In November, 1988, the artist Charlie Pachter fell hard for a 21/2-storey row house on Beverley Street in midtown Toronto.
The houses on Beverley are notable for their yellow-brick construction, and this particular house at 50 Beverley, built in 1880, beckoned. “The house was absolutely perfect,” Mr. Pachter recalls. “I fell for it.”
Mr. Pachter's mother, Sara, had witnessed her son's real estate endeavours go south in the eighties recession, during which Mr. Pachter lost what he describes as a fortune invested in properties on Toronto's Queen Street. That circumstance had caused Sara Pachter to note, wryly: “Charlie, if you went into the cemetery business, people would stop dying.”
Mr. Pachter paid $527,500 for 50 Beverley, the “top price paid on the street at the time,” he says. “They used to call me the King of Queen and then they renamed me the Baron of Beverley after I lost all the Queen Street stuff.”
Neighbours on the street took to whispering this observation: Charlie's house appeared not to be worth what he paid for it. Charlie, they were convinced, was lost in the land of “negative equity.”
The artist, known famously for his painting of the Queen saluting and poised on top of a moose, was and is very fond of real estate. Margaret Atwood lent him $10,000 to put toward his first house purchase, way back when.
He says it is important to note that the Beverley house was fully and gorgeously furnished. “It was a turnkey house right down to the last crystal wine glass,” he says.
Still. In the fall of 2000 Mr. Pachter sold the pretty yellow house, which he maintained as a rental property. The sale price? $361,000.
“I do think it's exceptional how much I lost,” he says. “I really did fall for it.”
You are at a dinner party. The topic of conversation arises: housing. Is this the end of the housing market? And what will it mean for me as a consumer?
You answer: This isn't 1991. And: That depends.
Today marks Day One of the pre-Christmas buy-buy-buy season and the country is in a slump.
The real estate market has fallen in the West and is slipping in Central Canada. (The Central 1 Credit Union in Vancouver this week declared the B.C. housing market to be in “recession.” “Some don't like that word,” says Central 1 chief executive officer Helmut Pastrick. “The ‘R' word. It has some unpleasant connotations with it. For an economist it rolls off the tongue fairly easily.”) It was puffed-up real estate values that fuelled the so-called aspirational consumption of recent years.
And consumer confidence is in the tank.
When the vodka martinis are poured this evening, the cocktail crowd will be clucking about the house down the street that sold for a million dollars six months ago – and the million-dollar house around the corner that has sat unloved on the market for two.
Suddenly, a whole new generation of homeowners is asking the question: Could what happened to Charlie happen to me?
On Oct. 1, KFC Corp. issued a $10 challenge to American consumers to create a family meal for less than $10. (Seven pieces of chicken, a “side” and biscuits.) Advising consumers on how to take takeout “to the next level,” the fast-food chain recommended that shoppers “spruce it up” by, for example, putting the “Original Recipe Chicken on a nice platter and garnish with parsley.” Setting the mood was another tip: “Add some ambience at home with candles, soft background music and other restaurant cues.”
In November, 2004, Eric Belsky at the Joint Center for Housing Studies at Harvard University co-authored a study titled Housing Wealth Effects: Housing's Impact on Wealth Accumulation, Wealth Distribution and Consumer Spending.
Two key conclusions culled from Mr. Belsky's research are these: “Wealth effects of real estate plainly ramp up to their long-run effects much faster than the wealth effects resulting from gains in corporate equities.”
And: “Households feel more confident of gains in housing wealth and thus spend more readily and quickly when they occur.”
The report determined that while consumers spend about 51/2 cents out of every dollar increase in housing wealth or stock wealth, the spending spurred by housing wealth is much more immediate.
Feeling house-rich, in other words, has the effect of pouring accelerant on the economy.
Benjamin Tal, senior economist at CIBC World Markets Inc., has often referred to this wealth effect when analyzing the state of the economy and the role that housing plays within it. “You basically feel richer, and you go and spend and have a nice dinner on the house. That's the way I see it.” Or buy a Dyson vacuum cleaner. Or a Miele appliance. Or upgrade the kitchen. (Zinc, granite, marble. Every season has its trend.) If one couldn't achieve the good life through dint of hard work and saving, one could buy it easily enough through a line of credit attached to the swollen asset valuation of one's home.
Mortgaging the good life would be an accurate description.
