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July 21, 2017 | The Bottom

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.

 

Besides hockey, guilt and crappy donuts, we’re really good at irony. What better example than houses? When times were hard, jobs scarce and the dollar plopping we blew the mother of all real estate gasbags. Now that the economy rocks, a serious correction threatens to become a crash. Fear of missing out has become a scramble to get out. Greed, then panic. It’s so classic.

In this case, however, the better the economy becomes the tougher it might be for the value of your home. The odds of a second interest rate increase in 2017 shot up dramatically on Friday with the latest data. Markets now expect another quarter-point increase on Wednesday, October 25th.

That will raise the prime rate at the banks to 3.2%, move secured lines of credit to within spitting distance of 4% and increase the cost of variable mortgages. Fixed-rate home loans will likely move higher in the week or two prior, as bond yields plump ahead of the central bank move. By the way, this would mean the Bank of Canada benchmark would have doubled in 2017. With more to come.

By historic standards this is still stupid-cheap money. But real estate is fueled by hormones, perceptions and stirred loins. The last rate hike didn’t cause a flurry of offers by people with cheaper pre-approved mortgages, for example, the way many forecast. Instead, it just scared buyers. They smell risk.

The Toronto market continues to collapse. The latest stats build on the numbers this blog gave you a few days ago. Fugly. Bigly. Overall sales were down 39% in the first two weeks of July, with a 45% crumble in deals for detached houses. Semis dropped 43% and condos 35%. Listings are starting to shrink as owners understand the market’s turning toxic and gamble that conditions will be better in the autumn. They won’t be.

In terms of price, the GTA average is $760,356. In April it was $919,589. That’s a fade of more than $159,000, or 17.31%. The declines have been historic: down 6.2% in May, another 8.1% in June, and 4.2% in just the first two weeks of July. In the last 15 days alone the average house shed $34,000, or enough to buy eight or nine used Kias.

By every definition, this is a sharp, deep and ferocious correction. If it were the stock market under discussion, we’d be just days away from an official bear market. That makes talk of a rebound in September kind of comical. Or irresponsible. Any buyer jumping in now to take advantage of a 17% price decline might end up losing all of their equity by the end of the year.

 

The threats are growing. Higher retail sales in May, a strengthening dollar and robust GDP expansion north of 3% confirm the Bank of Canada was correct in raising its rate this month, and certain to do it again in a few more weeks. Ontario’s anti-bubble measures are only now starting to have a real bite, chasing away foreign capital, whacking amateur landlords with new rent controls and spawning myriad CRA audits.

In BC the lefties are now in control, destined to make the 4% price drop and 80% decline in new home starts even worse. Ottawa has just announced measures to raise $500 million more in taxes from the hides of small businesses and incorporated professionals. And the bank regulator still plans on subjecting all buyers to a new mortgage stress test, even if they have a big down payment.

So how, exactly, are things supposed to get better in six weeks? Household debt will still be off the charts, two-thirds of it in mortgages. The cost of servicing $211 billion in home equity lines of credit will go up again. Governments desperate to stop people from buying digs they cannot afford are not about to reverse course and reflate the bubble. And right around the world, we’re in an environment of tightening monetary policy. In other words, you will never again see a bank offer a five-year 2% mortgage.

Simply put, why would anyone buy a property? The 17% slash in prices has occurred in a short ten weeks. An equal loss could lie ahead between now and the end of September – leading into the next round of rate hikes. Yes, there are more choices, vendors are motivated, conditional sales are back and you can spend $160,000 less than your best friend did in March – who now looks like a moron.

The market will continue to descend until it finds a bottom. Not there yet.

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July 21st, 2017

Posted In: The Greater Fool

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