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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 25, 2017 | Rexit

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.

 

Imagine buying a house worth $1.5 million to $2 million in 15 minutes. Without seeing it. Not built yet. And the deal’s firm. No second thoughts. No backing out or cooling off. No conditions, No second-guessing.

Come early. Line up for a couple hours with a few hundred strangers. No bathroom. Feel stressed and competitive. Bring at least five personal cheques for deposits. Plus photo ID. And you’d better be pre-qualified for a mortgage, or have bundles of cash. Because – did I mention? – there are no conditions. You sign it. You bought it. Thirty-eight-foot lot. Move-in date is two years out. Maybe.

Such is the reality for new-house buyers in the GTA. Yes, it’s insane, illogical, demeaning and fraught with risk. But the three builders who will unleash this madness on the morning of Saturday, May 13th know that supplicants will camp out overnight and the new ‘Impressions in the Village of Kleinberg’ will sell out in a day. Maybe two.

K village, by the way, is about 50 km from downtown Toronto, and the drive takes between one hour (good day) and 90 minutes (regular day) in traffic which can best be described as lethal. Also, to carry a $2 million house requires a minimum downpayment of $450,000 and an income of $260,000 – and that’s with the lowest mortgage rates ever, around 2.5% for a fixed-rate loan.

 

No sane person, even a rich one, would agree to buy a major property under such conditions. And yet purchasers believe the moment they walk out and climb into their CLA or E-class that they’ve just made money. Appreciation is relentless, unstoppable, expected and a mandate from God. After all, the price romp in that hood has exceeded even the shacks down the road in urban 416, as speculative buying has exploded in the exurbs and hinterland where cows, groundhogs and rustic rednecks in F150s were driven from their natural habitat.

This is why residential real estate is assuming more and more and more of Canada’s overall GDP. Actually, it’s scary. The entire economy is worth about $2.07 trillion, and personal debt (two-thirds of it mortgages) is now at $2.08 trillion. Never happened before. Residential real estate accounts for half of all economic growth, as we busily sell each other houses. At 13.2% of the GDP housing exceeds all manufacturing (10.5%), oil & gas (8%) and even the banks (7%). And yet it’s held together with the gossamer threads of emotion and confidence, and reinforced with the duct tape of cheap money.

We’re more dependent on housing than was the US before the real estate crash that peeled 32% off valuations. Before California’s property plunge, taking the state (larger than Canada) to the brink of bankruptcy. Canadians carry more debt than Americans did at the height of the Ninja mortgage, use-your-house-as-an-ATM madness of 2005-6. With each passing day the overall risk to the economy grows, since the housing boom cannot last. When half the growth is related to real estate (there are 48,000 realtors in the GTA alone and 110,000 in Canada) any reversal in this industry is serious stuff. And it all runs on hormones.

Needless to say, the threats are growing. Governments are seeking ways of ‘cooling off’ the market and, if they succeed, the landing will not be soft. US tax cuts (announcement Wednesday) will help expand the US, drive interest rates higher and increase mortgages here. The protectionist poop just thrown at our lumber industry by the Trump White House could be a harbinger or what’s yet to come – an assault on dairy or the gutting of NAFTA. Our dollar has gone into reverse, stoking inflation (thank goodness fresh cauliflower season’s at hand). And our main export, oil, is at the mercy of US overproduction. Wage growth is stagnant. Nik Nanos (I told you yesterday) finds a third of people say their finances are deteriorating. So all of housing’s gains are coming on the back of fresh debt.

Just as sane people do not spend $2 million on the strength of a salesman and a brochure in a few minutes, smart folks who have scored windfall gains in an unprecedented housing mania should seriously consider rexit. Nobody ever was destroyed by selling too soon. Millions have seen it happen by getting out too late.

See you on the 13th.  Historic.

Like watching the last bison go over the edge.

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April 25th, 2017

Posted In: The Greater Fool

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