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September 3, 2017 | Could be Worse

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.

A big week. On Tuesday real estate boards grudgingly publish the dismal data on August agony. On Wednesday interest rates go up (maybe – there’s currently a 56% chance). And in Kelowna, T2 and his money guy Bill Morneau face a caucus of Lib MPs nervous over federal plans to crucify their small business constituents.

Meanwhile gas prices soar thanks to Harvey, North Korea edges closer to becoming a smoky hole and your kids start leaving home every morning.

This autumn shapes up to be a corker. Higher rates, fatter taxes and a gonzo of a mortgage stress test are all on the Canadian agenda. Kim Ding Dong is daring the Trumpster to invade, but may end up being spanked by China. Germany has a landmark election and the US Congress might pass a tax relief bill that ignites the stock market.

Volatility, uncertainty and change. Get used to it. If you have a financial portfolio which is diversified and balanced, you’ll be fine. If your only asset is your house, maybe not. Sales in the GTA continue to erode (although August was typically quiet), while Victoria and Hamilton see prices start to wither and Vancouver wonders where the move-up buyers went. Soon 80% of markets will be stagnant or falling across Canada, and this is likely the week we hear year/year price gains in Toronto have gone from 30% to zero, or even negative.

The big news for many families is the epidemic of non-closings now taking place. This is reflective of a market still rapidly decelerating. As of Friday (September 1st) the number of active listings in the GTA hit an all-time low of less than 5,000. In just two months inventory has shrunk by 2,000 properties as sellers give up and withdraw.

Fewer listings usually mean lower sales going forward. Add in higher mortgages rates and the growing buzz around the universal stress test (plus the new tax grab), and it’s hell on wheels for 44,000 local realtors as well as those with deals going south.

Astonishingly, lots of people think they can walk away from a real estate contract before it closes simply because the market sucks and they want out. If social media’s any guide, moisters believe the worst that can happen is losing their deposit (or their mom’s). If vendors squeal, it’s because they’re greedy. Lost on most people is the absolute gravity of an accepted offer to purchase, and the inescapable consequences of trying to weasel out.

Yes, the deposit is gone. But that’s just the start. Following on will be the cost of a litigation lawyer (ten grand to perhaps four times that amount over time), plus the financial penalty of a settlement with the sellers. This can be escaped through bankruptcy, but it’s a failure that can stalk your career for decades. In short, there’s no happy ending in walking away from a firm deal, for either side.

That’s led a lot of regretful purchasers to try and rewrite their deals, asking for longer closings, lower prices or vendor take-back financing at the 11th hour – sometimes on the day the deal’s to be done. Because bankers are appraising low after buyers bid high, some sellers are forced to grant a second mortgage or see the offer crumble into legal wrangling. But extending that kind of financing is dangerous. If the new owner defaults and walks after closing, it’s the lender holding the first mortgage who calls the shots and gets paid. There may be nothing left for anyone else.

Of course, it could be worse. You could live in Houston. Or Seoul. So lighten up.

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September 3rd, 2017

Posted In: The Greater Fool

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