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December 4, 2015 | The Predicament

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.


Terrie’s 31. Peter, 32. Young. In love. Skewered.

“We came across your blog not too long ago, and this is our situation,” she tells me. “We make a combined income of 130 to 140 k, counting overtime, rent in Toronto and pay about 1,000 for 1 bdm. We just got married in July and were saving for a house, until my impulsive nature got me into convincing my husband to buy a new build townhouse in the suburbs – it will be completed in August 2016, cost 470 k. We have so far sunk 13 k into, and must come up with another 20 k. We owe about 33 k in student loans (my student loans), and used our savings for our wedding. Where can we go from here, as we signed an agreement with the builders and can’t get out it? I’m stressed. Please help, yes I got myself into this mess. Thanks and God bless.”

Over the next few weeks and months I’ll wager more people will be waking up in a cold sweat over a real estate decision. No wonder. The perfect storm gathers. If you’re thinking about buying a property, especially in Vancouver or the GTA, think about these seven things first.

There’s a jobs disaster building. The numbers Friday morning were pathetic – a loss of almost 35,000 paycheques last month, wiping out the gains of October (which were pumped up by temporary hiring for the federal election). The private sector shed 40,800 positions last month, which shows you what oil creep is doing. Another 15,000 jobs gone in Alberta. People who are worried about their incomes do not buy houses, no matter how cheap mortgages are.

Interest rates will rise. There was little doubt before the hot US job numbers Friday, and none now. So the Fed will begin the normalization process on December 16th – a tightening cycle expected to last about two years and add roughly 2% to current levels. Anyone taking a mortgage today should therefore expect to renew it in five years at almost double the rate. The US economy is expanding robustly as ours croaks. And while the Bank of Canada will hold off following the Fed for as long as possible, our bond market won’t. Cheap rates brought torrid house prices. Rising rates can chill fast.

The oil funk deepens. The price tumbled again on Friday – now down to $40 or a tad less – after OPEC producers refused to cut output, even though the world’s drowning in crude. Every day there are 2,000,000 more barrels of oil produced than are consumed, and it’s jammed into ocean tankers, underground reserves and tank farms. More production is set to come from Indonesia and Iran, and already Canada’s output is unloved and uncompetitive. Calgary’s screwed, and the misery won’t stop there.

Soon be back in recession? Job loss means our unemployment rate’s jumped, while higher rates and lower oil squeeze the national income. Now exports are tanking. On Friday we learned October was the 14th consecutive month Canada has run a trade deficit.  We imported more than we exported – the same as you spending more than you earn. Exports to the booming US dropped by the most in almost three years. Oil down 2%. Declines in 10 or the 11 main sectors. No wonder jobs are vanishing. No wonder the TSX is down 9%, among the worst performers on the planet.

More spending. More taxes. Canadians have chosen to elect governments addicted to spending, and will pay for it. Ontario owes more money than God. Alberta has raised taxes on people, companies and carbon. The T2 gang is about to roll back retirement savings, end income-splitting, jack taxes on the successful, creating a net loss, and it looks like their budget deficits could be double what was predicted (says the independent Parliamentary Budget Officer). Also coming are more restrictions on small business owners, an increase in payroll taxes for the public pension and massive spending to create temporary infrastructure construction jobs. More borrowing puts upward pressure on interest rates while higher taxes decrease family cash flow. Nothing good here for the price of a house.

Fools surround you. At least if you live near the GTA or in the Lower Mainland, where November real estate numbers were insane. A frenzy has erupted among those who smell higher rates coming and want to ‘beat the increase’ by buying at peak prices. Duh. Sales volumes jumped in both markets, and prices followed. Mortgage debt has amped higher in 2015 by almost $80 billion, with little corresponding increase in incomes, and none in savings. All around you, people are gambling everything on one asset – at a time when the gathering clouds could not be thicker, blacker.

And the rules are set to change. To contain this house lust, the feds are planning to raise minimum down payments – all the way to 10% for houses prices around $700,000 or more. Combined with rising mortgage costs, oil funk and mounting employment anxiety, the result could be sharp. The old government contemplated it, and balked. The new guys figure they can pull it off and survive. But, you know… horse. Barn.

So Terrie and Peter, you earned that stress. It’s one thing to buy just before a storm if you have lots of equity and a balanced life. If’s suicide to do so with no savings and epic leverage. Kiss your deposit goodbye, file your papers and walk.

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December 4th, 2015

Posted In: The Greater Fool

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