April 6, 2008


Title: Real estate books’ buyers may be greatest fools

Sub-title: Toronto area MP’s scaremongering boosts book sales. But his predictions of a major sector recession are premature.


During the late 1980s Garth Turner gave a grim forecast regarding the future of Canadian housing to the Toronto Real Estate Board. During the presentation, he was pelted with dinner buns by dissatisfied agents. However, despite their shoddy behaviour, the real estate agents turned out to have a more correct longer term view.


During the 20 years since Turner’s presentation, the average resale price of a Canadian home more than doubled in value from $129,000 to $307,000. Yet despite Turner’s questionable forecasting, two decades later, he is at it again. His latest book Greater Fool: The Troubled Future of Real Estate, cites a litany of troubles besetting the industry and claims that Canadian house prices are headed the same direction as those south of the border.


Trouble is, Turner`s claims have been getting a lot of coverage. That means that his book, which is littered with typographical and mathematical errors, characterized by inadequate references and devoid of footnotes, needs nevertheless to be taken seriously.


Are ever-rising home prices in danger?

Despite the fact that average house prices only fell once during the past twenty years, Turner believes that Canadians are currently making decisions about real estate that they may come to bitterly regret. “We’ve bought into the myth of ever rising home prices, which is reinforced daily by a self-serving industry and a pliant media,” writes Turner. “Not for at least an entire generation has real estate in Canada been so at risk.”


Turner cites economic weakness in our largest trading partner, Canada’s ageing population, a poor environmental outlook, speculation in key markets, rising household debt and stagnant family incomes as key factors informing his grim forecast.


Canada’s financial services institutions are a big part of the problem Turner writes. “Millions of bank shareholders, like millions of bondholders have a giant investment in the sustained growth of the real estate market and the endless appetite of homeowners for more debt.”


Debt levels need to be related to assets

Not much of what Turner says is new. Industry stakeholders have long warned that years of record double digit increases in house prices and the unprecedented new housing construction could not last forever. Furthermore in markets like Toronto, Vancouver and Calgary, there are signs that people are buying properties, despite huge recent price increases, in the hopes that there will always be a “Greater Fool,” available if they need to unload it.


What Turner brings to the table is excellent sound bites, a bit of common sense and a timely subject. That said, while Turner he with a logical premise, his forecasts -- that Canadian housing prices risk mimicking those in the U.S., are so serious, they need to be backed up. American resale home prices have fallen by more than 10 percent in nominal terms and are forecast to drop by much more. A drop of that magnitude in Canada would cause major tremors.  


Sadly, Turner’s book is all glitz and no beef. While he throws around impressive claims, such as his assertion that Canadians’ debt levels are as high as those of Americans, he does not back these up. Footnotes are non-existent and Turner’s references are often vague. It is thus impossible for the reader to know for example, which data he is referring to. (Turner’s response to telephone questions regarding his sources was to terminate the interview).


Boomers like their big houses

The arguments made in Greater Fool are weak in several key areas. For one, while Turner identifies trends that could slow housing demand by Canadian baby boomers, he neglects to mention that forecasters have been saying for decades that the boomers would rid themselves of their large homes once their kids left the nest.


Fact is, the boomers like their big houses. And they show no signs of wanting to give them up. Furthermore, even if boomers do start abandoning their castles and even if the succeeding generation is not big enough to buy them all, Canada admits huge numbers of immigrants each year, many of whom arrive at precisely the age during which they want to buy new houses.


Turner rightly notes that the worrying rise in debt levels among Canadians. However he overlooks the fact that average household wealth in Canada, net of debt, has also risen to record levels.


And while Turner’s concerns regarding increasingly flexible lending terms by Canadian financial institutions (which he likens to sub-prime lending techniques south of the border) are legitimate, he fails to back these up. For example Turner cites the implementation of 40 year mortgages as a worrying development. However these have been around only since 2007 and the percentage of Canadians holding them is small.


Furthermore, the Canadian residential mortgage lending market is very different from the U.S. market. According to the Canadian Bankers Association, non-prime loans make up less than 3 percent of all outstanding mortgages in Canada, compared to approximately 20 percent in the U.S. Furthermore, arrears amounted just 0.27% of total mortgage loans by the big seven Canadian banks, one fifth the U.S. total.


The other problem is that Turner’s book is riddled with typographical errors and contains at least one gross mathematical miscalculation. This is somewhat understandable in a technical book that is more than 200 pages long. However when, as Turner does, you are a Member of Parliament, who claims that everyone else is wrong and that you are right, the standards are higher.


True in times of consensus, gadflies are sometimes worth listening to. Yet despite Turner’s gustiness and his interesting ideas, his sloppily edited, poorly thought-out and undocumented work, is a bad place to start.


“My view may be prescient or wrong,” concludes Turner. “Regardless, there will be a greater fool.” What he neglects to mention, is that the greatest fools of all, may be those who buy his book.


Peter Diekmeyer peter@peterdiekmeyer.com) is Bankrate.ca’s Quebec correspondent.







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