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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

January 22, 2017 | Lambs

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.

They paid $1.7 million for it seven months ago. Now listed for $1.899 million. Both are big numbers for a property that, wall-to-wall, is twelve feet wide. At the Sunday open house there were three couples and a realtor present at the same time. It was jammed. Prospective buyers had to turn sideways and squish their noses on the exquisite wallcoverings to let another pass.

The economics of mid-town Toronto real estate underscore a market that’s lost its way. To afford this micro slice of designer bliss a buyer would need 20% down – about $400,000 – pay another $68,200 in non-refundable land transfer tax, then assume a $1.52 million mortgage with monthly payments of $7,000 a month (or almost $8,000 with property taxes and insurance included). That would require an income of close to $300,000. The bank interest alone totals $3,300 a month.

Yes, another GreaterFool field trip into the wilds of Canada’s biggest real estate market and, now that Vancouver is cooling faster than Donald Trump’s credibility (“I attracted more people than Obama. And probably Jesus. Honest…”), the frothiest in North America. As explained last week, the fact there’s just a 20-day supply of houses for sale in a region bursting with six million people explains a lot. It guarantees prices this spring will rise even as sales start to crumble – exactly the scenario Vancouver faced last summer before the lights went out.

Meanwhile the list of negatives continues to extend. Yes, we have a slow economy, historic debt, stagnant incomes, spendy politicians, rising taxes and now a goofy US president to contend with. That will bring higher interest rates and trade problems. The Bank of Canada is worried (we heard that last week). The T2 gang is freaked out (hence the Trump-ready cabinet shuffle in Ottawa). But Toronto buyers bravely keep buying – as with the 23% premium paid for the dodgy digs I featured seven days ago.

Now, to be fair, houses listed and selling for $1.5 million and more are not the norm. The average detached 416 property commands $1.286 million and in 905, where the drywallers live, it’s just $934,000. The average price across the GTA (condos included) is $730,000, which is 17% higher than a year earlier.

As always, then, first-time buyers are essential to keep the real estate fires burning. Without those sacrificial lambs there would be no move-up buyers on the property ladder, leading to the ultimate accomplishment of paying almost $2 million for a house narrower than your car. But the obstacles being thrown in the path of the newbies are piling up – stuff like the stress test which about 40% of the kids say will keep them sidelined.

Things just got a little worse, too. For the third time in three years, mortgage insurance premiums are going up. A lot. In some cases, doubling. Ouch.

Source: Canadian Mortgage Trends

Mortgage insurance is required (by law) for anyone buying a property with less than 20% down. For listings over $1 million, it’s not available, but for places selling under that amount buyers can get into ownership with as little as 5% down – only if they buy the insurance. You can see how much of an impact this could have on the entire market. Moisters buying after mid-March with just 5% down will have to finance a significant premium equal to 4% of the amount mortgaged – typically added to the principal, amortized over 25 years, and thereby suitably bloated.

But what’s interesting about the premium hike, initiated by CHMC and followed by Genworth, is that people with big down payments – up to 20% – are seeing their premiums almost doubled. Mortgage brokers warn this will inflate interest rates charged by major lenders who routinely sell the conventional mortgages (20% down) by securitizing them, and paying the premium themselves to do so.

Add to this the additional overhead Ottawa is forcing on lenders later this year when it starts reducing CMHC loan exposure and making the banks foot part of the cost. And all of it will happen as the Fed is expected to hike rates, once in March and again in June (unless the Trumpster blows up), pushing bond yields higher and taking fixed-rate mortgages along for the ride.

In short, there’s no economic or financial reason why house prices should rise. There are many why they should fall. But I give up. What’s logic got to do with it?

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January 22nd, 2017

Posted In: The Greater Fool

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