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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 25, 2018 | Not So Fast

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 March Rob Alexander was a happy guy. Houses were flying off the shelf. Agents were ecstatic. Sellers were raking it in. “Unprecedented” was the word Rob chose to describe what was happening in Barrie, the burg 110 km north of the Big Smoke, which is now part of the commutershed.

“Monthly home sales in March 2017 cracked 700 for the first time in history,” he said in the media release of the real estate board, of which he was president. “That is perhaps not so surprising since we have been experiencing record level demand for some time now, but it is unprecedented to see this many sales this early in the year. April, May and June may well see even more homes trade hands…”

The city of 150,000 souls, long a northern outcrop of the GTA, connected to the distant downtown by one of the deadliest, scariest expressways in the nation, suddenly turned hot. Minivans streamed north as families traded more snow and a longer commute for dramatically cheaper houses. But soon the Toronto bubble had spread to the shores of Kempenfelt Bay.

Sales last March shot higher 27% year/year in the area and 40% in the city itself. Astonishing to the locals was a 36.9% surge in house prices, catapulting the average through the half-million mark, to $547,847. Barrie was cheap and blue collar no more.

Well, the fire’s out. In fact, the town borders on a real estate disaster.

Transactions have plunged from more than 700 in 2017 to just 263 last month – a drop of more than 66%. The overall decrease in the first two months of the year was 33%, so you can see the downward momentum. Within the city itself, a mere 139 sales – 64% fewer than this month one year ago. The average price is also dropping – off 4.5% to barely over $509,000 – showing that even sticky valuations eventually come unglued. Likely there are bigger drops yet to come, as has been the case to the south in Vaughan, Richmond Hill or Markham.

Barrie provides a neat microcosm of how real estate thrives and dies. House sales and prices soared wildly for no discernible economic reason. The average place cost $381,000 in 2015, and jumped to $547,000 twenty-four months later – a 43% bloat. Meanwhile the population remained relatively stable, incomes were static (the average family brings in $81,000 before tax), and no major employers opened their doors. At the heart of the bubble was speculation, fueled by low interest rates and herd instinct. As the GTA swelled, so did the hinterland, from Niagara to Kingston – a sea of house horniness almost 400 km wide.

Give the 2-hour commute to Toronto, there was always a reason Barrie was cheap. But that was erased quickly as FOMO pushed further and further north.

Today Barrie is pooched. At least those who purchased a year ago are. They bought at peak house in a place where real estate is destined to continue to fall in value. Simply put, it lacks the population base, in-migration or internal demand to sustain bubble prices. That’s tough news in a town where there are 1,000 realtors and just 263 sales.

Outside of demand 416 hoods, urban Van and a few other spots, 2018 will be tough on most regional markets. In two or three more months the effects of the B20 stress test will be evident as credit is seriously restricted for newbie buyers. Ham-handed politicians continue to make things more dire with foreign buyers taxes, enhanced property taxes, empty house taxes and BC’s stunningly daft speculation tax. Now we have the spectre of a Trumpian trade war looming and Canada, as a trading nation, is in the crosshairs.

Of course, the greatest threat to housing is the same thing that most inflated it – the cost of money. A year ago, when Barrie was Stormy Daniels-hot, purchasers could find five-year mortgages at the scanty rate of 2%. No more. Fivers are close to 3.5% and with the stress test buyers must qualify at 5.14% or higher.

The US Fed raised its benchmark rate another quarter point last week – the fifth in about a year. Current odds are running more than 80% that the Bank of Canada will hike the cost of money for the fourth time in 10 months at its May setting, driving the stress test ever-closer to 6%.

Meanwhile, we have uncertainty. Disquiet. Concerns. Financial markets have been volatile and changeable. International bodies keep warning our banks have too much property exposure. Trump, as detailed here Friday, is quixotic and unpredictable. There’s no NAFTA deal yet, and now we have a new threat from Washington. That could bring big news in Barrie, where the largest private employer is a Honda factory. The second is a casino.

This blog has told you often that people are weird. They lust for things exploding in value (705 sales) and shun them when they fall (263 deals). They make really bad decisions ($547,847) then have a hard time admitting it ($509,000). They buy on emotion because everyone else is. The behaviour is classic, and foolhardy.

Highway 400 will be a sad ride for a while.

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March 25th, 2018

Posted In: The Greater Fool

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