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March 3, 2017 | This Blog Has Ruined Me

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.

On the same day the Fed confirmed rates will rise in 12 days – and keep rising – came historic news from the Big Smoke. The average detached in 416 has crossed $1.5 million for the first time and jumped to a record million in the minivan-infested, desperate housewives-riddled burbs.

In the space of a year, detached prices are up 32% in the city and 35% in 905. At $1.11 million the latter pool of boring houses with garages stuck on their snouts is now the fastest-rising kind of property. Never before has this level of frenzy occurred. Not even back in 1989, when the market frothed and foamed, before prices collapsed 32% and took 14 years to recover.

This is worrying a lot of people. Bank CEOs, economists, ratings agencies, financial managers and politicians. When inflation is 2% and wages gain 1%, houses cannot rise by 30% – at least for long. And now we know the interest rate environment will be changing for the next few years – taking mortgages along with the ride – it’s all a little scary.

Every listing has a bidding war, and the examples of over-paying are growing grotesque. As prices rise, listings shrink since moving becomes an impossibility for most. The market, as a whole, is in the process of seizing up – unbalanced, unhealthy, unstable and having a completely weird impact on people.

“Let me tell you about the hysteria over a unit in my building (Front and Jarvis),” says Robert. “It’s a 1 + 1 and listed at $369,000

“Spoke to a realtor and heard there been 85 showings and will go over $500,000. I see people in the lobby after work all stressed out and worried as they wait to go see the unit. Most of the people I pass by have a parent with them, maybe 50-60%….anyways I can’t imagine how stressful it is to chase the dream (using term loosely). Apparently the owner isn’t taking offers until the 7th….if my online brokerage told me to wait a few days to buy an ETF Id shut the account down faster than you can say “Smoking Man”.

“The unit is not that nice, realtor says this market doesn’t make sense anymore. People seem to “want” a place to call their own and are willing to do whatever they can to ‘get in.’”

When humans start behaving differently, so will markets. And we’re not there yet. The higher prices go and the keener the competition for scarce listings, the more obsessed people become. The more they want what’s rising in price – even to absurd levels. The more greed they feel. The greater the regret for not having bought previously, even if they could not have afforded it. This is the euphoric, panic-buying stage when no amount of logic or caution will turn off pure desire or the fear of missing out.

The outcome of all this is known. Every boom has ended in a bust. No asset has risen without end. It’s never different this time.

But between now and the end, emotion and recrimination are flowing.

My comment yesterday that nobody should expect Canadian property markets to “crash and burn” upset many of the sensitive souls who wander in here for a beverage and a tummy rub. This is exactly what they crave, believing that when Garth Turner admits there’ll be no financial collapse, prices must be ready to rise forever. So cute. And it’s interesting some people have evolved from blaming only Chinese dudes for houses nobody can afford to also including this pathetic blog.

“Indeed, I am one of the greatest fools for following you for ten years,” says a brave anon poster. “I am completely priced out of the YVR market and now its outlying municipalities, all you can offer me now is to invest my saved home down payment in the markets for a return that won’t catch me up to the prices of real estate locally. You’re a real Canadian disappointment Garth. You had your loyal flock sit back and wait while the immigrants moved in and pushed us out. This blog has ruined me.”

Here are a few thoughts, ruined one. The basic message here has always been balance and diversification. Buy what you can afford. Keep debt under control. Don’t put all your net worth in a single thing. Dial back risk. The goal of life is not a house, but the enjoyment of time – which money sure helps. And there’s absolutely nothing shameful about renting. Your mom is wrong.

Finally, my view that a correction always replaces a boom is unchanged. It will happen again. A ‘correction,’ by the way, is a price decline of 5% to 15% over the course of a few months. A crash (which is quite possible) is a price/sales drop of 20% or more, also over a half-dozen months. A ‘crash-and-burn’ is a reduction in prices of at least 30% and up to 50%, resulting in serious economic dislocation. A melt, by comparison, is when markets level out, correct, then erode over a period of at least three years. The result (prices down 30% or more) is as severe as a crash, but gets there with serious foreplay.

The latter is most likely, as we shift into an era of rising interest rates, US protectionism and massive household and public debt.

This blog has no idea exactly what’s coming. But it’s got hair on it.

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March 3rd, 2017

Posted In: The Greater Fool

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