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August 25, 2017 | The Crash

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.


“Here’s a question for you,” says young Caitlin asking, of course, on behalf of a friend. “If a millennial takes out a mortgage with 20% down thanks to the bank of mom and dad, and then 5 years later at renewal the studio apartment has dropped in value, does the mortgage get shoved over by the bank to the ‘insured category’ and become the taxpayer’s problem?”

Welcome to B-20 week here on GreaterFool, the only site in existence which can make OSFI seem vaguely sexy or stir loins over loan-to-value ratios. For days now we’ve stressed over stress testing, listened to the indebted deplorables moan & deny while enduring the cackling of the housing-crash morons who enjoy drowning kittens.

Without a doubt, we’re on the cusp of something big. The mainstream media, unlike this obsessed, pathetic blog, is so far just reporting the obvious: the bubble’s dead. Real estate now equals risk. For example, for the first time in a year, the price of a detached GTA house has fallen below a million, down from $1.205 million four months ago – a 20% decline in 120 days.

At this pace, within about a week, the average detached will be worth less in absolute dollar terms than it was a year ago. When you factor in the cost of buying (land transfer tax being the main item) and the expense of selling (commission), the annual loss on a GTA house is already 6%. Not tax-deductible, either. Already a lot of people are underwater, with homes worth less than the mortgages placed upon them. In the first seven months of this year, over 60,000 properties changed hands in the country’s biggest market, and anybody purchasing with less than 20% down has just learned about Mr. Market. He has a wicked sense of humour. Makes you buy stuff at the worst moment, when it’s extreme.

Combined with the mortgage rules about to be enacted, requiring everyone to qualify for loans at the current rate + 2%, plus dictating the banks adhere to strict LTV guidelines for new borrowings and renewals, there are big consequences.

Appraisals are routinely coming in for amounts less than folks paid for houses just weeks ago. That means many buyers discover the financing they expected won’t be offered. They must find the cash elsewhere or try to exit their deal. (Good luck with that.) Lenders have lost their stomach for risk as the market descends, and know they’ll soon be required by the regulator to bring all loans into line.

As bank financing withers, more people are being forced into the clutch of smaller, unregulated lenders in order to close deals, shouldering rates in the 8% range. Meanwhile it’s estimated 700 to a thousand property deals made in the last 60 days in the region won’t close. Wiping those numbers off the realtor stats and adding them back as new listings will make an already-ugly scorecard look even worse. In short, there are no reliable numbers right now to track the deterioration of this market.

But let’s get back to Caitlin.

What about renewals if market trends continue? If the resale value of a condo purchased for $600,000 with 20% and a $480,000 mortgage were to decline to $450,000, what then?

The maximum LTV on an uninsured home loan is 80%, which means Caitlin’s unit would qualify for financing of $360,000. In order to renew at that level and avoid paying the fat CMHC insurance premium, she’d have to find $120,000 somewhere and hand it over to the bank in order to reduce the principal outstanding. Now the poor lass has poured $240,000 cash (plus several years of condo fees and mortgage payments) into a property with a value of $450,000, on which she still owes $360,000. If she sold and netted $427,000 after commission, the loss would amount to over 140% of her down payment. Oops.

Poor Caitlin. And during every year of ownership, she paid more each month than did that twerp Ted, next door, who rents, reads this blog, and now has enough in his ETF-based portfolio to buy a lifetime supply of plaid shirts, bicycle tires and Axe.

When will the market bottom? Could be the spring. Could be 2019. You won’t know how bad until it’s over. Yes, like Trump.

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August 25th, 2017

Posted In: The Greater Fool

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