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July 2, 2017 | Deja Vu

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.


Twenty-seven years ago the average Toronto family had to spend 71% of its pre-tax income to carry a house. That was insane. So in 1990 the market started deteriorating. What followed was a painful, slow-motion gutting of residential real estate. Seven years later the bottom was hit – prices down more than 30%. It would take most of another decade to crawl back.

Hey, moisters, ask your parents how that felt. It seemed like everyone decided on a single day that buying a house was a real bad idea. Realtor phones went dead. Open houses emptied. Bidding wars stopped. Sellers were shocked. Just like now.

So here we are again. Same spot. Likely a similar response, perhaps more extreme given current epic debt levels. The Royal Bank says it now takes 72% of a family’s income to own, almost the same as Vancouver and “well outside rational limits… and our comfort zone.” It is a record level of unaffordability. But when it comes to real estate lately, everything’s a record.

Record high prices. Record low mortgage rates. Record amount of personal debt. Record levels of lines of credit. Record long bull market. Record number of realtors. Record influence of real estate on the economy. Record leverage. Record risk.

Toronto is skewing the numbers, but nationally real estate’s become a massive burden and sucker of personal wealth. The average family in the average place now commits 46% of pre-tax income to housing – or about two-thirds of take-home. That’s assuming you own a house with a big 25% down payment and a 25-year mortgage at current rock-bottom levels.

Here is RBC’s methodology:

The RBC Housing Affordability Measures show the proportion of median pre-tax household income that would be required to service the cost of mortgage payments (principal and interest), property taxes, and utilities based on the average market price for single-family detached homes and condo apartments, as well as for an overall aggregate of all housing types in a given market.

So in Toronto (or Vancouver), when the index hits 72% (or 79%) it means that 100% or more of median after-tax income is required to carry the house. No money left for food, Fido, the streetcar, kids, investing, the car, retirement, ball games or beer. Because nobody can actually live like that, the number is just a way of expressing risk. Currently, it’s never been greater.

“Housing affordability in Canada’s most populated area has evaporated at a disturbing pace,” says the bank. “RBC’s aggregate affordability measure for the area surged by more than one-third since 2014 with most of this increase occurring in the past four quarters (a rise in the measure represents a deterioration in affordability). In the process, the measure skyrocketed to its highest level on record. And it is closing in on Vancouver as the least affordable market in Canada, which is very concerning.”

So what now?

Well, as this blog has been detailing since April, the great unwind has already started. The pattern is spookily similar so far to that of more than a quarter century ago. But with some details you should not ignore.

In 1990, the prime rate at the banks was 10% (down from 10.5% the year before). Today the prime’s 2.7%. In 1990 a five-year fixed-rate mortgage cost 12.3%. Today it’s just 2.5% (or less). Inflation then was 5.6%. Now 1.6%.

In other words, we have the cheapest money ever, the lowest down payments (5% down was created in 1992), scant inflation – and yet families have crippled themselves with $2 trillion in debt, while allowing an emotion-driven asset class to account for 20% of the entire economy. Worse, we’re about to enter an era of relentlessly rising interest rates, after nine years of virtually-free money.

In short, expect worse than in 1990. And that sucked.

Said an analyst writing for Stockhouse this past week:

There will be a crash in the Toronto housing market (and Vancouver). All that remains in doubt is when this crash begins, and how far prices crash. In terms of quantum, these historically overvalued markets are facing a price-crash somewhere in the vicinity of 75% — and likely even more over the shorter term.

Seventy-five per cent. Hmm. That would erase $1.2 million from the value of the average detached house in Toronto or Vancouver. It is, of course, an extreme view. But then, what isn’t extreme lately?

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July 2nd, 2017

Posted In: The Greater Fool

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