Sales of new homes and condominiums in the Greater Toronto Area declined in August, the Building Industry and Land Development Association (BILD) reported today:
“According to RealNet Canada Inc., BILD’s official source of new home market intelligence, the 1,242 homes sold in August 2012 add up to the lowest monthly sales since 2009 and the lowest August on record. Year-to-date sales have remained on par with 2010 but below its record-breaking 2011 predecessor.”
The Huffington Post picked up on the recent data yesterday and pointed out that while lower prices would be a help to would-be-buyers, the adjustment in Canada’s now housing-dependent, over-indebted, domestic economy is likely to be painful:
“While many prospective home buyers may cheer to hear that homes could soon be more affordable, at least in Toronto, economists warn that a significant slowdown in housing could have repercussions for the entire economy.
In a report issued last month, Scotiabank warned that “balance sheets heavily skewed to real estate leave Canadians vulnerable to an adverse shock, including a sharp rise in unemployment and/or a sharp drop in home prices.”
Scotia predicted that home prices would decline on average 10 per cent across the country, and the market would take a decade to recover, based on previous housing market cycles.
But Capital Economics predicts a 25-per-cent decline in house prices, which would inevitably lead to rising unemployment. As BILD noted in its report, there are 193,000 people employed in construction in Toronto alone.
;
Just to illustrate the mentality of probably most Canadian homeowners, the other day my local printer mentioned she was happy that home prices had gone up so much. She hopes prices keep going up.
No doubt this is evidence of the so-called ‘wealth effect’ that the Beard@TheFed loves so much. But my nice printer friend, and anyone else with the same attitude, must ask herself or himself: if everyone’s home goes up in price by roughly the same percentage, is anyone of us really wealthier on that basis alone?
Of course not.
Unless she monetizes her paper gain and puts the profits (assuming there are any) toward another fruitful investment or can somehow reduce her cost of living without reducing her living standards (e.g rent and invest the cash), or she can arbitrage her proceeds, by say, moving to an area where real property values are much lower, the rise in her home’s price adds nothing to her real wealth. (In fact she’s susceptible to higher taxes, which will actually reduce her real wealth.)
Of course with a higher home price she may now have the opportunity to increase her debt. Or if she is retiring and needs cash she can always do a CHIP and give her home back to the bank.
Lower prices help deflate the bubble, and allow new entrants into the housing market a more equitable and fairer price. Whats so bad about that? Nobody should be complaining, the folks that didn’t sell at higher prices could have, but didn’t. So what?
This is what clears markets. Have no fear, nothing bad will come of this. Just the fruit will become lower on the tree for the newbies. And that is that.
Nicole Foss agrees:
http://www.youtube.com/watch?v=4fPAx5MEviA&feature=player_embedded
Found the above video on this thread:
https://www.kitcomm.com/showthread.php?t=107113
What a presidential candidate with integrity would say (and do).
http://market-ticker.org/akcs-www?post=211989
The fear is that many, recent (mostly young) highly-indebted home buyers could easily find themselves in a negative equity situation, that, if exacerbated by a very large decrease in prices and a very long period before real values recover, could be severely damaging to their longterm financial health. The equity will be gone but the debt will remain. And don’t forget that a severe drop in home prices would not happen in isolation of a bad economy. So many people could wind up with huge debts, no equity, and no job. Canadians are among the most highly-indebted people in the world. The risks are very high.
Nicole Foss, whom I respect, is a classic example of why making predictions is folly. She clearly understands the fundamentals but cannot grasp and assimilate all the variables that may come into play (no one can; it’s far to complex).
Which is why one should never try to predict the future or base their actions on predictions, especially when those actions are predicated on fear. All one can reasonably do is assess the risks (and the potential opportunities) and proceed in a way that minimizes the perceived risks and capitalizes on the opportunities.
>>> The fear is that many, recent (mostly young) highly-indebted home buyers could easily find themselves in a negative equity situation
They chose to gamble with too much leverage so don’t feel too bad for them. What I fear is what will happen if those buyers start to default en mass since we the taxpayers will be bailing out CMHC if they run out of money.
One thing I would say is that a 90% fall in nominal dollars will never happen. As governments and central bankers around the world have clearly demonstrated over the past few years, they are prepared to stimulate and print to no end. In fact, I’d be surprised if the Canadian gov’t let’s house prices fall 20% on average before they relax lending rules again and introduce other stimulus measures.
The underlying problem is there is not enough wealth being generated to collateralize all the debts. We’re passed the point where making money cheaper will have a significant effect. Bob Prechter calls it “jaguar inflation”: it’s the point where no matter how cheap credit becomes the people simply can’t take any more of it–unless the authorities permit strategic bankruptcies––which I predict will explode––to take hold en masse.
I doubt Foss thinks prices will fall 90% in nominal terms, unless she thinks there will be an all-out and complete credit collapse. I suppose mathematically this is possible considering the imbalance between collateral and debt in the system (e.g. the shadow banking system), but even if the system had to de-lever by 90%, there’s no way the money masters would let it happen via a sudden collapse. It would take many years of slow burn and misery, which could only be offset (if at all) by tremendous technological advances that reduce the cost of living significantly. But the flip side of that is no jobs for large portions of the population, so the cost of living for the average person would essentially have to approach zero (imagine what that would mean in practical terms). However, if the so-called “breakaway” civilization described by Catherine Austin Fitts is prepared, the faster solution would be a hyper-inflationary blow off.
Government played with the rules and manipulated the people in order to feed the banks. Once the market reached saturation, they changed the rules again to slow things down and protect the banks. The banks now have 70% of households (minus those without mortgages) indebted to them. Nice steady stream of reliable cash flow for decades to come.
Most people don’t understand money and finance. Like con men, G knows this and uses it against us. Yes, people should be responsible for their own financial health, but when you use ignorance as a weapon to fleece people (even if legally), you’re just as morally responsible for their ‘bad decisions’ as they are.
G should have just left the sound, tried and true mortgage rules in place so that housing affordability would reflect reality and only those who could really afford a home would buy one. As a matter of fact, if low interest rates were beyond their control (as I believe), then the responsible thing to do would have been to offset the low rates with tighter rules to make home ownership more expensive and avoid a bubble. Instead what to they do? They tighten up the rules after it was too late! They are playing a very dangerous game on behalf of the banks.
You can argue they blew the bubble to help the economy, but that’s very short-sighted. Oh, wait, what am I saying?…
Pingback: The Risk Trade-off : The Retiring Boomer
Pingback: Weekly News Links : The Retiring Boomer