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August 28, 2017 | Are We There Yet?

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.

Next week a shocking event will occur.

Well, it would have shocked you in March. Now it’s akin to watching Houston fill up with water. A disaster in slow-mo, but without the tragedy.

In seven days the nation’s largest real estate board will be forced to admit year-over-year house prices have gone down. What an astonishing reversal from five months ago when real estate values in the GTA were romping higher by more than 30% y/y each month, when 90% of new listings sold in the same week they came to market, when bidding wars were rampant, arrogant realtors were holding blind auctions, bully offers were flying and people were desperate to buy at any price for fear of being locked out of the market forever.

This blog said pshaw. Don’t be a moron. It’s peak house.

And, lo, ‘twas so.

August numbers will show a price decline in the neighbourhood of 20%, while sales continue to run 40-60% below last year’s levels. For real estate agents, this is an event never before witnessed – sales falling by half in just a few months, buyers retreating and commissions evaporating. There are over 80,000 realtors in Ontario, more than 48,000 of them in the GTA alone. Their ranks have bloated 41% in the past five years, making this the fastest-growing employment category in the nation. Just like FOMO-infused, house-lusty buyers, they wanted to straddle the real estate rocket. Now the ride’s over. It blew up.

“I have noticed that my local 9 hole public golf course located near the real estate board’s offices in central Toronto has been very quiet recently,” says one veteran agent.  “For years, the little course has been a favourite for real estate agents who would drop in for a quick round, between appointments. In times past the lot was full of Mercedes, Audi’s and Lexus, many with a real estate branded personal license plates.

“This summer the parking lot has been almost empty. On two occasions this week, I walked on with no reservation, and played 9 holes by myself !  That has never happened since I started playing there in 1999. On Friday I had time to drop 3 or 4 balls on a green and practice putting in the middle of my round, because there was nobody behind me to hurry me along. Now if an agent hasn’t generated a pay cheque since April, survival instincts kick in and the first thing that gets chopped are the optional expenses.

“My totally unsupported hypothesis ponders this question :  If every home owner took a $200,000 hair cut in the past 5 months, and many agents haven’t sniffed a deal in a similar length of time, maybe Toronto is not feeling as financially frisky as last March.”

As reported here, the average detached home which commanded $1.205 million in April, and was swarmed with horny buyers, is now available in the $900,000 range, and open to a conditional offer. Inventory in July jumped almost 20% while the sales-to-listing ratio crumbled. The same emotional excess that pushed people to extreme buying in the winter has them running as prices decline. Yes, we leap in when risk is highest and quiver when it fades. Genius.

So where are we now? Has the market bottomed? Is it anywhere near? Time to move in and bargain hunt?

Nah, doesn’t look like it.

The two shoes yet to drop are a few weeks away. Interest rates go up again in the third week of October, increasing the prime rate to 3.2%, taking secured HELOCs to 3.7% and adding about a quarter point to all fixed-rate mortgages, which are already hovering at the 3% mark. If the Bank of Canada’s on a tightening trajectory consistent with the past, four or five more increases are to come over the next 18 to 24 months. That would lift the five-year fixed to 4% in 2019. By historic standards, dirt cheap. For Moisters who thought 2% loans were their birthright, it’s a mess.

The second shoe makes it worse. The universal stress test. All borrowers will be required by the end of 2017 to qualify at the current rate + 2%, regardless of down payment heft. It means mortgage rates will have gone from 2% to 5% in less than a year – precisely what the housing bulls, who like to come here to paw, pee and snort, said would never happen.

How much more will this depress prices?

The mortgage dudes have settled on 18%, the amount by which they think credit will be reduced when the test is in place. People will qualify to borrow that much less, on average, which would push down prices equally. Thus, another $175,000 off the average GTA detached, taking it to about $800,000. That, by the way, would wipe out 2.5 years of price increases. Yup, back to the spring of 2015.

TD Bank is less flummoxed, saying prices could be depressed as much as 10% by the test. Of course, when you add in the Bank of Canada’s tightening thrust, the impact of the coming draconian tax changes this blog has been obsessed with, and the circus of US politics, it could all get more extreme. It is precisely this uncertainty which has kept buyers on the sidelines, sensing there are lower prices and more desperate sellers ahead.

So, no, not the bottom. We have not yet landed. It won’t be apparent until the event is past. But if you need a house, can afford it, plan to be there a decade, hate stress tests and higher rates you will fare better than the fools of April.

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August 28th, 2017

Posted In: The Greater Fool

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