Yellow flags

One problem with writing this daily blog is remaining humble. So why bother?

You may recall the pushback from the steerage section when this site told you (in stark, Adele-disparaging terms) that (a) we’d hit peak house, (b) buying in Bunnypatch was a really dodgy idea because WFH can’t last, (c) rates were soon going up (a lot) and (d) it was genius to sell and risky to buy three months ago.

Where are we now?

A mess. Social media – like that loser community called Reddit – has lit up with stories of people who bought in Feb or March, haven’t closed yet and whose purchases are devaluing weekly. Appraisals are coming in under sale prices (routinely) and many cannot afford to consummate their transactions. People are saying they’ll walk away and lose deposits, without realizing there is so, so, so much more to forfeit if they don’t show up on closing day.

Offer nights have no offers. Sales are dropping everywhere. Mortgages are moving quickly towards 5%. The CB will raise all rates again in 21 days. Lenders have seen mortgage app volumes drop by over 40%. Approvals are harder to get. And a new set of anti-real estate laws and taxes are just now coming into effect.

Meanwhile people are being called back to work. The masks are dropping. Normalcy is returning to life, and all this extra social activity is adding to the fires of inflation. We are a long ways away from a rate ceiling, and once again the inverse relationship between real estate prices and interest rates will be on full display.

Yes, we told you all about it. This is what it looks like:

The correlation between rates and house prices is undeniable

Source: CREA, Statistics Canada, The Habistat

There’s a reason houses cost $220,000 throughout most of the 1990s, and are four times as expensive now. Mortgage rates topped 10% for most of that decade, down payments were higher and kids never expected to slide from being uni graduates to homeowners. Lately cheap 2% home loans allowed for a tsunami of debt, which escalated prices while tax-free real estate capital gains fomented speculation.

So when the cost of money inevitably reversed, high prices and historic debt are proving to be a toxic combo.

In addition to cheap rates and bad tax law we lost our minds during Covid. The exodus to the sticks was monumental, and a first in Canadian history. It reversed a century of social change as deluded Millennials convinced themselves they could find a decent latte in Ingersoll or work remotely forever from Squamish. It also destroyed – for a generation, perhaps – the quality of life in Bunnypatch, ripping apart the relationship between local incomes and local house prices.

Look at this. Unbelievable.

Here is what we did to poor Bunnypatch

Source: Canadian Real Estate Association, The Habistat

Here’s where some of the greatest personal financial carnage will occur. This pricing is unsustainable as jobs drift back to traditional workplaces and urban refugees realize what their odyssey cost – including diversity and career advancement. Some will stay in Hicksville and be content, of course. But many will list. And buyers will be sparse. Valuations will fall back to earth, where they belong.

So far, our yellow flags look prescient. Recent buyers may well fall into negative equity. Almost everywhere. In Vancouver, rockstar realtor Steve Saretsky has finally come to this conclusion:

“The highly levered Vancouver housing market is going to struggle with mortgage rates north of 4%. Need I remind you that in 2018, when mortgage rates were hovering around 3.5%, Greater Vancouver home sales slumped to an eighteen year low. Thus there should be no surprise that sales activity has fallen precipitously since the end of February, and April home sales fell 34% year-over-year. Prices need to adjust for the higher cost of borrowing. There are now signs that process is underway.”

Meanwhile politicians flail about, trying to blame money laundering, foreign buyers or monetary policy for the fact average people can no longer afford average homes. The fact remains that 50% of all sales are to new buyers and a majority of them are supported by the Bank of Mom, while 95% of all transactions are among resident Canadians, financed by domestic landers. It’s also not just here. In America, Britain. Australia, NZ and much of the western world, housing costs have erupted during the pandemic. Canada just poses an extreme example of how humans can really screw something up.

The only question now: in a few months as prices tumble, will courage meet common sense, and buying begin anew?

Don’t hold your breath. Whining is easier.

About the picture: “Our beloved collie Danny, reflecting on politics, asking himself if he should run for office,” write Kris and Colleen. “After all, he has nice hair and a sunny disposition although his speech pattern can be somewhat disjointed… You are welcome to use this photo if you deem appropriate. Anything to brighten the mood .”

If you have a beast photo to share with the pack, send it along to “[email protected].” – Garth