Through the muck

Eighty years ago young men waded into the hell of enemy fire on French beaches to save the world from tyranny. Today the kids just want condos. They ask online what the point of a country is, when the young can’t afford a house.

Real estate is a disease. And some wonder if yesterday’s CB rate cut will rekindle FOMO, lure buyers back into bidding wars, pump prices higher and further warp our social priorities. The odds of that happening are probably high.

Economists figure the quarter-point-nip this week will be followed by another in September, then a third before Christmas. The CB clearly signalled this is the start of a process, not the end. By this time next year Mr. Market figures the Bank of Canada will have shaved at least 1% and perhaps as much as 1.5% from its key rate. Mortgages will be under 4% again. That tsunami of renewers will have been saved. And we’ll be heading into a federal election where the deciding issue will be… ta-da… real estate.

As stated, a sickness. An epidemic.

So, where are we now, the eightieth year after D-Day? Well, the house that sold (new) for $6,000 as WW2 ended is $1.6 million now. There were 12 million Canadians when the war finished, and now we are 40 million. So a population increase of 250% does not really explain a real estate advance of 26,000%.

The main driver of price has been credit. When the war ended banks were reticent to give mortgages for more than 50% of a home’s value. A decade after CMHC was formed in 1945, mortgage insurance was created, protecting lenders. The minimum down was 25%. In 1971 capital gains taxes came to Canada, and residential real estate was the only asset class exempted.

Over time, required downpayments fell to 10%. Then in 1992, all the way down to 5%. Suddenly not only were banks protected (by taxpayers) against default, but they offered 20x leverage to buy real estate, the gains from which were free of tax. That same year, the federal government approved the Home Buyer’s Plan, allowing people to take registered retirement money out of their tax shelters and use it to buy real estate.

Twenty times leverage. Guarantees for lenders. Tax-free housing profits. Free downpayment loans. And then… cheap financing.

The horse was out of the barn. Never to return. By 2000 the average Toronto property price had climbed from just over $200,000 to $250,000. When mortgage rates dropped in the 2008-9 credit crisis the price rose from $300,000 to $500,000 in three years. By Covid, it was $1 million. Mortgages were 2% or less. Money was abundant and available for under the rate of inflation. In 2021, for the first time, we heard the phrase ‘housing crisis’. And with that governments gushed more public funds into real estate. The Home Buyer’s Plan has been expanded massively. A new home-buying tax shelter created. Tax credits given to new purchasers. Tens of billions shovelled annually to families, which can be used against mortgage payments. Public money made available for home renovations, heat pumps and secondary suites. And still real estate gains are untaxed.

Is it any wonder we’re here? We did this. We keep electing politicians who will feed housing. And what’s the biggest issue in the 2025 federal vote going to be? Yup.

Okay, as interest rates begin a steady descent over the coming months, major markets are likely at low ebb. In Vancouver last month sales were 20% below year-ago levels. In the GTA, similar results, with a 21% drop. In those markets, as in Calgary. Montreal, Halifax and others, listings have increased substantially. Prices have moderated a bit and, in general, ten interest rates hikes succeeded in knocking about 15% off house values, after a 50% gain over pre-Covid days.

The average Van property costs $1.2 million. Detacheds are $2 million. In the Toronto region, the average is $1.16 million and dinky condos now command eight hundred thousand. Despite mortgages over 6% and a stress test near 8%, plus over 22,000 unsold new condo units and a collapse in new-build SFH sales, the average property did not come back to earth during this tightening cycle. It is still far beyond the means of the average income-earner.

And now, this prediction: “As borrowing costs decrease over the next 18 months, more buyers are expected to enter the market.” So says Jennifer Pearce, head wizard of the Toronto real estate board. And she’s correct. There is pent-up demand, new household formation, an increasing population and governments pandering to real estate sales while the feds have already told us prices need to stay high to protect the net worth of retiring Canadians. Add in mortgage price declines, and the malady takes hold again.

When this pathetic blog started 16 years ago, we were in the throes of a meltdown in the US housing market, on the cusp of a Wall Street bank collapse and in the midst of a Canadian experiment with 0%-down mortgages that was destined to end badly. It seemed certain real estate in this country would prove dangerous.

And it has. Not for those who milked the personal gains of the last decade, but for the nation as a whole. We are more in debt. More myopic and unbalanced. More at risk, in a one-asset world. More dependent on government. More obsessed. And, from the aspect of a 21-year-old crawling through muck and bullets eight decades ago, more entitled and far less grateful.

Nobody died so we could afford real estate. This is on us.

About the picture: “The older dog is a retired Service dog named Wilbur from “Dogs with wings” here in Edmonton,” writes John. “The younger one is a two year old named Smitty; named after two Oiler players. Both sit calmly all game with the biggest Oiler fan in the house My wife, she has her own oiler room with a bunch of paraphernalia to enjoy the game. Kids know better than to enter. Thanks Garth for what you do, have followed you for some time and it shows. We are doing good, our B&D portfolio is allowing us to see a very comfortable retirement on the horizon after 30 years of sea service with my start in the Navy. Looking forward to telling sea stories about steamers, wood hulled minesweepers, and other Farrous oxide hulled vessels the Goverment calls ships.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.