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March 1, 2016 | Greed, Meet Fear

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.
Art lives in Okotoks, south of Calgary. “In my world,” he says, “I stay close to the busiest realtor to keep a pulse of what’s going on. Since April/May of last year, appraisers have been factoring in a 0.5% decrease/month in Okotoks/Calgary.”In Saskatchewan, CTV just did a three-parter on the local economy. It reported…

The recent oil slump is hitting Lloydminster hard. Jobs have been lost, businesses have shut down and employment insurance is running out. Some people lost their job more than a year ago and still haven’t found work. Middle class families are utilizing soup kitchens for meals, men are shoveling driveways for extra cash and families are wondering and waiting when the economy will rebound. The city, which sits along the Saskatchewan-Alberta border, is on the edge.

Brad messaged me days ago while standing at a giant equipment auction. “I’m at the Ritchie Brothers sale in Edmonton at the moment,” he said. “Lots of gear from the oil patch going through.  Apparently breaking record inventory levels.  The April sale is supposed to be unimaginable so I’m told.  US dollar is strong so most of the gear is heading south.”

Mark lives in Vancouver. He emailed me: “My friend, a small time developer here, says this about it….’A bit crazy eh.  Don’t know where all this is going. It might be a mess later on.’ Believe it.”

What a strange country we’ve wrought. Two years ago the economy expanded by 2.5%. Last year growth crashed by half. In 2015 Canadians (households and governments) increased their debt by $78 billion – more than all the borrowing taken on during the great recession in 2009. We’ve run a trade deficit now for almost seven years. This year, after clawing back towards a balanced budget, Ottawa will plunge into $20 billion of red ink.

PISS AWAY modified About 150 drilling rigs in western Canada are about to be permanently idled, costing 20,250 more jobs. “We’re losing people,” says the industry association, “that are never coming back.” Meanwhile commodity prices are at 1990s levels, employment levels have sunk, the banks are laying off, Bombardier’s cooked and economists warn that consumers are on a high-speed journey towards the wall.

At the same time a house in North Toronto that shocked the locals four years ago when it was sold for $400,000 more than asking has been levelled, and a McMansion is rising in its stead. In Kitsilano, as reported here, some dork paid $735,000 over asking in a bidding war (five offers) for a regular home listed in excess of $3 million sitting on a normal 33-foot lot.

RBC’s latest ‘affordability’ report is anything but. What speculators (they used to be called ‘citizens’) have done to YVR house prices, and are in the process of doing in Toronto, is off the charts. Even the bank seems shocked.

“Single-detached homes have long since slipped out of reach for the average local homebuyer,” it says. “This implies that only a select few wealthy households can afford to own such properties at market prices.” To carry the average home in Van now takes an impossible 109% of the average family’s pre-tax income. Yes, that’s pre-tax. And it even factors in a hefty down payment of 25%, with financing at today’s ultra-low rates. In other words, this is impossible. Those who reach are assuming massive risk.

To buy a hunk of real estate there (not a detached home) requires the average income-earner to put away 10% of her income for six years to finance just a 5% deposit, and then 100% of take-home wages to carry it. Toronto’s marginally better – where a buyer has to save for almost five years, then devote 61% of their gross income (or about 85% of net pay) to finance it. Of course, devoting more than a third of your overall income to a house is too much, so RBC is now calling this 604-416 thing “dangerously unaffordable.”

But things change fast outside of the bubble cities where real estate has become a social disease. It takes less than three years to save for a house in Calgary, which can be carried for under 40% of average income. Winnipeg needs only two years’ worth of savings and Montreal hardly much more.

In fact that are two Canadas at this time – the one descending into economic stress and the other leveraging its way up a towering cliff. The first group heads for despair. The second grows euphoric. The first taste fear. The second, profit and greed. Standing at the Ritchie’s Auction in northern Alberta, Brad sees dreams being sold for pennies on the dollar. On the Westside of Vancouver a dentist friend is paying $3 million for a forty-foot lot. ‘But if I wait,’ he protested to me, ‘it’ll be $4 million.’

It’s impossible the average house in Canada – which requires 71% of average gross income to carry (with 25% down) – will retain its value in the current economy, unless families have an infinite capacity for debt. At greatest risk are those places where real estate’s turned into an investment commodity and prices divorced from fundamentals. Every month brings it closer. And while local markets in the GTA and the Lower Mainland have defied logic, rewarding owners, the tank empties fast.

What a stunning opportunity to reap a windfall, or learn about regret.

As Mark’s developer buddy said. Mess coming.

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March 1st, 2016

Posted In: The Greater Fool

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