Some Housing Schadenfreude

I was in the Calgary airport a few weeks ago on my way to the west coast when I wandered into a bookstore and picked up Garth Turner's book Greater Fool, a critique of the current Canadian housing market. A little ironic, I thought, given that the bookstore looked out onto the open rolling hills at the edge of one of Canada's hottest real estate markets, unencumbered by any natural barriers which might put a halt to the ever-expanding building.

Turner is a Member of the Canadian Parliament and noted author and commentator on financial issues. This is a timely book, given that the real estate market may already be peaking in Canada.

Turner argues - and I would concur, given my experience talking to people when I return to Canada - that many Canadians believe their housing market is different from the U.S. housing market, which is in the midst of the worst collapse in prices since The Depression over 70 years ago. Prodded on by highly conflicted real estate and banking industries, too many Canadians believe that home prices cannot go down.

Canadians rationalize their beliefs based on faulty logic and Turner demolishes the rationalizations one by one:

• Canada does not have a subprime mortgage market. Turner notes, that this is wrong since banks offer "below prime" loans.
• Canadians are not able to take out loans with little no equity down. Turner notes that Canadians have been able to do so for some time, although the Canadian Mortgage and Housing Corporation recently said it would no longer insure mortgages with less than 5% down (as if 5% down means much). If Canadians aren't stretching to meet mortgage payments like they are in America, then why have 35 and 40-year loans been created, replacing the traditional 25-year loan?
• The economy is healthier in Canada. Perhaps, but that does not mean it is healthy, nor will it remain so when your trading partner that accounts for 40% of your economic output is in a recession. Rising commodity prices have increased incomes a bit, perhaps, but not by much, and certainly not by the amount home prices have increased. In fact, by almost any measure, house prices are as expensive relative to incomes and rents in Canada as they have ever been.

In fact, Canada looks remarkably similar to the U.S. Canadians are just as indebted as Americans are, mortgage debt has skyrocketed by 70% over the past seven years, and speculators have flooded hot markets, with speculators accounting for as many as 40% of condos sold in Toronto in 2007.

Turner excoriates the financial industry, the homebuilders and the real estate agents that have encouraged the mania in Canada. He laments the "all now" attitude of many younger buyers who believe they are entitled to granite counters and stainless steel appliances, and are willing to plunge deep into debt to attain such luxury items.

The only place where Turner falls down is in his argument that global warming will lead people buying smaller homes. It appears that Turner feels passionately about global warming. However, he assumes that global warming will alter consumer behavior and dramatically alter peoples' lifestyles. There is little evidence to support this. For most Canadians, environmentalism is a feel-good issue they support as long as it does not significantly impede their lifestyles. Yes, people may recycle more and halt the use of pesticides on their lawn, but where has it ever occurred that individuals did not want to live better, more comfortable and wealthier lives than their parents?

In fact, Turner seems to contradict himself when he argues that global warming will lead to the migration of millions. However, millions of immigrants coming into Canada would increase demand for housing and be supportive of home prices. Turner practices what he preaches, however, having purchased a smaller, less energy consuming and more self-sufficient homestead.

Also, some of the book is repetitive, with Turner repeatedly making the same or similar points about the collapsing American market. It had the feel that information was being repeated to add to the volume of the book.

However, I shan't quibble. Every Canadian involved in real estate, or who is thinking about buying or selling a house should read this book. Unfortunately, it will almost certainly be out of date in two or three years when Canadians are living their own housing meltdown nightmare. However, it will be good to keep on the bookshelves until a new generation of real estate speculators bid up prices to insane levels in 15 or 20 years.

Out of five, I rate Greater Fools

1/2

and place it on my investment book log.

Comments

[adan:]

nice to see an actual book review - thanks!

2008 Aug 06 08:36 AM

[sammyg68:]

Hi just finished reading Garth Turners Book Greater Fool, I currently do live in Canada, and was wondering what will happen to our housing market as I wanted to enter it for the first time, so thats why I purchased his book, He does repeat himself alot in the book thats for sure, but he also makes alot of great points like income for the average household in Canada has not changed in more hen a decade, but housing pricing have gone through the roof, double are even triple in some places. What I would like to know where is the money coming from to afford these houses. The banks lended cheap money to people who should not of gotten a mortgage in the first place. And I also believe with our aging population here in Canada more of the baby boomers will be selling there homes added more homes to be sold on the market with less buyers, this can drive prices down. Tighter lending practices were also put in place this summer changing from 40 year zero down, to 35 years with a min. of 5% down, this brings downward presurre in the market as well. Plus once the speculators leave the market this also causes prices to drop. So Garth has made some great points in his book and I agree with him 100% that housing prices in Canada will decrease its just hard for people who own real estate to accept it.

2008 Aug 06 10:02 AM

[mouth:]

Does this mean that we should short the Canadian dollar?

2008 Aug 06 12:30 PM

[Mafeking:]

Garth Turner is a larger than life character on the Canadian scene having served both as a conservative and liberal member of parliament and as a financial advisor who famously urged people in the late 1990s to use equity in their homes to buy stock. Turner has an ability to articulate the 'perceived economic wisdom' zeitgeist and publish a book on it. Of course, the perceived economic wisdom is almost always wrong.

Here is why Turner's latest book overstates the situation: Even at the peak of the housing boom here home buyers were never as extended as in the US; houses prices have not risen as much as in the 'hot' markets in the US.

The market with the most dramatic increase was Calgary which is also the headquarters of the Canadian oil boom. So house price increases there were fueled by the 'tar sands' boom rather than a general run up in housing. Calgary house prices have more to do with oil prices than a general housing malaise.

Also Canadian house price increases were the lowest in the Anglo-Saxon world: UK, US, Australia and NZ have all increased a lot more than Canada.

