Howestreet.com - the source for market opinions

ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

June 13, 2016 | Hara-kiri

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.

GARBAGE modified

“Can’t tell you enough how reminiscent these stats are to the 2007 pre-crash USA,” says Mike. “History is repeating itself, this time in Canada. I suspect auto sales will the next major indicator, durable goods, etc.”

The news Mike refers to comes from his industry where Canadian motorhome registrations collapsed 44.1% year/year in April, and have now tumbled 35.4% so far in 2016. “It certainly doesn’t look good for the Recreational Product business in Canada,” he says.

This may be one reason why. Household debt’s shooting for the top of the chart (below), when expressed as a percentage of disposable income. If real estate values were not rising and interest rates in the ditch (both of which will change), this is a snapshot of a nation committing financial hara-kiri.

HOUSEHOLD DEBT

And here’ another reason Mike ain’t selling a lot of 30-footers. Disposable income is being sucked off by huge mortgage payments, as many people finance $1 million homes with loans exceeding 450% of their incomes, and with two-thirds now taking 30 or 35-year amortizations.

450 PER CENT

Increasingly the heat’s on the T2 gang to stop the insanity of 30% year/year price increases in Van and 15% in the GTA, before these markets hit a wall, doing to the nation what oil did to Alberta. As reported here last week, Finance Minister Bill Morneau is now considering a package of measures from his department which would restrict mortgage accessibility, raise posted rates and force bankers to eat more risk.

A Bank of America Merrill Lynch report says the Bank of Canada will not be playing the bad guy in bringing house-horny northern beavers back to their senses. Instead, this is purely Ottawa’s gig. And, says TD Economics: “The Bank of Canada highlighted a concern over the rising share of households carrying debt loads of more than 450% of income in both Toronto and Vancouver and increasingly relying on 30-year amortizations to make their debt payments more affordable. Households are now taking on more and tying themselves to it for even longer.”

What can the central bank do? Basically, (a) look seriously pissed and (b) raise rates. The first has already happened. The second won’t take place until after the US hikes two to four more times – which will be at least a year from now. But, from a political standpoint, that’s way too long to wait. Besides, if YVR and GTA prices continue to hockey-stick higher for another year, rising mortgage rates then could bring one mother of a correction.

Morneau and his boss know it would be far better to start deflating now. And I hear they will. So, buyers should wait. Owners (those who have lucked into a once-in-a-generation windfall) should sell. And never look back.

I corresponded yesterday with the Van guy I referenced days ago who sits on a $2.6 million beater house and worries about selling and pocketing the loot. “But I might have to rent a house in Langley,” he lamented, “and then have to drive all that way to work. I couldn’t take the stress.” The answer, I said, is simple. That amount of money, invested for a 6% return in a nice balanced portfolio, would throw off enough income each year to (a) lease a new S-class Mercedes, (b) hire an assistant/driver at $40,000 a year, and leave $4,500 a month for rent. Plus he’d still have his two million extra bucks. So, how bad can Langley be?

Mercedes

Finally, let’s bring in Dan for an update, and some perspective:

“I wrote you a while back about how we bought our place in 2007 for $325,000 and we’d be lucky to sell for $300,000 (you posted my email on April 3, 2016). We’ll I’m proud to say that we listed for $299,900 and sold our place for $295,000. We are so happy to not be home owners anymore, even though we lost a ton of money if you add it all up. We will be renting forever and reaping the benefits of our new found savings and investing—suck it you house horny house purchasers. Thanks for your awesome blog. You rock!”

By the way, a Vancouver realtor (who does most of her work in Richmond) called me yesterday for some money advice. She just sold her four of her five properties, and plans on bailing out entirely. “This cannot last,” she said. “In fact, I see it already slowing fast.”

Soon to be faster.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the HoweStreet.com Weekly Recap.

June 13th, 2016

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site

*
*

This site uses Akismet to reduce spam. Learn how your comment data is processed.