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April 11, 2018 | Gross

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.

Mama, don’t let your daughter buy a condo. Don’t fork over the downpayment.  You’ll both regret it. In fact nobody, young nor old, should be ‘investing’ in a 600-foot concrete box, especially one that’s not even built. Remember the GreaterFool Pre-Construction Rule #7 – never purchase real estate you can’t actually pee in.

As this pathetic blog has chronicled of late, detacheds are in trouble and condos are hot.  Last month only 14% of available houses with dirt were purchased in Vancouver, while more than 60% of all condos flew off the shelf. As a result, detached prices are plopping in many areas (look at the graph here yesterday) while condo prices are shooting higher in the GTA or the LM by 25% year/year.

Two reasons for this. First, we’re being overrun by moisters in their plaid shirts, beards, tats and stupid, skinny suits. Mills now outnumber Boomers and constitute the largest cohort. They’re entering those nesting years in which everyone craves a couple of screamers, a minivan and financial servitude. So, real estate demand is ramping up.

But, wait. Here comes reality to mess things up.

According to Environics, the moisters may have great potential, but they’re struggling. Only 55% of his group (born 1981-2000) has full-time employment, compared to 74% of GenXers (1966-1980). And when it comes to income, the X-people average $102,000, compared with $71,000 for the kids. Given the fact detached houses in Van and T.O. cost over a million, you can see the problem.

But there’s more. It’s B20. The mortgage stress test, now in effect for just three months, effectively raises the qualifying rate for a more by 2%, which is yuge. It means a moister must be able to hand payments at close to 5.5%, instead of the rate offered by the bank. Do not diminish the impact of this.

Many people thought B20 would result in lower property values overall because of an estimated 20% shrink in credit. So they point to sticky average prices now as evidence it ain’t working. But it is. A new Leger survey confirms it. A third of all buyers have decided to shelve their house plans entirely, while a quarter have compromised on the size of the purchase.

The biggest impact has been to reroute money away from detached homes the Mills can’t afford (especially with the new rule in place) into condos – which are a major compromise, but relatively cheap. The net result: more demand and higher prices for the very worst kind of real estate investment (I told you why last week). Meanwhile in most markets, prices for detacheds haven’t moved much as potential sellers retreat, reducing supply.

Is this a healthy development?

If you think so, then come to the General Store for a triple-scoop serving of salty chocolate peanut butter ice cream, with sprinkles. The girls will dial 9-1-1 for you.

It’s all underscores the obvious: politicians screw things up. In 2017 we already knew housing markets were bubbly, wobbly and unsustainable. We knew average families were being priced out, sellers were afraid to list and interest rates rising. Despite those natural trends, governments in Victoria, Toronto and Ottawa decided to implement a blizzard of changes. Now we have anti-foreigner taxes, empty house taxes, stiffer rent controls, luxury taxes, speculation taxes, the onerous stress test and a BC politburo that can’t leave anything alone. Yes, markets have cooled. But they’ve also distorted, with risk shifting onto the shoulders of those most unable to survive it. The kids.

The average downtown Toronto condo now sells for $690,000. Per-foot resale costs have been pushed up to $876 on average and to a thousand bucks in the core – a 35% year/year gain. In Vancouver the typical condo increased 19% in the last year, to $775,000. And yes, Mills earn less on the left coast than they do in The Big Smoke. No wonder BCers have a negative savings rate and more debt than anyone else in the nation. As a consequence of all this, Bloomberg reported on Wednesday that Toronto rents jumped 10.7% y/y in the first quarter of 2018. When prices rise, so do lease rates – and vice versa.

So, in summary: government intervention and social engineering prevented the housing market from rolling over naturally. It pushed demand in the wrong direction. It’s inflated condos and worsened affordability. An entire generation is being squeezed into shoddy glass boxes with questionable long-term resale creds, escalating costs and zero suitability for growing families.

Did more taxes ever fix anything?

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April 11th, 2018

Posted In: The Greater Fool

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