Also as far boomers downsizing is concerned the huge immigration boom Canada is experiencing (percentage wise the largest in the OECD - the country will have an Asian majority by 2034) should more than offset any downsizing effect.

2008 Sep 13 09:59 AM

[neeb??:]

to sammyg68;
not very surprising considering that 'house=money in bank' instead of a place one raises a family in...

2008 Sep 13 10:04 AM

[MarKoz:]

I feel that a lot of the granite counter tops and stainless steel appliances are simply in place to create the illusion of value when all you're really getting is 700 sq ft in a poorly constructed building for $500,000.

2008 Sep 13 01:00 PM

[steveballmer:]

Loved it! I wrote the forward.

2008 Sep 13 01:50 PM

[GKM:]

Good job Steve! Did you write the foreword too or did your editor do the spell checking?

Shhhh about the Canadian housing market. It's all good. No problems. New highs coming. Totally different. Btw, I'm currently long.

2008 Sep 13 02:23 PM

[Dans Deep C...:]

Funny how a few years ago the NAR economist was writing books on why housing would go up forever and now this. On the way up it's a can't miss and on the way down everyone is ready to jump on the pile, but even more shockingly you still have real estate agents promoting the "power of no money down buying."

dansdeepcreekblog.blog...

Yes it is very powerful indeed for the agents.

2008 Sep 13 02:34 PM

[Paulo:]

A big difference between Canada and the U.S. is that the interest you pay on what you owe on your principal residence is not in any way tax deductible but when you sell, there is no tax on whatever 'profit' you make. There is less incentive in Canada generally to bet on a McMansion with no money down and with a 40 year mortgage. As for the hot market in Calgary, it has happened before in that same place that a lot of people have walked away from homes they paid too much for.
Things will get interesting when those who did buy particle board McMansions with no money down and 40 year mortgages are obliged to deal with all the major repairs that kind of 'investment' involves only halfway through the mortgage pay-off period.

2008 Sep 13 02:49 PM

[SA Guest:]

Most would not dispute that slower economic growth impacts the health of a housing market and that an economic slowdown in the US impacts the level of growth in the Canadian economy. To that end one could reasonably conclude that there is a relationship between the US and Canadian housing markets but this is not central to Turner’s argument.

What he does argue is that Canadian lending practices are / have been comparable to the predatory practices of US sub-prime lenders but only offers anecdotal evidence. He goes on to cite national statistics from both countries on income growth and housing prices, concluding that the Canadian housing market is characterized by an identical pattern of excess to its US counterpart.

Rather than employing the rigors of a Case-Schiller type of analysis to create a reliable and accurate economic database, Turner instead plays fast and loose with cross-border statistics and anecdotal evidence to make his case.

That is not to say that there aren’t some over heated areas in Canada but it could be argued that the rapid increase in Calgary and Edmonton was more related to a supply imbalance resulting from rapid economic growth.

There are many subtle yet significant differences within the Canadian real estate market and between Canada and the US much like there are differences between the real estate markets in Miami and Manhattan.

It is reasonable to expect that housing prices in Canada will be impacted by a slowing US economy (some markets more than others). It is not reasonable to suggest that Canada is facing a real estate crash based on the analysis that Turner has provided.

2008 Sep 13 03:27 PM

[JustATaxPayer:]

We read the signs of the US housing market nearly 5 years ago and sold our house in Ventura County Californai; hottest market in the US, at its peak. (People thought we were crazy for selling).

We had no idea how far down the market would go.

We came back to Northern Michigan (Traverse City area) and just bought an upscale forclosed house for 1/4 the price we sold our "average" (1800 sqr ft) California house. I doubt the market will ever come back to the levels it was, and I honestly hope it never does.

A house should be a home, not an investment.

A lot of people were hurt in the US housing market, a few of us made out ok (but we had to sell when everyone thought we were crazy).

2008 Sep 13 04:05 PM

[notsosmart:]

yogi bear-u r so right. a house is the roof over your head.its a liability,not an asset.it costs u money & u have nothing-loss or profit till u sell.homeowners were sold a bill of goods when they were told its an asset so we will lend u money against the appreciation.i paid my 30 yr mortgage in 20 yrs & never had a heloc.but all this will happen again in about 10 -15 yrs as the sheeple are stupid.

2008 Sep 13 05:22 PM

[novotny:]

I was just in Vancouver and it reminded me of San Diego 3 years ago. Downtown is filled with glass high rise condos, but if you look at night you notice the lights aren't on in most of them. They were bought mainly by Chinese speculators possibly with the winter olympics in mind. I live in NYC and was surprised to see the prices close to what I would pay nearby, but the wages are awful and the gas is over $6 a gallon. Jobs don't seem to be too plentiful either. If I could figure out a good vehicle for shorting that market I would be "all in".

2008 Sep 14 02:38 AM

[Brian in Mo...:]

HXD.to - TSE down Canadian etf, HGD.to Gold down , HAD.to agriculture down, HMD.to miners down to name a few. They may be what your looking for if you think Canada is in trouble. I think HGU.to gold up vs OIL down HOD.to is an interesting play, but I'm really a gold bug anyway. HXD.to would increase when the TSE top companies fall, good tool for Canadians worried about both banks and commodities.

2008 Sep 14 10:12 AM

[Brian in Mo...:]

One clarification HGD.to is gold miners down and HED.to is oil companies down. HBD.to is Bullion down. HOD.to is Oil down.
Also some of the more spector oriented funds are very low volume.
Just Canadian banks interest you it's HFD and HFU, which have decent volume. HMD.to has very little volume, but maybe have the most vulnerable companies to a global slowdown.

2008 Sep 14 10:18 AM