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April 29, 2016 | No Kidding

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.


Besides the Globe and Mail, and possibly the weird Vancouver dailies, the biggest house-pushers in the land work for CMHC. No wonder.

These are the guys who let people without any money buy $800,000 houses with 5% down (that they got from their Mom) and enjoy the same interest rate as the 50-year-old dude who has 50% to deposit. It’s a twisted system we have. CHMC institutionalizes risk. By backstopping lenders who make high-ratio loans, it creates a massive moral hazard.

Canada Mortgage and Housing Corp has close to $600 billion on the books. Not all of is it high-risk, high-ratio stuff, but enough to give any accountant the runs. The agency has a vested interest in a residential real estate market that continues to expand and, in fact, gets more expensive. It’s a far cry from the origins of this federal agency, which was to help WW2 soldiers get digs. Now it helps dig the financial graves of Millennials.

This is worth mentioning, since the latest CMHC report paints a somewhat sobering picture of the state of real estate. The feds have concluded that nine of the major 15 markets in Canada are overvalued. In other words, new buyers are paying too much – in Vancouver, Saskatoon, Toronto, Hamilton, Quebec City, Edmonton, Calgary, Regina and Montreal.

There are distinct reasons for this.

First, overvaluation comes because idiot purchasers pay too much when buying from greedy sellers. They engage in bully offers, bidding wars, blind auctions and unconditional deals. This is the result of prices surging past economic fundamentals – when they’re no longer supported by family incomes, population growth, economic expansion or job creation. If you live in Vancouver or hot slices of 905, you know what they mean.

Prices here are based on rank speculation or on FOMO. It’s the fear-of-missing-out that worries everyone the most. That gave us the Nortel bubble and the subsequent collapse. It fueled the US housing gasbag, which blew up and took the middle class with it.

Overvaluation also comes when the economy starts to suck, but real estate values stay sticky. Poor Saskatoon’s a good example. Prices there are down 2% and sales are off 6%, but the economy is unraveling a lot faster, thanks to the commodity slide. Calgary and Edmonton obviously fall into the same category, thanks to oil (despite the recent bounce to $45). Cowtown’s rush hour traffic has thinned out along with energy executives, while the commercial vacancy rate skyrockets. House sales are 11% lower than this time last year, but the average price is up 1.2%. If you need any more evidence of the irrationality of your fellow beavers, there it is.

Then there’s overvaluation because of migration. Like in Hamilton, a grimy but gentrifying city of 520,000 (slightly smaller than Halifax) which has been invaded by alarming numbers of metrosexual, panini-pressing, specialty beverage-sipping, bearded hipsters from the Kingdom of 416, where they have zero chance of ever owning a SFH of their own. You can put Victoria in the same silo, or maybe even PoCo or parts of the Okanagan, where YVR refugees are swelling local prices like a hormonal frog.

Overbuilding is a concern, too. Like in Toronto where the inventory of built but unsold condos continues to escalate. In Saskatoon and Regina the supply of new houses is outpacing demand. And days ago we told you about a giant surplus of unsold houses in Edmonton – enough to threaten average prices with a serious downwards tug.

The point is this: real estate is local. Mortgage rates and regs may be national in nature, but every market is different, constantly changing and influenced by a lot more than just the cost of money. These days the media is playing a big role. Giants like the Globe are feeding a social obsession with housing, running story after story about “what they got” or “Millennials priced out.” Plus, of course, serious column inches on the yellow peril or assignment clauses – that feed our new anti-Chinese, anti-realtor prejudices.

There’s nothing wrong with owning property. I do. But never fall for this fairy tale that prices will continue to rise, without risk of reversal, because things are different this time. They aren’t. House values went up because the cost of money went down and the fear of debt faded. When you see CMHC highlight concerns, pay attention. If you live in one of those nine markets, pay even more attention.

Or, ignore me. See what happens.

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April 29th, 2016

Posted In: The Greater Fool

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