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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 9, 2017 | Insights

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.

 

Remember when July was boring? Ha, you wish. When a full-bore housing correction envelopes us, just weeks after a bubbled frenzy, every day brings some riveting news. So here are a few things to know as the week begins…

Up she goes:
At last count four of the Big Five have pulled the trigger on long-term, fixed-rate mortgages. The cost of two, three and five-year loans with 25-year amortizations has risen an average of 20 beeps (a fifth of a point). This is notable because (as you know) the Bank of Canada will not be pulling its trigger until Wednesday morning – which will whoosh the cost of variable-rate home loans along with it.

The chartered banks are not jumping the gun, but rather reacting to surging yields in the bond market. The return on a five-year Justin Bond has catapulted from 0.9% up to almost 1.5% in recent weeks. In the debt world, that’s positively Kardashian in size, depth, breadth and width. And there’s probably more to come. Two BoC moves this year, one more Fed hike, then maybe three for each set of central bankers in 2018.

Here’s what it means:
Matt’s a GTA-area lawyer in the far eastern burbs where, he says, “there has been a noticeable influx of GTA refugees (retirees and near retirees) buying property in the area – they cash out and move up (with the only downside being everything here closes at 8 in the evening).”

“With all the talk of interest increases I thought I would run some scenarios,” he says, “through our handy dandy mortgage amortization tool at the office (likely not a better use of my time than seeing my family or tackling the mountain of paper on my desk, but curiosity got the better of me). The attached spreadsheet summarizes how much you’ll be paying if (and when) money starts costing more than 2.5%.  My highly inflated lawyer’s ego thought it might be of interest to you too.”

You bet. Matt’s calcs for an ‘affordable’ $500,000 mortgage with a 25-year am show monthly payments of $2,240 (or $26,878 a year) when the rate is the lowly 2.5% we’re all used to. If the central bank hikes five times between now and the end of next year, that home loan could well renew at 3.5%. While still cheap by historic standards, it would add 10.55% to the monthly and annual payments. If the renewal came in at 5% down the road (seems reasonably likely in a few years), then payments would be 24.15% higher.

So what? We can all afford that, right?

Oops. Not exactly. Remember this?….

Nearly three-quarters of Canadian homeowners say they would have difficulty paying their mortgage if their payments were to increase by more than 10 per cent, a new survey by Manulife Bank says. Thirty-eight per cent of those polled say their mortgage bills could rise between 1 per cent to 5 per cent before they would have financial difficulty; 20 per cent say they could sustain an increase in payments between 6 per cent and 10 per cent before having trouble; and 14 per cent say any hike would be a problem.

“What these people don’t realize is that we’re at record-low interest rates today,” said Rick Lunny, president and chief executive of Manulife Bank, adding that a 10-per-cent increase in mortgage payments could be the result of as little as a 1-per-cent interest hike.

By the way, Millennials as a group are shouldering the highest levels of mortgage debt, followed by GenXers and Boomers. The moisters are also those most likely to be whacked by any economic downturn that a crumbling housing market brings. First in, first out. Sorry, kids. But I warned ya.

The latest barks from an old dog:
He calls himself “Old Ron the Realtor” and is one of the many clandestine, secret GreaterFool operatives out there. His latest report – insightful as usual as to the latest GTA sales, reported Friday.

“July 6 (real estate board) reports indicate a further 1.35% decline from June numbers, or about $10,770 in less than a week. The trend is clearly downward. If this continues, I wonder if the Province will start to pump up the market first with words, then with actions ?  When 29% of the provincial economic store is wrapped up in real estate, a serious slump in GTA housing spells both economic and political disaster. Perhaps that is why The Liberal Star buried TREB’s bad news this week, and lead instead with an unsubstantiated TREB prediction of price nirvana for the current year. I was going to contact the Star real estate reporter to point out the obvious, but why bother.

“This was all predicted by George the Greek in an animated conversation last March on the Danforth. Always dapper, the Re/Max veteran said the market officially turned south on February 22, 2017. My Bro and I both Brokers with about 80 combined years under our belts in this business, looked skeptical, but our guts both knew that the when markets get slap happy it always ends in tears.  As the venerable Sir John Mark Templeton once opined: ” Bull markets are born in Pessimism, grow on Skepticism, mature on Optimism and die on Euphoria” We both knew we were long into the “Euphoric” stage of the party, as a 25 x100 foot East York building lot was just sold for $1.4 million. How the oracle of Greek-town knew the exact time and date remains a mystery, but four months later few can argue that he nailed it.”

Mid-AirBnB collision warning:
First it was Toronto bringing down the hammer on AirBnB – another nail in the condo coffin – and now can’t-leave-anything-alone Vancouver is following suit. Soon it will be plain illegal for people to rent out secondary suites, laneway houses and any investment property (like a condo) for short-term guests. It gets worse, too: citizens will have to apply for and obtain a business license in order to provide rooms in principal residences plus pay a 3% tax on revenues – as well as reporting the cash flow as income to the CRA.

Vancouver currently has more than 5,000 short-term rental units on the market, including a ton of condos which are leased out (to people too cheap to stay in hotels) in order to get around that insane 1% vacant house tax. In Toronto it’s estimated there are 3,000 investment condos solely dedicated to AirBnB usage – which are now also being gelded.

Well, come April (when the new regs click in) it will be a little harder for several thousand families to make their mortgage payments. Well done, YVR.

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July 9th, 2017

Posted In: The Greater Fool

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