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September 10, 2017 | Divide & Conquer

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.


“Yeah,” the realtress said, looking down at her Gucci sandals after the failed showing, “it seems so.” Deceased, that is. Real estate in the country’s biggest market is well and truly croaked after last week’s rate hike. The second in two months sent a crystal message to even the biggest housing bull. There’ll be no autumn renaissance. And April may also be cruel.

Only one question remains. Will this be a temporary respite, flatlining prices for a year or less allowing incomes to catch up and debt to stabilize? Or is it a once-in-a-generation event which craters values by a third, requiring more than a decade to recover? If so, 2017 may be the new 1990. (Buyers then had to wait 14 years to break even.)

Some believe with the prime and mortgages popping higher again property sales might get a lift. Could be. Over the next few weeks some potential buyers who pre-approved for cheap loans may pull the trigger and buy. But not many. Most are too scared of reaching for a falling knife. No realtor salvation there.

Here’s another outcome to consider.

First, a quarter of all borrowers have variable rate mortgages, which have just increased twice in seven weeks. Since most of them only went VRM to get a cheap rate, this is a shock. Second, there’s been a massive, historic and yuge increase in secured lines of credit (HELOCs) over the past five years – something akin to 40%. With $220 billion borrowed against their houses, these people also just experienced two rate increases which will immediately raise payments – by 16% (secured lines are usually demand loans).

But wait. We know almost half the folks with HELOCs don’t make regular repayments  – principal or interest. Every month the size of their borrowing simply increases by the unpaid interest, until the debt limit is achieved. That day is now coming a lot faster.

Meanwhile, as the cost and size of home-equity lines swell, the value of the real estate securing it is shrinking. If this continues for a couple of years, vast numbers of people may find they face a margin call on their homes. Ever wondered what happens when you have a mortgage and a HELOC, but no longer any equity? Screwed.

As rates normalize, this could be a decade-long housing slump.  Increasing numbers of people who were porcine debt-snorflers may be unable to borrow more, and be forced into selling.  Will that not drive property values lower as supply topples demand?

So many questions. So many realtor Audis about to be returned. And so evident is the damage too-low interest rates have had on housing affordability, debt accumulation and Canadians’ brains. BMO egghead Robert Kavcic sent around a meaningful chart at the end of last week when it became oh so clear the Bank of Canada is serious about reversing its monetary policy mistakes.

“It’s no coincidence,” he says, “that, after a multi-year period of well-behaved price growth, the Toronto market began to explode after the Bank of Canada cut rates twice in the first half of 2015.” The average home cost $552,000 when the central bank shockingly cut its benchmark rate as oil prices decline. Two short years later that house was changing hands for almost $200,000 more. In the meantime wages flatlined. The only supporter of inflated real estate was debt. Look at this:


So what did cutting rates do? “It sent a clear message that, after barely containing their enthusiasm for years as rates were expected to (eventually) normalize, buyers/investors/speculators had a free pass to run amok.” And muck they did. Borrowing and spending without discipline. Kavcic says this market might still land softly. I think the bank made him do it.

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Just a week now until your MP goes back to work in Ottawa, which sadly means Pride Parade season must be over. Besides being hard at work legislating weed (Ontario announced Friday it’ll take over drug dealing) the prime minister plans to drop the hammer on the self-employed this autumn in the name of ‘middle-class fairness.’

We’ve kicked this canard a number of times, but he’s still quacking. This weekend June, a YVR dentist, was in touch. “I graduated 7 years ago and incorporated last year,” she says. “The most expensive thing I own is a 2010 Jetta. My husband and I rent a small apartment. I work as an associate dentist for 2 different owners who each own multiple dental practices.”

She’s aggrieved and wanted to write T2’s money guy, Bill Morneau. “I was trying to tell them, look, I’m not rich, these other guys are. Look, this isn’t fair, I took on all these risks and expenses and extra work that salaried people didn’t. I stopped writing when I got the sudden feeling that I’m yelling at someone who is pretending to be deaf. Well of course they know exactly what I am. That’s why they chose me. They already know I’m not rich. They already know it’s not fair. I’m just political cannon fodder.”

Well, she wrote, anyway. Here’s some of her note:

I think you already know that you are not actually taxing “the rich,” and that you are not actually trying to make things “fair.” I think you are purposefully using emotionally charged labels to turn public opinion against small business owners, because while everyone is squabbling about what is fair and who is rich, you just want to hide the fact that you need lots of money for a massive spending spree, and you are not about to tax the actual rich. I can see that you are trying to push these measures through as quickly as possible, with a farce of a “consultation period,” because you don’t actually want to give anyone time to investigate what is best for Canadians in the long term. You decided the easiest thing is to grab it from people who earn enough to cough up the money, but not enough to put up an expensive and drawn-out fight.

That is why you are shaking down small business owners, because broader hikes that affect everyone will cost you votes, and you are too afraid to take on the Bay Street CEOs. That’s also why you keep harping on about “income sprinkling” even though, out of the three proposed measures, it brings in the least money. You are using it as an emotional trigger, because you know it will draw more potent knee-jerk hatred than the boring and esoteric intricacies of passive income taxation. You believe you are scapegoating a group of people that probably would not have voted for you anyway, or is small enough that the loss of their votes does not matter.

This is classic divide-and-conquer – single out a small group who have enough to pay but not to fight, convince everyone else their problems are caused by these “tax cheats,” and while they squabble, you reap the profits to cover your excessive spending, keep the actual rich people from throwing an expensive hissy fit, and let the next government worry about the political fallout when small businesses close, people lose their jobs, and health professional shortage becomes suffocating. It is brilliant – the money comes in right now but the fallout can take decades to unravel, this policy can hardly be seen as the spark that started the forest fire while everyone is bickering, and the mob will be so smug and satisfied with having taken down “the rich” that you can leave the CEOs and Panama Papers crowd unscathed. You even managed to make the schadenfreude so cathartic that most people forgot to criticize how you are collecting and spending their taxes, which will not be lowered despite “the rich” finally paying their “fair share.”

June for MP! Are you in?

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September 10th, 2017

Posted In: The Greater Fool

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