Animal spirits

The silent spring. It was shocking when environmentalists first pointed out the growing absence of song birds. (We’ll save the climate change debate for another day. It’s real, by the way.) Now, in terms of the most important assets citizens own, the more terrifying silence.

The housing market’s in worse shape than official stats tell. That’s the view from the ground level. As this blog showed the other day, the vast majority of realtors are starving alley cats. Mortgage brokers are living on bugs. Appraisers and home inspectors are looking for real jobs. The country can no longer support over 110,000 people whose only occupation is flogging houses. Worse, if the bulk of your net worth is in one pile at one address in one city, you better pray it’s the right burg. Like Montreal or Halifax.

But not Vancouver. Or most of the 905. The LM. Victoria, or anywhere near a swollen river (oops, more climate change talk. Sorry.)

There was an interesting tidbit in the Van media this week about a couple who’ve lived almost two decades in a rich hood there. Now retired, they’ve saw their property jump in value to $4 million. Property tax, too, from five grand a year to almost three thousand a month. Meanwhile the house has shed 30% of its value since the Dippers arrived and started killing the market. So, yes, the place is now listed.

The lefties and moisters on this blog will have no sympathy. They’ll fail to understand these people weren’t speculators, did nothing to pump the worth of their property, and are powerless as it deflates. But government actions have turned a correction into a growing crash. It was inevitable Mr. Market would turn tale and pop the speculative bubble. No help was needed from a foreign buyer tax, a spec tax, a vacancy tax or extra property tax. Even the stress test. It’s all been overkill, say the people affected. But because there are many fewer dinged owners than envious renters, nothing will change. The rout will continue.

It’s been asked a few times here why this is happening, and who’d getting gouged. Politicians point out that at least 95% of the population pays none of these taxes. So if they have cratered the market, it must prove Chinese dudes, dirty money and speckers were driving things.

Not so fast. It’s psychology which fuels markets. Not taxes. Not foreigners. Not even macroecononics or mortgage rates.

Human nature makes us crave what is rising in value. Assets become popular, desirous, wanted. The more that they rise in value the greater the worry they will swell forever, becoming unattainable. So people rush in, their breasts beating with FOMO, borrowing and paying too much. The zenith was two years ago, with 30% year/year price gains recorded monthly in the GTA or Vancouver. Yes, it bred speculation. Half the condo sales in Toronto went to people with no intention of living in them.

Governments reacted to a perception real estate was out of control. And it was. But not because of offshore buyers or people hoarding vacant units. It was on fire from widespread, across-the-bard demand after realtors, politicians and the media managed to convince most people it was no bubble, but the future. The result was insatiable demand and reckless behaviour.

Now we’re on the other side of the mountain. It’s not that a bevy of new taxes and regulations have killed off real estate by shutting out offshore buyers or that the stress test itself eliminated first-timers. Instead, it’s a sense buying now would be catching a falling knife, that prices are crazy inflated and especially that peer pressure to do so has evaporated. In short, when people think something, it exists. Mortgages are cheap, real estate is cheaper, competition has vanished and choice has blossomed. Yet sales fall.  See what I mean?

Anyway, what now?

The prognosis is poor unless May numbers bounce back strongly. The summer months usually bring less demand, while the second half of 2019 will be dominated by political uncertainty and macro events like the seething Sino trade war. Trump is getting more controversial, not less, and we’re steaming towards a pivotal national election in October. You can probably rule out any more interest rate cuts, given the latest jobs numbers. And it looks like the stress test is here to stay.

In short, the advice stands. If you need a house and can afford it without dumping all your net worth in there, go ahead. It’s better than last year. But don’t call it an investment. Or a retirement plan. It’s just a place to live and you may indeed see lost equity.

Having said that, the longer you wait, the cheaper things will get. When everyone calls you a moron – do it.