Canada's Housing Bubble

Mar 30, 2010 Garth Turner GreaterFool.ca

On a day when all the banks punted mortgage rates, I went to Edmonton. Gave a speech to a packed room of people, and ate in a deserted restaurant. The chef was so lonely he came out to visit, then told me to eat my veggies.

In the Q&A following my talk the inevitable question arose: But what about oil? Don’t rising energy prices make things different in Edmonton, since it’s the gateway to the oil sands?

Of course, they do not. When the price of oil shoots higher, as it will, this doesn’t translate into a salary increase for everybody living in Alberta. A few maybe – like the guy who drove eight hours yesterday to come down from his house near Fort Mac – will benefit. But for most folks here it means the same as families in Toronto – $1.40 gas, higher heating costs and less disposable income.

No, there’s no saving the residential real estate market anywhere. Not in oil country. Not in the GTA. Not on the coast. In fact a financial guy in Vancouver wrote me a long and passionate letter yesterday about why it’s different in the Lower Mainland. The usual. Immigration, a post-Olympic gush of foreign capital, population growth, pent-up demand from condo-captive GenXers. Yadda, yadda.

Everywhere I travel, it’s the same story. It’s different in Halifax (military presence). Different in Ottawa (government). Different in Toronto (migration). Different in Saskatoon (potash). Different in Alberta (oil). Different in BC (delusion). And while each market is unique, we’ve entered that time in which regional characteristics simply don’t matter any more. The tide’s turned.

My conviction that we are in a false economy is growing ever stronger. The recovery is basically jobless, while debt quickly becomes the defining feature of homeowners, families and governments. Taxes and inflation will rise sharply over the next few years. Interest rates have already started their ascent. There is no sustainable foundation for annual growth of 5%, especially when our major trading partner is stumbling. That God she gave us a motherlode of tradable commodities, for without that we’d be Greece.

But the overriding reason this market is entering on the backside slide will be a change in investor sentiment. Being herd animals, we tend to bob and weave with the pack. Mainstream opinion breeds more of it, whipped along by the ‘experts’ and the MSM that creates them. People believe things because other people believe them. And the contrarians stand on the ridge, looking down at the herd thundering mercilessly toward danger, shaking their heads.

In the last 24 hours, however, change is with us. Suddenly the media is full of bleak comments about the demise of the housing market. The same dinglenuts who six months ago were telling us why Canada would never replicate the American housing mess are now calling one mortgage rate increase the end of days.

Of course, it isn’t. But it matters. The first shoe has dropped. The BoC drops the next June first. Then the HST July first. Then the growing realization the economy is a swamp. And after that, media stories about negative equity, squished flippers and poor virginal first-timers with unrepayable debt.

That’s the point at which prices melt and the long adjustment really begins.

This is a good thing. Trust me. Just try to ignore the wailing.