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November 14, 2017 | The apologist

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.

On a day when Venezuela decided to shaft bondholders and global commodities choked, the Bank of Commerce announced next year will be Party Time for real estate in Toronto and Vancouver.

Huh? Has the bank officially embraced weed, nine months early? After housing’s excess and remorse in 2017, with big new issues looming next year, how can CIBC make such a bold declaration like this?:

“When the fog clears,  it will become evident that the long-term trajectory of the market will show even tighter conditions. The supply issues facing… Toronto and Vancouver will worsen and demand is routinely understated. Short of significant change in housing policies and preferences, there is nothing in the pipeline to alleviate the pressure.”

This is the work of Benny Tal, the bank’s long-time real estate-friendly econo guy who is telling everyone who sold at the height of the frenzy last Spring (so they could buy in again for less during the Funk of ’18) that they’re fools. It stands in stark contrast to the opinion of real estate finance guys like RateSpy founder and veteran mortgage broker Rob McLister. Even without the peril of rising interest rates, McLister concluded this will be the result of the new universal stress test, now six weeks away:

“Slashed Buying Power — The majority of homebuyers put down 20% or more. The bulk of those are uninsured mortgage customers. OSFI’s stress test would slash buying power for prime buyers by roughly 18%—assuming they chose a bank mortgage and 25-year amortization. For non-prime borrowers, qualifying rates would immediately rocket into the 6% to 7% range—unheard of territory for most young buyers.

“Home Price Haircut — Equity is the #1 safety net keeping bank mortgage books safe. Less buying power means less demand at the same price. OSFI’s much tighter credit policies could conspire with other factors (e.g., rate hikes and debt loads) to kill a portion of demand and jeopardize equity for 70% of the Canadians who own. That soft landing we all hope for could harden up, tout suite.”

So why does CIBC’s guy discount the impact of reduced credit and the chaos that will cause in real estate? Can we tell who’s zooming us? Both views cannot be correct.

Tal’s logic is simple. Demand will outstrip supply, rising rates or the 2%  test notwithstanding. There’s a restricted supply of land in the GTA and YVR, stunned politicians (he didn’t use that exact term), plus a steady stream of new buyers, thanks to migration and immigration. While the B20 bomber stress test will reduce demand by up to 15%, the bank says buyers will find their way around it by going for longer-term mortgages (30 years+) and borrowing from subprime lenders or credit unions who aren’t subject to the new regs. This will be “troubling” he adds, since that part of the market’s essentially unregulated.

But, hormones being what they are, buyers will keep buying whether it’s wise or not. Tal also points to the pent-up demand coming from hordes of blinky Millennials between 20 and 35 who are still living in their parents’ basements (between 35% and 40% of the entire cohort) and will eventually leave the nest some time before they retire.

Yes, says, Tal, condos are likely in the soup thanks to overbuilding and the fact nobody can buy one and lease it out for positive cash flow (forget what Brad Lamb tells you). But for real estate as a whole: “The housing market is about to face its most significant test in a decade as the combination of higher interest rates and regulatory changes will work to reduce purchasing power. The impact will be noticeable but probably short-lived – mainly in the GTA and Vancouver where supply issues will continue to dominate long-term housing trajectories. At this point we do not see any real relief. In fact, the opposite is the case.”

Hmm. It could just be bank talk as the big lenders try to mitigate the damage B20 will have. Especially CIBC, with a fat property exposure. It wouldn’t be the first time we’ve been led around by the nose when it comes to housing – the Ponzi of our time. But what if Benny’s an oracle? What to do?

First, heed the word on condos. The 20%-plus price romp in the Lower Mainland and the GTA in high-rise units is irrational, the result of a torrent of newbie money diverted away from unaffordable detached homes. But evidence is everywhere the market’s being overbuilt, is still heavily influenced by speculation, and will be hurt next year in the heady combo of rent controls, B20 and rising rates. Right now the greatest degree of real estate risk likely sits at the bottom of the market.

Beyond that, CIBC’s  perma-bull Tal could be blowing smoke. After all, it was cheap rates and free-flowing credit which created house prices most people no longer can afford. Why wouldn’t rising rates and falling credit bring them down? How could mortgage brokers be so wrong about the impact on their clients? How can real estate values be sustained when the qualifying rate for a home loan goes from 2.5% in April to 5% eight months later? As more and more net worth flows into housing, yet incomes are stagnant and household debt bloats, do we not inch closer to HouseAgeddon? Do you really want to be there when things unwind?

Sheesh. Maybe I’ve just seen too much. Nortel, gold fever, dot-coms, silver hoarding, 19% GICs, plunges, bubbles, panics – and now weed, Bitcoin and $2 million bungalows. Every crisis eventually healed. Even boom became a bust. And every apologist for excess turned out to be wrong.

Is it different this time? Ask a unicorn.

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November 14th, 2017

Posted In: The Greater Fool

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