Let it Burn

When the US housing market croaked, starting in 2005 (it needed two years to bottom), the entire American economy dove along with it. House prices fell 32% on average, and took a decade to recover. Unemployment doubled.

When the Canadian housing market blew up in the late Eighties and early Nineties, a similar pattern. Toronto houses, for example, shed 31% of their value over a couple of years. Over the next five years the national jobless rate swelled from 7.8% to 11.4%, and the country staggered through a recession.

Talk to the people of Ireland, Greece, Spain or the UK about their real estate busts in the last few years. Same story. House sales and prices collapsed, then economic activity followed. In every single instance, large numbers of people lost their jobs, sapping consumer confidence and exacerbating the decline. It’s just the way economies work. Everything is connected to everything else.

The conversations on this pathetic blog recently show most people don’t get this. They believe even though we’ve allowed real estate to make up a quarter of the whole economy, prices can be forced lower without consequence. It’s impossible. It won’t happen. Others chirp in with statements like, “bring on the collapse,” thinking once markets tumble by 40% or a half they’ll be able to afford real estate.

Let it burn. Is this a solution?

We should all be aware of the perfect storm which has gathered over the land. The headwinds were already there – rising mortgage rates as the world reinflates. Debilitating household debt levels. Tighter lending rules imposed by worried regulators. Utterly unsustainable house values. Stagnant incomes and depleted savings.

Then the politicians moved in. The 15% anti-foreigner tax in Ontario and now a 20% levy in BC. Universal rent controls to squish amateur landlords. The empty house tax. Increased property taxes. The weird and punitive NDP ‘speculation’ tax. Meanwhile amortizations have been reduced, mortgage insurance costs increased and the universal stress test imposed.

The market response so far has been negative. Sales down. Prices in some areas freefalling. But these are early days. And now there are macro threats to worry about. Donald Trump is utterly unpredictable, but clearly protectionist. He threatens a global trade war in which Canada could end up roadkill. Such a conflict would curb growth, drop commodity values and hit oil – our major export. It would increase US consumer prices, fuel inflation and lead to higher American interest rates – and Canadian mortgages. For days now financial markets have been whip-sawing between despair and relief as the Trumpian Tweets fly.

Against this backdrop of growing uncertainty, the let-it-burn crowd craves a collapse they think will hurt the wealthy and benefit the rest. Forget it. Things don’t work that way. If governments in Ontario and BC succeed in artificially cratering real estate values, the cost could be substantial and the odds are good a recession will ensue – as always seems to happen. Jobs are lost, disposable income shrivels, buyers retreat, construction stops, renos freeze up, realtors, car leasing dudes and mortgage brokers starve, drywallers, electricians, framers, roofers and plumbers go home. If you’re not working and can’t get credit, it actually doesn’t matter how cheap houses get. You’re SOL.

There is no scenario in which a politically-created housing crash does not end in economic reversal. Then it’s the worker bees who suffer most, while the wealthy are in a position to scoop up distressed assets (also known as ‘homes’). Taxing non-residents, non-locals, cottage owners, mansion dwellers or anyone with two properties may drive them away and gut real estate values, but it doesn’t make the rich poorer or the poor richer. It just means capital moves, taking jobs with it.

The Canadian housing market was doomed anyway, but had the chance of a long, bumpy landing. Doubtful now.

Be careful what you wish for.