There is nothing new in the concept of conspicuous consumption, a term coined by Thorstein Veblen more than 100 years ago and reframed by economists and social critics in the modern era as upscale emulation.
What was newish in the turn-of-the-21st-century fashion was the way in which low interest rates triggered rampant levels of borrowing against home equity.
Now, in the wake of repeated stock market shocks and decreases in house values, the new-new fashion is to suggest that chastened consumers are remaking themselves into apostles of frugality.
Farewell Wolfgang Puck Italian-style wedding soup with acini de pepe pasta; hello Campbell's tomato.
Is this a meaningful observation?
If the question is, does our human nature change as a function of varying macroeconomic indicators, then the answer is an emphatic ‘no,'“ says Gad Saad, a behavioural scientist and associate professor of marketing at Concordia University and author of The Evolutionary Bases of Consumption, published last year. “Our behaviours might change in response to short-term environmental contingencies.”
The aroma of the short-term environment is, at a minimum, worry. At a maximum, fear, which works as a decelerant on consumer spending.
“What we are starting to see here is something very interesting,” says Mr. Tal at the CIBC.
“First of all, the spending-on-the-house is not there any more … We are turning into active savers because of the fact that the housing market is levelling off and, in fact, slowing down.”
Mr. Tal estimates that about $50-billion in “extra money” has gone into cash over the past year or so. “A declining real estate market can lead ironically to something desirable, which is a higher savings rate.”
There, does that make you feel any better?
Talking point: A Bank of England report out this week forecasts that a continuing housing slump could lead to 1.2 million British households finding themselves in “negative equity” territory, defined as the value of a home falling below the amount of the mortgage. Housing prices are forecast to fall faster in Britain than they have in the United States.
John Bishop, proprietor of Bishop's restaurant in Vancouver, notes that he has been trying to unload his uncle's house in Wales for the past eight months. “Nothing is moving at all,” he says.
In June, 2006, the Canada Mortgage and Housing Corp. (CMHC) announced that in order to make home ownership “more affordable and accessible to Canadians” it was eliminating homeowner high-ratio mortgage insurance fees, offering insurance on mortgages amortized over 35 years (the agency would extend this again six months later to 40 years) and backing mortgages that give borrowers the option of making “interest-only mortgage payments for up to the first 10 years.”
While CMHC billed the moves as “helping Canadians access a wide variety of quality, affordable homes, while making vibrant, healthy communities and cities a reality across the country,” they could just as easily be seen as bubble enhancers.
Last July, the agency reversed gears, reintroducing a minimum down payment requirement of 5 per cent and chopping the maximum amortization to 35 years.
Economists have been wondering: What happened in those two years?
Is there looming bad news buried somewhere in the data?
Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP), says that in the 12 months leading up to the fall of 2007, 37 per cent of mortgages issued bore amortizations longer than 25 years. “That is huge to have such a large percentage in such a very short time frame,” Mr. Murphy says.
By the end of last August, total residential mortgage credit had risen to an estimated $881-billion, an increase of $100-billion across a 12-month period, according to Bank of Canada statistics. CAAMP estimates that outstanding mortgage credit will break through $1-trillion next year.
That number does not include home equity lines of credit. Total household credit does: That sum rose to an estimated $1.28-trillion as of August, an increase of $130-billion in the course of a year.
Unearthing more granular information is not easy. In its Financial System Review released last December, the Bank of Canada reported that 8.8 per cent of Canadian mortgages had a loan-to-value (LTV) ratio of between 80 and 90 per cent in 2006. A further 1.5 per cent of mortgages had an LTV ratio of between 90 and 100 per cent. The number of mortgages with an LTV ratio of 100 per cent or more was reported at 4.87 per cent.
That last number jibes with the oft-quoted figure that Canada has experienced relatively low exposure to the so-called “subprime” mortgage market. U.S. subprime borrowers have poor, if not wretched, credit ratings. “Here, for a person to purchase a home for no money down they had to have a strong credit rating, or at least a demonstrated ability to pay their bills on time,” says Scott Hannah, CEO of the Credit Counselling Society of British Columbia. Mr. Hannah, who notes that business at the society is sadly booming with a 40-per-cent increase from last September in consumers seeking credit counselling, does not see the push to facilitate home ownership as a good thing. “This was artificial equity built on the basis of providing consumers with access to the real estate market before they were ready,” he says, before adding, “We can't have everything we want.”
