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August 2, 2017 | How Bad Can it Get?

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.

So, Derek got an offer. Wohoo.

Of course you remember this poor blog dog. Took the advice and sold at the tippy-top of the market – getting a peak-house price of $2.2 million for his north ‘burb McMansion. Over asking, of course. Multiple offers. Literally sold in hours. Ecstatic.

But that didn’t last. The buyers (one’s a realtor) showed up a couple of days later, moaning, gnashing, sweating and fretting, asking to get out. Derek told them they had a contract and life isn’t fair. Do the deal or get sued.

Well, Easter came, then the Ontario anti-bubble measures, and then the wheels seriously fell off the market. Derek re-listed when it became clear the deal was in serious jeopardy, got a litigation lawyer and there she sits. The buyers have ignored every letter, the statement of claim, and may (for all D knows) have moved to someplace remote and exotic, like Regina.

But, finally, some action. “Lo and behold,” Derek reports, “we got an offer last night! 1.7 conditional on financing and inspection. Really nervous to leave so much on the table. Agent thinks there may be at least one more interested party so we will see what pans out.”

If our guy does do the deal, he has a claim for $500,000 in damages (plus costs) – if he can find the purchasers. Will keep you posted. In the meantime here is a stark reminder of what’s happening to the market – when a $2.2 million property loses 23% of its value in three months. This is absolutely consistent with the numbers posted here yesterday. It is one of the fastest market unwindings in history – and the bottom is yet unknown.

Meanwhile in Oakville, Shay is out shopping for a townhouse, watching prices fall as listings mold. He sent me this email from his agent to illustrate current conditions. Yeah, it’s a buyer’s market. (The note has been redacted to protect the innocent.)


So, here’s a question many have been asking: if this sharp correction in the nation’s largest market impacts other areas and leads to a general real estate decline of Kardashian proportions, whither the economy? With households so steeped in debt, with so much net worth tied up in a single asset, with interest rates rising, and with a huge chunk of the economy tied directly to real estate, won’t everything head south if housing blows up? Just as occurred in the US?

The short answer is a downturn deep and widespread enough in property values would cause a recession. That’s not the end of the world for the economy (we had one in 2015-6), nor does it necessarily mean the stock market would tank or banks wobble. In fact, investors can do quite well when the economy is in negative growth.

Key things to remember: most Canadian mortgages are insured (including all those which are high ratio) which means the big banks are insulated from the kind of mess and despair that befell US lenders. Second, in global terms, this place is a puddle. Properties here can plop in value and consumer spending dry up, but it won’t result in the same stock-eating beast that savaged equity markets in 2008-9. It was the drying up of credit in America, then across the world, that took us to the brink.

But there’d be painful consequences. Unemployment would spike after months of great job growth, since a million people now work selling, building, fussing over, insuring or financing houses (Toronto alone has 48,000 realtors). In fact real estate employs more than oil and gas and manufacturing combined – a huge departure from the past, making this downturn more serious.

Most economists think if the correction we’re now in gets worse, economic growth would be hacked from 2% to about 1.5%. Yup, that’s it. For things to become ugly for investors, there would have to be a spike in mortgage defaults leading to a loss of confidence in the financial sector. But in reality, a collapse in house prices isn’t going to drive people out of their homes, and Canadians have no history of walking away from mortgage debt.

The bottom line is a real estate mash-up would hurt a lot of families by erasing home equity and threatening jobs. They’d spend less, dropping economic growth. The country could tip into recession and the Bank of Canada might have to stall its rate agenda for a while, or even reverse it. That monetary stimulus could end up goosing stocks – since corporations love cheap money. Meanwhile smart investors with the bulk of their wealth in US or international assets (as consistently recommended here) plus a 20% portfolio weighting in greenbacks, will probably skate through unscathed.

Way less lucky would be those overexposed to housing, carrying big debt, at risk of seeing their entire equity erased and facing job implosion. Realtors, of course,  qualify for all of the above.

So let’s be charitable. Relief Hampers for Re/Max. Who’s in?

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August 2nd, 2017

Posted In: The Greater Fool

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