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February 2, 2017 | Money for Nothing

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.

This week we talked about the tale of two markets, one dribbling away like a Boomer’s bladder, the other frothing over. Given the increasing weirdness of our Trumpian times, and the renaissance of that evil Border Adjustment Tax, the greater fools still competing for pieces of GTA turf may soon regret it. Maybe not. But they’re sure paying through the nose.

Here’s a small example of what happens at the intersection of stupidity and greed.

If you asked the 1970s to come back and visit you, they’d arrive inside 16 Parmalea, in a soul-sucking geriatric suburb on the western edge of 416. Sitting under a flightpath to the sprawling Pearson airport a couple of clicks to the west, Parmalea is one of those curvy little crescents that now-dead urban planners thought were such a good idea. Homogenity gone nuts. Houses with all the unique character and intrigue of a Dodge Caravan.

But, hey, some people like living here – enough, obviously, that an unrenovated home can sell for over-asking, get flipped, and sell again in a second bidding war. Nothing spectacular. No media coverage. Just a wee example of social dementia.

“The realtor who helped us purchase our home sent over something interesting” blog dog Rob reports. “A house in our area was listed in the summer for $799,888 and sold for $960,000.

“It seems as though it was purchased by a numbered company.”

Indeed. Here’s the ‘sold’ listing.

Rob continues. “It was placed on the market a few weeks ago at $999,888 and just sold for $1,200,000.. Looking at the pictures, absolutely no work was done and seven months later it sells for a 25% premium? This seems to be a bit ridiculous, wouldn’t you agree? It seems as though we are entering or have entered the euphoric stage.”

You betcha, Rob. And here’s the second ‘sold’ listing.

So the journey from $800,000, which seems like a lot for a house that needs two hundred in fixes, to $1.2 million took but a few months and involved no effort. But just contemplate how much money circulated. The city made a total of $70,800 in land transfer tax. Lawyers took at least five grand from two transactions. Real estate agents and their brokers charged $108,000. There was almost $20,000 in HST collected. Plus mortgage appraisals, application fees, insurance premiums and amortized interest. So a house that did nothing but sit there had more than $200,000 spent on it with no improvements or renos done.

This is the FIRE (finance, insurance, real estate) economy at work. Some think it’s exactly why we’re screwed. Nothing was manufactured. No good produced. No job created. Just more inflation, over-valuation and manufactured equity – all supported by increased levels of debt.

This worries economists even more than their pathetic personalities. Real estate and financial services make up a stunning 20% of the country’s entire GDP. Worse, at $2 trillion, household debt now exceeds the economy in total, with 65% of that sitting in mortgages. Residential construction alone is 7% of all economic activity (about the same as oil and gas) with the house-selling business accounting for 12.4%

In fact, the biggest contributor to Canadian growth since the price of oil started to tumble a few years ago has been real estate. This is the single biggest component of our national enterprise. Bigger than the oil sands. All the car companies. All the factories. There are more than 110,000 realtors. If you laid them all end-to-end, it would be a good start.

The risk is clear. The stakes are high. If Toronto catches what Vancouver has, we’re in for an historic ride.

Meanwhile, at 16 Parmalea, there’s a shiny new family. They’d better like it.

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February 2nd, 2017

Posted In: The Greater Fool

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