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December 18, 2017 | Common sense

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.

Days ago, this pathetic blog asked what the landing of B20 – now scheduled for two weeks away – would mean to the real estate market. A few sketchy opinions were offered, ranging from a serious blow to prices and sales to an onslaught of renewed horniness. In short, nobody knows. But it’s coming, and once landed it’ll not be unmoved.

Herewith, then, the Official GreatFool Synopsis. The envelope, please….

*The market will be pooched.*

And following are the reasons why B20 will be the last straw breaking the back of residential real estate in most hoods in most markets. In the bubble cities it will help create and sustain a long, slow, resolute slide in values. In the normal cities it will spank speculators, punish amateur landlords and cure people of thinking they can buy a house, live in it for two years, then sell for more than they spent. It’s already happening, which you know if you live in Halifax, Edmonton or Ottawa.

Actions have consequences. Bringing in a universal stress test every single buyer must pass is the strongest single action ever seen in the Canadian housing market. Already there are signs of weakness, stagnation, ennui and je-ne-sais-quoi in Calgary, the GTA and the Lower Mainland. Alberta home prices are down by 8%, inventory in Toronto has exploded higher, the burbs are dying and sellers of detacheds in Vancouver are feeling lonely and unloved. These are not healthy markets, even before B20 has touched down.

In fact, mortgage dudes, realtors and economists think a significant amount of demand was pulled forward from 2018 into November by newbie buyers terrified they’d fail the test in January. These are sales which won’t be taking place later, and have helped mask the deteriorating conditions now taking hold.

For example, consider Richmond Hill in the GTA – less than a year ago one of the frothiest places on earth where every listing was swarmed and sellers sold in days, or hours, for huge premiums over ridiculous asking prices.

“You may find it interesting that Richmond Hill detached median sold price has dropped a whopping $122k, down to $1,100,000, or a full 35% down from the peak in April,” says Toronto real estate broker Alex Prikhodco in his monthly report to us. “In January-February sellers are going to get crucified. Expect a further drop of 10-15% before March 2018.”

And, yikes, look at this. The average sale price of almost $1.7 million nine months ago is now $1.1 million. If Alex is correct, these houses are on their way to the $900,000 range, for a plunge of about 45%. Pity all those buyers who were desperate to secure a particleboard-&-glue McMansion last March “before being priced out forever.”

Feeling not so rich in Richmond Hill


Meanwhile, let’s use some common sense. Canadian household debt just shot past a new milepost, with 65% of the $2.2 trillion we owe being in mortgages. Debt is rising faster than incomes and during the past nine years of cheap money nobody, apparently, used low rates to pay down their loans. They just borrowed more.

So, here come the consequences. Trump, his tax cuts, US expansion and renewed global growth are bringing back a little inflation and fatter interest rates. The cost of money is going up in 2018 in both Canada and the States, just as B20 affects the credit market. Less credit means cheaper houses. Look out Richmond Hill.

At the same time, lower American corporate taxes have propelled stock markets skyward, with more to come, it seems. A boring balanced portfolio in 2017 delivered 9.5% at the same time Toronto real estate was negative 2%. As more people understand where risk truly lies today and run screaming from insanely inflated house prices, expect the divergence to widen. Be safe. Be liquid.

Finally, a reminder of how fast sizzling real estate markets can turn frosty. In April the Ontario government unveiled a mishmash of policies called the ‘Fair Housing Plan’ (politicians love the F word). Here’s what happened to sales: over $14.5 billion was erased in a seven-month period.

Toronto real estate just took a $14-billion hit

Source: Toronto Real Estate Charts

This time the policy change is much more impactful and immediate. When buyers qualify to borrow 15% or 20% less, sellers have two choices: no sale, or drop the price an equal amount. Seems simple enough. Pooched.

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December 18th, 2017

Posted In: The Greater Fool

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