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July 7, 2017 | Market Update

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.

 

Collapsing markets. Suicidal realtors. Overwhelmed Audi dealerships. Rising mortgage rates. Rampaging regulators. Vanishing foreigners. Chortling sellers. Shocked buyers. Whadda week. And this housing correction has just begun!

In no special order, some of the latest news…

Sinking in Suburbia:
Whoever would have thought real estate in weird little (two-hours-from-Toronto-on-death-highway-QEW) Niagara-on-the-Lake would double in 30 months? But it did. The GTA disease spread due south right to the USA border where it ran into the reality of Buffalo (average house price $94,000). From Peterborough to Orillia, K-W, to the Hammer and down the Niagara Peninsula, property values have soared. And now they’re headed in the opposite direction.

In Mississauga, listings have jumped over 40% while sales have given up 25%. Milton is comatose, and in shock. Deals in Hamilton and Burlington collapsed 20% in June. In Waterloo Region (Silicone Valley North) the average price of all homes fell 6.2% last month while detached houses shed 9.5%, to $537,389. If this keeps up, they’ll be 50% off by the winter. And free by next summer!

What goes up with a vengeance usually comes down the same way. They walked too cocky in the 905, methinks.

It’s in the bag, now:
Not a chance interest rates will be staying put next Wednesday. By noon the Bank of Canada rate will be at least a quarter point higher, as will the big bank primes, along with the cost of HELOCs, personal lines of credit, variable-rate mortgages and all kinds of demand consumer loans. As you know, fixed-rate mortgages are already on the move, up 20 beeps so far. More to come.

The clincher was the jobs report Friday morning, showing another 45,300 people found work in June. Yeah, yeah, a lot of the positions were part-time, but the total employment picture is bright. Between April and June another 103,000 jobs were created, which is the best quarterly gain in seven long years – the same length of time since the last interest rate hike.

Said CIBC’s chief economist: “Today’s jobs numbers cement the case for the central bankers to raise rates in the coming week. The jobs market is tightening, and not that far from what historically has been judged as full employment.”

Full employment? All the Millennials with MAs working at Starbucks are stark proof of that!

Within minutes of the StatsCan print (that’s what financial dudes call a ‘report’ ), markets were giving 96% odds the Bank of Canada would move. It now appears there will be two rate increases in 2017 and (unless Trump nukes weird Kim) three more in 2018. The bank rate that was 0.5% in the first half of 2017 would then be close to 2% late in 2018. That’s a quadrupling, and it means 2.5% five-year mortgages may not be seen again in your lifetime.

Unlike this blog, bonds mature:
Most people with mortgages lock in for five years, and the cost of that benchmark loan is dictated by the bond market. The gold standard is Government of Canada 5-year debt, which was yielding a piteous 0.9% just a few weeks ago. It has now spiked to almost 1.5% (Friday’s close: 1.471%), which is the highest since 2014.

So, multiple increases by Mr. Poloz at the BoC, locking step with the US Fed, will plump bonds for some time, drop bond prices, and be passed through in steadily-increasing mortgage costs. And you know what the likely result of that will be, right?

Two charts say ‘housing’s screwed’ so eloquently:
Less than two months ago over 90% of all properties coming to the GTA market sold immediately. Now there are 60% more for sale than a year ago, and plunge of historic proportions has taken place in the sales-to-listings ratio. Buyers could not contain their enthusiasm when choice was limited and competition fierce. Now that conditions have improved unbelievably, they’ve fled. Go figure.

 

Source: RBC Economics

And here’s what the impact has been on pricing. Detached homes are down 14% in eight weeks, which is the extent of most normal real estate corrections. Unless something happens to halt the downward momentum, we could eclipse the seriously painful plop of the 1990s, when Toronto digs lost 32% of their value. As mentioned, it took 14 years to erase the effects of the decline.

So tell us again, Re/Max, how it’s different this time.

 

Source: Toronto Real Estate Board

And talk about bad timing:
Given all of the above, the last thing those poor realtors and mortgage brokers need is a regulator on steroids. But here’s OSFI, the agency that polices financial institutions giving notice this week that everyone borrowing money will have to be stress-tested before a mortgage is granted – starting this autumn.

Borrowers – even those with a 20% down payment and no need for mortgage insurance – will have to prove they could carry a loan costing 200 basis points (2%) more than the going rate. Ouch. That’s uncomfortably close to double current rates. Impacted will be about 80% of all buyers who have those relatively big down payments, which means they will qualify to borrow less than requested – about 18% less.

Says former broker and RateHub owner Rob McLister: “This one change would have more of an impact to mortgage shoppers than any Bank of Canada rate hike in history.”

