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May 1, 2018 | Nesting

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.

When RBC and the green guys raised mortgage rates a few days, this was inevitable: the others would follow. Now it’s happening. CIBC on Tuesday became the third of the five to move. The next step will be for the Bank of Canada benchmark five-year to increase, bumping up the stress test threshold. Almost on cue, real estate sales in Calgary took a big turn downward with prices also falling. The numbers for other markets, including the GTA and YVR, will be out shortly. Won’t be pretty if you’re a seller.

An entire generation of people have entered their hormonal and nesting years without knowing a housing downturn. The last serious one in Toronto, for example, happened 27 years ago. The economy soured. Sales plunged. Prices dropped 33% and took about 13 years to recover. When you factor inflation into the mix, a buyer in 1991 didn’t see her money back until almost 2010.

So for many people housing sucked as an investment. Rather it was a cost – a place to live. The last decade stands in awesome contrast to that experience, thanks almost entirely to two things – cheap money and moister fear. When central banks decided to save the world from the credit crisis they crashed rates, stimulated borrowing, and ignited a housing orgy in Canada that ended up with shacks selling for seven figures. Meanwhile the 55% collapse in stocks markets in 2008-9 – just as the Millennials were becoming sentient – scared an entire generation away from financial assets. Instead they got house-horny.

And it sure continues.

This week pollster Nik Nanos had new numbers showing the moisters still believe houses = solid investments. A survey (commissioned by realtors) found 91% think owning a home is a “smart financial investment” which shows the failure of math and logic in schooling. (In the absence of rising house prices it can cost twice as much to own as to rent, as this blog has oft shown.)

However Nanos also found 70% of the kids understand real estate’s unaffordable. So, guess what? They expect the government to fix it, with seven in ten agreeing politicians need to help young people to buy. Yup, more social engineering. More subsidies. With an election looming in Ontario next month, the kids are asking for an exemption from land transfer tax, for example. And they like that crazy Doug Ford guy who wants to scrap the foreign buyer tax and open up protected lands so they can be paved and covered with attractive particle board-&-glue palaces, decorated with minivans.

Well, the fact remains most people want real estate. Especially when they marry and breed. It’s in the genes. Turns out we’re not much different than woodchucks or finches. Or prairie gophers.

“My wife and I are 29 and looking at getting into a house in the near future as we are hoping to have kids soon,” Tom writes me. “We can afford to put 20% down on a decent place while still following your rule of 90 (the remainder of the money invested in ETFs). With interest rates on the rise this will put pressure on housing prices, as you have stated many times on your blog. I was wondering what your thoughts are on the housing market in Saskatoon and if rates will have a large impact on house prices here.

“As you have said many times every market is local and RBC says affordability is basically in line with the historical average, so I’m just wondering if I’m better off waiting or if now is as good as ever to pull the pin. Thanks for everything you do for us freeloaders and thanks even more if you find the time to answer me.”

Yes, location matters. The average property in Saskatoon cost $336,222 last month, which is 7.5% cheaper than a year ago. To buy it takes a downpayment of just $67,000 with mortgage payments barely over $1,300. Given the fact the median family income in Saskabush is more than $94,000, it means the average family can afford the average house. So, knock yourself out, Tom.

In Vancouver (or Toronto), a vastly different story. Families earn less and are faced by insurmountable housing costs. Without the promise of constant capital appreciation, it makes no financial sense to buy at this time when mortgage costs are rising and the correction has just begun. The only relative bargains, as detailed here, are in the thickets of McMansions growing in the northern burbs, where $2 million houses are now $1.6, and populated with desperate sellers who will take less when pushed. Not exactly what the mills seek.

So, when 91% of moisters think it’s a swell time to buy, and seek help, politicians would be fools to encourage them. More pro-housing incentives would shove a lot of vulnerable people into epic debt at a time when a decade-long real estate gasbag is ripe to split.

Will our leaders do the responsible thing, or sell out for votes?

Can’t believe I asked that.

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May 1st, 2018

Posted In: The Greater Fool

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