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March 21, 2018 | The bully

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.

It’s just an ugly half-century-old bung on 55 feet of uninspired dirt in the worky East End. But when it went up for sale eleven months ago, realtor Dan was surprised.

“So I sold the place with a bully offer,” he says. (That’s when a purchaser disregards the seller’s desire to accept offers on a certain date and ponies up an extreme bid to bully everyone else out of the way.) “In this case the seller was wanting to wait until the listing came out. That didn’t happen. The house had no improvements for 20 years, and even had just 60-amp service. So I sold it to him. It was all I could do to make him see the light.”

Thus did the place on Applefield, Toronto, change hands. It had been listed for $849,900, and sold for $890,000. With double land transfer tax the bully bidder shelled out almost $920,000. Yes, peak house.

Two weeks later the Ontario government lowered the boom with a go-home tax, universal rent controls and more. Then interest rates started to snake higher. News of the B20 mortgage stress test spread. And suddenly the bubble was gone. No more 30% year/year increases. Instead, the beginning of the great unwind.

Well, an identical house across the street is for sale, and realtor Dan is shaking his head. The ask is $748,800. If it sells for full coin, the net after commission will be $711,360 for a real-world, one-year loss of equity on this street of 22.6%. Ouch.

Ignore the real estate board stats, because this is what’s actually happening to detached homes in most hoods, in most markets, most of the time. The buyers are gone. Sellers who waited to list are freaking. Prices are tumbling. And it may have just started.

As you know, the US Fed jacked rates again Wednesday. That it would, was a slam-dunk certainty. The cost of money has now jumped five times in little more than a year. As a result bond yields went up, the stock market swallowed it and the US dollar declined. All as expected.

The big question – given a shiny new boss at the American central bank (Jerome Powell) – was what comes next? How aggressive will the bankers be in piling on more interest, based on their view of the Trump economy? Now we know. Very.

Here’s the forecast just received: three increases in 2018. Three more in 2019. At least two additional in 2020. The federal funds rate which sat at zero during the dark, desperate, credit-crisis Obama days will hit almost 3.5% by the time Trump squares off against Oprah. This is happening because the Fed believes modest economic growth will be sustained, almost everybody who wants a job will have one and the Republican tax cuts will fuel it all. As a result, lots of consumer spending and business investment will occur – and higher rates will result, to ensure no wage-price spiral or romping inflation.

Fine. No more doubt. Seven more American rate hikes coming, bringing the total to 13 in this tightening cycle. That’s not far off the historic average, but it must scare the poop out of moisters and real estate bulls who thought (and said so here) that mortgage rates could never rise above 3% without causing the market to crash. “Because everyone is so in debt and has no money,” they whined, “the government wouldn’t dare do it.”

Well, kids, the government isn’t running this show. The CBers are. Get used to it. In this country the mandate of the Bank of Canada is not to worry about your mortgage or even economic growth, but rather to protect the value of the dollar, keep inflation under control and maintain monetary stability. As such, you can be sure rates here will also rise – as they have in the past when 92% of the time the BoC aped the Fed. It may take a few months, but it’s coming.

This is what makes politicians so dangerous. They diddle with housing when natural forces are the best tonic to issues like unaffordability. The risk now is that the universal mortgage stress test overreaches. Or that Toronto will err with a vacant homes tax. Or BC’s provincial politburo will tax a declining market into a dying one. Household debt is extreme, residential real estate is leveraged up the wazoo, the cost of money is plodding higher and now governments – who allowed the bubble to inflate – have chosen the worst moment possible to prove they can push everyone around.

The outcome will be far worse as a result. More proof bullies never win.

(Note: An earlier version of this post incorrectly identified the exact home for sale. That reference has been removed.)

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March 21st, 2018

Posted In: The Greater Fool

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