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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

November 4, 2015 | The Unravelling

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.

 

Yesterday you read here that markets think the odds of rates rising, are rising. On Wednesday the most powerful babe in the world gave further clarity. Fed boss Janet Yellen testified before Congress – the financial services committee – and said if the economy chugs along, rates go up next month.

So will that happen, Janet?

“At this point, I see the U.S. economy as performing well,” she said. “Domestic spending has been growing at a solid pace and if the data continue to point to growth and firmer prices, a December rate hike would be a live possibility.”

What does that mean? Should you call the bank tomorrow and lock in for five years on that mortgage?

Well, we’ll know more Friday morning. That’s when the all-important jobs report is published, and GreaterFool’s Washington-based unit will be uplinking the data here the moment it’s released. The magic number is two hundred thousand. Over that, and Janet gets aroused. Under, all bets are off.

But you might be interested in knowing what the bond market thinks. This is the place where your mortgage rate is actually set, so it matters. As Yellen addressed the politicians, here’s what happened to yields on US Treasuries.

YIELDS

Also as Yellen spoke: the US dollar strengthened and the Canadian dollar went limp. The loonie ended the day down a half cent, just sneaking over the 76-cent mark. As suggested here yesterday, commodities took a bullet. Oil was down 3% on the day, and gold’s lost twenty-five bucks in the last two days. Expect more if the Fed does move on December 16th and, yeah, I would definitely lock in that home loan.

Now a rate bump, even a baby one this year followed by more in 2016, will not help Canadian real estate one bit. In the bubbly places (there are only two left) news of higher rates coming will further inflame sales and prices as the greater fools among us rush to get in. Yes, that’s the way fools think: it’s better to spend more money now and take on a greater debt at a lower finance rate than to wait and pay less later resulting in a smaller mortgage that has a higher rate. This is known technically as Hipster Logic.

In the not-bubbly markets (the rest of Canada, especially Alberta), a looming rate pop will have the opposite effect – decreasing sales, scaring off buyers and rendering sellers suicidal. This is human nature at its finest. We lust after stuff that’s inflated and rising, while we shun things that are falling and unwanted – even though we loved them previously when they cost more.

After the little tempest I stirred Monday in Calgary – talking about those mansions auctioned off for 40% of their value and the numbers not being included in real estate board stats – I heard from housing analyst Ross Kay.

“Yesterday the entire province of Alberta became aware that two of the most stunning and quality newly built homes were sold.  Those homes’ selling prices immediately established their Current Market Value Price in the same way banks have allowed tens of thousands of Calgarians to be encumbered by mortgage debt at their local bank branch.  The problems have only begun,” he says.

Kay states that when a $3.9 million house goes at auction for $1.5 million there are more losers than the owner. “The municipality just lost $20,000 a year in property taxes and is now faced with thousands of potential challenges to assessments.  Obviously every owner in Calgary with a home worth over $700,000 that is under 10 years old, should immediately be challenging their assessment.”

Banks are having a kitten, too, Kay adds, since a 60% drop in the price of quality homes going to auction makes a joke of thousands of appraisals done over the last year, on which mortgage loans are based. Plus: “Realtors who only months ago claimed that houses were great investments and prices would make small gains this year, are now faced with telling over 52,000 Calgarians who they encouraged to buy homes with those words, that some of those buyers face the real prospect of a 56% loss in one year.”

This is how housing markets unravel. Banks get nervous and pull in their horns. The media starts doubting the Frankenumbers real estate board spoon-feed them every month. Buyers hold out for the better prices they know are coming. The stage after that is capitulation.

BILL modified  Well, we have a shiny new finance minister on whose shoulders such issues will settle. Bill Morneau inherits an economy barely growing, with oil woes, housing imbalances, and a population pickled in debt expecting ponies and sunshine, tax cuts and jobs – exactly what they were promised. Bill has a net worth north of $30 million and last year earned $1.07 million running the HR business his dad founded and passed along.

Of course, we won’t know he’s trustworthy until we learn if he reads this pathetic blog. Watch for the warning signs. They include shedding.

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November 4th, 2015

Posted In: The Greater Fool

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