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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 19, 2016 | Classic

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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Time for a little update on recent worries, memes and phobias. Lord knows, there’s no shortage.

First, Brexit. Hope you don’t own property in London. It’s already shaping up to be what the ‘remain’ guys forecast – an economic and financial challenge for little, isolated Britain. This week the IMF offed its projection for global growth, thanks to the weird decision UK voters made last month. Recession is coming, said the international body, unless Britain can forge some new trade deals. Fast.

But for individuals, fallout is tangible. Plunging British bond yields have resulted in a drop in annuity payments for retirees, meaning they must now live on about 4% less than before the vote. Worse, the seven-year-long real estate boom in London is now in serious jeopardy, says Société Générale. First commercial properties were nailed (investors found REITs locked up with plunging values and no redemptions), and now residential values are at risk.

“While in recent stress tests the major UK banks were assessed with declines of about 30% in commercial real estate prices, we fear that London residential could experience an even more severe downturn,†says the company. “We see a classic housing bubble in London and Brexit as the trigger for the correction … Given the current ratio of prices to incomes in London, a price correction of even 40-50% in the most expensive London boroughs does not seem impossible.â€

Yikes. A 50% decline? The typical London house costs $805,000 in C$ – about the price of a beater garage in Burnaby – which is 12 times the average London income. Because Brexit is expected to hollow out the City’s financial sector, shock at the top of the real estate market there could ripple downwards fast, affecting everyone.

So, a bitter win for voters. Lower pensions. House equity erased. And soon a passport to visit Scotland and get pickled in scotch.

Could something like that happen in YVR, where the average detached house costs 24 times the average household income because it’s twice as good as London? Or will all that foreign investment capital hold prices aloft because, ya know, everybody wants to live there?

To determine that we should figure out why prices have gone ballistic. So it’s handy the Royal Bank has just done exactly that. This is RBC’s conclusion on why prices have gone up 162% in Vancouver since 1999, and 140% in Toronto…

First, cheap money. No surprise there. Because people can borrow a ton more when rates are low, and they have zero discipline, that’s exactly the outcome. So 40% of the Toronto price romp and 34% of that in Van is because of this, says the bank.

Second, higher incomes over that 16-year period are responsible for another 29% rise in Toronto and a big 40% in YVR. Next is the willingness of people to commit way more of those incomes to mortgage payments, to which 17% of the price increase in Toronto is attributable, and 4% in Vancouver. And finally, the Bank of Mom. That’s boosted prices 5% in both cities.

The bottom line (says the bank): between 85% and 90% of our own bubbles are attributable to these factors, with the final amount coming from land restrictions and other factors, like dudes from China. In fact, the bank suggests the influence of foreign buyers is more at the bottom and middle of the market, not the top.

Hmm. What does this tell us? Either the bank has been vaping too much or (a) people in Vancouver who think Chinese guys are the reason nobody can afford a home are plain wrong, (b) locals have created 85% to 90% of this problem, and (c) things are a lot more precarious than anybody imagined.

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This points to Canadian homeowners doing exactly what this pathetic blog has repeatedly suggested – over-extending, over-borrowing and over-reaching, pushed into extreme leverage by cheap money, a diminished fear of debt and FOMO created by a wild exaggeration of the impact of foreign money. This is not good, because when market sentiment turns (it’s starting) lots of worried, debt-sautéed Canadians will push up listings and pull down prices. Classic behaviour. Because it isn’t different this time. It never was. Vancouver is not Paris. Toronto ain’t London. Even Winnipeg is not Singapore, as much as that surprises.

Every market in Canada will be affected by the reset ahead. However a great many folks will miss the early stages, blinded by their own misjudgment of the situation. They’ll buy into the teeth of a storm or miss harvesting a never-to-be-repeated tax-free capital gain.

Lessons of this summer (Brexit, Nice, Trump, Dallas, Turkey) are simple. Love liquidity. Shun debt. Interview the average 26-year-old. Do the opposite.

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July 19th, 2016

Posted In: The Greater Fool

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