Latest posts by FIRECracker (see all)
- How to Become FI with 6 Kids, Zero Privilege, and a Small Salary - January 11, 2019
- Our 2018 Finances - January 7, 2019
- Happy New Year 2019! - December 31, 2018
So saw this scary headline the other day.
Now, as much as people think I’m jumping up and down at the demise of our housing market, let me make one thing clear: I do NOT want a US-style housing crash in Canada.
The US housing crash was a cataclysmic black swan event that brought down financial institutions, cratered the stock market, and brought about a global economic recession that lasted for years. I keenly remember what it was like living through that, watching our investments plummet while at the same time fearing a job loss. We managed to get out of that without losing any money, but I wouldn’t wish that kind of stress on anybody.
And more importantly, it affected people (like us) who didn’t over-leverage into housing. Who cares if idiot Home Boners who can’t do math lose everything? But renters like me got dragged down with those idiots, and that was not OK.
What I was hoping for (and what our government was trying to engineer) was a Soft Landing. A gradual reduction of home prices, maybe 2-3% a year, for many years, that would bring national house prices slowly back down to their historical norm. Over-leveraged idiots with no slack in their budgets would watch their equity get eaten away as they throw money at their mortgage only to see their cash disappear, but no banks would go belly-up, no wave of job losses would happen, everything would stay civil. The idiots get screwed, but the rest of us would be fine.
This week, housing stats came out of the Toronto Real Estate Board.
Prices for single detached family homes fell 17.2 per cent in the GTA.
For a comparison, here’s an article from December 2008 from CNN Money panicking about a “record” 18% drop in home prices. 18%. Versus 17.2%. And the American number was for the whole year. The Canadian one happened over a single month.
What the Hell Happened?
Well, a bunch of things. First of all, our government was trying to poke and prod the housing market into a Soft Landing for some time now, but none of it seemed to work. This January, they introduced federal regulations known as B20, which we wrote about here. Basically, the B20 regulations were designed to limit how much debt a person could take on. It added 2% onto the posted rate for every prospective homebuyer in the country when determining eligibility. The net result is that people qualified for less money, which means buyers had less rope to hang themselves with.
The problem was that provinces were implementing their own Soft Landing measures too. Ontario implemented a 15% foreign buyers tax last year. In British Columbia, that tax is 20%. Plus, they have a speculators tax of 2% annually of a property’s value if you own multiple houses. And on top of that BC has a an annual 1%-of-property-value tax if your house is deemed “empty,” meaning not rented or occupied for six months of the year.
And in isolation, all of these policies probably made sense to the people writing them. And I’m no policy expert or anything, but maybe they shouldn’t have done them all at the same time? Because I don’t think SFH prices are supposed to drop 17.2% in one month.
Here’s What This Means.
OK, so what does this price drop mean? Well, a couple things.
#1: Anyone who bought a house in the last year is now underwater.
I really don’t think Home Boners truly appreciate how scary debt is. When everything’s going up, debt is great! You managed to double your gains using leverage! Good for you.
But when things go down? Debt becomes a monster.
I may have mentioned this before, but Wanderer’s mom used to be a real estate agent. And when I asked her what the worst listings to work were, she would say foreclosures. Not only do the sellers not want to sell, the couple is usually fighting like cats and dogs.
In many home purchases, the decision to buy is not made equally. Usually, one person drags the other person into the decision. So when that decision turns wrong, the hesitant partner lashes out in righteous fury. “You see? You didn’t listen to me and now we’re screwed!” So Wanderer’s mom gets stuck trying to negotiate a sale in which the sellers are both uncooperative and going through a divorce.
Expect many Toronto Home Boners to be in this situation soon.
#2: The Government MAY Have Over-Reached
As a Canadian, I like our government. It doesn’t start wars, it gives us health care, and right now our leader takes such great selfies that he could fall back on a career as a male model should this whole politics thing not pan out.
But on this occasion, they may have shot themselves in the foot. The federal B20 regulations, plus a rising interest rate policy from our Central bank, plus a foreign buyers tax, plus an empty house tax, plus a speculators tax, may have been just a few too many things coming online all at once.
Bringing on new taxes with unknown effects is like training extras on the Walking Dead. The trick is to Stagger Them. STAGGER!!!
What Gives Me Hope
So am I selling all my TSX ETFs and giving up on the Frozen North? No. Or at least, not yet. Here’s what gives me hope that we’ll all be OK.
#1: Local Versus National
The statistics I’ve quoted are local. Toronto Single Family Homes down by 17.2%. But the American statistic was national. US home prices down by 18%. So I’m hoping that while Toronto may get fucked, the rest of the country won’t, and even though Toronto is the biggest city in Canada, the aggregate of the rest of the country not getting fucked will blunt the catastrophic impact.
What I’m watching very closely is if our banks start falling over. The 2008 housing crisis didn’t turn into the 2008 Great Financial Crisis until Lehman Brothers collapsed. So believe me, I am watching Home Capital very closely right now.
#2: The Government Can Always Reverse Itself
The thing about 2008 is that nobody saw it coming. In this case, the crash (if it does turn out to be a crash) was actually caused by over-zealous government policy. Which I see as an oddly comforting fact. If our government inadvertently caused this crash, it can simply reverse their policies if their impact was too great.
And I know, depending on government to do the right thing is idiotic. But remember, our government is still run by someone who knows what they’re doing. And also, he has dreamy eyes.
Soft Landing! Soft Landing!
So I am still waving the Soft Landing flag, and hoping someone who knows what they’re doing pays attention. The Home Boners? They’re screwed. They will be miserable, and stressed, and all their money will get sucked away by the invisible monster that their home has become. And that’s OK. They deserve it because they don’t understand how math works.
But the rest of us? We didn’t screw up like those people did, so we don’t deserve to get dragged down with their dumb asses.
The Hard Landing may have just started. Let’s all hope we don’t get squished.
Incidentally, I don’t know how I came across this but I recently stumbled onto one of Jim Collins’ old posts about how he bought a condo back in the 1980’s right as the housing market turned negative. It’s a hilarious read that I had no idea was lurking on his site. Check out The Godfather’s experience with a housing crash here: How I Lost Money in Real Estate Before it was Fashionable.
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