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July 25, 2017 | You’re Kidding…

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.

Well, that didn’t take long…
Last week BC was taken over by a lefty coalition NDP-Green government, promising social justice, environmental stewardship, a better economy, affordable housing and free ponies. This week the energy giant Petronas announced it ‘s throwing in the towel on a $36 billion LNG (liquefied natural gas) facility on the west coast.

Of course it’s not all because socialists and anti-energy zealots are now in charge. The Trudeau government approved the plan, but with 190 conditions and a first-ever cap on emissions. In fact, there are gobs of blame to go around. The greenies protested. First Nations were in a funk. Economic nationalists moaned (Petronas is Malaysian-owned). But the message to the investors was clear, delivered by BC Green leader Andrew Weaver, who said the LNG industry is “nonsense… a colossal failure.”

Well done, Canada. Now all those construction guys, pipefitters, engineers and armies of contractors can enjoy a low carbon footprint serving lattes on Robson Street. One more little nail in BC’s real estate coffin.

Stress? You have no idea…
Not content to geld people who run small businesses or wage war on higher income-earners in general, the T2 gang is gearing up to finish off the speculative real estate frenzy this autumn with the mother of all stress tests. The federal bank cop – OSFI – has proposed that everyone applying for a mortgage qualify for the loan at a rate which is 2% higher than the prevailing one.

So, if you can carry $650,000 at 3%, for example, you must show you could also afford the payments at 5%. This test will apply to all – no matter how large the down payment or if you’re applying for CHMC insurance coverage. Veteran mortgage broker and RateSpy owner Rob McLister likens this to the Kim Jun Un intercontinental ballistic, nuclear-tipped WMD when it comes to market impact. Think of the GTA a smoky hole.

Why would Ottawa actively plan such a thing? (The pre-action ‘consultative’ period is now in progress.) Because interest rates are going up. Way up. The Canada five-year bond that was 0.5% a year ago is now at 1.65% and on its way to 2%. That’s a 400% increase in debt yield, and it will translate into, yes, 5% mortgages down the road.

Anyone born after 1960 has no idea what this might mean.

The voice of experience…
“Back in the 70’s and 80’s I worked for Canada trust and Guaranty trust in their mortgage departments,” says blog dog Vic. “Many of the most senior people had been trained by people who were still influenced by the concepts evolved from depression times. They had some funny ideas and expressions A ‘prudent’ mortgage loan considered the value in the property, the borrower’s ability to pay, if he likely to pay and if the down payment came from his own resources. Our basic responsibility was to appraise and underwrite every mortgage on that basis. The thought that the Lenders mortgage departments would come to be staffed by ‘Mortgage specialists’ who were little more than in-house brokers would have left them aghast.”

Now that banks have CMHC wiping away their risk, says Vic, everything has changed. Not for the better. “Compare when the bank assumes the risk with an uninsured conventional loan and  a high ratio loan when CMHC insures the risk.

“Take two purchasers with $65,000 down.

“Uninsured that’s a sale of $325,000 and a mortgage of $260,000.

“Insured it’s a sale of $900,000, a mortgage of $835,000 plus an insurance premium of $33,400 for a total of $868,000.

“We’ve lost any sense of perspective. If you think that it’s an insurance policy and that somewhere there’s a big pot of money to pay any claims, that various governments haven’t already borrowed to pay for their favourite vote buying programs, you have more confidence than I. If you find this to be just a curmudgeonly rant, I hope that you’re right, otherwise we are so screwed.”

Meanwhile, in Albertastan…
The socialist government in Canada’s most capitalist province keeps telling people the worst of the recession is over. But it’s not. At least when you use commercial or residential real estate as a yardstick of economic health.

Commercial vacancy rates are the highest in Canada in Calgary and Edmonton. The half-empty flagship Bow thingy sticking up in the Cowtown skyline is a memorial to delusional planning. And last week there was a stunning snapshot of how much people don’t want to live in Calgary, or can’t find work there.

At present (says the city) there are 23,600 vacant housing units, which is 2,700 more than last year and the highest in 30 years, if not forever (records only go back to 1989). In the last two years net migration to the city has been negative 5,500, and almost 11,000 empty apartments are the legacy of rising unemployment.

You have to love how the Calgary Herald reported this: “The bottom in the recession is behind us,” economist Trevor Tombe said.” Seriously.


Sure, but it can’t happen here. Can it?
This is the tenth anniversary of the summer of ’07 in Orlando, Florida. It was that year the big housing crash really started to take shape and like in southern Ontario or the Lower Mainland, Orlando had seen a massive appreciation in values, excessive speculation and a surge in mortgage debt.

So where are things now? Any insights to be gained as Toronto and Vancouver start to wobble?

Well, median prices this summer are still 12% below where they were ten years ago, according to the local real estate board. Worse, one in ten local homeowners remains underwater, paying mortgages that are larger than the actual value of their homes. That means for a decade many of these folks have been unable to sell, since they’d have to come up with a serious amount of money just to hand the keys over.

No, Toronto is not Orlando. Feel free to ignore this. You’re special.

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July 25th, 2017

Posted In: The Greater Fool

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