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June 10, 2016 | Scary

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.

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Kids are so damn cute.

When the country’s mortgage brokers, in a survey, asked Next Gens (yeah, the Mills) how they feel about real estate, a majority started to drool, with 72% saying they considered mortgages to be “good debt.” Which is perfect. They’re going to need lots of it.

The average income among the group is $75,000, the amount saved equals $27,000, and the expectations are immense. Over 80% hope their “first home” will be a low-rise dwelling, with 59% expecting it to be a detached house. A mere 18% would prefer a condo. Two-thirds know they will be putting down less than 20% and almost 40% admit they’ll need the Bank of Mom to pull it off. As you can tell, the notion of a ‘starter home’ is kaput.

This all reflects the fact a 26-year-old today has only ever known cheapo mortgage rates, and a real estate market steadily inflating since she was chucking her Tickle Me Elmo. Meanwhile parents have been burrowing deep into a one-asset strategy, while media and governments have been on the front lines of house-humping. So what else do we expect young people to covet? Freedom? Experiences? Adventure? Idealism? Nah. They learned good. They all want mortgages. But just at the wrong moment.

Over the last couple of days your pathetic blog has detailed the reasons current insane conditions, now infecting all of the Lower Mainland ad most of southern Ontario, cannot last. Bankers are craving higher down payments. Credit Unions are scared. There are calls for specker taxes, flipper taxes, cap gains taxes and Chinese dude taxes. The Bank of Canada this week issued a stark warning to people currently buying houses – if you’re expecting prices to rise, don’t. The federal finance minister says Ottawa’s “deep dive” into the housing situation will end up in action. And now T2 himself has thrown out a caution.

“Rising home prices,” he told BNN (which you should never watch), “uncertainty around being able to buy your first home or upgrade as you want to grow a family is a real drag on our economy and a real drag on Canadians’ opportunities.”

Hey, and we all thought real estate was the economy. So when Trudeau talks about nutso valuations like they’re a broken thing the government must fix – given the context of all those other voices – it’s time to pay attention. As we told you two days ago, there are changes coming designed to deflate the market before it blows up and mashes everything with it.

Like it not, Millenials, the next few years may be the worst time in your craven young lives to be diddling with real estate. The housing pendulum has swung so extremely in one direction that the snapback could be dramatic. Consider what the Bank of Canada told us this week:

  • A record 15% of all new mortgages in the past year were given to people whose debt equals 450% of their income – that is up by a quarter in a single year.
  • The greatest number of these walking dead are in (surprise) Toronto and Vancouver. In the GTA last year a stunning 40% of all new insured mortgages were for 450% or more of a borrower’s total income – an increase of a third in just two years. In YVR these mortgage zombies represent 30% of new borrowers. You can compare this to the average debt-to-income ratio for Canadians as a whole, 164% (also a record).
  • Said the bank: “Higher household indebtedness, its growing concentration in highly indebted households and an increase in the proportion of mortgages with riskier characteristics make households more vulnerable… with potential consequences for lenders and mortgage insurers.”
  • Here’s one you should fret about: almost 60% of all new uninsured mortgages (taken on houses selling for more than $1 million) have 30 or 35-year amortizations. It means buyers are stretching themselves to the max to get into the market. They may have borrowed, begged or earned the down payment, but the monthly’s a strain. By extending the am, they lower the payment while ensuring they’re screwed over for more interest.
  • Finally, our biggest bank (RBC) carries the biggest share (54%) of these uninsured mortgages – the volume of which has grown like a weed as prices rise and after CHMC cut off insurance on any purchase over seven figures.

This is a risk cocktail. Which is what I told the guy I talked to Friday with a house near Cambie, in Van. “It’s nice but nothing special,” he said, “probably a tetar-down if sold. The place across the street, also nothing special, just sold for $2.6 million (after a week on the market – but they had asked for $2.8). The notion of selling it and stashing $2 million in the investment account is compelling but…”

But… everyone’s demented. They expect weekly equity increases. They fear selling because they can’t imagine buying again. “Besides, the government would never consider doing anything that would tank the market, because what would people do??”

We may just find out.

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June 10th, 2016

Posted In: The Greater Fool

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