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July 10, 2015 | Bad Behaviour

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.

So, let’s review.

Last weekend the Greek people decisively voted down a deal with Europe. This weekend their government accepted the same deal. Hey, didn’t those guys invent democracy? In any case, it’s over. Like there was ever any question.

Last week the Chinese stock market was in flames. The government pulled out all the stops as it skidded to a bottom. This pathetic blog quoted a Goldman analyst saying a 27% rebound was possible over the next year – and was pummeled for it. The Shanghai market promptly gained 11% over the next two days. It’s over. Like that’s a surprise.

Days ago North American equities were blowing smoke. Thanks to the volatility mentioned above. DIY investors sweated for 48 hours, then threw in the towel. More proof people buy when things go up and run away screaming when they get cheap. Then the Dow added about 300 points, for a year/year return of 7.6%. The bear market meme was finished. Like it ever should have begun.

The doomer talk is old. It’s irrelevant. It’s wrong. The world is moving ahead. US interest rates will still rise this year. The split between Canada and the States will widen. European markets will likely hold onto double-digit gains. People hiding in GICs or gold will lose more. The two genuine risks facing most Canadians remain the same. Too much net worth in real estate; and running out of money.

If you’re not working steadily to mitigate those, you’ll regret it. Greece, China and the Dow Jones are mere distractions. Instead, the flashing yellow and red lights are coming out of housing markets, especially in Ontario and BC.

For example, an indeterminate yet swelling number of people are borrowing against their real estate equity with a HELOC that costs 3%, then lending the money to a homebuyer willing to pay 10%. It’s part of our subprime lending market, which is by all accounts the fastest growing segment of the real estate financing world. Privately-funded mortgages are being arranged by individual homeowners willing to take the risk, by mortgage brokers and through mortgage investment corporations.

Because the unwashed masses are utterly convinced real estate will go up forever, loans with interest rates four or five times higher than at the banks are common among those who have been turned down by traditional lenders. Rates start at around 7% and bloat to 15%, even for first mortgages, and it seems everyone is oblivious to the danger. When real estate prices correct and subprime buyers sink underwater, they’ll walk. The lender then takes over a property worth less than the money extended. Loses all round.

Meanwhile subprime borrowing for down payments is virtually mainstream, especially in 416 or YVR where it’s hard to find decent digs for under $1 million, when CMHC will not insure loans on seven-figure properties. So in order to cough up that 20% plus closing costs, mortgage brokers or private lenders are the destination of choice. In other words, if you thought only millionaires buy million-dollar houses, think again. This is a debt orgy.

Speaking of which (orgies), how about the latest flipping craze in nutso Vancouver?

Sotheby’s, high-pressure pumper of high-end houses, shocked a lot of people this week by admitting its role in grossly inflating luxury home values in Delusia. Not only do the company’s agents encourage bidding wars in the $3-million-plus category, but then they oversee winning buyers selling their contract assignments to even greater fools, willing to add another 20%.

Says Ross McCredie, CEO of Sotheby’s International Realty Canada: “The person who wins the bid says, ‘Listen, there are two other people here who desperately want that home and will pay $500,000 more. We’re seeing it more and more.”

By the way, he adds this. Make sure you write it down and stick it on the fridge door for your later amusement: “There’s a genuine fear in the market that you either need to stay in the market or you need to get into the market or you’ll never get in.”

By every measure, the economy’s faltering. Growth has been negative each month this year. Oil ain’t recovering. The latest jobs numbers suck again. Corporate profits are weak. Incomes are stagnant. Debt is epidemic. Things are so bad the central bank is toying with the idea of a rate cut on Wednesday to stave off recession. Is this really the time for borrowing big, paying cheater rates or buying from a flipper to get a house at an historic high price? How can anyone seriously believe a shill like McCredie saying buy now, “or you’ll never get in”?

Well, lots do. I bet most of the people you know. Or are related to. Or married to.

This is the great risk within.

Greece? Phfft.

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July 10th, 2015

Posted In: The Greater Fool

One Comment

  • Avatar Robert Laden says:

    It’s might not really be “over” in Greece nor in China. The Greek parliament did not approve a deal. They approved the process of negotiating a deal. And if fundamentals finally start to matter, the move up in the Chinese stock market might just be a “dead cat” bounce?

    If those wealthy Chinese folks have a choice between over-priced Chinese stocks and over-priced houses in Vancouver, maybe they continue to choose Vancouver? Buy what you know? Maybe the Chinese don’t know that they can buy bargain real estate in Moose Jaw, Saskatchewan?

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