Toronto real estate market primed for a crash?

Posted on July 4th, 2012 Won't you help brighten a lonely comment's day?

Unfortunately, I don’t know who wrote this Pastebin entry about the Toronto and Vancouver real estate markets, but it’s a salient and seemingly well-researched piece, certainly better than the vast majority of so-called “news” sites out there anyways.

I’ve copied it here in its entirety and would love to be able to attribute it to whoever wrote it (if you know, drop me a line!).

The real estate market everywhere will be in turmoil by September. The bankers know it. The realtors smell it. The sheeple have no idea what’s coming.

Investor and consumer behaviour’s been irrational. Your friends, relatives and the people at work have been employing leverage on a scale not seen since the 1920s to speculate that assets already priced at record levels will go higher. Net worth has been consolidated in houses, as it was in stocks prior to the Great Depression and in US real estate before the GFC. The consequences will be the same. F knows this. It’s why the hammer dropped two weeks ago. Too late.

An astonishing number of people are about to be turned into crispy critters by something they see as safe and benign. A whack of them lined up outside a new Vancouver-area condo development called Cambie+7 a few days ago – the latest reminder of the lust we saw weeks ago north of Toronto when people stormed a sales centre and bought million-dollar homes in five minutes.

Here they are:

What they’re buying: Lilliputian units (less than 600 feet), in an unbuilt structure in a regional city with a declining real estate market for an average of $710 a square foot. Why? Two reasons. “Proven value appreciation,” says the developer. “Condos in the area went up 35% in the last three years.” So, of course, they’ll go up forever. Second, a 5% deposit – putting rank speculation on a $500,000 asset within the grasp of anyone with $25,000.

By the way, here’s what half a million (including closing costs) gets you:

That real estate is troubled will become apparent to everyone in a few months. For those who care to look now, the cracks are widening. Quite apart from the public delusion mentioned above, Vancouver (for example) is unraveling. In the next day or so the real estate board will try to caramelize and fluff the latest ugly set of numbers. But June was a disaster, as this pathetic blog told you would happen.

Sales of detached houses crashed 37%
Prices have declined for four consecutive months, the first such occurrence in 16 years.
The average SFH has lost almost 13% of its value, likely one-third or less of what’s coming.
Condo sales were down 20%. Prices were down 6% in a single month.
Listings of detached homes have exploded higher 27% over this time a year ago.
But this is not a Vancouver story. It will define economic lives in every significant community. Prices could actually revert to the mean, which historically places the cost of owning a house close to that of renting the same digs. By this measure houses in Toronto and Vancouver are overvalued by about half. You can just imagine the consequences.
Bankers can. That elfin deity known as F tried to calm jittery Bay Street nerves with a conference call on Friday, addressing head-on fears that slashing the amortization rate and curtailing lending will crash housing. It didn’t work. “We are prepared to take that risk, quite frankly, because of the greater risk of the development over time of a housing bubble,” he said. “I realize it may have some dampening effect on the economy and I realize it may have some dampening effect in the residential real estate market.”

For their part bankers are uncharacteristically speaking out. As RBC’s head of banking told a Globe reporter, “This is not like turning a Ferrari. This is like a big ship. And it takes a while to turn. And sometimes if you over steer, you can’t re-steer the other way.”

It’s all just beginning. The odds of us having a soft landing, as I detailed last week, are fading daily. One on hand the lenders, agents, developers, brokers and bankers understand what just happened and where it’s leading. On the other, idiot buyers, popped on leverage, are embracing deals they see as riskless.

When the facts emerge, expect chaos at the exits.

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