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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

August 1, 2016 | The Common Wisdom

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.

SEAT-modified

Let’s summarize.

The regulator in Ottawa tells banks to stress test for a 50% property crash in Van and a 40% plop in Toronto. Meanwhile two major banks have already cut back on mortgage lending in YVR. Too much risk. The IMF, World Bank, Economist, Moody’s, Fitch and Standard & Poors all warn Canada has a real estate bubble. The federal government hastily organizes a housing task force to come up with solutions. The Bank of Canada warns household debt is off the chart. Bank CEOs start cautioning people to stop borrowing. They continue. Debt hits a new high. Bank of Montreal says incomes are being swamped by mortgages and house flippers are a plague.

Then the BC government shocks everyone with a massive tax on foreign buyers. In response, some Vancouver sellers increase their prices so they can offer the Chinese dudes a ‘discount’ equal to the tax. The land registry office is swamped ahead of tomorrow’s deadline.

Meanwhile Canada loses jobs in June, the economy plunges into negative growth in the latest quarter and Westjet’s profit declines 40%. More than 25% of the office buildings in downtown Calgary sit empty, where there’s a 15-year supply of space. The federal government prepares to spend $120 billion it doesn’t have, and the central bank is seriously considering cutting emergency interest rates while the US readies to raise them.

Now, what would prompt a sane person to buy property in this environment, when prices remain at the highest level in Canadian history?

But wait. Don’t slit your wrists or call your realtor yet. It gets worse. We just won the debt contest. No G7 country is more screwed. Officially.

When it comes to debt, we're No.1!

G7 DEBT RATIO

While all economists not directly employed by real estate boards or mortgage lenders are vexed, the biggest furrows have etched into the brows of Paul Ashworth and David Madani, property bears working for London, UK-based Capital Economics. Just as the oil crisis starts to dissipate, they warn, the Canadian housing crisis will commence.

In a new report, which chronicles the “ridiculous levels” of our mortgage debt they write: “Our bigger concern now is that the housing bubble will burst before the year is out… When the bubble bursts, residential investment will fall sharply, as falling home sales hit real estate commissions and new construction.”

Here’s why this matters so much: the oil and gas industry, which has been brutalized, accounts for 6% of the Canadian economy – about the same as in 2000. Meanwhile housing construction and real estate, which amounted to 17% of the national GDP in 2000, now account for 20% of it. Thus, imagine what a serious correction to real estate valuations might do to consumer spending, finance, homebuilders, mortgage lenders and granite salesguys.

So, Capital Economics predicts things will hit the fan by the end of 2016 and that the Bank of Canada will respond by cutting its key rate in half, down to 0.25%. In turn, the two events together should cream the Canadian dollar and send domestic inflation higher. Yes, we will be blogging next February (again) about $8 cauliflower.

Finally (if you’re waiting for a bus to lie in front of) there’s oil. Going a lot lower, says Morgan Stanley, which will certainly whack Canada a little more. The global oil market, it reports, “is severely oversupplied” with inventories at a five-year high, refineries turning out way too much gas and crude prices set to fall further. (Oil went under $40 on Monday – first time in half a year.) Already cruising towards an historic budget deficit, new taxes and way more spending, Alberta is seriously pooched. Calgary house prices have remained remarkably sticky so far. Count on that to change.

Well, make of this what you will. People horny for houses in the GTA or YVR will (of course) keep looking and offering, despite the clear risk involved. They can’t help it. Hormones.

Homeowners thinking of selling but afraid to do so because of (a) greed (our house keeps going up) and (b) fear (but where will we move?) will probably wait until they hear about the correction in the local media. Too late then. And for every scary report (like this blog post) there’s another one published by the mortgage brokers, Re/Max, the credit unions or Royal LePage saying no bubble exists and all’s good.

You’ll have to make up your own mind on this. If you decide to dial back on real estate for a while, seeking balance, expect to be lonely. Just remember nobody was ever crushed for bailing too early. Too late is another matter.

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August 1st, 2016

Posted In: The Greater Fool

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