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April 30, 2018 | Perfect Storm

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.

Real estate sales sliding, listings down, mortgages swelling and FOMO gone. Man, it’s a tough time to own a Royal LePage or Re/Max franchise. Sure, all those agents have to rent their desks monthly but that just keeps the lights on. To make any money, you gotta have sales. And to do that you need market share. For that, you promote.

Days ago the flak team at LePage released “Peak Millennial Affordability media launch,” designed to get MSM coverage. It worked. “A big thank you to all of our spokespeople from across the country for their contributions in providing regional perspectives,” said Sarah Louis Gardner in an internal email from head office. “So far today we have achieved great media coverage.”

Indeed. In just a few hours, stories in 51 newspapers, on 16 radio stations and four national broadcasters. The appetite for real estate news is now insatiable, with most outlets running the release word-for-word (after all, reporters are expensive and they dress badly) – even when the story is negative.

So here’s the news: B20 is Hoovering the kids. The purchasing power for the average peak millennial “dropped by approximately 16.5%, or $40,103, after the introduction of the OSFI stress test.” Just to make the point (and help sales in New Brunswick), LePage pointed out kids can buy a whole house (no mortgage) in Moncton for the same 20% down payment required in the GTA or Van. Yeah, I know. But it’s Moncton.

As mentioned, it’s Moister Week here at GreaterFool. This isn’t to give the Millennials more attention so they feel special (mom already did that), but to underscore a basic tenet of real estate: without entry-level buyers the market croaks. So when a real estate flogging machine like Royal LePage uses this message to get noticed, it’s time to fret a little.

The perfect storm brews. Moisters are at its centre. Everyone will be impacted as he event blows through. Consider the facts:

  • Mortgage rates went up last week, and will soon be rising again. Not trivial hikes either – almost half a point at TD.
  • This is happening as bond markets reflect and anticipate central bank increases. The US 10-year Treasury flirting with 3% for the first time in years, and rising 25% in just a few months tells you where the cost of money is headed.
  • Almost half (47%) of all existing mortgages in Canada come up for renewal this year – almost twice the usual number, thanks to the crappy borrowing decisions and over-buying by people three years ago. Most will be renewing at higher rates and now with B20 in place many cannot shop the market (lest they face a stress test).
  • The economy, says the Bank of Canada, is 50% more sensitive to rising rates than in the past. That’s because we’ve snorfled our way into $2.1 trillion in debt, over 70% of it in mortgages and HELOCs.
  • Total debt payments have risen year/year almost 7% for families. Meanwhile the stress test has made cheaper houses (and condos) cost more and pushed greater numbers of borrowers into the arms of subprime outfits like Firm Capital, where mortgages cost 8.5%.
  • Check out this quote from a Manulife economist in a scary Bloomberg story on the storm: “The economy has never been as levered as it currently is, and the economy is far more interest sensitive than it has been in the past, to a degree that we don’t have certainty over how each interest rate hike is going to affect Canadian consumers. All we know is it’s going to be painful, but how painful isn’t quite clear.”

During a typical spring market in Canada 55% of all real estate buys are done by newbies. These first-time buyers squeeze into the market all leveraged and giggly, allowing former virgins to move up the property ladder using equity and extra debt to buy more house. So removing 16.5% of a peak Millennial’s purchasing power is a big deal. Sellers get less, then have to borrow bigger at increasing rates. Plus, there’s more to come. The odds are currently 93% that the Fed will raise its key rate again in June, with our guys reluctantly following.

Thus, the prediction holds. Correction, then melt. In some areas that’s well underway. In others, it’s coming. In many markets the big trends are being masked by a paucity of listings. When that ends, change comes.

However, it gets worse, kids. The realtors also want to trash your stash.

CREA poohbahs this week begged Parliamentarians to put the brakes on Ottawa’s plans to allow homeowners to have mini grow-ops in their houses. T2 wants to let everyone cultivate up to four marijuana plants, producing a potential 5 kg a year of pot. CREA’s horrified.

“We’ve heard from homeowners and tenants across the country who are worried about living beside grow-ops. What does this do to their home value? Will this increase their rent? How safe will their kids be? Will their quality of life diminish because of the prevalence of drugs in their neighbourhood? These are all concerns that need to be considered before the passing of Bill C-45,” the realtor boss told senators.

Gnarly. But we may have more to worry about.

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April 30th, 2018

Posted In: The Greater Fool

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