Mr. Housing Bubble? Hmmmm….

Summer has officially begun!

I hope you are enjoying my monthly emails. I trust they are informative and interesting.

Following this introduction is an article by Garth Turner who is the MP for Halton, just outside Toronto. You can read the original at

Luxury homes in Victoria are selling at a faster clip this year than last as local and out-of-town buyers seek out high-end properties. A climb in real estate prices (37 per cent in the last two years) is pushing more homes past that deluxe marker.

“Million-dollar home sales are climbing at a rate never before seen in major centres across the country,” says Michael Polzler, executive vice-president and regional director RE/MAX in Ontario and Atlantic Canada. “The Canadian love affair with real estate is far from over. If the market continues at this pace, existing sales records for all types of real estate, including upscale properties, will be shattered by year end.”

The most expensive home sold locally so far this year went for $8.4 million. The highest-priced home listed on the MLS is on Oak Bay waterfront with a $25-million price tag. Prices across the country continue to rise for everything from starter homes to posh mansions.

The Canadian Real Estate Association noted in mid-June the average price of a home in major cities topped $300,000 for the first time.

And the B.C. real estate market surpassed the $4 billion in sales for the first time.

A total of 11,338 homes, worth more than $4.52 billion, sold through the multiple listing service in May, said the B.C. Real Estate Association.

In Greater Victoria, the average price of a single-family house in May was $515,755 in May, while the median was $447,450. As prices rise, it is likely that RE/MAX will move its survey level to $1.5 million and more, said Elton Ash, regional executive vice-president for RE/MAX in Western Canada.

Well, there ya go. Everybody’s doing it. Have you got your luxury house yet?

Re/Max is out there priming the housing pump, and doing damn well at it, considering the amount of ink the latest news release generated. In fact, we have now entered a new and terminal phase in a real estate market that is just about guaranteed to end it badly. Think Nortel. Now think house. Oh, maybe not to the same degree, of course – with a loss of 90% of market value – but just as much emotional carnage. You see, far less than 10% of Canadian investor net worth was in Nortel stock, while more than 80% of all family assets are now in real estate.

The above news story, of course, is ridiculous. It gives the impression that most houses are selling for vast sums, and being snapped up by voracious people inherently smarter than you. The reality is the average family income today is $54,000, and that family can afford mortgage payments of no more than $2,000 a month, or enough to support a $300,000 mortgage at 5.5% with a 25-year amortization. So, with a hefty 25% down payment, this family can live in a $400,000 house, but only after managing to save $100,000. By the way, this family would also be eating a lot of KD – maybe even going to the food bank – because their debt service ratio would be off the chart.

But, hey, everybody’s doing it. The average house price in Toronto (counting in zillions of cheapo suburban condos) is $366,000; in Victoria it is $515,000; and in Vancouver approaching $700,000. In fact, a news item widely heard a few weeks ago forecast average Van prices of $1.2 million by the time the 2010 Olympic games arrive.

My point is that when the biggest headlines are reserved for the price of houses, like they were for Nortel at $120 a share, you should take notice. The end game has begun.

What does this have to do with politics? Everything, of course. People with houses rising in value feel wealthier and are likely to vote for politicians and governments they perceive will leave the market alone to make them rich. People with houses falling in value are in a funk, especially when they may have bought at the top, mortgaged too much or have just gone and spent a chunk of their disappearing equity. They vote another way.

My theory is that within a year, the brew of rising interest rates, erosion of manufacturing jobs, a natural economic slowdown, the brake of rising energy costs and a wheels-coming-off US recession could seriously pierce the housing bubble enveloping us today. This will come despite all the hype of real estate gurus, and the criticism heaped upon me for saying so by those with a vested interest in house prices going up forever – which today is almost everyone. Best case scenario – I’m wrong. Real estate becomes completely unaffordable to the average family. Worst case – I’m right. The market corrects just as it did in the 1990-1994 period. Listings swamp demand and prices slump. The last buyers in, take a long, cold bath.

This kind of thing has happened before, but never with the stakes this high. Mortgage debt and house prices have spiked together, fed by the cheapest money in a generation. T here is now an entire population of buyers who know of prices doing only one thing. This is a market without history. Never good.

And while I am not an interventionist kind of guy, I fear the housing meltdown could be nationally paralyzing and politically disruptive. Strikes me a prudent government might want to consider trying to slow this baby down, so the inevitable train wreck is at least foreseen. How about:

(1) Slowly increasing the minimum down payment of 5%?

(2) Disallowing, or discouraging, interest-only mortgages?

(3) Immediately reviewing the new practice of extending 35-year amortizations, which some say are on the way to 50?

(4) Suspending for a period of a few years the ability of first-timers to dip into their RRSPs for down payments?

(5) Closely monitoring new players in the high-ratio mortgage insurance biz to make sure buyers are qualified?

(6) Duct-taping the mouths of Re/Max spokespeople?

Let’s talk a year from now, seeing if these ideas seem too radical then.

Food for thought, I’d say! Well, that’s all for now folks! Remember, if you are in need of cashflow, call me at 1.800.265.2694. RealCash continues to be the leader in commission advances for real estate professionals in Canada. Thanks to you.


Karim Kanji – Marketing & Sales