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October 27, 2016 | ‘Problematic Conditions’

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.


What are the odds markets give that Canadian interest rates could be cut next year? Right now, about 25%. And the odds they might increase? 0%.

Don’t mistake this for good news. It isn’t. The States is poised (according to Fed officials) for a rate increase in six weeks, then two more in 2017. If our central bank doesn’t follow suit, or drops its key rate a quarter point to just 0.25%, then you can count on three things. (a) Lots of inflation and $8 cauliflower. (b) A dollar worth something with a ‘6’ in front of it. (c) Cheaper houses.

The last point may be a surprise. After all, house prices and mortgage rates are negatively correlated. People can’t really afford real estate today because central banks have driven rates into the ditch. But there comes a point (we’re there) at which rates don’t matter anymore because debt and borrowing capacity have maxed out. Veteran analyst Will Dunning made that point clearly in the weighty report I referenced yesterday. If the Bank of Canada cuts again, we’re all in the soup.

And, dammit, looks like that could happen.

First, there’s a good chance Wild Bill overreached. At least that’s an opinion gaining ground in the last few days among realtors (natch) and mortgage brokers (of course), and also a growing number of economists. By forcing all moisters to take a stress test based on a 4.64% rate, while contract rates are half that, Morneau is drastically reducing the amount they qualify to borrow, or throwing up to 20% of them out of the market entirely. Additionally, no more mortgage insurance for commission guys, self-employed dudes, landlords or people wanting 30-year amortizations. Plus now you must prove tax-free status on the sale of your home, and lenders will soon have to finance a portion of loan losses.

Maybe all those are good things, long overdue, and correct a spate of boners that should never have happened, but it’s a helluva lot to throw at a market at once. Especially (as we showed here yesterday) one that was already starting to roll over, like Vancouver. If Dunning’s right, most secondary markets which were relatively balanced (Halifax, Montreal, Winnipeg or Saskabush) will slide into decline. YVR, of course, is pooched. In six months we might have only one bubbly little gasbag left, if at all.

The big problem is that our eight-year infatuation with house porn, the W network, Brad Lamb, Bob Rennie and the former underwear models who host Property Brothers, has resulted in an unhealthy hunk of the entire economy being dependent on real estate. More than manufacturing. More than oil and gas. All based on a national hormonal imbalance.

This week Bloomberg asked prominent economists to come up with the scariest charts they could think of. Below is the contribution of TD’s Brian DePratto, illustrating exactly the point this pathetic blag has been making for years. We have a condo economy.

Real estate share of output near record high


Click to enlarge

“Canadians seem to love housing, with real estate near its highest-ever share of the economy (although the history is quite short),” he says. “With new measures to cool the housing market in play, it can be scary to think what might happen if Canada were to lose this driver of growth.”

So, Morneau’s measures are estimated to reduce housing activity over the next 12 months by 20%, cost 50,000 construction jobs and – if prices decline by 10% or 15% – reduce Canadian personal net worth by billions. The impact on consumer spending would be measureable, since we have $1.3 trillion in mortgage debt and the ‘wealth effect’ of rising real estate would be kaput. If the meme changes from ‘buy now or be forever priced out’ to ‘houses are toxic,’ then we’ll have a recession on our hands.

Will Wild Bill talk about this Tuesday afternoon when he stands in the House of Commons, winks at the pages, and delivers his economic statement?

Nah, don’t count on it. The consequences of his October 3rd manifesto are as yet unknown, except in Vancouver where it’s turned a correction into a rout. Months will be needed to ascertain how deeply his actions have carved into market activity, how buyers and sellers will react, how swiftly prices moderate, and the toll this suite of reforms will have on the overall economy. Meanwhile the US recovery will continue, monetary policy there normalize, and the gulf between our two countries widen. If you don’t have a nice little pile of US-denominated assets in your portfolio, fix that.

So, in conclusion, lighten up on moose, beaver and maple. Be twice as invested in US and international assets. Keep 20% of so of your liquid net worth in greenbacks. Go short on your bonds but avoid bonding with your shorts. Don’t run to cash, since our dollar’s wobbly and inflation accelerating. Seek balance, as more volatility seems certain. And if you’ve made a fat capital gain on your house, take it.

Remember what the CMHC dudes said this week: “We now see strong evidence of problematic conditions overall nationally. Home prices have risen ahead of economic fundamentals such as personal disposable income and population growth, resulting in overvaluation in many Canadian housing markets.”

No kidding. And not for long.

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October 27th, 2016

Posted In: The Greater Fool

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