Real Estate Engine Running Out Of Steam - For Good Reason

Summary

• While slacker conditions may enable a few more people to hyperextend themselves a little further in debt servitude and realty speculation, it will not help what ails Canadian households and our overly-concentrated-on-realty economy.
• As in past periods of 'easy money,' it is typical for individuals and institutions to ramp up their expenditures, leverage and risk exposure during the boom times and then be caught short when money flows recede.
• On the other hand, those who well managed the last decade of ultra-low-rates and rising prices will have taken the opportunity to pay down debt, reduce financial leverage, and strengthen their balance sheets with liquid savings.

Sales trends lead price trends, and according to a new report by Altus Group on behalf of the Canadian Real Estate Association, Canadian home sales fell 11% nationally in 2018 on poor affordability, higher rates and tougher loan qualification rules. The report also estimates that each home sale not made is a loss of some $60,000 in knock-off revenues not flowing through the economy to related services like lawyers, realtors, movers, home furnishings etc. See: Sales decline causes significant economic spin-off losses.

Naturally, these are the same 'feeder fish' sectors that grew above trend over the last decade and are now feverishly lobbying the government to step in with more 'help for homebuyers' in the form of 30-year mortgage amortizations and laxer lending standards (help for whom?).

While slacker conditions may enable a few more people to hyperextend themselves a little further in debt servitude and realty speculation, it will not help what ails Canadian households and our overly-concentrated-on-realty economy.

The real estate gravy train had a hell of a run over the past 15 years on lower and lower rates, higher and higher debt, and inflows of foreign capital looking for land banks; but all credit booms must come to an end, and this one is long overdue.

As in past periods of 'easy money,' it is typical for individuals and institutions to ramp up their expenditures, leverage and risk exposure during the boom times and then be caught short when money flows recede. On the other hand, those who well managed the last decade of ultra-low-rates and rising prices will have taken the opportunity to pay down debt, reduce financial leverage, and strengthen their balance sheets with liquid savings. They will have reduced costs, not increased them. They will not have their income and assets all dependent on a never-ending expansion. They will have a plan that defines their life and financial goals including a target list with the amount they wish to allocate to different asset classes once price and yield come back to attractive levels. They will, in short, be some of the few positioned to benefit as this historic financial cycle completes.

Disclosure: No positions.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[f851963]

Excellent article, shows who and why housing is so expensive. Thanks for the information.

[Jeff B]

I've had the unpleasant experience of watching and listening to an array of realtors over the past year while I house hunt. And a small number of home inspectors and smaller number of lawyers.

The lawyers are scary. None would (or could?) explain how title insurance works in Ontario. They'd simply say "You have nothing to worry about", but when I started reading on my own I discovered there is a lot to worry about because actual protection is rather thin. They also advised that "You don't need a survey" ... without which most forms of title insurance immediately fall into default because visible defects are generally not covered.

The realtors, with perhaps two exceptions, I would not leave alone in my home office. They lie and they lie a lot. One told me -- after I looked at renovation work that clearly required permits (plumbing, electrical, bedroom partitioning) -- that no permits were required.

One home inspector told me he could tell everything about a home's wiring from the power panel, after I asked why I hadn't seen him checking receptacles. Another finished his "inspection" in less than two hours (some rooms he did not even enter). [ I'm an engineer -- you cannot tell everything from the power panel. ]

So why does any of the above matter? I think it's a sign that it's still a hot market when the ancillary professionals can act so sloppily. When prospective buyers send offers waiving all conditions on homes they've never seen in person (yes, actually happening here). So yes, the market may have fallen off some, but it's still racing along.

[jack2012]

Yup ,it is all about getting the deal done knowing the "little guy" may not have the time or energy to suit if anything goes wrong while they hide behind the declaration form filled in by the vendor to protect the realtor. Here in Greater Vancouver so many dumps have sold that never would in a normal market. An inspector who is too hard on properties would have his/her card drop to the bottom of file 13, never to be seen again. Well said Jeff, and I believe everything you say as I have been there, but fortunately have not been burned. Check the fine print at the bottom of the inspection form. Is there any liability ?

[swisspete]

Jeff, with you on all. but I don't think this is a reflection of the hotness of the market. it's a reflection of American culture, of selling and convincing rather than doing a good job. more and more, it is less and less about doing things right and well, but cheap and "successfully", with successfully being the idea of the great business man. people can't tell the difference anymore. they don't know what doing it right looks like.

[Jeff B]

@swisspete ... You may be right more generally about the hotness. I'm in eastern Ontario, and here it's not like Toronto or Vancouver. There was the normal seasonal lull in sales late fall and early winter; now it's picking up speed (I sample listing durations as part of my search).

[jack2012]

$60 K in fees not going to lawyers and realtors. That is so sad....maybe some will have to seek meaningful employment. Never have so few ripped off so many polite Canadians who pay these fees. Ever heard of a notary or FSBO (for sale buy owner) ? Even the Chinese government told their citizens to stop treating housing as a commodity vs a place to live . It is time the greed stopped and it appears it has. And yes, the movers do the only real work and they are paid the least.

[Mitch Zeitz]

The movers make like $20/hour to haul furniture up stairs while the brokers get 2.5% of house price each to list on a service with a few hired pics, fill in a few blanks on standardized forms and mime a negotiation. Sad.