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April 19, 2018 | Going Under

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.

Here’s a safe prediction for you: expect far more media stories in the coming months on people being eaten by their houses. The latest was a TV news piece in Ontario Thursday night about a woman who fears losing her home since she cannot make outrageous mortgage payments to her private lender.

Why borrow from a high-rate sub-prime mortgage broker? Because she didn’t qualify for a bank loan. B20.

Lately housing anguish and suffering is all around us. There are the Mattamay Homes Refugees who think it’s unfair they paid $1.5 million for unbuilt houses at the peak which are now worth less. They cannot close deals, they say, since their existing homes have fallen in value. The company says, tough.

Then there’s blog dog Derek, whose tale was told here, then repeated across Canada in most media outlets. Buyers who ponied up $2.25 million in a bidding war for his house last spring walked, got sued, lost and now face a $470,000 judgment, plus having surrendered their deposit. Derek told me last night he saw one of the buyers in court this week as writs were issued against their property. “We actually felt really bad for him,” D says, “as he really appeared to be a broken man. But we gave him every opportunity to just close on the house. Really would have been the smartest thing to do.”

You bet. The fools will spend half a million and have nothing to show for it. Closing would have been so much wiser, securing an asset which may eventually rise again.

But not soon. The numbers are getting worse.

New house prices in the GTA, for example, just dropped by the largest amount in eight years – since the financial crisis. A 8% year/year surge last year has turned into negative numbers now, as sale prices in February fell more than 7% year/year. The reason, Stats Can says, is a rise in mortgage rates plus B20. The real underlying reason’s even simpler: few can afford a new detached house going for $1.2 million.

The result is an 82% crash in single-family home sales from this time last year, to a level almost 80% below the 10-year average. Condos aren’t immune, despite the price surge there. Sales of new units have crashed 50% in a year, reflecting the exodus of speckers, flippers and amateur landlords who face negative cash flow.

Meanwhile, something far more sinister is happening. Families continue to siphon equity out of their houses to do things like pay existing debt. HELOC borrowing has not slowed down even as real estate sales crunch across the country. The latest stats show Canadians have withdrawn (and spent) more than $283 billion from their houses – a number which is escalating almost 8% a year.

As mentioned here before, more than four in ten of those families are not paying back their home equity loans, while a quarter make interest-only payments. Thus, the debt load continues to escalate monthly as the outstanding balances grow. It’s a disaster in the making, since most HELOCs are demand loans at variable rates. As the Bank of Canada moves higher (looks like May could bring the next increase) that $283 billion will require over $700 million in additional payments each year.

That’s a ton of money to rip out of family budgets and send to the lenders (the banks). In total, Canadians now hemorrhage about $8.5 billion a year on HELOC interest payments, or tack it onto their outstanding loans. As interest rates rise, so will the toll. And if real estate values tumble in any particular location, lenders have the absolute right to demand immediate repayment of all or a portion of the borrowing to maintain LTV (loan-to-value) ratios. Go ahead. Read the fine print on your HELOC. Inebriate yourself a little first. Or a lot.

The tales of woe have just begun and as they ripple across the MSM, spill onto FB and into Twitter, the meme will spread of just how much risk is contained in residential real estate. Don’t plan on a quick drop, followed by a rebound. Instead, a steep correction, then a lengthy melt.

Derek will look like a genius.

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April 19th, 2018

Posted In: The Greater Fool

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