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March 15, 2017 | Choices

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.

Another newsy day. Another bold GreaterFool prediction nailed. If this blog were only humble, it would be, well, less pathetic. But first to Laura, our daily example of why people blow themselves up.

“Hi Garth,” she says, then sucks up for a while (it’s now mandatory). Turns out L’s married, 30ish, baby, some money in RSPs and TFSAs and a $200,000 mortgage on a little, geriatric Van house (“my husband bought it before the craziness”) now worth $1.6 million – “land value only.”

“I know what you probably want us to do,” Laura adds, “sell the house and run – but it’s too convenient for work, babysitting, rental suite etc. Eventually (5 – 10 years) we will have to tear down/build or gut/renovate or sell/buy once our family grows as the house isn’t ideal. My question: We were gifted $100,000. Do you suggest we plunk some onto the remaining mortgage balance or invest otherwise?”

As I sped down the 401 in semi-autonomous mode, I texted:

Why would you plow even more money into a bloated real estate asset?
Yes, and you are insane not to sell.

Laura was not intimidated, or impressed. “Thanks a lot for your response. I know, I know…a million and half in the bank, we’re crazy not to sell. But we’ve been saying prices are crazy since it was at $700,000 and rental prices are insane. Is there any end in sight?” And she ended it with a big smiley emotithingy.

Of course Laura & hubs are gambling by not selling. They risk leaving the biggest capital gains tax-free windfall of their lives sitting on the table, suffering from that recency bias we delved into days ago. They believe prices will go up simply because they have gone up – even knowing the market has detached from the economy.

In this case the house is a piece of junk which L admits will never be their forever home. Plus they have a dude living in the basement. So why hang on and risk a market correction that cost them hundreds of thousands? “It’s too convenient.”

Life’s all about choices. Making them is easy. Living with them, not so much.

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So the Fed raised its key rate on Wednesday, as we told you it would. The American central bankers also said they plan two more in 2017, which will take the level to about 1.5%, or a full point above the Bank of Canada’s. Stock markets did not tank in reaction, but spiked higher, with a triple-digit advance for the Dow. Why? Because higher rates only come with economic expansion, growth and the potential for more inflation – which also means fatter corporate profits.

As written here a few times, this is the end of deflation, negative rates and cheap money. Interest rates will be normalizing over the course of a few years, with the expectation of six or seven increases in the next 20 months. The US economy is moving forward with virtual full employment. Global growth is in the 3% range. China has bucked up. The deplorables look like they’re losing the Dutch election. Even the European Central Bank is talking about backing off on its policy of papering over everything with money.

Laura’s house may go to $1.8 million. Nobody knows. But it could also slide as rates increase and Canadians climb to reach new pinnacles of personal indebtedness. The odds of a correction now outweigh the likelihood of an advance. It’s just a matter of time…

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…and bank economist Robert Kavcic says he knows. Two years. The BeeMo egghead states that’s how long it’ll take our bubble markets (Toronto, particularly) to retrace the path of 1989 when boom turned to bust.

“At the rate we’re now going with 20-per-cent year-on-year price increases, assuming stable mortgage rates and continued income growth, we’ll be at 1989 valuation levels in about 24 months,” he told clients. In case you missed the historic post here on the Eighties Massacre, prices peaked, then crashed more than 30% and took over a dozen years to recover.

Kavcic’s analysis is based on unsustainable price increases and the growing amount of family income that’s being devoted to servicing mortgages. At the current pace, we get to the tipping point in 2019. But wait. That projection is based on today’s mortgage rates – with a fiver available in the 2.5% range – holding, which we can be certain won’t happen.

If you’re still reading this, Laura, we’ll end this post with a comment from a Simon Fraser U prof who’s just penned a paper on what comes next.

“When housing bubbles unwind, there is major collateral damage and people are hurt through little or no fault of their own. And the historical record is that they do unwind, essentially without fail.”

Choices, babe.

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March 15th, 2017

Posted In: The Greater Fool

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