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September 13, 2017 | The Do-over

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.

For the last hundred agonizing days, realtors have told lonely sellers to be patient. “Come September,” they’ve said with gravitas, “it all changes. After Labour Day the market will come back. Just you wait ‘n see. I know this stuff.”

Well, not so much. Almost half way into what was supposed to be the recovery month in the bloodied GTA, the news is grim. Sales are lousy and prices are falling. Potential buyers were rattled by July’s interest rate increase and shocked by the one in September. Suddenly all those assumptions – that Justin would never let mortgages go up, voracious immigrants will forever jack prices, everybody wants to live here and it’s, like, different this time – are dust.

Since the lights went out in April, says veteran broker Alex Prikhodko, almost 4,500 listings have been allowed to expire. Another 45,000 properties came off the market as sellers either suspended or terminated their listings. And still there are about 25,000 houses for sale.

“That is roughly 50,000 people waiting to offload and cash out in the wake of “don’t worry, it will rebound in September” lie manufactured by the real estate industry,” he tells me. “September is sure looking like a massive flop with a lot of people about to realize what kind of financial mess they got themselves into. Denial cannot last forever and putting your head into the sand doesn’t magically wish your problems away.”

Still the realtor figures sales will be slightly higher this month than last (nothing to be too proud of), while average prices will continue to tank.

“Everybody, literally everybody, was waiting for a strong market rebound. I’m going to have to disappoint them and dismiss those sentiments as wishful thinking. Nobody is waiting for a rebound more so than those who listed their properties but failed to sell between mid-April and today.”

And, holy mother of mortgages, look what the diggers at Moody’s Analytics just dragged in. It’s a new report claiming GTA detached house prices – which have shed about 20% of their value this year – may be overvalued by as much as 60%. Canadians, it warns, should prepare “for several years of retrenchment” with real estate values across the entire country averaging just 1% growth annually for the next decade. That should be way less than inflation – and with mortgage rates expected to bloat by at least a full point over the next 12 months (more afterwards), it will feel like going backwards. Which it will.

At particular risk are the folks who together borrowed $220 billion at variable rates against their real estate equity in order to (a) renovate their houses, (b) buy more houses or (c) give to their kids to buy houses. The cost of those borrowings is rising fast and hard, while the value of the assets falls. What seemed like a good idea at the time looks wild now.

Remember, too, we’re just weeks away from B-20 revisions to federal banking guidelines that will require all house buyers seeking a mortgage to bend over and take a stress test. If they don’t qualify to carry a loan at current rates +2%, they don’t get it. Available credit is expected by the mortgage industry to fall by 18%. When credit wilts, so do prices.

By the way, it’s coming. Have no doubt about that. Just listen to Dave McKay, who happens to be in charge of the Royal Bank: “We need some of this policy change, particularly the B-20 change, as we are in a highly stimulative monetary policy environment. We needed to layer on some type of policy change; now that the Bank of Canada feels more comfortable raising rates, that’s supposed to be the brake on the economy that we all like to see.”

In other words, they want brakes. The Bank of Canada. The feds. The provinces. The lenders. It’s why we’ve seen rates double in two months, why there are foreign buyer taxes, universal rent controls, speculator taxes, empty house levies and stress tests. It’s what this moany, pissy blog has been warning you about for months. Lo, years. One-asset strategies don’t work. Period.

So at risk now, especially, are moisters and newbies who bought in the last year or so, have fat mortgages destined to reset higher and whose equity will be wiped away entirely by even a modest correction. Big risk, too, for people at or nearing retirement with the bulk of their net worth in a single asset which has just turned illiquid. Without selling, they don’t release the equity which is essential to generating cash flow in a world where 70% don’t have pensions.

September was supposed to change all that. The big do-over. Imagine how January will feel.

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September 13th, 2017

Posted In: The Greater Fool

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