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September 3, 2015 | Racing the Rats

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.

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Next Wednesday morning at ten Stephen Poloz will visit the National Press Theatre in Ottawa and make a big interest rate announcement on behalf of the Bank of Canada. “No change,” he’ll say. And the prime minister will heave a sigh of relief.

After all, it’s been one kick in right-honourable teeth after another. StatsCan revealed the country slipped into recession, reminding voters of why they feel pissy. Then RBC said housing affordability has taken a big drop with hot Vancouver getting ‘risky’, reminding people they’re not getting ahead. Then a drowned Syrian child half a world away, epitomizing tragedy, was linked to a Canadian cabinet minister. During a federal election campaign, any one of these is tough to survive politically.

So at least the central bank won’t make it worse by saying the economy is so pooched it must make money even cheaper for the third time in a year. That’s the thinking right now among economists, most of whom believe the country is already starting to emerge from half a year of negative growth.

A lot depends on Friday morning and the latest jobs numbers – the best indication whether or not the US recovery’s still motoring ahead. If it is, if oil prices recover a bit and China doesn’t blow up, then an interesting scenario is likely to develop. The expectation as I write this is that America cranked out at least 213,000 more new hires last month, consistent with the past year. Add in that huge GDP number of a few days ago (3.7% growth) and it means the Fed can raise its key rate for the first time in a decade. That could happen September 17th, October 28th or December 16th. But it will happen by the end of the year.

Remember, the Bank of Canada has more than a 90% track record of following the Fed, and our bond market is even more closely correlated. In other words, everybody should expect five-year, fixed-rate mortgages to cost more this autumn. The fact the Bank of Canada will not be raising its rate next week – despite the crapstorm our economy has been in – should tell you something. This is it. Rates go down no more. They start to rise.

What have Canadians been doing to prepare?

Gorging themselves on new debt, of course! While inflation is running at just over 1% and wages in Toronto and Vancouver have actually slipped 2.8% in recent years, your friends and idiot relatives increased their borrowing by 4.9% in the last year, says RBC. Together we now owe $1.84 trillion (a trillion is a thousand times a billion).

The bank says we’ll shortly establish a new record for overall debt, at more than 164% of household income, as consumer spending continues to surge despite the oil crisis, lousy job creation, recession and Justin Bieber crying in shame at the VMAs. In short, cheap money’s done nothing but encourage more borrowing and more spending. People have not used it to pay off loans faster, just make them bigger.

“Canadians ‘spent’ their interest savings on mortgage debt, not consumption,” says a bank economist. So what Canadians saved on interest payments, they peed away on higher house prices and epic mortgages. And that brings me to Bonnie.

“I was hoping you could give me some advice on whether or not we should purchase a house now or hold off,” she writes me. (By the way, I do not make these letters up. I’m not that good.)

“We sold our home in the suburbs of Vancouver (Coquitlam) a few months ago for $720,000, after buying it in June, 2009 for $538,000 (we took your advice then about purchasing a home in a downward market). We sold within a few day thinking we could just upgrade to a new home with a purchase price of around $900,000.  But we did not realize how crazy the housing market was and had lost out on several homes due to a bidding war.”

Bonnie says they ended up in a rental house, “that we like a lot” which is costing $2,000 a month – no stretch on a household income of $155,000. “But I feel a bit desperate to get back into the housing market even though I know this is crazy.” Thus, Bonnie is considering a $700,000 mortgage with $200,000 down (if they find the right place) which she says will cost about $3,600 a month.

Of course, that’s just for the mortgage at current low rates. Add in the opportunity cost of the down payment, insurance, property tax and maintenance, and the monthly soars past $4,000. So why would a family double their housing costs at a time when interest rates are about to start a slow ascent, and real estate risk (especially in YVR) is through the roof?

“I guess I’m getting caught up in the rat race,” she says. And truer words were never spoken.

The big jump in house prices – even while sales levels are unimpressive – in Toronto and Vancouver last month has pushed those markets further into the red zone, making them outliers in Canada. For example, sales plunged 26% in Calgary last month, with similar misery across all of Alberta.

In Atlantic Canada listings are piling up on top of each other and asking prices are in a steady decline. And remember that runaway housing boom that flatlanders came here to crow about a couple of years ago? Pfft. Here’s the latest report from the Saskatoon realtors:

“August represented the eighth straight month with a year over year reduction in the number of home sales in Saskatoon. This, coupled with a continued elevation in inventory levels equates to a buyers’ market. Currently there are just over 2,000 residential listings on the market in Saskatoon, an increase of 26% from just 12 months ago. Considering that there were 329 sales in August, it would take 6 months to liquidate the current inventory of homes. Year to date 2,812 homes changed hands, a 12% reduction from last year. The sales to active listing ratio for August was 39% significantly lower than the five year average of 54%.

“This suggests that only four out of every ten homes placed on the market will result in a sale. Meanwhile the average home required 50 days to sell compared to the five year average of 41 days “The reality is that our market is feeling the effects of slower economic times” comments Jason Yochim, CEO of the Saskatoon Region Association of REALTORS®. “If someone is serious about selling their home they need to sharpen their pencil regarding price to ensure a successful sale.” he adds.

“The number of sales are down in nearly every price range but most notably between $450,000 and $500,000 and $750,000 and $900,000. This reduction has also impacted the new home market where the number of housing starts are down significantly over 2014. Year to date single family housing starts totaled 510 representing a 28% reduction from 2014 while multi-family starts increased by 10% to 798 units.”

Now, take out the word ‘Saskatoon’ and insert your city.

It’s coming.

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September 3rd, 2015

Posted In: The Greater Fool

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