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June 16, 2017 | The Big Fix

Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Just as we all fixate on plopping properties, the feds have raised the hoary spectre of a bank failing. The timing’s impeccable. Real estate has never accounted for this much of the nation’s overall economy, nor has it ever been this delusional. Lots of people worry that if a correction turned into a crash our mortgage-spewing banks would be in trouble.

Unlikely, since these guys are obscenely profitable, well-run, diversified and have moved most of the mortgage risk onto taxpayers through CMHC insurance. But, hey, anything’s possible. Trump is president, after all.

So after a plan to ‘bail-in’ a failed bank was included in both the last two Harper and Trudeau budgets, it’s finally happening. The details were “pre-published” on Friday, after which there’ll be a one-month consultation period, then the whole thing gets cemented in the fall.

Of course, just imagining that CIBC or BMO might fail is terrifying. These big dinos dominate every aspect of our financial lives. The credit crisis took down venerable Wall Street institutions, of course, but the US has 6,800 federally-insured banks. We have six. Seeing any one of them fail is unthinkable, which is why the feds have classified them as ‘systemically-important’.

Almost a year ago Ottawa passed legislation to deal with this. The Bank Recapitalization (Bail-in) Regime law is now on the books and will soon be enacted. In response a lot of looney, tinfoil-hatted, survivalist, dooomer nutbars have argued that once it happens, nobody’s savings account, GIC, bank mutual fund or bond would be safe. Like in Cyprus, the government could convert personal accounts into bank shares – which means your cash would be seized and used to rescue the bank. This is a ‘bail-in’ because the rescue money comes from within, not a government bail-out. Taxpayers are spared. Bank customers are pooched.

Well, that’s wrong. Now we can see it.

“The rules would only apply to debt and shares issued that are unsecured, tradable, transferable, and have original terms to maturity of at least 400 days,” says Ottawa. “Such debt is held primarily by foreign and domestic institutional (fixed-income) investors, including asset and fund managers and large corporations, typically as a small portion of these investors’ overall portfolios.

“Canadians’ deposits (including chequing accounts, savings accounts and term deposits such as Guaranteed Investment Certificates) are not subject to losses under the regime.”

Common stock in the banks, corporate bonds and other securities are a different story. Owners of stocks and bonds would be expected to pony up the cash to save a bank while anyone with a CDIC-insured deposit would not. But let’s not kid ourselves. Ain’t gonna happen. Much more likely is a crisis at one of the country’s big credit unions which have massively exposed themselves to residential real estate mortgage risk. If you’re the worrying type and bank there, knock yourself out.

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Odds are there’ll be hundreds of lonely realtors at open houses this weekend. Sales in major GTA markets continue to fall off a cliff. It’s a quirk of human nature that as demand falls, thousands more people decide to list their homes, creating vastly more choice for buyers, who then decide to stay home because of growing risk. Go figure.

A purchaser today can offer less, buy below the listing price and make an offer conditional upon securing financing or a satisfactory home inspection. Yet few dare. Among the scant sales in the northwest corner of the region a week ago, a home marketed for over $3 million sold for $500,000 less than list. That would have been unheard of before Easter.

Well, here’s the latest.

  • Last month the ratio of sales to new listings in Toronto dropped to about 40%, which means six-in-ten houses didn’t sell. It’s the lowest number since 2008, and compares with 90% four months ago. This is the worst decline in almost 30 years. In fact the last time we even came close to this collapse (1988) there was a 32% price crash which took two years to unfold and then required 14 years to reverse.
  • So, will there be speculation taxes coming, turning the fledgling correction into a full-fledged mess? CREA’s big economist Gregory Klump thinks so, and said as much during an event this week. People in the GTA should brace themselves, he adds, since the Ontario government will usher in the tax once the market starts to recover from its current funk. The time line: six months.
  • Meanwhile in BC it’s not clear if the Dipper-Tree Hugger Coalition & Experimental Government will be imposing a spec tax, or relying on “other measures” to murder the market. No word yet on whether that includes hanging investors by their privates from the pointy bits of the downtown Van Library. But it might. “The speculation part is what is out of control right now,” said the Green Party dude. “What we’re trying to get right at is people who are now viewing houses as a tradable commodity, not a place to live.” With almost 100% of detached Van houses costing $1 million or more, it’s a little late for that.
  • Of course, a province-wide foreign buyer’s tax of a withering 30% now seems a certainty. So long, Victoria.

 

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June 16th, 2017

Posted In: The Greater Fool

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