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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

August 17, 2016 | The Snorflers

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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Sad people with empty lives and no friends, who read this drivel daily, will know Kelvin. He’s the dude with the hot, young wife and sexy new accounting job (they get all the babes) in San Francisco, featured here yesterday.

But this is not about him. It’s about bubbles, foreigners and urban myths. Plus, San Fran. If you haven’t been there, go. A memorable place, now one of the globe’s coolest cities since it’s a hotbed of technological innovation, a magnet for the best minds of a generation. With a spooky, deserted prison in the middle of the bay. And very expensive houses.

People in Vancouver like to compare their city to this one, and maybe they should. Like YVR, northern California attracts foreign investors who often shovel money into residential real estate. Last year 16% of all house sales in the area went to foreigners, which is roughly double the number in Vancouver.

So why did Frisco house prices increase by only 10% in 2015 and just 5% over the past 12 month period? Howcum there’s a puny 0.8% appreciation expected in the next year? Meanwhile Vancouver prices bloated by an astonishing 32% – with everyone is blaming those damn foreigners.

Hmm, or how about Miami? Chinese dudes there, too. Almost a quarter of all sales in Florida last year went to offshore buyers, yet Miami house prices rose by only 7%. So why is it, with far fewer foreign dollars flowing into YVR or the GTA than major US cities, we have gasbag markets, rampant house horniness and excessive price increases? Could it (gasp) be us?

You betcha, says a new report from UK-based Capital Economics. Canadians are basically nuts. “We are sceptical of claims that Canada’s housing bubble is primarily due to foreign investors. Blaming foreigners for a country’s problems has always been a handy fall-back for politicians; whether it’s a lack of jobs, crime or, in this case, housing affordability. This is mainly a home-grown problem caused by low interest rates and irresponsible lending.”

Does any of this sound vaguely familiar? It should. With fewer than 10% of sales in YVR going to non-residents, it means over 90% of trades are local-to-local. So how can prices jump exponentially when the economy is sucking air and household incomes are stagnant? Does this “prove” that a river of foreign money is forcing house prices beyond the means of native Canadians – who now cast themselves as victims?

Nope. Forget that, says Capital Economics. This advancing train wreck has been gassed with debt.

As detailed here in recent months, borrowers in Toronto and Vancouver have been snorfling mortgage money as never before, convinced they can borrow endless amounts because (of course) real estate always goes up. Four in 10 mortgages in Toronto are carried by people with debt equal to 450% or more of their incomes, with a third of Vancouver homeowners in the same leaky boat.

But it gets worse.

Says the firm: “We’re reliably informed that the mortgages in Toronto now stretch to 600% of combined gross income. So two people both earning $100,000 gross can borrow $1,200,000. What has really changed in the past 12 months is not a big increase in foreign buyers, but a further decline in interest rates, which has allowed lenders to relax lending standards even further.”

Never before have houses cost this much. Never before have people owed this much. The negative correlation between interest rates and household debt is almost perfect. Now that the economy’s swampy, jobs are being lost, trade is down and taxes are up, it’s starting to come unravelled, as this pathetic blog has been documenting with the regularity of a manic golden retriever. Detached sales are falling, listings are edging higher and the sales/list ratio has eroded.

This week CREA admitted home sales have now declined three times in three months. (In Calgary the score is 20 out of 20.) Nationally, house sales fell last month at an annualized rate of more than 15%, with negative numbers also compared to this time last year. Despite this drop in activity, prices keep rising – the Canadian average was 9.9% higher over 12 months, with the realtor Frankenumber up more than 14%. As you know, Toronto added 16% and YVR popped by 32%. Hard to see this as anything other than the final spurt before the inevitable slump.

So if you accept the argument that insane housing valuations were caused by locals now hitting a debt and income wall, you know we’re probably in for a pooching. If, on the other hand, you believe foreigners have single-handedly shoved prices into orbit, then the collapse in deals following BC’s Chinese Dudes tax suggests the same outcome. Either way, it’s over.

Kelvin dodged a bullet.

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August 17th, 2016

Posted In: The Greater Fool

One Comment

  • Avatar holly hallston says:

    Good one Garth; keep pounding the Kool Aide drinking flunkies until they wake up. We’ve got our own bubble bursting in the Florida condo market, especially around the Miami area. I was there a year and a half ago when it was a forest of cranes. John Mauldin has an excellent article on the bust which is shortly scheduled to become a rout rivaling the 2007-2008 debacle. GTA and YVR prospectors should take a serious gander at that piece since it’s a showcase for what’s in their pipeline; crash and burn. Ya see Garth, mass stupidity isn’t just a Vancouver/Toronto problem. By the way, a vote for Clinton may keep the bankers and Wall Street happy, but Main Street and the citizen will get the reaming of the century from that crook. Or maybe you think the T2 way is best, eh?

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