Canadian MP Turns Real Estate Bubble Theorist

John in Toronto Real Estate News

There’s a new book on the market that is sure to satisfy Toronto real estate bubble theorists. While I haven’t read it yet, recent media reports suggest that MP Garth Turner’s Greater Fool warns Canadians of a US style real estate collapse in Canada.

From the National Post:

In a nutshell, Turner urges his Canadian readers to sell their real estate if it makes up much more than a third of total family net worth and consider renting until the storm passes.

But don’t run out and sell your houses quite yet. It appears as though the only authority who believes Turner’s doom and gloom theory is, well, Garth Turner himself. From The Star:

But try to find a respected Canadian economist who buys into Turner's pessimism. People at the University of Toronto's economics department, the Ivey School of Business at the University of Western Ontario and University of British Columbia's Centre for Urban Economics and Real Estate couldn't find one for us.

While most seem to think a gradual softening is likely after 10 years of constant price increases, a U.S.-style meltdown doesn't appear to be on anyone's radar.

Turner believes that zero down and 40-year mortgages have left Canadians as overleveraged as our American neighbours.  But I'm curious to find out if Turner actually proves this theory in his book.  Not only did the US have 40- and even 50-year amortization mortgages before Canada, but US lenders have also been offering 125% home equity loans at least since the late nineties.  A 125% home equity loan means that the US bank would be willing to lend a homeowner up to 125% of the value of their home.  The most Canadian banks are willing to lend home buyers is 100% of the value of a home.

I also find it interesting that Turner considers it a myth that Canadian lenders are more conservative than American lenders.  If it truly is a myth, why don't Canadians have 125% home equity loans?   Why don't our banks employ the same aggressive sales tactics as those used in the US?  Why don't our banks push the Adjustable Rate Mortgages found in the US?  Why is Negative Amortization in the US home buyers' lexicon but not in the Canadians'?  Why isn't Canada in the middle of a sub-prime collapse? 

I am curious to see how many of Turner's conclusions are based on actual analysis and how many are just on one person's alarmist opinions that pander to the fear and uncertainty many people have about the real estate market. A recent post on the book’s blog suggests less of the former and more of the later.  Turner writes:

Interestingly enough, yesterday the latest resale numbers came out from the Canadian Real Estate Association, showing a 6% tumble in sales activity across the country last month - which amounts to an annualized collapse of more than 70%.

This is generally not how real estate statistics are reported and for good reason.  There are countless  factors that can impact real estate sales in any given month - like a snowy February - and even seasonally adjusted statistics may not take such factors into account.  So to use one months data as the basis for an annualized figure is very misleading.

It’s a little ironic to see this from Turner, former business editor at the Toronto Sun, because he reportedly blasts the media for their coverage of the health of the real estate market. There are many reasons to be concerned about the health of the US economy, and by extension, ours.  But I have yet to see a major publication be so irresponsible as to suggest that a 6% drop in home sales in February implies a 70% annualized collapse in real estate sales.

If this is any indication of the type of analysis we can expect from the book, perhaps our $16.68 is better spent elsewhere.

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

Subscribe to the Move Smartly blog by email 

Related Posts:

The US Real Estate Market Meltdown: is Toronto Next?

US Subprime Mortgage Crisis: Here's to Being Boring, Canadian-Style

Comments

[Martin]

While it is certainly irresponsible to suggest that a 6% drop in home sales in one month implies a 70% annualized collapse, it is just as irresponsible for Canadian real estate agents and other vested interests to pretend that Canada's real estate boom has nothing to do with the global real estate boom. This global rush was caused by cheap credit and relatively lax lending conditions. While Canada may not have had ARMS, we had our liar loans and other questionable products, made possible through the proliferation of shady mortgage brokers. Major banks have also encouraged people to borrow far beyond the limits they formerly allowed. While interest rates are still low, credit is tightening and there are signs all over the world that the bubble is popping. Agents want to pretend that their particular country won't be affected. That seems highly unlikely.

[Chris]

Well, 6% Month-over-Month drop can technically represent more than 70% Year-over-Year drop. 6% is merely for a month, but if it keeps going at this MOM rate every month for a year, it will certainly go over 70%. His math is not incorrect. However, it will not be the case most likely. Undoubtedly, he is exaggerating a little bit. I am buying his book because I believe that he is an intelligent and reasonable person.

[jan normandale]

John Pasalis of Prudential Properties Plus "review" of Garth Turner's book begins with "While I haven’t read it yet,.." then proceeds to provide a page and a half; 600 plus word "review" of Turners book!

How does John expect anyone to accept this review after typing that sentence? This is conjectural journalism at the least. John, please read the book then give me a review.

This isn't a discussion point about the market accuracy of either Turner or Realosophy it's about credibility for this journal.

[Anthon]

First of all, Turner's math is kooky pseudo-science -- it can only be true if month-to-month sales had declined in a straight line for 12 months in a row -- which it hasn't. But hey ... some people thrive on comparing apples to oranges.

