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December 10, 2015 | Lucky Us

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.

Friday morning, just as financial markets open, the finance minister will make yet another announcement. This time (unlike last week’s tax-TFSA bomb) he’ll be standing on the polished buff tiles of the House of Commons foyer, with no technical briefing planned for reporters.

The reason? Raising real estate down payments is simple. You just do it.

Well, that’s the buzz. So while the Hot One selfies across the globe and does photo shoots for Vogue, groping Sophie’s butt, poor Bill is sent out to get his shot off. Hiking the required down to 10% could have the potential (as reported here last week) of eliminating more than 100,000 annual house deals – or more than will take place in the entire GTA during 2015.

But the expectation is for a graduated down payment system: something like 5% for properties selling for $500,000 or less, 7% for listings up to $700,000, and a 10% down payment requirement above that figure. Of course, properties changing hands for $1 million or more are already disqualified from mortgage insurance coverage. Buyers there have to cough up at least 20% of the purchase price in cash (or additional financing).

So what will be the impact? In the cheaper markets (like Montreal or the Peg), not much. But in YVR or the GTA, where seven hundred grand buys a glorified garage with a kitchen or a crappy semi downwind from the sewage treatment plant, this could be big news. Combine that with a realization US rates are rising (on Wednesday), and the Canadian economy is shifting into reverse, and 2016 could be a watershed year for real estate.

And here’s something interesting: even the real estate guys are taking this seriously, trying to get on the right side of the issue. After all, the latest debt numbers are stunning. Mortgages equal to 500% of incomes now common, debt swelling at five times the rate of economic growth and large numbers of existing homeowners struggling to service their monthlies. Clearly money’s been too cheap and the cost of entry too low. If house prices drop, or even flatline, stand back.

Look at Re/Max, pedaling hard. “New rules on larger down payments would barely impact consumers outside of Vancouver and Toronto,” the company said this week. In fact, the realtors did a survey asking Canadians if they think buyers should be forced to have more skin in the game. Over 66% agreed that “10% or more is a good level for down payment on a home.”

So, if this is correct, the people are out ahead of the industry and the politicians, understanding how massively we have hitched our wagon to a single, emotional asset class. And that’s probably because the bulk of us don’t live in Vancouver or 416. Re/Max confirms minimum downs will be increased (presumably because Department of Finance minions have been consulting with it on the impact), as well as new rules forcing the banks to take on more lender risk by accepting a deductible on any insured loss on a property.

That’s a big deal. To date bankers have loaned gobs of money to moist virgins with zero savings but 100% hormones, doing it at the same cheapo rate a richer, older buyer with a fat down payment might receive, while washing their hands of risk – since it’s all covered by the feds. That might change quickly with a deductible on losses, combined with what’s happening to banks because of the lager economy.

For example look at poor Alberta. Oil was down to $36 on Thursday, with thirty-two the next support level. The layoffs are everywhere, with real estate shedding value fast and even rents tumbling. Monthly condo lease rates in Calgary have tanked about 20% since last year – from an average of $2,200 to just $1,700. House rental rates are down 10% and there’s (obviously) a surge in the number available. No wonder. Sales are down again this month by 20% while listings have increased 34%. In Edmonton the number of rental houses on the market has exploded by over 70%.

Even with just days to go before the Fed increase, and our dollar at 73 cents, momentum is building for the Bank of Canada to cut its key rate for the third time. That has helped drive preferred share values down, and comes as the worst possible news for the T2 gang in Ottawa who swept into power on the hopey-changey platform. A cut will be an admission the economy is succumbing to oil creep, that our dollar must to be sacrificed and there’s tougher sledding ahead.

“As I look at the Canadian economy,” says the chief economist at Scotiabank. “the risks are rising, not diminishing.”

The first rate cut last January excited the kids and led to a big price jump for houses. The second one in July did almost nothing. The third one’s a warning. Those among us with all net worth in maple – whether a house or a mess of bank mutual funds – may soon wish they lived elsewhere.

I mean, until they see this. Lucky us.


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December 10th, 2015

Posted In: The Greater Fool

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