"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
Sept 22, 2013 snippet from Kim Magi of TheStar.com (full story here)
A unit in Toronto’s troubled Trump Hotel up for auction Sunday only received one bid and below the minimum offer.
Kashif Khan, managing director of Toronto-based Ritchies Auctioneers, said the $550,000 bid will be taken to the owner of the unit."
“At that price, we can’t close the deal . . . but we will be presenting the offer to the seller,” he said. “We don’t know (if he will accept) — crazy things happen.”
The owner of the unit, a local real estate broker, commissioned Ritchies weeks ago to sell the suite at a 30 per cent or more discount after seeing about a dozen other units in the hotel stalled on MLS for months. A similar unit in the tower, located on the corner of Bay and Adelaide Sts., is currently listed by developer Talon International at $1.6 million.
Earlier this week, a number of people expected to make an offer on the 950-sq-ft hotel suite, but Khan said the last-minute location change of the auction saw their anticipated number drop by two-thirds.
The auction was supposed to take place in the hotel’s ballroom, but Trump executives said they didn’t want a sale of a unit in the building to happen on site.
Gazundering rules were first reported here. Auctions are now
Will Real Estate be the New Blackberry?
Labour Force Participation Rates are higher in Canada than the U.S. although notice the descending trend and as recently noted Canada relies 2.3 times more on residential and commercial construction than the U.S. does. With a private sector construction industry at a major pivot point, unless government steps up with a lot more construction spending, Canadian Labour should start retraining now.
As I advised above, "Canadian Labour should start retraining now." Lesson #1: How to spot a trap.
There is a big difference between the grunts that work in the trenches to produce goods and services that build an economy and the kings who peer down upon them. The management of Blackberry had a very large incentive to make sure that their jobs would end. Here are the payouts for executives.
Total compensation to the senior business managers: $84.6M
Source and a more granular story at huffingtonpost.ca
If you are part of the 99% labouring at a job and have bought or are contemplating the purchase of real estate via leveraging "cheap" mortgage financing, you should really do an appraisal of what your employment prospects are relative to the amortization period of that very large loan.
What percentage of the 4500 Blackberry employees are going to aggressively market their real estate for sale in an effort to liberate whatever equity they have? As the labour force participation rate falls, so will fundamentally over-priced real estate.
Housing Extreme Canada
According to a report from BMO Capital Markets, residential and non-residential construction accounts for 13.4% of Canadian GDP and is well beyond the 30 year average of 10.4%.
The U.S. reliance on construction is only 5.8% of GDP and at the top of their housing bubble in 2006 was only 9.4%.
The reliance on this volatile cyclical sector shows up in the employment data where 9.7% of Canadian workers are employed.
“Any time you get to extremes on almost any measure of the economy, you have to start asking serious questions,” said Doug Porter, chief economist at BMO Capital Markets “Has something fundamental changed to justify this, or is it an accident waiting to happen?”
What if Rates Rise?
Anyone who owned real estate in the 1970's and 80's knows that today's real estate prices are highly speculative and only manageable because of historically low mortgage rates and provable incomes.
As long as rates remain in the 3-5% range, and household incomes do not fall further behind in real terms, then one might believe that housing prices could remain aloft for some time to come.
In the Canadian metros with hot housing markets, that's the story. In small town Canada without a major corporate or government employer, the income side of the qualification fails and housing is a depreciating asset.
Inflationists are betting that housing prices will continue to rise because of government subsidy and global money printing.
Deflationists don't see inflationary effects from the printing other than serial speculative spikes and sell-offs (commodities, stocks, bonds, real estate) that further distorts wealth distribution. Where is the productivity, pricing power and wage growth?
Most people agree that if inflation (both price and wage) does get beyond the policy target of 2% CPI, then rates will rise across the curve. The private sector lenders will need higher rates to manage risk, and the government sector will need higher rates (or higher taxes and less subsidy or spending) to dampen inflation.
Notice that a mortgage rate move from 4% to 8% results in a 45% increase in monthly payments over 25 years.
Before you sign up for that big mortgage, make sure your household income does not have a shorter amortization than the loan.
U.S. Dollar & Wage Trend
The top half of this mashup is the U.S. CPI for 200 years.
Inflationists are still waiting for a big surge in prices and while they might be determined to bid up prices of real estate, collector cars and discretionary baubles bangles and beads, general price inflation is in a 1%-3% per year range in both Canada and the U.S.
In the U.S. we are seeing uptick moves to the top of the CPI range along with what appears to be a solid uptrend in wages since 2012. The wage trend also fits nicely with a definite uptrend in the USD/CAD ratio that's been on since 2011. A stronger USD helps American wage earners buy more stuff which encourages employers to hire more people.
On the Canadian side, CAD wages rose along with the strong CAD$ out of the 2009 pit of gloom and by 2011 according to the charts above, the gears shifted and as Canadian wages continued to accelerate, U.S. wages slumped until the USD/CAD ratio hit its last low in late 2012. Now for the past year the US$ has been in a solid uptrend and U.S. wages have been moving up as well with higher highs and higher lows.
A lot of global debt is priced in US$ and so the demand for US$ may not be anywhere near exhausted.
Canadian wages seem to be forming a cap (? on chart above) and in a range that might correct. If the USD/CAD ratio continues to climb the wall of worry, it is going to change a lot of portfolio construction globally and locally as Canadian real estate value perception falls against a rising U.S. dollar.
We know that overpriced Canadian real estate is a negative yield generator (case study). If the Currency markets sell the Loonie and rush to the senior currency (the US$), get ready for real estate markdowns in a Canadian neighborhhood near you.
Vancouver is the giant, and I have drawn a couple of lines on the chart where I think we will see a lot of action.
CLICK TABLE TO ENLARGE
Inflationists need a Rally
The Economist ranks Canada's housing as the second most overvalued in relation to both rents and income. This is not news to the readers of these pages who have seen the various Demographia posts and have lived through the faux appraisals untethered from fundamentals.
Our only remaining question is why do high net worth individuals expose themselves to such great risk by continuing to swap cash for negative returns?
We know why the retail buyer has bought the farm; the government has been subsidizing credit to anyone via CMHC. Ironically that's us taxpayers; we have been blowing up the balloon. Cheap credit has masked the outrageous principal amount before interest that glib marketers tout as affordable. The granite and stainless steel may be fashionable at the moment, but at these prices when you look back from the future, you are buying a hovel.
My case study demonstrates the futility of Vancouver as a port in the storm and now that we have "real" yields breaking out, mortgage lenders are getting ahead of the curve by raising rates to mitigate term risk and not waiting around for the Bank of Canada who is still betting on shorting cash via ZIRP.
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense