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April 13, 2017 | Standard Deviation

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.

Minister Morneau to Discuss Toronto Housing With Ontario Finance Minister and Toronto Mayor

Minister of Finance Bill Morneau will hold a meeting with Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory to discuss the housing market in the Greater Toronto Area.
A media availability will follow the meeting at approximately 3:30 p.m.
Date and Time
2:30 p.m. (local time)
Tuesday, April 18
Artscape Wychwood Barns
Toronto, Ontario


And so, Maybe Week draws to a close here on GreaterFool, the blog your Mom wishes you’d never stumbled across. Maybe the bidding wars are over. Maybe people have finished borrowing more money than God. Maybe the politicians will diddle their way to real estate destruction. Maybe all the fools have bought. Maybe this is peak house. Maybe it’s already passed. Maybe not. Maybe this is no soft landing, but a pause before we go all #United Airlines.

As you can see from the media notice above, three levels of government are now in play over GTA house prices. The city’s mayor wants an Empty House Tax plus higher property taxes. The province wants a speculator tax, a foreign dudes tax and maybe even a capital gains tax. The feds want banks to shoulder more mortgage risk and further tighten lending. Meanwhile the Bank of Canada has set the stage for higher interest rates and 80% of house-owning moisters wish they didn’t.

This is not good if you bought a place in the last few months, at the highest level in the history of our beaver-loving nation. As detailed here over recent days, deals are falling apart, expected bidding wars fizzling, buyers getting cold feet and the insane expectations of greedy sellers being squished. All this at the same time as the latest sexy sales and price numbers have been trumpeted by the realtors, in a media blast they’ll likely come to regret.

It’s worth noting that this week the guy who sets most interest rates in Canada warned of what’s coming, with a special message for smug Big Smokers. “There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices, and so it’s that gap between what fundamentals could manage to explain and what’s actually happening which suggests that there is a growing role for speculation,” says central bank boss Stephen Poloz. “It’s time we remind folks that prices of houses can go down as well as up.”

And you gotta love this: “People need to ask themselves very carefully, ‘Why am I buying this house?”’

It’s all about risk. Your Mom (and others like her) think real estate has none of it, and always goes up. In fact they’d buy at any price. It’s irrelevant, since it’ll be higher in six months. This is the very essence of speculation, turning so many of your friends, relatives and co-workers into asset gamblers. Only a specker would buy a house for $1.6 million that last changed hands two years ago for half the price.

Poloz says the speculation today in markets like Toronto and Vancouver is “unsustainable.” It’s divorced from economic fundamentals and, surely as Conservatives follow Liberals, will correct back towards the mean.

Whazzat mean? The chart below is from the nerds at Bloomberg, showing Toronto’s market has achieved a standard deviation of +4. This is like having 18 beer then playing with your chainsaw. In your underwear. SD is a measure of risk and volatility, basically telling you how far an asset has strayed from the mean. So, it’s risk. Historically, housing has risen by about 5% annually and since 2015 has been out of control.

Source: Bloomberg. Click to enlarge.

Poloz, the man who so far has refused to raise rates and temper this madness, now asks simply, “What would you do if there was a correction? When something has been rising that quickly, of course, it’s vulnerable to a correction.”

And maybe this is it. We’ll only know later.

Remember, real estate is a helpful asset class. It makes sense to own some, so long as it’s affordable, useful and doesn’t represent too much of your net worth. But a house is not a financial strategy, not a retirement plan and no substitute for a growing financial portfolio. If you made a windfall gain on your property, this is the time to harvest it. If you own no land, this is not the time to seek it.

Trust me, there are better things to covet.

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April 13th, 2017

Posted In: The Greater Fool

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