It’s time for a scotch.

Collapsing markets. Suicidal realtors. Overwhelmed Audi dealerships. Rising mortgage rates. Rampaging regulators. Vanishing foreigners. Chortling sellers. Shocked buyers. Whadda week. And this housing correction has just begun! In no special order, some of the latest news… Sinking in Suburbia: Whoever would have thought real estate in weird little (two-hours-from-Toronto-on-death-highway-QEW) Niagara-on-the-Lake would double in 30 months? But it did. The GTA disease spread due south right to the USA border where it ran into the reality of Buffalo (average house price $94,000). From Peterborough to Orillia, K-W, to the Hammer and down the Niagara Peninsula, property values have soared. And now they’re headed in the opposite direction. In Mississauga, listings have jumped over 40% while sales have given up 25%. Milton is comatose, and in shock. Deals in Hamilton and Burlington collapsed 20% in June. In Waterloo Region (Silicone Valley North) the average price of all homes fell 6.2% last month while detached houses shed 9.5%, to $537,389. If this keeps up, they’ll be 50% off by the winter. And free by next summer! What goes up with a vengeance usually comes down the same way. They walked too cocky in the 905, methinks. It’s in the bag, now: Not a chance interest rates will be staying put next Wednesday. By noon the Bank of Canada rate will be at least a quarter point higher, as will the big bank primes, along with the cost of HELOCs, personal lines of credit, variable-rate mortgages and all kinds of demand consumer loans. As you know, fixed-rate mortgages are already on the move, up 20 beeps so far. More to come. The clincher was the jobs report Friday morning, showing another 45,300 people found work in June. Yeah, yeah, a lot of the positions were part-time, but the total employment picture is bright. Between April and June another 103,000 jobs were created, which is the best quarterly gain in seven long years – the same length of time since the last interest rate hike. Said CIBC’s chief economist: “Today’s jobs numbers cement the case for the central bankers to raise rates in the coming week. The jobs market is tightening, and not that far from what historically has been judged as full employment.” Full employment? All the Millennials with MAs working at Starbucks are stark proof of that! Within minutes of the StatsCan print (that’s what financial dudes call a ‘report’ ), markets were giving 96% odds the Bank of Canada would move. It now appears there will be two rate increases in 2017 and (unless Trump nukes weird Kim) three more in 2018. The bank rate that was 0.5% in the first half of 2017 would then be close to 2% late in 2018. That’s a quadrupling, and it means 2.5% five-year mortgages may not be seen again in your lifetime. Unlike this blog, bonds mature: Most people with mortgages lock in for five years, and the cost of that benchmark loan is dictated by the bond market. The gold standard is Government of Canada 5-year debt, which was yielding a piteous 0.9% just a few weeks ago. It has now spiked to almost 1.5% (Friday’s close: 1.471%), which is the highest since 2014. So, multiple increases by Mr. Poloz at the BoC, locking step with the US Fed, will plump bonds for some time, drop bond prices, and be passed through in steadily-increasing mortgage costs. And you know what the likely result of that will be, right? Two charts say ‘housing’s screwed’ so eloquently: Less than two months ago over 90% of all properties coming to the GTA market sold immediately. Now there are 60% more for sale than a year ago, and plunge of historic proportions has taken place in the sales-to-listings ratio. Buyers could not contain their enthusiasm when choice was limited and competition fierce. Now that conditions have improved unbelievably, they’ve fled. Go figure. Source: RBC Economics And here’s what the impact has been on pricing. Detached homes are down 14% in eight weeks, which is the extent of most normal real estate corrections. Unless something happens to halt the downward momentum, we could eclipse the seriously painful plop of the 1990s, when Toronto digs lost 32% of their value. As mentioned, it took 14 years to erase the effects of the decline. So tell us again, Re/Max, how it’s different this time. Source: Toronto Real Estate Board And talk about bad timing: Given all of the above, the last thing those poor realtors and mortgage brokers need is a regulator on steroids. But here’s OSFI, the agency that polices financial institutions giving notice this week that everyone borrowing money will have to be stress-tested before a mortgage is granted – starting this autumn. Borrowers – even those with a 20% down payment and no need for mortgage insurance – will have to prove they could carry a loan costing 200 basis points (2%) more than the going rate. Ouch. That’s uncomfortably close to double current rates. Impacted will be about 80% of all buyers who have those relatively big down payments, which means they will qualify to borrow less than requested – about 18% less. Says former broker and RateHub owner Rob McLister: “This one change would have more of an impact to mortgage shoppers than any Bank of Canada rate hike in history.” It’s time for a scotch.

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July 7th, 2017

Posted In: The Greater Fool

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