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January 5, 2018 | Opportunity Coming for Those Who are Ready

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

While still up .7% over the last year, Toronto home prices fell for the 7th consecutive month in December, down 8.9% since May–the largest seven-month decline in data tracked since 2000. Falling 3.5% since November, the average sale price in Toronto is still–a wildly un-afforable for most–$735,021 ($1.2 million for single detached homes.)  See Toronto home prices fall for seventh month as lending tightens. Here is the chart.

Still with Canadian households at record indebtedness, and new lending restrictions just biting this month, the long overdue slowdown in the real estate sector is barely just started in Canada.  The economy which has been precariously dependent on this one sector since at least 2014, wobbles in the balance. See:  Global Housing Markets are ‘slowing sharply’. Is Canada next?

As the Bank of Canada frets over consumer debt levels and fantasizes about room for higher rates, this month’s new “stress test” for traditional mortgages is expected to reduce homebuyers’ purchasing power by about 21% (ie., 21% lower prices needed) and disqualify 1 in 10 would-be-borrowers in 2018 and beyond.

Now more levered than Americans before their housing bubble bust in 2006, Canadians are wholly unprepared for a secular downturn in real estate–something not seen in Canada since 1989.

After the average house price in the greater Toronto area (GTA) increased 113% in real terms between 1985 and 1989, the bubble burst.  See Toronto housing bubble in 1989:

Coupled with the early 90s recession, a spike in unemployment and a drop in the inflow of immigrants to the area, housing prices in the GTA collapsed. Between 1989 and 1996 average price of a house in GTA have declined by 40% adjusted for inflation…Downtown of Toronto was hit the worst with over 50% decline in value of a home.

Most often missed in these discussions, is that once debt and speculation-fueled financial bubbles burst, it typically takes more than a decade (or two!) for prices to recover their prior peak. By then those who held high, with leverage and low cash liquidity, have long since liquidated low with losses:

Unaccounted for inflation, it took 13 years for the average house price to recover in the GTA. In nominal terms, the average price breached the 1989 peak of $273,698 in 2002.

Only those who are prepared and waiting with low-leverage, patience and cash savings are able to take advantage of the most lucrative and low-risk investment opportunities in each secular cycle; while the unprepared–oblivious and/or reckless–as well as those needing to downsize holdings to raise cash for retirement, all suffer in the aftermath.

This price expansion cycle has been extra-long thanks to financially suicidal, central bank-enabled, credit expansion following the 2008 financial bust.  This suggests that the price contraction cycle–investment opportunity–that follows next, while also be equal and opposite in the other direction.  Who is ready?

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January 5th, 2018

Posted In: Juggling Dynamite

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