Canada's Housing Bubble

Sep 18, 2010 Garth Turner GreaterFool.ca

An hour by commuter train west of Toronto brings you to downtown Hamilton, a city of half a million people. Grafted to its eastern flank is the suburb of Burlington, where another 170,000 live. And while Hamilton’s been known as an industrial, blue collar kinda place, Burlington’s waterfront is graced with a long boulevard lined with estates, some of which are currently for sale for between $5 million and $9 million.

In fact, that’s a problem. Usually no such homes are on the market. Something’s up.

And despite the odd seven-figure sale, the average home price in the whole Hamilton-Burlington area, says the local real estate board, is showing signs of distemper. In the last 90 days, it;s fallen 5%, and now sits at just $299,000.

I mention this, since anyone getting on the evening GO from Toronto’s Union Station to central Hamilton would be on a ride into real estate reality. The average SFH price in Toronto is about $600,000, or twice that of a region  just an hour away where almost 700,000 people live.

In fact, going west, it gets worse.

In London (population 457,000) the average home price is now $227,000. In nearby St. Thomas, where Ford is about to shut down an assembly plant, houses average $184,000. And down the road another hour or so is Windsor, once the car capital of Canada, where a nice two-storey suburban home can be had for about $150,000.

In fact on Monday Windsor will sell off 19 properties for tax arrears, if you’re interested. (The city is bedevilled with $45 million worth of property tax that owners won’t pay.) On the list is a prime riverfront lot near the glitzy casino, with an unobstructed view of the Detroit skyline. It’s $22,000. And there’s also an urban six-acre undeveloped parcel of land surrounded on four sides by homes, schools and a Shoppers Drug Mart. The price is $164,000.

Of course, one kilometre further west puts you at ground zero for HouseAgeddon – downtown Detroit, a city which has lost half its population. Several days ago, a firestorm swept through a neighbourhood, leaping from one abandoned home to another, taunting fire crews and consuming 85 unloved residences, before being extinguished.

Now you may not think you have anything in common with Detroit. Or Windsor. Maybe even London, or Hamilton or its suburbs which now melt into the GTA. But you do, at least if you’re a homeowner.

The lesson here is that real estate has little intrinsic value. Instead, it’s entire worth is determined by the market. By supply and demand. By the desires of buyers. Identical houses an hour apart can vary greatly in price, and it’s almost always for economic reasons. These days there is little steel being produced in Hamilton, far fewer car parts and railway engines in London, and no more engines in Windsor. As economic opportunity leaves town, so does home equity.

This may be a self-evident, but nonetheless valuable little lesson in economics.

After all, Canada’s unemployment rate is forecast to remain above 8% for some time. Years, maybe. Wages and salaries have flatlined, while household debt has reached historic levels. Almost half of us save less than 5% of what we make and 40% have stopped trying to save anything. Sixty per cent of people say they’d be screwed if they missed one paycheque. And 70% own houses.

I thought of such things as I sat in a Vancouver hotel lobby on Friday and listened to a man who had asked me to help him. At 62 he has not worked since being laid off three years ago from his office job, has a couple of hundred thousand in RRSPs, and a modest house worth $1.2 million.

‘I’m worried. What should I do?’ he asked, dead serious.