Housing prices dropping suddenly

Housing prices are starting to drop in Toronto... and this is both bad news for the short term and good news over the long term.

What it means is that Toronto's housing bubble is about to burst. Which will lead to a recession in the construction industry as the prices of homes collapse, which will have a ripple effect across the Canadian economy.

In the long run however the economy will recover and home prices should be roughly half of what they currently are (the same thing happened in the USA in 2007, resulting in the American Recession of 2007-2009).

Its about freaking time too. Toronto's real estate market has been in an unprecedented bull market for over a decade now, resulting in bidding wars on homes that have raised home prices to double what they're actually worth.

The sudden downturn in home sales is a sign that many Torontonians are fed up with high prices for homes and have decided to wait before buying a home. Sales dropped in May and again in June. The Toronto Real Estate Board reports 8,442 homes were sold in June, down 23% from June 2009.

If we see more decreases in July and August we will be looking at a collapse, one which ultimately hurt banks if people decide to default on their mortgages because the house isn't worth any more what it supposedly is worth on paper. If we see extreme drops in sales (like 30% or more) then the prices will start to drop significantly.

“In the old days the vendor called the shots. It was do you want the property or not? Because we have a lot of other people lined up for it,” says Ede, an Remax agent. “Now buyers are saying 'I’m going to think about it – and you better give me a good deal.'”

Right now average prices in Toronto are still high. In June 2010 they were $435,034, up 8% from June 2009. Real estimate economists however admit that was below double digit expectations.

Listings are up 28% too in June... homes are flooding the market and yet they're not selling.

Economists worry this may be signs that Toronto's real estate market bubble is about to burst. If that happens it will mean chaos for the industry and mortgage lenders. Analysts say if sales dip below 8,000 per month then it will start to make bankers very nervous.

Canada managed to avoid a bank bailout during the American Recession. But that doesn't mean the same problems can't happen here if the real estate market collapses... which at the same time will hurt the banking and mortgage deriviatives/equities industry.

If you have stocks or deriviatives in the mortgage industry now would be a very good time to sell, before those companies lose their shirts.

There's also more reasons why the market is likely to collapse soon. Toronto is currently experiencing a building renaissance in new homes and condos. Residential building permits were up 22% in April according to Statistics Canada. Most of them are condos, indicative that more Torontonians are opting for condo living instead of commuting from the suburbs.

Non residential building permits meanwhile were down 28%, suggesting industrial, commercial and institutions are cutting back. Canada wide both residential and non-residential sectors are down 10.8%.

According to a house price survey by Royal LePage we should expect to see house prices increase 7% by the end of 2010 compared to December 2009, as people try to take advantage of low interest rates and low taxes. But this is not a good sign... affordability is a big issue, so while prices may go up the number of actual sales is expected to go down as the market continues to become flooded.

The first 6 months of 2010 has already seen double digit increases in home prices, so 7% suggests that the next 6 months will see a dip in housing prices. Analysts admit that the flooding of the market means high prices is unsustainable.

They have to crash sometime.

Some economists believe Canada's housing market is overvalued by at least 30% in major cities. If the market collapses it will actually dip BELOW the real value, especially if people lose their shirts and have to sell their homes when they can no longer make payments.

And there's actually a lot of Canadians that are hovering near financial collapse. According to the bank loan managers a lot of Canadians have been refinancing their mortgages and using their home equity like an ATM so they can buy a new car, a speed boat, a cottage, etc. Or they're making their mortgage payments using their credit card, maxing their credit card out to $60,000 or more.

These financially inept people are so plentiful that one in four Canadians would be unable to deal with an unexpected expense of $5000... even if allowed to use their credit cards. They have almost no money in their bank accounts and they have already maxed out their credit cards... or worse, their credit rating is so bad they would be refused credit.

Meanwhile the CMHC has increased the number of mortgages which are "insured" by the Canadian government to $600 billion... so if the mortgage industry in Canada collapses it won't be the banks on the hook... it will be the Canadian government and Canadian taxpayers who will be paying for it.

Remember how Stephen Harper is against the bank tax? Well, if the mortgage industry collapses and nearly takes Canadian banks with it you can pretty much guarantee he will be flip-flopping on that issue pretty quickly.

Although frankly I can't see Stephen Harper's minority government sticking around very long if the Canadian economy goes into a local recession. Canada was barely affected by the American Recession... we were shielded from the worst of it. But a made-in-Canada recession is a different matter. It will be deeper and hurt a lot more Canadians, especially in major cities.