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January 24, 2018 | Not cool

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.

There comes a point at which people can’t afford houses. In Toronto, it could be here.

The new reality is most evident in the new-house business. The average price of a fresh home, smelling of drywall compound, paint, glue and all that quality particleboard, is now $1.223 million. Too much. As a result, sales have plunged.

As 2017 ended, that was obvious to everyone. In all of the six-million-plus GTA, just 322 new single-family dwellings (that includes detacheds, semis and towns) were sold. That was down a shocking 82% from year-before levels, and 76% below the 10-year average. In fact it was the lowest recorded number. Ever.

So, if you’re a big builder sitting on serviced land and wanting to stay solvent in a real estate market rapidly losing altitude, whaddya do?

You betcha. Put your houses on sale.

The result for Mattamy Homes – the biggest of the big (so big it’s constructed a factory-based house assembly line in the past) – is a social media storm. The shaming started this week with the media interviewing pissed-off people who bought new homes a year ago (not yet built) and now see similar properties in the same hood being marketed for less. A lot less – $90,000.

Apparently real estate sometimes goes down. Who knew?

“To come back a year later and see the same house that we bought is now $90,000 cheaper, that’s not cool,” says a buyer who cannot understand why her unbuilt house cost more last year than an unbuilt house in the same subdivision, sold by the same developer now. And you can bet nobody else on Twitter, Snapchat or IG will get it, either. Houses always go up, and if they don’t, then Mattamy should take the hit – not the fools who bought at the market’s peak. Life is so unfair.

I’ll call him Franco, because as a new-housing business guru, a familiar media face and insider, being quoted on this blog is careericide. F looks at the Mattamy pricing chop in east GTA and says he understand completely. “Face it. Low rise prices have decreased on average between 17% and 20% in Durham Region since April 2017. There thousands of homes to be built there by many of the major builders over the next few years and they’re now making adjustments to their pricing to recognize that lack of sales over the last few months. They are aware of what has (and is happening) in the resale market.”

But Mattamy’s being a bit ballsy. Most builders are throwing around incentives (free rec rooms, free landscaping, an extra tree!) rather than chopping prices and starting a war with the greater fools who lined up outside the sales trailers last spring. “This notionally protects the price that existing buyers had paid while maintaining a comparable price point for all concerned.”

Will the builder be savaged online now? Of course. The absolute convictions of an entire generation are being shredded. In a shocking, debilitating series of revelations they’ve discovered that, yes, the cost of money does go up. No, the government isn’t going to move in and protect their mortgage rate. Justin may not even care. And, OMG, the price of a house can be lower than it was last year. Suddenly using twenty times leverage to buy a condo or a semi at the most inflated value in history, with money that will cost a lot more when it renews, doesn’t look savvy. In fact, it could be crushing.

“The Mattamy move is surprising,” adds F, drawing deeply on a Chai-flavoured vape. “How will this end? Mattamy should consider adjusting the price to the existing buyers. They may be worried prices won’t return to what they were a year ago, and that their sales volumes will not recover quickly enough to achieve economies of scale once construction starts. Also, they’re trying to increase market share, since most other builders have canned their openings until the smoke clears.”

The company has made a small concession ($30,000) but the jilted buyers of 2017 are still deeply offended. Mattamy shrugs. Buyers are very happy when the market goes up, an exec says, so “they have to appreciate that the same decision could go the other way.”

And so it starts.

Rising mortgage rates. The stress test. Falling prices. And lower valuations for everyone who was insane enough to jump into a market at its peak, believing it would ascend forever. Today’s generation of first-time buyers has never experienced a falling market. Never borrowed a mortgage at 5%, let alone 8%. Never seen a property grow illiquid. Never felt trapped in real estate that could not be sold. Never faced a loan renewal at a higher rate. And never seen houses go for less this year than the last.

Apparently many of them think life already sucks. So this should be interesting.

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January 24th, 2018

Posted In: The Greater Fool

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