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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 5, 2018 | No Love

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.

Why did the Dow pop 300 points Monday? Because Trump’s blowing smoke. There’ll be no big whack against Canadian steel imports, which means all the hipsters and anarchists in Hamilton are safe. It’s political theatre. Crazy Donald stuff.

That was the thinking once senior Republican Paul Ryan openly disagreed with the president, joining just about everyone on the planet in pointing out how demented causing a trade war is. The impact was immediate. Stocks up. Bond prices down. Loonie shored. Yields up. Interest rate hikes back on the table. NAFTA talks carry on.

Of course, Trump being Trump, this could all change by Wednesday morning. But at this point markets think the Presidential panic of last week was overstated. So what can we expect now?

The Bank of Canada will increase rates again, but not this week. Maybe only once in 2018, perhaps twice – that depends on the economy, on trade and the dollar. But they will not be cut, and no relief is coming for a housing market about to enter its worst period in a long, long time. So crappy, in fact, the Toronto Real Estate Board delayed releasing its numbers on Monday, hoping for a 7.2 earthquake somewhere or maybe a new royal pregnancy.

No such luck.

Brenda is 83, lives on CPP and OAS and finally sold her mid-town house after Derrick, her 30-something son and blog dog, pointed out the obvious. So, suddenly, she could expect $800,000 and a monthly income bigger by $4,500, most of it tax-free. Lots to rent a shiny new condo with and still live on double what she had before. Closing was set for Friday. She moved out several weeks earlier into the new place. “That was hard,” she told me, “after forty years. Can’t believe the amount of stuff that had to go. Oh dear.”

Well, the buyers didn’t close. ‘Can’t get financing,’ was the reason – hard to believe at the end of the last possible day. More likely they saw a declining market, got cold feet, and thought it would be cheaper to choke. Maybe come back on the old lady for a big discount later. Or just walk away from a 5% deposit as the cheapest way out of a poor deal.

Brenda is left with a year’s lease on the condo, an empty, ugly house showing its age, all the costs of home ownership, and yet no income to pay for it. To fight she’ll have to hire a litigation lawyer and foot his ten-grand retainer. Which won’t happen. And the buyers know it. Despicable. Let’s hope they don’t meet Derrick outside a dark donut shop in the east end.

Expect more of this. The numbers out of the Toronto Real Estate Board – tomorrow, if they have the courage – will be awful. A big drop in volumes, especially for detached homes. Prices will stay relatively sticky, and the extent of the market weakness will be somewhat masked (again) by the ongoing moister demand for condos. As documented here, there are already drops in sale prices of 20% or more in many parts of the GTA, so the news of falling sales will further push the meme that this is a crappy time to buy.

A major myth is that house-lusty buyers pace anxiously on the sidelines of a robust real estate market, ready to run in and pounce once prices crash. That’s been at the core of the NDP strategy in BC, for example, where tax upon tax has been levied in the hope of crashing prices so properties become affordable and will be snapped up by average families.

But, it won’t happen. Not in Van. Not in Toronto.

People want things that are rising, even if they can’t afford them. They shun things that fall, even when they can buy. So when valuations drop by a fifth or a third there’ll be no feeding frenzy. Fear always replaces greed and desire. People hang off buying because prices might erode further. They’re scared of making a mistake – which seems a lot more real to them in a falling market than a rising one. Mostly they lack the courage to do the unpopular thing.

Thus, sales and prices fall together in a self-reinforcing loop. This is human nature on display. So when realtors reluctantly announce average prices have crashed by a quarter, you know what to expect (and what to do).

It won’t be tomorrow. But it’s coming.

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March 5th, 2018

Posted In: The Greater Fool

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