I was in the Calgary airport a few weeks ago on my way to the west coast when I wandered into a bookstore and picked up Garth Turner's book Greater Fool, a critique of the current Canadian housing market. A little ironic, I thought, given that the bookstore looked out onto the open rolling hills at the edge of one of Canada's hottest real estate markets, unencumbered by any natural barriers which might put a halt to the ever-expanding building.
Turner is a Member of the Canadian Parliament and noted author and commentator on financial issues. This is a timely book, given that the real estate market may already be peaking in Canada.
Turner argues - and I would concur, given my experience talking to people when I return to Canada - that many Canadians believe their housing market is different from the US housing market, which is in the midst of the worst collapse in prices since The Depression over 70 years ago. Prodded on by highly conflicted real estate and banking industries, too many Canadians believe that home prices cannot go down.
Canadians rationalize their beliefs based on faulty logic and Turner demolishes the rationalizations one by one. Canada does not have a subprime mortgage market. Wrong, Turner notes. Banks offer "below prime" loans. Canadians are not able to take out loans with little no equity down. Nope. Canadians have been able to do so for some time, though the Canadian Mortgage and Housing Corporation recently said it would no longer insure mortgages with less than 5% down (as if 5% down means much). Canadians aren't stretching to meet mortgage payments like they are in America. Then why have 35 and 40 year loans been created, replacing the traditional 25 year loan? The economy is healthier in Canada. Perhaps, but that does not mean it is healthy, nor will it remain so when your trading partner that accounts for 40% of your economic output is in a recession. Rising commodity prices have increased incomes. A bit, perhaps, but not by much, and certainly not by the amount home prices have increased. In fact, by almost any measure, house prices are as expensive relative to incomes and rents in Canada as they have ever been.
In fact, Canada looks remarkably similar to the US. Canadians are just as indebted as Americans, mortgage debt has skyrocketed by 70% over the past 7 years, and speculators have flooded hot markets, with speculators accounting for as many as 40% of condos sold in Toronto in 2007.
Turner excoriates the financial industry, the homebuilders and the real estate agents that have encouraged the mania in Canada. He laments the "all now" attitude of many younger buyers who believe they are entitled to granite counters and stainless steel appliances, and are willing to plunge deep into debt to attain such luxury items.
The only place where Turner falls down is in his argument that global warming will lead people buying smaller homes. It appears that Turner feels passionately about global warming. However, he assumes that global warming will alter consumer behavior and dramatically alter peoples' lifestyles. There is little evidence to support this. For most Canadians, environmentalism is a feel-good issue they support as long as it does not significantly impede their lifestyles. Yes, people may recycle more and halt the use of pesticides on their lawn, but where has it ever occurred that individuals did not want to live a better, more comfortable and wealthier lives than their parents? In fact, Turner seems to contradict himself when he argues that global warming will lead to the migration of millions. However, millions of immigrants coming into Canada would increase demand for housing and be supportive of home prices. Turner practices what he preaches, however, having purchased a smaller, less energy-consuming and more self-sufficient homestead.
Also, some of the book is repetitive, with Turner making the same or similar points about the collapsing American market over and over. It had the feel that information was being repeated to add to the volume of the book.
But I shan't quibble. Every Canadian involved in real estate or who is thinking about buying or selling a house should read this book. Unfortunately, it will almost certainly be out of date in two or three years when Canadians are living their own housing melt-down nightmare. However, it will be good to keep on the bookshelves until a new generation of real estate speculators bid up prices to insane levels in 15 or 20 years.
Out of five, I rate Greater Fools
and place it on my investment book log.