market conditions for condominium apartments points to further growth in the average selling price in 2015. A sustained period of strong listings growth will be required to account for the pent-up demand for ownership housing in the GTA,” said Jason Mercer, TREB’s Director of Market Analysis.”

In Montreal, the country’s second-biggest housing market, there are now 30,170 listings – a 14-month supply – and that number just increased by 8%. While sales improved in December, the average detached house in the last year appreciated by zero.

Jacob lives in Fort McMurray, epicentre of the oil patch and Canada’s most famous boom town.

“I have lived and worked here for just over a year now and there is a noticeable difference in the whole town. When I got here, it was always full throttle all the time, if employees didn’t like the boss they had or could earn a few cents more an hour at another job they moved immediately, there was that much work.”

The layoffs have started, of course. Suncor, Shell, the indie drillers and contractors, Civeo. Everyone expects more to come, because you can’t do business with $50 oil like you could when it was $100.

Listings have gone nuclear. There are 73,000 souls in Fort Mac, and currently 820 MLS listings. (Calgary has 1.2 million people, with just over 3,000 listings.) More importantly, where will eight hundred new families come from? Why would you move to a city where the jobs are leaving? Where the average detached house costs $750,000 – at least for now?

As the Globe reporter I spoke to there a few weeks ago points out, urban Ft Mac has one listing for every 76 residents. Urban Toronto has one per 501 people. So much for liquidity.

Jeff is a lifelong Albertan, oilman, living in Calgary. He tells me this:

“I am an engineering executive in the energy sector.  Because of position and proximity, I see a lot of information before it becomes public.  Project cancellations, budget curtailments, and layoffs are currently significantly under-reported in the media.  I’m holding more proprietary information now than ever before.

“Many of the recent layoffs have been to contractors.  Any contractor with a holding company is considered “EI Exempt”.  They don’t pay into EI, so they can’t collect it when they lose their job.  As an owner, you can’t lay yourself off.  The employment statistics will not accurately reflect the number of positions recently eliminated.  The reality is worse.

“The reported break-even figures for oil sands projects are also a misnomer.  They will apply to large, established facilities.  One can also not make blanket statements about the operational costs for mining facilities versus steam injection facilities.  The junior SAGD sector is essentially destroyed.  Billions in capital investment is at risk of massive write-downs (or outright write-off) in 2015.”

Hmm. Jeff, being an engineer, also did an analysis of current listings in some of the city’s tonier burbs. He found that occupied listings, as opposed to new-builds and reno-flips done on spec, account for just 26% of the houses for sale. “We are going to see over the next few months who buckles first,” he says. “ Three-quarters of the listings are held by builders who will have margin compression from lower selling prices on one side and their one-year bullet loans (full principal + interest) coming due on the other.”

Vancouver isn’t Calgary, Toronto, Northern Alberta, the Maritimes (where prices are falling) or Montreal. All real estate markets are local. Meanwhile deflationary influences are everywhere. If this is not reversed in the months ahead, and I do not see how, then real assets (including properties) will continue to decline in value, money will become more valuable, and debts more impossible. Those who fail to see that coming, which includes almost everybody, are in for an awakening.