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February 15, 2018 | Being Rational

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.

Last Friday we learned 88,000 jobs offed in January. As Ontario’s new minimum-wage law took effect, losses for part-timers hit a record. Adios 147,000 paycheques. As this week concludes, the news about real estate is just as bad – the largest-ever sales plop, down 14.5% across the nation in 31 days.

Toronto was punked. According to CREA, deals there tumbled 27%. Hamilton took a 32% hit, K-W fell 20% and Ottawa was hammered for 33%. The reason? Panic-buying in November and December by people trying to ‘beat’ the new stress test led to a bust in January.

Say the realtors: “The decline in January sales provides clear evidence that the strength in activity late last year reflected a pull-forward of transactions, as rational home buyers hurried to purchase before mortgage rules changed in 2018.”

‘Rational’ buyers? You mean the ones who bought real estate just before stiffer mortgage rules and higher mortgage rates dropped prices? Who paid more than they had to? House values immediately fell 2.4% (that’s an annualized 28%) once 2018 unfolded. It’s hard to understand how anyone could have not seen that coming – which means a lot of new buyers now carry bigger mortgages because they feared not qualifying to borrow as much later. Of course, if they’d waited, they could have borrowed less and had the same house.

Oh well. I tried.

So what next? More of the same. This won’t be a great year for real estate as the cost of money escalates. Not just mortgages, of course, but also those lines of credit which have become so bloated in recent years ($220 billion) – almost all of which are variable rate, demand loans.

Burnaby blog dog Pete, a finance dude in the health care business, has some proof for us.

“In past posts I recall you warning how lines of credit are demand loans and the terms can change at any moment,” he says, “and here is a clear example of how quickly that can happen.

“I received this letter last night from TD bank and it’s scary to think what might be happening across the country.  I have a credit score over 800 and minimal debt but what about the people that have $100k LOC’s out there?  This could be the beginning of the credit crunch that we’ve been long expecting right?  Even a small increase could push people over the edge – well this isn’t exactly a small increase on an already high number.”

Pete’s LOC rate, as you can see, is mushrooming by 1.79%, to a withering 9.24%.

Meanwhile, have you been keeping tabs on stocks? That correction is history, it seems. Investors decided to stop being worried about soaring bond returns and accept that we’re shuffling into an era of higher-growth, higher-inflation, higher-yields and higher-rates. The odds of yet another Fed rate increase next month have risen to 90%, up from 85% earlier this week. The Dow is back above 25,000, and markets are now pricing in four more US central bank hikes by the end of next year, with three of them in 2018.

Bond yields, in other words, will continue to edge up. And it’s the bond market that determines Canadian five-year mortgage rates. So with almost half of all existing home loans coming up for renewal this year, it’s a slam dunk most people will be facing higher monthlies as a result.

Add it up. A weaker job picture, increased borrowing costs, stiffer mortgage regs and massive government intervention in the real estate market – where sales have deteriorated and prices are already under some pressure. Now coming up in the next 12 days: BC’s market-killing spec tax, and a federal budget out to fry investors and small business peoplekind.

At least Patrick Brown found his spine.

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February 15th, 2018

Posted In: The Greater Fool

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