What You Are Not Being Told About Housing … And Why You Should Care

UPDATED 10 COMMENTS RECEIVED – By Mike Archer and Win Wachsmann. A generation of boomers has based most of its financial planning on the three false credos: if you get a good job, your retirement is safe, real estate always goes up and your home is your biggest investment.

While those statements were true for most of North America during the 1970s, ‘80s and ’90s everything has changed in the last ten years

Manufacturing jobs were shipped offshore and businesses across North America shuttered their doors and collapsed their pension obligations, putting hundreds of thousand of middle-aged middle class workers out of work.

The boomers who bought their homes when prices were lower, who upgraded several times and saw their home values increase in metropolitan areas are in for a rude shock.

They have been told in the great sales pitches of the real estate and the newspaper industries -– two industries which have been glued at the hip for 50 years – that values and prices would increase.

The demographics and the housing math has changed.

The newspaper stories haven’t.

The stories now make up part of the legends of the childhoods of the kids from the 50s to the 70s. Mom and Dad bought a house for $13,000 and sold it 20 years later for $130,000. Then they moved and bought a $250,000 home which they sold ten years later for $430,000 and retired to a small condo or used the money to pay for their short stay at a retirement home before dying.

So the baby boomer, fresh out of college, went out and, based on two incomes, bought a starter home for $150,000 which they were told would easily be worth $350,000 to $450,000 by the time they retired.

New, younger buyers entering the housing markets continued to drive the prices up.

In the metropolitan Vancouver area, house prices reached the million dollar mark for that same starter home.

Coupled with low interest rates set by the Bank of Canada many people were still buying these homes in the 2009 and 2010 – based on the promise of cheap mortgage money and an increased demand from offshore buyers.

But the reality was somewhat different.

As the economy tanked in 2008 and as boomers lost their jobs or were downsized, they couldn’t adjust their lifestyle quick enough.

The solution –- rack up credit card debt and/or remortgage the home (if possible) or (if not) get a second mortgages .

Now, a home that was going to finance retirement, was supporting a current lifestyle –- sacrificing tomorrow for today.

All the while these homeowners were expecting the value of their home to rise to cover their spending. That’s what they were told to believe.

Many mortgages were based on 5% down and 35 year amortizations. (in 2007 the the federal government introduced a 0% down, 40 year mortgage which qualified for Canada Mortgage and Housing Corporation (CMHC) insurance coverage in an effort to entice even more people to buy) With that payback period, monthly payments in the early years were almost all interest – no principle. Just like rent but with a lifetime of debt.

A modest market correction or a rise in mortgage rates would drop the resale value of a home below the value of the mortgage.

In order for home prices to increase, there must be a demand for those homes. However, today few can (or want to) afford those expensive homes and the demand is decreasing.

The children of the boomers, the natural buyers of all those boomer homes are either unable or unwilling to move up . Unable to afford the down payments and massive debt loads. Unable to because they have very little equity and too much debt. Unwilling because of lifestyle choices.

Housing starts are also down, indicating decreased demand for new homes.

Slowly the boomers are seeing the light. As more and more people are putting their homes on the market, for whatever reason, and, as the listings increase it puts a corresponding pressure on prices.

In February for example the number of sales and prices of homes from North Delta to Abbotsford and Mission has started to drop. Single family sales numbers are down 34.5% from a year ago while townhouse sales numbers have dropped 44%. Prices have dropped 4.8% – from $495,345 to $471,767 on average.

What will happen next?

As personal debt increases so does the debt accumulated by the Federal, Provincial and Municipal governments. Many are broke or on the way.

Years of mismanagement, vanity projects, and rank incompetence based on changing or faulty demographics means only one thing – – increased fees and taxes. There is no impending population boom to bail out the schools and governments.

And what about those boomers who have paid off their homes?

Their taxes and fees will just keep on going up. Eventually they will get tired of the big empty home with all the maintenance and decide to downsize. They have no reason to keep their house prices artificially high to cover mortgage costs. The result – lower listing prices in order to unload their homes.

While this sums up the situation faced by a great many members of the single largest demographic group in history you will find very little discussion of the housing market in local newspapers or on TV or Radio news programs.

As the real estate balloon, which many say burst last December, (the market peak was actually in May 2012) is quickly deflating all over the Lower Mainland, across BC and across the country, who is warning the homeowner?

Not the newspapers, TV and Radio who depend on realtors and a stable housing market. Why would they rock the boat?