Second, the number is resales is a measure of *volume* -- it's not a measure of price.

Third, real estate is local. National resale statistics are like looking at a stock market index. But unlike a fund that tracks the index (and hopefully, reflects the broader market), you or I can't own a piece of every property in Canada.

In the GTA, the number of resales in February 2008 was down only 11% from February 2007, while average price was up 2 to 4%.

Nationally, the number of resales in February 2008 was down 9.6% from February 2007, while average price was up 5.3%.

That said, there's nothing wrong with having a doomsayer in our midst. With exuberance and optimism for the market, we shouldn't forget to exercise caution, due diligence, and risk assessment/mitigation.

[Urmi Desai]

Hi Jan:

Thanks for your comments. You raise some concerns that pertain to our blog's editorial policy, which I'd like to respond to.

Move Smartly bloggers often comment on recent events, and in many cases, not all information is available. When this happens, bloggers are required to make this clear.

John's post is not a book review - it seeks to comment on media headlines arising from the publicity surrounding Mr. Turner's new book, "Greater Fool." As you note, John states that he hasn't read the book upfront, which is in keeping with our policy.

John restricts his comments to: 1) public statements made by Mr. Turner to promote the sales of his book, "Greater Fool", 2) media reports of the same, and 3) a blog post authored by Mr. Turner.

As you note, John's credentials and affiliations are clearly listed.

While we are bloggers, we strive to be upfront and honest with our readers about where our views are coming from. We welcome your views and concerns.

Urmi

Editor, Move Smartly

[Garth Turner]

Hey, nice review for a guy who has not read my book! Maybe I can buy a house from John that he has never bothered looking at. However, I am flattered he's this insecure. I must be on to something.

Garth Turner

[Carl Minicucci]

I will give Mr. Turner the benefit of the doubt in assuming that he made his comment prior to reading the one immediately preceeding his. The timing of each was within minutes.

Urmi, in her comment, clearly demonstrates the editorial principles to which John subscribes in his post. The only thing Mr. Turner's comment appears to demonstrate is an ad hominem fallacy.

Just my two cents...now if only someone could spare another $16.66.

[Renee]

I have purchased the book and am 1/4 way through. I think Garth is bold enough to tell it like it is! Good for him. I believe he is right. I believe a crash is soon to come. So for those who feed off the greed - beware!

Renegade

[John Pasalis]

I think it’s important to note that Garth Turner is not the only person forecasting a slowdown in the real estate market. In fact, every report I’ve read from real estate associations, brokerages, banks and academics all suggest that the real estate market is set to fall from the record highs set in 2007.

Saying that the market is going to correct itself is a no-brainer. The timing and reasoning as to why matter.

The only thing “new” in Turner’s book has to do with his justification for the slow down and the severity we should expect. Thus far his blog post and statements do not offer me compelling evidence to this effect.

When it comes to speculation and excess in the real estate market, I have already expressed strong reservations about believing pre-construction condos, or any other real estate for that matter, to be a “sure thing": see
http://www.movesmartly.com/2007/11/what-does-the-f.html

However, I think there's an equal danger when selling in haste: see
http://www.greaterfool.ca/2008/03/13/letter-from-victoria/

Having said this, I do agree with Garth on three things. 1. You should be able to afford any property you purchase. 2. You should take the advice of a certified, properly-accredited and well-qualified financial planner before making any major decisions to buy or sell. 3. To post a review, I will have to read the book. Stay tuned.

[Billy TwoBaulz]

I have to agree with several posters above, including Garth Turner - a book review wherein the reviewer has not read the book is worthless. Even more so when the writer is a realtor. The relevant quote here is "It is difficult to get a man to understand something when his job depends on not understanding it." - Upton Sinclair

[Carioca Canuck]

Real estate is the only occupation where you have to deliberately lie in order to make an income.

Asa former banker who was here in 1982 all I can cay is that Garth is right on the money.

Only an utter fool would buy real estate today. Wait for the crash which is inevitable.....stop buying, as people are starting to do where I live (Calgary....were sales are down 40% 3 months running)......

[Dane Caldwell]

You said, 'Turner considers it a myth that Canadian lenders are more conservative than American lenders.' You proceed to provide examples of American tactics.

BMO's deceptive offer to pay the Toronto Land Transfer Tax on mortgages taken with them may not be aggressive...but is sure is sneaky and only costs its clients MORE.

Of course the banks and CMHC are going to tell us there is no chance of a real estate crash...they have a vested interest: our mortgage interest.

I don't know if Garth is right, but at least he's not blowing hot air.

Garth's advice for homeowners is common sense and not at all alarmist.

Perhaps a better blog would come from reading the book and commenting on it rather than indirectly commenting on it under the guise of commenting on Headlines.

Dane

[John]

This guy is a real estate agent, how can his opinion be objective????