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June 9, 2016 | Coming, Part Deux

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.


Close you eyes. Hum Imagine. Now visualize Vancouver house prices dropping by 64%. That would take the average detached house from its current insane level above $1.7 million, all the way down to $650,000. It means anyone who paid more than that could feel a sting lasting a lifetime.

Or Toronto prices declining 42%. The average 416 detached would plop from $1.285 million to $745,000. Ouch. That’s a fast trip back to 2011, meaning almost every buyer since then would be a loser.

“All of the decline will come from the net wealth of homeowners and would eventually show up in StatsCans publications around three months after the 25% national correction was recorded,” says housing analyst Ross Kay.

But what the heck is the guy talking about? A 25% correction in national house prices, whacking YVR and the GTA the hardest (the more bloated, the bigger the bust), would be akin to the US housing meltdown (32%) or the collapse in Toronto prices during the 1990s recession (31%). What is Ross vaping?

Actually you should blame the Bank of Canada which this week did a great job in underscoring all the nasty themes this pathetic blog has been yammering about now for a few years. Houses are inflated because money’s too cheap. People have built-in house horniness, and totally expect more increases. Too much demand is chasing too little supply. The resulting pop in valuations is utterly unsustainable. And the risks are mounting – a slow economy, lousy jobs picture, rising rates to come and a nation pickled in debt. Worse, leverage is out of control. The Bank of Mom is sucking off windfall equity from parental houses and dumping it into speculative condo buys for junior. It’s a doubling-down that could turn a hard landing into a smoky hole.

“What the Bank of Canada suggested today,” says Kay, “is the virtual financial devastation of this country and exposes the real risk those over 65 are facing by not getting honest and unbiased real estate advice first followed up by sound financial advice to immediately implement a strategy to grab that “false wealth” and make it real while they can.”

Yeah. In other words, sell, get liquid, get safe.

So what did the central bank say in its landmark assessment of the country’s financial health?

Here are the highlights:

  • Surging prices in real estate markets like Vancouver and Toronto are not sustainable at their current pace.
  • Vulnerabilities due to the continued rise of household debt and greater imbalances in regional housing markets are higher than they were six months ago.
  • “In this risk scenario, a severe recession in Canada generates a sharp increase in unemployment across the country that places many highly indebted households under financial stress and causes a broad-based correction in house prices. This chain of events would strain the financial system and the real economy. Such a scenario might unfold if a large negative demand shock hit the Canadian economy…”
  • “Self-reinforcing price expectations”, and not economic fundamentals (or Chinese dudes), are propelling prices higher in the Kingdom of 416 and western Delusia.
  • So, buyers are walking into massive risk. “This suggests that prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction.”
  • And, if jobs fade or rates rise and the economy suffers, that “broad-based correction in house prices” could suck off an average 25% in equity.

Now, glue this onto Finance Minister Bill Morneau’s comments yesterday that the T2 feds are doing “a deep dive” into all aspects of the housing market, crafting a housing policy with the goal of ensuring more affordability, and hopefully you can see where this is heading. The last thing a PM who desperately needs to be loved (and hot) wants is single-family detached houses in Vancouver losing $1.2 million in value. The Mills would love it, but the economy would go defib. Already Ottawa’s contemplating a $120-billion hole in federal finances.

Well, nobody knows what happens next. More regulation? A dramatic dampening-down of the market so it doesn’t self-destruct? A slow melt flowing from a slagging economy and rising US rates? A crash? Nothing? Desperate Audi-less realtors sleeping under bridges, eating bugs?

This blog has stopped predicting. You’re on your own.

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June 9th, 2016

Posted In: The Greater Fool

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