If the housing market collapses and billions of dollars’ worth of phantom ‘net worth’ goes up in smoke, just how is everybody going to pay their bills, thir credit card debt or their taxes and fees?

Just how is an economy that is mostly a service economy, based on people importing stuff and selling it to other people who consume stuff because they can borrow against the equity in their home, going to function?

And what about the high reliance on housing related jobs – real estate , construction, home furnishing etc., which will be adversely affected by a downturn? They are at historic highs and will suffer the most as the BC economy slows down.

Good questions.

And, it turns out, some people (other than newspapers) have been looking into the matter for you.

For a monthly report on Abbotsford Economic Indicators simply click here.

Join the discussion 16 Comments

  • Joe Mainlander says:

    Refreshing editorial.

    So, will Abbotsford Today lose some Real estate advertising for printing this?

  • Donovan says:

    Excellent article .

  • negativity says:

    We have heard this theory before. It didn’t work out to well for the bears in Greater Vancouver.


    Greater Vancouver benchmark – SFH
    December 2008 – $648K (Tyee boomer theory crash)
    Feb 2013 – $745

    tag: broken clock right twice day

  • negativity says:

    The real estate market is cyclical. Negativity sells too. How many people in the US made it rich writing about the house of cards during their epic downfall. Don’t instantly believe the hype on the way up or down. Do your own research and realize no one has a crystal ball.

    • Mike says:

      the story of real estate in Canada was been written

      expect anywhere from 15 – 30% correction followed by years of stagnation

      house prices in BC more than doubled in 5 years between 2002 and 2007

      what goes up…..well you said it, cyclical

      that being said, demand neighbourhoods will likely not be affected

      the problem will be in the 500K+ particle board McMansions as there will be no one to buy them

      • negativity says:

        Settle down there Garth. You realize your visionary has been touting a crash since 2001. Ouch. Are you targetting Canada or Abbotsford with your bold prediction? When is going to happen? Do tell so we can mark our calendar. You are correct, the story has been written. Your theory, that we aren’t being told about, except the one written in 2008, was crushed by the market from 2008-2013. Fact. Tears, blame the government, broken watches are all thats left.

  • RupertMurdoch says:

    @ negativity: broken clock right twice day

    in 2008, the Government crashed interest rates to emergency levels and blew out CMHC insurance limits to accomodate as many new buyers as possible to keep things humming along. No such moves are left on the table this time and it is politically unpopular to accumulate more debt anyways. The current (and 2008) trend in declining prices is reinforced by both economics and demographics. They kicked the can down the road and tricked the sheep into thinking they had built a perpetually rolling can. No such luck I’m afraid…

  • negativity says:

    The boomer theory was wrong in 2008-2013. Period. It doesn’t matter what your excuse is. Nothing left on the table? What if rates stay low for the next 5 years? Like I said, the boomer theory isn’t new and was proven wrong. Perhaps its right this time. Keep moving the yardsticks to find a trend to make yourself feel better, but at the end of the day even a broken clock is right twice a day.

  • don says:

    @ negativity Sorry my deluded friend the broken clock analogy is a poor one. A better anology would be guessing how many shots of booze(debt) it will take to put your friend under the table. If i say 10 and it takes 12 was i really wrong?

  • Mr. White Rock says:

    Average home prices will really drop late this fall. If you are thinking of buying wait till then (you should save 60 to 80 thousand dollars on a Fraser valley single family home). Interest rates will stay low well into next year.

    The clock is right twice a day crap is from someone in the business (builder/realtor/mortgage broker). They will always tell you it’s a great time to buy. Google USA housing bust, you will see that number of units sold drops first (for 6 – 9 months) then the prices start to drop. If you wait till March 2014 you will probably save well over $100,000

    Get paid to wait (or buy now and loose big)

  • negativity says:

    It would be a poor analogy when the “crash” has been predicted every year for the last 5 years. Mr. White Rock, what will your excuse be when we re-visit this and the average price has not dropped 100k. It’s the government’s fault!

  • Mr. White Rock says:

    Real Estate Industry is already blaming government for changing mortgage requirements (no more zero down payment, no more 35 and 40 year mortgages, etc.). Mortgages at 2.99%, cheapest in years and still housing sales are down over 30%. In a few months the prices will follow. This is what happened in USA and Europe, it will happen in Canada too (it is not different here no matter what realtor’s tell you).

    Wait and save, save your money!

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