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January 27, 2017 | The Mess

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.

Over the last few weeks this pathetic but addictive blog has tried to warn the nation. The nation ignored it. There are now multiple offers being made on houses all the way from Lunenburg (seriously) to the dodgiest streets of Toronto, through the windswept grape fields of Niagara, the smoke of Hamilton right into the thirsty underwear regions of Victoria.

Almost everywhere, there’s limited supply – but still-cheap mortgages and buckets of house lust keep people buying. Yes, many markets are materially slower than they used to be, but prices have not corrected as one would expect. For every smart seller grabbing windfall gains there for four drooling greater fools with fat pre-approvals waiting to buy. In all of the GTA, for example, list prices are mere suggestions at where the opening bid should be placed.

The yellow flags, meanwhile, are everywhere. Debt is rampant. CMHC this week warned of seriously overvalued markets. The Bank of Canada’s freaked enough to consider another rate cut. The feds are apparently readying more measures to douse the fire. And it’s starting to look like everything done to date – higher downs, the moister stress test, lender restrictions, bigger mortgage insurance premiums – ain’t working.

Real estate’s a disease. Never more costly, it’s the opiate of the masses walking into historic levels of long-term borrowing even as a unpredictable, mercurial bully moves into the White House. Do people not know this could raise interest rates, whack the economy or jack the jobless rate? Probably not. And they don’t care.

Well, it’s not just me trying to save people from themselves. Analyst Jason Bilodeau, of Macquarie Research, is also warning of a train wreck in the making, and has just issued a report to let people know “what a real housing correction looks like.” Unlike what most Canadians believe, when real estate makes that fateful adjustment it will be neither shall nor short. Past corrections, Bilodeau found, have ranged from 5% to more than 25%. “But this time will be different,” he says, “and we mean worse.”

I thought you might be interested in Macquarie’s summary. Print this. Leave it on your daughter’s pillow.

“We maintain our view that there will be a material moderation in Canadian housing activity in 2017. We expect slower domestic Personal Loan growth to reflect a material moderation in domestic housing activity including lower new home construction, lower sales activity and moderating/declining pricing.

“The risks of a more severe outcome have risen in our view. Concerns reflect 1) a housing market which is overstretched by many measures 2) increased regulatory interference aimed at cooling the market place and 3) evidence of suggesting a correction is now underway in select markets.

A 25% drop would seem probable (US crash was 32%)

“History suggests that such a correction could be severe. We have studied several previous housing corrections in Canada dating back to the 1970s. Regional Price corrections have ranged from 5-10% to as much as 25%+. By some estimates, it would take correction of 15% to 30%+ on average in current house prices to return to trend levels.  During prior housing corrections, bank stocks have declined on the order of 20-25%.

“But this time could be different…and we mean worse. HH leverage is at all-time record highs, the recent pace of price appreciation is nearly unprecedented, housing is more important to the economy than it has ever been and fiscal policy is already highly accommodative.

Compared to incomes, prices are unsustainable

“If a housing correction unfolds, we believe that there is likely to be material downside to the current operating outlook for domestic lenders. We considered lower levels of personal loan growth and higher levels of credit losses. Based only on first order impacts, 2017/2018 estimates could be lower by 5% to as much 15-20%. We would expect actual results to be worse when compounding factors are considered.

“We are downgrading CIBC, MIC and HCG from Neutral to Underperform to reflect our growing concerns regarding the domestic outlook. As the risks regarding the domestic economy rise in our view, we want to further reduce our exposure to domestic banking, Canadian Housing and the Canadian consumer. Notwithstanding their discounted multiples, we believe CM, MIC, and HCG offer the greatest exposure in our coverage universe to the risk of further deteriorating domestic conditions. TD Bank remains our only Outperform rated name.”

Look familiar? Canada on the same pre-crash path as US

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January 27th, 2017

Posted In: The Greater Fool

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