On Tuesday of this week, Merrill Lynch economist David Wolf released a report hypothesizing that the Canadian housing market is tracking the U.S. housing market with a two-year lag, a follow-up on a “tipping point” report he issued in September. “We ourselves are getting more alarmed by the day,” he wrote this week.
Mr. Wolf suggested that one of the reasons for the lag – if, indeed, that's what's happening – may be “because Canadian lending standards were slower to loosen. CMHC began permitting 100-per-cent LTV mortgages and amortizations for terms of more than 25 years [eventually to 40 years] only in 2006,” Mr. Wolf wrote. (Merrill Lynch would not give Mr. Wolf clearance to speak on this matter.) Given the timing of the loosening of lending standards, the Bank of Canada system review doesn't help very much.
The bank drew its numbers from the Canadian Financial Monitor, the arm of Ipsos Reid that conducts proprietary research on Canadian household finances. Michael Hsu, a Monitor researcher, says the numbers are based on estimates derived from surveying 12,000 Canadian households across the country. Mr. Hsu offers an updated estimate: As of July 30 of this year, 5.7 per cent of Canadian homeowners had LTV mortgages of 100 per cent or more.
Up: yes.
Alarmingly: no.
The caveat: This is an estimate only.
One wonders: What might have happened if the CMHC had not retreated from its more relaxed insurance guidelines? By Mr. Hsu's estimate, 12.1 per cent of Canadian mortgage holders have an LTV of 80 per cent or more. A mortgage holder with a thin equity base in, say Vancouver, is most at risk of falling into negative equity. “I'm expecting the peak to trough – the high-to-low decline – to be about 20 per cent,” Central 1's Mr. Pastrick says of house prices in B.C. “If some borrowers were highly leveraged … by that I mean perhaps zero down or 5 per cent down, that kind of thing, with prices dropping let's say 20 per cent, obviously there's a negative equity position.”
CMHC will not break out the data on the number of interest-only mortgages it has insured, nor a breakout of how many mortgages were insured under the 30-, 35- and 40-year amortization periods. “CMHC's business activities are confidential,” an agency spokesperson said by e-mail.
The first record of the term “NEBBies,” for negative equity baby boomers, appeared in February, 1991. Writing in Barron's a year later, Kenneth Harney captured this newly observed class thusly: “They are professional and managerial households headed by 35-to-54-year-olds. They've got annual incomes above $55,000, nice houses, nice cars, and solid positions in their communities. They prospered in the 1980s, and tapped their generous home equities to finance home additions, boats, vacation condos and other luxuries. They cashed in part of their inflation winnings, in effect, just before the economic bust hit town. Now they're up to – or over – their earlobes in debt.”
Remember, this isn't 1991. “The correction in the early 1990s was triggered by double-digit interest rates which reduced affordability dramatically and led to a dramatic decline in [house] prices,” says the CIBC's Mr. Tal. “Today we do not have the affordability trigger since rates are still relatively low. In fact, it's still about 20 per cent cheaper to carry a house today than in the early 1990s.”
In the current Toronto market, Mr. Tal sees prices falling by between 7 and 10 per cent by the end of next year before levelling off. “When you double the value of your real estate in the past few years you're not panicking with even a 10- or 15- or 20-per-cent decline,” he says. The blow-off that started six months ago in the West will, he believes, extend for another six to eight months, hitting close to 20 per cent in Calgary, Edmonton and Vancouver.
“If tomorrow I'm telling you your house is worth – instead of $600,000 – it's worth $540,000, are you going to walk away? I don't think so. You will not be happy about it. You will change your consumption.”
For those first-time home buyers who went charging into a peaking market this may provide little solace.
Charlie Pachter has led an excellent life, despite the serial setbacks in real estate. “Now that I'm a seasoned veteran of this and I've watched economies rise and fall and rise and fall three or four times, I'm living with it now with a certain state of grace.”
He resides in a fabulously modern, custom-designed home near the Art Gallery of Ontario – “I'm 10 yards from Tintoretto,” he says.
In 1997 he bought and levelled a “dump” of a house on the site. This turn of events caused Sara Pachter to declare: “Fifty years it took us to move out of this neighbourhood and he moves back in.”
He has renovated many properties, a gallery of which he has posted on his website. “I'm a risk taker,” he says. “I won a few and lost a few.”
© The Globe and Mail
