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March 30, 2016 | What Could Go Wrong?

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.


Okay, so this isn’t typical. In 416 these days the average detached is fetching (say the realtors) $1,211,459. In the burbs, that drops to $816,000, but you then require a soul transplant. For the entire mega-region, including the sale of all condos, townhouses, singles and parking spaces (you can pay as much as fifty grand for one), the average property costs a few bucks less than six hundred thousand. Five years ago, that number was $431,000, or 39% less.

In those five years, the cost of a mortgage has barely moved – down just thirty basis points. In 2011, for the first time ever, household debt touched a level equal to 150% of disposable income. Today it’s 13% higher and growing at the fastest rate in half a decade. Over this time the price of oil collapsed by 70%, unemployment increased substantially, and economic growth fell by half. Canadians threw out Con governments in Alberta and Ottawa and replaced them with tax-and-spend, high-deficit, left-of-centre administrations.

So, in summary: Bad economy. Flat incomes. Scant rich people. Higher tax. Big deficits. Property inflation. Way more family debt. And yet we’re among the spendiest and house-horniest people on the planet – a land where it’s made to seem normal that some single dude in a leased Boxster lays down almost two large for half a house.

This worries some people. After all, mortgage debt is not like a car loan. It’s amortized, and can take most of a career to pay off. And while mortgage rates have been reasonably stable for the past five years, most economists don’t expect that to hold for the next five. Now that the future will be peppered with big government deficits and stimulative over-spending, it’s anticipated central bank rates have hit the floor and can only move in a single direction with those in the States.

Days ago Canada was listed among seven countries that are “most vulnerable to a debt crisis” within the next 36 months by US-based Forbes magazine. Analysts there (and elsewhere) aren’t too fussed about our shiny new Lib government borrowing bigtime, but rather they worry about the mountains of debt being accumulated by households without any visible way of paying it all back. If the real estate market just flatlines, let alone corrects, a lot of people will have gambled and lost. As for the larger economy, record levels of borrowing mean a ton of our GDP is being financed by Mr. & Mrs. Hipster, who may now need several years (or longer) to see incomes rise and debt ratios reduced. The conclusion – we’re vulnerable. To a jobs drought. Higher borrowing costs. A shock of any kind.

It’s not just Forbes, of course. Those guys are only the latest to look at Canada and wonder what we could possibly be thinking. Add in the IMF, the Economist, every major US debt-rating agency, the World Bank and now the Bank for International Settlements, which is the globe’s de facto central banker. Two years ago the BIS warned us to slow down on the debt binge and cited early indications of a coming debt shock. As a result, we borrowed more. Look at house prices in Van and 416 in the last twenty-four months.

The good news is that Norway and Australia are more pooched than us. And meanwhile the indie Parliament Budget Officer in Ottawa disagrees with Forbes that we will hit the wall by 2019. Instead, he figures it won’t happen until 2020. What a relief. At that time the amount of money we all spend on debt servicing – even with historically low interest rates – will achieve a record level.

This, he says, “will be beyond historical experience.”

Well, if the young professional who bought the semi above has a five-year, variable-rate mortgage, he’ll have spent $787,000 in down payment and monthlies by then to live there, and still owe $1.12 million. Let us pray for him.

Nah. Let’s just watch.

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March 30th, 2016

Posted In: The Greater Fool

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