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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 23, 2017 | The Finale

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.

All you need to know about how Toronto real estate happened last Saturday. Fifteen thousand people packed a tacky seminar on how to get rich buying property. Yes, in Toronto – now one of the most inflated, bubbly, frothy, horny housing markets on the planet, where prices rose 27% in a year and, according to Tony Robbins, they can never go down.

Robbins, of course, is a motivational speaker who knows diddly about Toronto real estate. The same with some dude named Pitbull. He spoke, too. And the kid realtor who hosts “Love it or List It” in Vancouver. But Brad Lamb was there, the condo flogger who finds math so challenging. And did I mention there were 15,000 others? They all paid between $50 and $150 for a seat, so the organizers made millions – which went to Robbins, the doggy guy et al.

The event was a ‘real estate wealth expo’, not aimed at helping people buy a home to live in, but full of encouragement to borrow massively and – as soon as possible – grab real estate as an investment. No money down. Rent it out. Watch it soar. How hard can that be?

There comes a time in the life of every bubble, usually near death, when the fools pile in at the moment of peak euphoria. History is rife with examples. The pattern is as ancient and reliable as human nature. Now, in Toronto, this is that instant. When speakers make big bucks telling you to do something, rather than doing it themselves, it’s time to go home. That’s now. When everyone is clamouring to buy the same asset, as they did with Nortel stock seventeen years ago, sell.

But let’s not just trust history. Instead, hard evidence. Facts, numbers, stats. For some, we turn to John Pasalis, a fixture on the Canadian real estate scene, and head of an outfit called Realosophy Realty. The thing that differentiates JP from the normal realtor is perspective and (dare I say it?) integrity. Very truthy dude.

Anyway, he has just released a large, indepth and highly interesting paper called “Freeholds on Fire: how Investor Demand for House is driving up Prices in the GTA.” The conclusion is simple. It’s not Chinese industrialists. It’s not moist Millennials. It’s not even the Bank of Mom or rapacious lenders at the heart of the current delusion – but Tony Robbins-inspired losers gobbling up every listing that materializes.

And why are they losers? Because, as Pasalis found, 95% of them are cash-flow negative. In other words, almost all of these ‘investors’ are bleeding money monthly. If the price appreciation stops (and it will), they will truly qualify as the GTA’s greater fools.

Here is the report’s summery page:

Lack of government data and competing explanations for Toronto’s skyrocketing real estate prices have resulted in uncertainty about whether the market is becoming unstable. Using an innovative method of measuring investor demand which looks at the number of houses being bought and immediately rented out, Realosophy’s John Pasalis finds evidence of speculative activity across the Greater Toronto Area, specifically:

  • These investors are responsible for 17-21% of all sales in Aurora, Newmarket and Richmond Hill and 36-39% of all sales in some of the GTA’s hottest neighbourhoods.
  • Whitby, Ajax and Oshawa all saw the steepest increase in sales to investors of over 400% in just 4 years.
  • An estimated 95% of all investment properties purchased in 2016 are losing money every month.
  • This subset of investors in the GTA real estate market alone accounted for 10% of all sales; all investors could be responsible for as much as 25%-30% of all sales. This behaviour, emblematic of bubble markets according to leading economists, not only prices out regular buyers, but eventually risks a market correction affecting all property owners. Regular buyers and sellers are advised to be aware of what Greater Toronto Area neighbourhoods are showing the greatest signs of speculation when making real estate decisions. Governments are called to implement the right measures to address the problems suggested by the data. Most notably, lenders currently underwrite mortgages for residential investment properties as if they are owner occupied homes, resulting in a loophole that allows buyers to finance money losing investment properties largely with debt; these loopholes should be closed by tightening lending practices.

In the past, this blog has pointed out that 52% of all condo purchases are currently being made by speculators, not owners. Virtually every one of those units will end up hitting the rental market unable to provide a positive rate of return for the investor. Even with 2.5% mortgages available, after financing charges, property tax, condo fees, insurance and the lost investing power of the downpayment, it is impossible to make money as a condo landlord. The situation is even more dire with detached houses or rental semis – now costing seven figures. Negative cash flow, with everyone gambling that prices will continue to inflate. As the Realosophy boss concludes, this is the reason a boom became a bubble, and will end in a bust.

What can be done?

The Ontario government asked the feds to impose a higher capital gains tax on spec real estate. They didn’t. So now it’s up to the provincial guys to levy a speculation tax on non-principal residence holdings – if they have the courage. Meanwhile the CRA is routinely forcing speckers to include real estate gains in their taxable income, not allowing the 50% capital gains tax exemption, because they consider speculation to be a business. Finally, as JP suggests, bankers should stop lecturing people about how risky real estate now is, and do something about it.

In any case, it’s only a matter of time. Fifteen thousand sweaty investors sealed it.

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March 23rd, 2017

Posted In: The Greater Fool

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