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July 24, 2017 | Wishful Thinking

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.

Woohoo. Eighty cents.

It’s been over a year since our dollar was worth this much against the greenback, and good news is bad news for the real estate market. The loonie has surged in recent weeks because (a) the economy doesn’t suck as much anymore and (b) the Bank of Canada is hot to raise rates – again. So the dollar has gained 10% since early May, and become one of the best-performing currencies on the planet.

The bulk of those gains have come on hawkish statements by the central bank, then the rate increase we saw earlier this month. There’s now an 80% chance being given by the market (based on overnight swaps) that rates will up again this year – probably in October. So, yes, the Bank of Canada benchmark will officially double in 2017.

The bond market is also aroused. Look at the yield on a Government of Canada benchmark five-year bond. It’s a virtual monetary erection.

 

The return on this piece of debt has travelled from 0.9% in June to 1.563% this week. That an increase of more than 70%, which is yuuuge. It pretty much guarantees the price of fixed-rate mortgages will be going up. Again.

Now, to be realistic, rates are still stupid cheap. We are miles away from anything that could be called ‘normal’ by historic standards. But events of the past few months have clearly shown the era of deflation worries, emergency interest rates and central bank stimulus are coming to an end. The doomers blew it. There was no reason to hoard gold, toilet paper or tuna after all. And the crypto-currency dudes will likely end up being just as Hoovered.

In short, 2.5% five-year mortgages are done and gone. Every renewal here on in will probably be at a higher rate. And as the cost of money rises, the value of residential real estate will fall. The negative correlation between the two has been tight and irrefutable. Those who say “things will bounce back in September” must have a house to sell, because there’s no credible reason to believe current conditions will reverse.

Here’s Alicia, for example, a twenty-something realtor in the satellite city of Guelph – where prices exploded as GTA refugees poured in, causing a Starbucks eruption and an unfortunate shortage of man-bun elastics.

Hi Garth – Guelph has been impacted big time. Significant changes the first week of May…. Multiple Offers died almost overnight… very palpable. Properties are now sitting on market for 35-50 days.

A sign of the times…. neighbours had sold their home, was to close in 2 weeks, moving overseas in 2 weeks, deal fell through, they want to sell it before they leave and are freaking out. Although the warning signs have been going off for a while…. the multiple offers that we had in winter along with list prices were simply unsustainable… When I spoke to realtors in the office about pricing and multiple offers etc many thought “this is the new normal “ …  Couldn’t believe they were saying that.

There are a few things that bother me about this profession but one in particular is how many realtors spew facts and info as if they know it all – like they have a crystal ball… posting on their Facebook “the market is balancing out”, “it is a good time to buy”. “buy now before prices go up again in the Sept” … unbelievable.

And here’s GreaterFool correspondent, real estate broker and owner of www.Listing.ca, Alex Prikhodco, tossing us some of the latest data that the local Toronto real estate board is too chicken to publish. By the way, this is how the board’s newly-minted boss, Tim Syrianos, just described the market:

“We are in a period of flux that often follows major government policy announcements pointed at the housing market. On one hand, consumer survey results tell us many households are very interested in purchasing a home in the near future, but some of these would-be buyers seem to be temporarily on the sidelines waiting to see the real impact of the Ontario Fair Housing Plan. On the other hand, we have existing home owners who are listing their home because they feel price growth may have peaked. The end result has been a better supplied market and a moderating annual pace of price growth.”

Hmm. So here’s what a “moderating pace of growth” looks like in terms of detached house prices over the last three months:

Toronto: April $1.275 million, July $1.050 million – a decline of 17.6%.
Mississauga: April $1.11 million, July $979,000 – a decline of 12%.
Vaughan: April $1.435 million, July $1.2 million – a decline of 16.5%
Richmond Hill: April $1.624 million, July $1.275 million – a decline of 21.5%
Newmarket: April $1.125 million, July $850,000 – a decline of 32%.

It’s worth noting that Richmond Hill prices are now back at summer of ’16 levels, and the days-on-market has more than doubled in almost all regions. And, yes, this is with just one Bank of Canada rate increase and only one uptick in mortgage rates. Still to come is the new stress test that all homebuyers will have to pass, regardless of whether they have a fat down payment or not – and the continued tightening of monetary policy.

In summary: your house may have just lost 20% of its value, but it’s in Canadian dollars. Woohoo.

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July 24th, 2017

Posted In: The Greater Fool

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