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July 6, 2017 | The Perfect Storm

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.

 

The perfect storm. It’s here. A little later than anticipated, but as forecast

The nation’s largest real estate market is in the midst of a disorderly unwinding. It could be a soft landing, but that’s seriously in doubt now. There are just too many factors conspiring to bring this Icarus back to earth in a shower of debris.

The latest? Mortgage rate increases. TD added a few beeps last night and the Royal Bank went full bore on Thursday, upping the cost of two-, three- and five-year home loans. Remember – these are fixed-rate loans that only move with the general interest rate environment, not variable-rate mortgages immediately affected by the Bank of Canada.

That little shock comes Wednesday  when the prime rate pops along with the cost of HELOCs, personal lines of credit, business loans, consumer loans, car loans and credit card balances. The current odds of this happening are 90%, which means you can stop pretending it’s different this time.

But it gets worse. The bank regulator, OFSI, this week brought down the hammer on houses selling for more than $1 million. In a few months borrowers who have over 20% to put down (required for seven-figure houses) must pass a mortgage stress test – just like people applying for loans covered by CMHC. So, if you can’t qualify for payments at a withering 2% above the current rate, no loan. In a lateral move, the regulator is also tightening up on the practice of bundling mortgages which sub-prime guys like Home Capital do to avoid the cost of mortgage insurance.

Meanwhile, the market is shredding.

Single-family home sales in June in the vast GTA plunged 45% as owners deluged the market with listings, buyers recoiled and prices started to limp. There are 60% more listings to choose from than a year ago – when the market was in the grips of bidding wars, fevered speculation and romping valuations. Suddenly horny’s turned to scary. Without relentless month-over-month price gains, potential buyers realize an offer now will likely guarantee losses by the end of the year.

GTA house prices gave up 6% in May and another 8% in June. Says realtor blog dog Ron, with decades of experience: “Amazing. Price of a detached now down $125,694 from April high, that is 13.66% – a real equity eater! Curious to know where the market finds some support. Right now to borrow a phrase from your investment activities : Nobody with any brains wants to catch a falling knife”

The sales plunge was the steepest in almost a decade. Inventory is piling up with a vengeance. This is the worst market activity since January of 2009, when the world was sliding over the edge of the credit crisis cliff.

Are the Ontario government’s anti-bubble measures introduced in late April responsible? How about the onerous 15% foreign buyers’ speculation tax? Or Toronto’s banning of AirBnB exclusive-use condos? Higher mortgage rates, now materializing? Tighter lending conditions as bankers gird for a bust?

Well, all of it, and none of it. Any market in which prices detach from economic fundamentals is living on borrowed time. As this pathetic blog has chronicled in one boring, lethal post after another, price gains were unsubstantiated, fueled by hormones, house lust and sheer speculation and built on a foundation of cheap, plentiful but unrepayable debt. Given the gossamer quality of this gasbag, it didn’t take much to prick it.

What next?

With the rapidity of the bust, that’s impossible to gauge. We’re now into one of the slowest periods of the year for house deals, so the downturn is likely to be accentuated by lower volumes. Meanwhile interest rates will continue to rise, and listings increase. If prices can drop 14% in the last 60 days, they can sure do that again in the next two months. The decline would then approximate that which ate the US middle class – and took three years to roll out. The last time Toronto saw this kind of imploding market, the recovery period was 14 years. So, your guess is as good as mine. But so far this appears to be epic.

The winners, of course, are the greedy, voracious, genius sellers who found a greater fool in January, February or March. They sold at peak house and pocketed a fat tax-free capital gain. The losers are the purchasers who bought into the buy-now-or-buy-never FOMO nonsense that permeated the deplorable comment section, and may see their equity shrink below their mortgage. Add in closing costs – double land transfer tax, legals and some renos – and this could be one of life’s greatest financial boners.

Finally, a real-life example of how a market disintegrates far faster than the official real estate board numbers can track. It’s the tale of a $1.55 million house that sold officially for the full amount but actually changed hands for $350,000 less.

Says Alex Prikhodko, founder of Real Estate Bay Realty Brokerage, in Toronto (and blog dog):

“It is a poorly held secret that a lot of buyers, who purchased in March and early April (firm of course) and have closing date approaching, are trying to either get out of closing on their purchases or asking for cash backs from the sellers. It is very typical for buyers to ask for $20, $30 or $50 thousand dollars cash back upon closing or they would walk away and forego their deposits. Most sellers comply, because nobody wants to test the market with 5-6 properties listed for sale on the same street for months without any action.

“What is shocking is that in this particular case, the buyer first asked for $150 thousand cash back upon closing via the letter of direction from his lawyer and just yesterday asked for a FURTHER $200 thousand on top, which the sellers agreed to. We are talking about a firm sale that is reported on MLS as $1.55 million, where in reality the property is sold for a mere $1.2 million, a discrepancy of 22.58%.

“The amount is exceptional here, but the practice of cashbacks is as commonplace nowadays as bidding wars used to be just 3 months ago.”

Here is the actual correspondence between agents. Remember – this is a sale for $1.2 million which was reported as $1.55 million. Makes you wonder what the real story is…

 

Did I ever mention this will not end well?

 

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July 6th, 2017

Posted In: The Greater Fool

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