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July 11, 2017 | It Could Be Worse

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.

 

In response to recent comments accusing this blog of being unnecessarily negative about residential real estate, we are pleased to announce our newest occasional feature:

 The GTA Housing Deathwatch

 First up, Derek. You may recall this blog dog sold his North GTA McMansion at the height of the frenzy prior to Easter, received multiple bids, and picked the highest one – $2.25 million, more than he expected. Days later, with the market starting to turn, the buyers balked. They begged to be let out of the deal, then the mean lawyers were called in. Ultimately Derek relisted (for $2.25), later dropping the price to $1.9.

 

Meanwhile he sued the purchasers (one of whom is a real estate agent) for breach of contract. The claimed damages amount to $1 million plus costs, and the defendants have until the end of the month to file a statement of defence. But they ‘ve chosen to disappear. No communication. Nada.

“Stress,” says Derek. “We are steeped in it.”

Word from their agent is that an offer might possibly, maybe, perhaps be in the works for a max of $1.6. “I’ll take it,” says D, who meanwhile has rented a new place with possession on August 1st – the date the house deal was supposed to close. So all of the costs of his original place – mortgage payments, property taxes, insurance, maintenance from that day on – will be added to the claim.

Comments a lawyer working on similar cases in the area: “This is endemic. We are swamped with actions involving collapsed deals, and the effect seems to be one of dominoes. I’m starting to think the entire move-up market is collapsing as buyers elect to default, or find they cannot finance at the prices they paid. Good for us, though.”

 Close by, in York Region – where some of the frothiest house prices in the entire country occurred during the winter – there is buyer remorse and seller panic. Between April and the end of June sales of detached houses collapsed more than 55% while condo deals declined 20%. The price of an average house fell more than 11% while apartments gave up 19.3% of their value – all in the space of eight weeks.

Year/year sales are down 60% while listings are up by almost half. Meanwhile greed has become fear, and the speculators have turned tail and left town. Said a veteran realtor to the local paper: “The supply increased by 47 per cent. Everybody was waiting and wanted to cash out but some waited too long. Where before you only had one house, now you’ve got 10 on the market and now you can’t sell that house.”

  As Rate Day in Canada dawns, financial markets indicate a 98% chance the Bank of Canada will commence a tightening cycle.  It probably couldn’t happen at a worse time – just like the news that all borrowers will be “stress-tested” starting later this year, required to qualify for loans 2% more expensive than offered.

Is the central bank making a big mistake? Not according to Derek Holt, one of Bay Street’s sexier economists. On Tuesday he published his Top 10 List of why the Bank of Canada is about to goose rates multiple times. “Call it an economist’s attempt at late night comedy, minus the part about being funny of course because this is about monetary policy,” he said, correctly.

Among this reasons: This is not 2009 anymore – the economy is alive and there’s no need for emergency rates. And, besides, what’s wrong with a housing correction? “A cooler market for affordability is welcome to a point,” he says. Derek also says it’s “seriously misinformed” for people to think what happened in the US when the housing market ate the middle class will take place here.

 You bet, says veteran real estate broker Alex Prikhodko, it could be worse. “There are plenty of reasons to believe that this is just the beginning of a long and, for a lot of people, painful down spiral,” says the Toronto realtor. Particularly crushed, he surmises, will be three groups:

“1. Amateur builders (flippers). They are the most vulnerable to price drops, as they are carrying significant debt which they will no longer be able to service and will be forced to sell for whatever they can get.
2. Amateur landlords. Currently rent covers around 45% of a mortgage payment with 20% down. These people were willing to take a hit on mortgage/rent discrepancy for as long as their properties were rising in value, since they would have easily recovered the losses upon resale. This is no longer the case and they are not likely going to keep taking losses by holding onto their depreciating assets.
3. Mortgage renewals. Anyone who bought in the last 2 years with 20% down or less have already lost their entire down payment and are de facto in underwater mortgage situation will be denied mortgage upon renewal on appraisal.”

“I personally know a lot of people in all 3 types of scenarios,” says Alex, “who are seriously freaking out. To make things worse (or better), Bank of Canada is about to raise interest rates. The actual increase won’t be much, but it will send a powerful message, much like the foreign tax did. Let’s face it, foreign tax was only a psychological signal and had no economic impact whatsoever. All asset bubbles are psychological and this one is no exception.”

 So what will be the impact of three or four rate increases by the end of next year? Adding three-quarters of a point or a full 1% to mortgages would eliminate 6 to 8% of all potential homebuyers, says the chief economist to the mortgage business. It’s worth noting the American housing bubble blew up when 8% of homeowners became distressed.

“Right now people are staying away from buying,” Will Dunning just told Bloomberg. “If they stay away over a longer period of time, that could become dangerous, that could become deflationary.”

Tomorrow this blog begins a series on puppies and tummy rubs. Come early. Bring a blanket.

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July 11th, 2017

Posted In: The Greater Fool

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