Zombie nation

Most people forget housing’s a commodity. The price is set by supply and demand. Whether anyone wants to buy your home or not is determined by their confidence and access to money. Plus hormones. And mom. And HGTV.

Our national house lust, fed by cheap interest rates, has inflated real estate to the point where it carries a ton of risk. The nature of that risk lies in the gap between what the property’s worth and what it sells for. They’re not the same. Worth is determined by things like replacement cost, what cash flow that asset could generate (in rent) plus the ability of people who live in the locale to afford it (based on income). In contrast, value is set by the market – sometimes made up of demented, inexperienced bidders hepped up on leverage and throwing around money they never expect to repay.

Yesterday I told you the reason someone would buy something for twice the price of a few years ago – because they fear it will go higher. That’s irrational, I know. But people are essentially herd animals. The same holds true on the downside. When prices fall, they fear they will go lower – so buyers evaporate, then listings pile up.  It really doesn’t matter what inflates houses (low mortgages, Chinese dudes, Liberals) nor what deflates them (rate hikes, oil, layoffs) because all that really counts is the way people feel about it.

And these days they’re confused.

Look at the latest stats out of CREA. Quelle mess. We have  dweebish exuberance in YVR, a cooling trend wafting over Toronto, despair in Calgary and a seeping WTFness in a bulk of other markets where sales are stagnant or falling and nobody’s making money on real estate anymore.

Cowtown matters, as I’ve tried to impress here over the last few months. Two years ago it was our hottest market. Now it’s the worst. That’s not because a recession has descended, but rather because it’s dawning on people that housing’s a bad gig, and if they’re worried about a job or a fat mortgage it’s best to get out or delay getting in.

Look at the numbers. Ugly. Sales down 36.4% last month year/year in Calgary and almost 30% across the entire province. Prices are off about 4% or more in both markets, but on-the-street evidence is of a far bigger erosion. (Recall the Priddis McMansions selling for 60% off at auction last month.) In Fort Mac sales have fallen by almost half and prices are lower by 11%. In Edmonton the pace of deals has have fallen 15%.

In Regina sales have dropped 12%. In Saskatoon last month the year/rear decline in sales activity was almost 20%. Both sales and prices in Winnipeg are lower by 3%. In Montreal sales were ahead slightly and the median house price touched $300,000 for the first time. Amazing bargain in the country’s second-largest market.

Here’s how BeeMo economist Doug Porter characterized the western thing: “The renewed sag in oil in recent months looks to have triggered a renewed weakening in housing markets across much of Alberta and Saskatchewan. Six of the 25 major markets reported double-digit declines in sales last month, and four of those were in these two provinces.”

When it comes to housing prices, here’s a little chart (from CREA) on the wild disparities now taking place across the country. As you can see, any brag that Canadian house prices ‘rose 8.3% on average in October’ as the anchorettes on Global will tell you, is bunk.

The single remaining source of gas being shoved into the bubble is coming from Vancouver, those poor people who live beyond the rocks, spend all day on Twitter and find out who won elections before they actually vote. Apart from that troubled city, along with 416, the Canadian housing market is becoming “incredibly weak,” according to TD Economics.

Worse, as you know, mortgage rates are set to rise. In fact, the upward pressure is already there, already being felt and manifested. Once December 16th comes and goes, you can look forward to a steady exit from the 2% range as all rates enter the next digit and beyond. Be aware that once rates begin to ascend, they will continue on a slow but relentless path, if history is any guide. The Fed always tightens in a series of moves, and almost always Canadian bond yields and eventually the Bank of Canada have followed.

This could be the perfect storm. Lousy commodity values and a big hit on real estate in a country whose largest export is oil. Regional housing markets reflecting a weak economy, fewer job prospects and diminished consumer confidence. Then, higher mortgage costs – having the biggest effect on the place where mortgages are most epic.

Nobody in Vancouver, or under 30, believes any of this. They think it’s different this time. It’s so cute.

Zzzz.