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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

February 21, 2018 | Capitulation

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.

Has this blog capitulated? Stopped snarling? Rolled over for a tummy rub?

That was the allegation yesterday in the wake of the tax-tax BC budget and the silly expectations fostered by the Dippers there that they’d crash real estate values so every moister could have a home. On one side, the politicians are out to punish non-residents who buy or own real estate (as in Ontario), thinking that will lessen demand, while they promise to pump $6 billion into the market  – increasing demand. Suck. Blow.

Being prickish, this blog said:

Real estate values will inevitably moderate as the cost of money rises and household debt goes from critical to moronic. But nobody should expect 40% declines in YVR or the GTA, especially in the urban areas always in demand. Even at that level, most people would find it unattainable without committing 100% of their net worth to a single asset. Unwise.

This may need more ‘splaining – because in no way has the view altered that housing is entering a grind that will push valuations lower over a prolonged period of time. Every market is unique, so some will be impacted more than others, even as sales struggle everywhere. Places like Fredericton, Lloydminster, London or even Montreal will fare better, since price-income ratios were not blown to extremes. Slaughtered could be swaths of the 905 or the LM – Richmond Hill, Vaughan, Ajax, Burnaby, Abby or PoCo – where prices swelled as the stupid money sloshed out of Toronto or Vancouver.

As far the urban cores of those cities, as mentioned, there’s no 40% drop on the horizon, given the paucity of listings, building constraints and the fact the largest demographic in society (Boomers just passed the torch to the Mills) think work needs to be within an easy bicycle ride of home. This is the most downtown gen in Canadian history, now creating its own frenzied market, driving up condo prices 24% a year even while detached values crumble by 9%.

Besides, we now know government attempts to protect moisters from themselves have failed. Mortgage amortizations were hacked from 40 years to 25. Down payment thresholds were raised. CMHC premiums were jacked. Insured buyers were stress tested. And, after the mills ran to the Bank of Mom to avoid it, that test was applied to everyone. Meanwhile mortgage rates have snaked higher with the Bank of Canada pulling the trigger three times in the last few months.

And still they buy.

So addled with real estate horniness is this cohort that any noticeable, Tweetable drop in house prices will likely result in swarming. If the kids would just go on strike for a couple of years, house appraisals would fall faster than a Conservative’s pants, but alas, won’t happen. This forms the core of why demand hoods of Van and TO will remain that way – and why anyone who can’t play should either stop bitching, or move.

As for the outlying exurbs, or places which never deserved to inflated (Niagara, Langley), the story’s completely different. Risk abounds. The next couple of years will really shock people who were in feeling safe in their Huggies the last time mortgage rates went north of 6%.

On Wednesday US central bankers said things are awesome. Corporate profits are up double-digits. Donald Trump actually did something about guns. Bond yields are fat. And now everyone expects interest rates to go up two or three times more in 2018. Again next year.

The shift continues from that low-rate, low-growth, cheap-money world that wildly inflated house prices and family debt, into something far different. Nothing affects real estate more than the cost of money, since almost everyone uses extreme leverage to get it. For eight years rates fell or sat in the ditch, and house prices inflated insanely. Now we’re on the path to normalized rates and property values will respond the same way. Worse, after that orgy of buying Canadians carry record loads of mortgage debt, plus $220 billion in home lines of credit, and most of that borrowing will be refinanced this year. Ouch.

So the direction of real estate overall is down. Obviously. All that kneejerk, tax-crazed politicians like those in BC and Ontario will do is acerbate the decline. However in pockets where the moisters like to gather to drink Chai, eat kale and look at their phones, the bets are off. They can’t help it. Terminal house lust. They’re doomed.

Capitulation blog?

Not even close. But about that tummy rub…

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February 21st, 2018

Posted In: The Greater Fool

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