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September 8, 2017 | The Shaming

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.

John Pasalis is a smart guy. The realtor-broker looked around him in April of this year, when real estate values galloping higher by an insane measure every month, and concluded…

“People are buying 100 per cent on debt. They are refinancing their homes. They don’t care if they are cash-flow negative. People just think they’re going to make money. Everybody wants another property. I’m talking friends, aunts.”

History will show, after we go through the difficult days ahead for our indebted brethren, just what happened. It was not Chinese dudes, Russian oligarchs or Iranians that spiked house prices. It wasn’t immigration. Nor did restrictive government land policies explain it. Bidding wars, multiple offers, bully deals, flips and assignments were not responsible. Plus you can rule out greedy, unethical, aggressive or plain incompetent realtors. Even the moisters get a pass.

Low mortgage rates and dumb pro-housing policies like free RRSP loans played a key role in explaining things, but those merely greased the way for the real cause of a gasbag that will end up wounding the middle class. That, of course, is speculation.

As the bubble bursts, one in seven families in the GTA own multiple properties. Mortgage debt has been increasing by three times the inflation rate. The debt-to-income ratio among the majority of those buying seven-figure homes is 450% or greater. At one point earlier this year some developers estimated 80% of sales in new condo buildings were to people with no intention of moving in.

Pasalis was quite correct. Real estate became a cult, an obsession and then a disease. Speckers and flippers replaced the FOMOers as the driving force in markets in Vancouver, Victoria, Toronto, Hamilton, the Lower Mainland and southern Ontario right through to Niagara, London and north of Barrie where the drywallers and pilots live.

As the Americans discovered a decade ago, this is about as dangerous as a real estate disaster gets. ‘Investors’ with multiple properties, who borrowed against inflated principal residences to buy more, or stuffed down payments in the hands of their spawn, used 100% debt to do so. When prices decline and the equity in all properties falls, panic sets in. Condos or detacheds with negative cash flows – which made sense when prices were inflating – turn into financial sinkholes.

Even worse is the impact of rising mortgage rates. Not only do they scare buyers and depress values, but the higher cost of money immediately impacts variable rate mortgages, which are the loans of choice for most speculators. Those VRMs have now jumped twice in two months, and given the latest GDP and jobs stats, more increases are to come. The economics of buying properties for short-term gain, or rental cash flow, just blew up.

In case you missed it, the Yanks have recently discovered it was speculation by upper middle-class families that created a housing monster which ended up eating them. Forget the common belief that deplorables hopped up on NINJA (no-job, no-income) subprime loans caused the crisis by defaulting in droves on mortgages they could not afford. Nope, says a paper authored by several university economists. Never happened.

Analyzing credit data, they conclude the biggest snoflers of new mortgage debt during the housing bubble were those with scores in the middle and top of the credit score distribution. People at the bottom didn’t actually borrow more, with their debt levels remaining constant. Their default rates did not spike when crisis hit, either. It was the wealthier people freaking, selling and walking.

This suggests lower-income, worse-credit people who bought houses were doing so because they wanted to live there. When the bubble popped, they stayed. It was home. The richer folks, meanwhile, succumbed to the silly notion real estate would go up forever, profits were essentially guaranteed, debt used to get property was good debt, and leverage was the best possible tool to magically manufacture wealth. So they used low rates and willing lenders to chase drive valuations to levels unsupported by the economy, incomes or population growth.

Being better off, these folks qualified to borrow more, based on their cash flow or the equity accumulating in their principal residences. But it could not last. It didn’t. Just like here. The researchers reached this conclusion: “The rise in mortgage delinquencies is virtually exclusively accounted for by real estate investors.”

Well, Canada is not the US. We have no history of widespread mortgage defaults. Our lenders are better protected against mortgage portfolio declines. There’s no reason to expect what the housing crash did to Wall Street will be replicated on Bay Street. But there are common themes, suggesting common outcomes. If so, the descent in Canada may only have begun.

House porn. Just as healthy as the regular kind.

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September 8th, 2017

Posted In: The Greater Fool

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