Are stubborn sellers killing the real estate crash?

Garry Marr | Jan 12, 2013 7:00 AM ET | Last Updated: Jan 11, 2013 2:40 PM ET
More from Garry Marr | @DustyWallet

Like many others, Toronto public relations manager Megan Vickell is sitting on the real estate sidelines dreaming of bargains to come.

What direction are home prices headed? Depends on who you ask

After a dropoff in sales, the debate over the future of Canada’s housing market has come down to an argument over how much prices will pull back

The 28-year-old has never owned a property and is hoping to scoop up a discounted Toronto condo when prices fall off today’s frothy record highs.

“I’m waiting for that bubble to pop that everybody is talking about so I’m not sitting there owning a condo in the city that later everybody else has for a much cheaper price,” said Ms. Vickell. “I mean look at everything that’s being built, who is going to live in all those? There’s lots of beautiful spots out there.”

You can’t blame her for wanting to wait. Research firm Urbanation Inc. says Toronto’s average condo prices climbed to as high as $407 per square foot in 2012, a sharp rise from the $229 per square foot fetched in the first quarter of 2003.

The picture is not much different nationally. The average sale price across the country was $364,260 over the first 11 months of 2012, according to the Canadian Real Estate Association. Compare that to beginning of this boom when the average sale price across the country was $158,303 in 1999.

But what if the crash never comes?


Urbanation says condo prices dropped 3% in Toronto in the fourth quarter from the previous quarter and Canada-wide home prices were down 0.8% in November from a year ago. But, so far, that’s about it.

The one thing missing from the market, for all those people looking for a crash, is a catalyst or an event that will force people to reduce their asking prices. Before this housing market burns up in flames, it needs some type of spark.

I’m waiting for that bubble to pop that everybody is talking about

And, if you talk to some people, that key event — two that come to mind are a spike in interest rates or job losses — is not happening any time soon.

“Crashes don’t just happen in a vacuum, you need a trigger,” says Benjamin Tal, deputy chief economist with CIBC World Markets. “I can’t point to any crisis in the history of crashes that didn’t have a trigger.”

In the United States, the trigger proved to be a sub-prime market and the expiry of teaser rates that jumped as much four percentage points on some mortgages. Overnight, people couldn’t afford their homes.

“If you have a gradual increase in the rates this doesn’t happen,” says the economist, who predicts a decline in prices but only in the 5% to 10% range. The real estate industry is on the same page, continually calling for a soft landing.

What has people like Ms. Vickell excited and looking for a major decline in prices is the massive drop off in sales activity in some major markets. Nationally, sales were down almost 12% in November from a year ago. Vancouver remains the leading example where sales were down 22.7% in 2012 from a year earlier.

So you’re sitting on the sidelines, not buying at what many consider ridiculously high prices — the product of a 14-year boom that has only seen one mild pullback during the recession in 2008. But what if sellers simply refuse to lower their price, something that has happened so far in the markets where sales are drying up very fast. What’s next?

“I think stagnation is a good word for what will happen, it’s what we saw in the market from 1992 to 1997,” says Mr. Tal.

Peter J. Thompson/National PostMegan Vickell, who is waiting for the condo market to ease before purchasing, stands in front of condos on Toronto's Yonge Street near Eglinton, Thursday January 10, 2013.

The CREA stats show the market nationally — albeit real estate can be a very regional story — did not move all that much in the 1990s before it took off in 1999. There were some corrections in the 5% range on a yearly basis but average prices from a bottoming out of $142,091 in 1990 had climbed to $154,768 by 1997 — an 8% increase that is paltry by today’s standards for such a long period.

“We are going to see a correction and the question is ‘what will emerge from that,’” said Mr. Tal. “The scenario is the market will not be strong, it will be stagnant.”

In this scenario, instead of people of people selling in a panic, they pull their homes off the market, waiting for a better day, refusing to sell at distressed prices. New listings and active listings will start to shrink.

“In the U.S., you had to sell your house because you were delinquent. If you tell me tomorrow the unemployment rate [in Canada] will jump to 12%, we will have a crisis,” said Mr. Tal.

People are not forced to sell, they are staying with their price

Don Lawby, chief executive of the Century 21 Canada, and a charter member of the club that doesn’t see home prices dropping anytime soon, can’t see any desperation from sellers.

“The economy continues to be okay, people have jobs, interest rates are low,” said Mr. Lawby. “Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”


Still, Ms. Vickell’s patience may pay off. Even Mr. Lawby concedes that the condo sector may be hit. Developers who already have buildings under construction may be forced to scale down projects or lower prices on unsold units.

“They are going to be throwing in packages to sell,” says Mr. Lawby. “But the average homeowner, without an economic event, they have no need to sell.”

David Madani, Canada economist with Capital Economics, takes a more extreme view, predicting a price-drop of 25% in the next year or two across the country. Rapidly flagging sales are a sure sign his prediction will come to fruition, he says.

“We have to tell our clients ‘you don’t necessarily need a trigger.’ You reach a threshold point where people get afraid, where valuations have lost touch with fundamentals,” he says, adding there is a standoff between buyers and sellers before any crash. “Sellers eventually realize the market has shifted beneath them and they capitulate and drop their asking price.”

But Mr. Madani’s calls for a crash are being largely drowned out by the real estate industry’s steady calls for a soft landing.

Gregory Klump, chief economist with CREA, says history supports the notion that some sort of major event is needed to create a housing market collapse.

“In the late 1980s, it was a case of a spike in interest rates, in late 2008 and early 2009 it was a massive layoff,” said Mr. Klump. “You need a massive and extended economic shock and none of that is in the forecast.”

In the interim, people waiting for a decline a major decline in price will have to keep waiting, says Mr. Klump. Only time will tell if it ever materializes.

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