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May 14, 2018 | It Bites

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 year at this time 32 houses a day were selling in Victoria, that quirky little citystate where everyone thinks they’re special. So May sales hit just over a thousand – which is the last time that’ll happen for years to come. This year? At the half-way mark, the pace of deals has collapsed 35%. Meanwhile active listings have shot ahead 17%, since the writing is now on the wall.

The price of oil has been snaking higher for some time and crossed the important $70 mark last week as the Trumpster trashed the Iran deal. Some people say eighty bucks is coming. Maybe ninety. So you’d think the truck nuts would be swinging in Cowtown as confidence builds and houses find buyers.

But, nope. Sales so far this month have taken a 27% tumble from last year (which wasn’t great). Listings are swelling like an aroused stallion and have jumped 34% in Calgary. Meanwhile the average house has fallen another 6.5% in value.

In Toronto, where the real estate board no longer publishes mid-month stats (part of its campaign to be obtuse, impenetrable and peckish), it seems last month’s decline has accelerated. In April average prices were 14% lower, sales dropped 32% and detached deals were down 34%. In Vancouver there hasn’t been a single day this year when property sales have passed the 200 mark – which used to be a common occurrence.

Those house pumpers, scared realtors and mortgage floggers who came here months ago to say the B20 stress test was toothless are now licking their wounds. Combined with the relentless inching ahead of mortgage rates (thanks to central bankers and the bond market), the entire Canadian real estate scene is changing rapidly. Hot markets, like the GTA and YVR, are cooling. Money seems to be flowing into those other places – Ottawa and Montreal, for example – where house prices are still at manageable multiples of local income.

Here’s what Toronto mortgage broker Paul Meredith was telling his clients on Monday, as the benchmark 5-year Bank of Canada mortgage rate hit 5.34%.

“Mortgage qualification is done by using the higher of the benchmark rate or 2% above your contract rate. Your contract rate being the rate your payments are based on.  For example, with a 5 year variable rate at 2.21% (prime -1.24%), you would have to qualify as if your payments were at the rate of 5.34%.   2% above 2.21% is only 4.21%, so the qualifying rate would be 5.34%, since that is the higher of the two.

With a 5 year fixed rate at 3.49%, 2.00% above this rate would be 5.49%.  As this is higher than the 5.34% benchmark rate, your qualification would be based on 5.49%.

This is what is referred to as the Stress Test.  You need to qualify based on a higher rate, which is to protect you against rising rates. In other words, it ensures that you will still be able to afford to make your mortgage payments if rates were to rise higher.  As we are now in a rising rate environment, this not a bad idea actually, and is a pretty decent example of forward thinking.  It’s just frustrating when you are shopping for a home and the maximum amount you qualify for continues to decrease.

A year ago, the qualifying rate was 4.64% and you could still qualify for 5 year fixed mortgages based on your contract rate… providing you had at least 20% down payment.  (this changed January 1st, 2018).

To give you an idea of how much impact this has, a couple with a $120,000 household income would have qualified for a mortgage as high as $800,000 a year ago.   Today, that same couple would only qualify for around $600,000. That’s a 25% drop!”

Exactly right. Months before B20 landed, this blog told you eventually it would erase as much as 20% of available credit for first-time buyers. That’s now happening. We also warned the major credit unions would be forced into adopting the stress test, along with the banks. Also taking place. And inevitably sales volumes and prices would shudder. Ditto.

What we didn’t know last autumn was that the US Fed would raise its key rate four times in 2018 (now a certainty) nor that the Bank of Canada would jack three times (a 95% probability, according to the markets). And how could anyone have surmised that Comrade Premier Horgan would enact legislation designed to purposefully tax the BC market into oblivion?

So here we are. The economy’s decent, but not torrid. Wages have gone up, but job creation has stalled. NAFTA’s looks iffy, but oil is plumping. Corporate profits are robust, but the Canadian market isn’t. Families crave more debt, yet everyone believes houses always goes up. It is a land of disconnects.

Anyway, if you think May sucks in Victoria (or elsewhere), just wait.

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May 14th, 2018

Posted In: The Greater Fool

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