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February 25, 2018 | The Misplay

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.

Nicole is crestfallen. What looked like a great plan to downsize, reduce debt and nuke stress has yielded the opposite. What now?

“My husband and I bought a small, detached house in Toronto several years ago, had a kid, and then decided it was time to get out of the gritty city and move to the country,” she tells me. “It just so happened that we were trying to make this transition last spring when the housing market was going crazy, but that wasn’t our impetus.  We bought a lovely little house outside Hamilton (for less than the appraised value of the TO house… we were trying to be prudent), then listed our Toronto house in early May.  It didn’t sell and we only got one offer that was way under asking.”

“Our real estate agent suggested we try renting the house out for a year with the aim to put it on the market once the real estate situation had stabilized again.  We successfully rented it for a year for enough to *mostly* cover our costs (which involved remortgaging it to close on the new property and living with very tight budget that leaves zero room for things like home repairs).  The time is coming up to think about selling, but the detached housing market in that area of TO is still flaccid, with our house now likely having dropped in value by about $70K (according to comparable homes in the area).  If it sold as things look right now, we fear that we’d have moved and ended up with an increased mortgage, versus ending with a decreased mortgage (the original goal).  If we rent it out for another year, we don’t know if the value of that house will hold, increase slightly, or slip lower still.

“We are desperately trying to responsibly reduce our debt but we’re not sure what the Toronto market is going to do in the next year or so… would it be wiser to sell this year, or next?    What are your predictions for the detached housing market in west Toronto? Thank you kindly for any time you have for us on this matter.  Any advice would be greatly appreciated!”

What a classic set of mistakes. First, buying before you sell. Second, trying to time the housing market. Third, renting out real estate you should dump.

Gone, Nicki, are the days when anyone should purchase a property before the existing one has been listed and firmly sold . Real estate’s quickly become illiquid in many places, including once-sizzling Toronto hoods. Sure, I know people fret and cry out, “but where will we live?” after they’ve agreed to sell. But get over it. Buying is easier than selling and you can always move into the car.

As for renting out a place you can’t sell for what you’re asking, forget it. A bad move. Never is it cash flow-positive when you factor in the non-productive equity sitting there, plus financing, property tax, insurance, maintenance and the hassle of tenants. The rent received is lumped atop employment income and taxed to the max. And if the tenants decide not to move out, you can’t make them. Seriously. The negative cash flow on condos is bad enough. On detached places it’s truly grim.

Finally, N, you should have lowered the price and stayed last May until a buyer materialized. Yes, prices have fallen about 10% for detacheds since, and there’s more to come. Here are some recent facts to chill you and everyone else who thinks the Big Smoke real estate market will spring back this rutting season.

We’ve experienced only a few weeks of the mortgage stress test, but it’s absolutely having an impact. Mortgage brokers report the big banks are punting about 20% of all applicants, sending these people scurrying to credit unions, private lenders or guys making home loans from their vans. The borrowers often end up getting less money and paying more for it. That means they’ll pay less for a house, too.

But wait. The credit union option (they are not now required to stress-test people) may soon dry up. Quebec’s securities regulator is on the verge of demanding all credit unions in that province adopt the B20 guidelines by the end of next month. Biggie Desjardins is already voluntarily implementing it, and by the end of the year you can be sure giants from Meridien (Ontario) to Vancity (BC) will be following suit. More downward price pressure.

Plus, we’ll all be borrowing at higher rates this year. The next Fed increase in the States will likely be March 21st, and then two – maybe three- additional increases by the world’s key central bank after that. More in 2019

Said a big Fed poohbah on Friday: “It makes sense to think about three or four rate increases in 2018. We should be moving ahead with a rate increase relatively soon, in the near future.” The Bank of Canada will follow suit, lest the dollar tank and Trump flip out alleging our falling currency is a trade weapon. Safe to assume at least two hikes in Canada this year, taking five-year mortgages at about 4% and the stress test to 6%.

Already the impacts are being felt. Toronto sales down 18% last month. Resale detached houses plopping by 9%. Newly-built home sales crashing in January by 48%. More money draining out of land-based housing and flipping over into condos. Not good for you, Nicole.

Finally, more evidence our collective house lust has landed us in a bad place. In the last year borrowing on lines of credit secured by real estate jumped more than 7%, even as interest rates were rising. We owe a stunning $230 billion in floating-rate, demand loans (in addition to $1.3 trillion in mortgages)

Clearly people have been using their homes as banking machines, often tapping into the equity just to make ends meet and service other debts. A quarter of people are paying nothing on the principal and most HELOCs remain in place until a property is sold. As real estate loses value, those borrowings get harder to handle.

Get the drift, Nicki? The odds of your house restoring in value this year are probably zero. The odds of it losing value, overwhelming. And meanwhile you’re shedding money every month carrying two places, while subsidizing a happy renter.

Suck it up. List. Discount. Sell. And remember.

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February 25th, 2018

Posted In: The Greater Fool

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