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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

June 6, 2018 | The Stress

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 Hanny first reached out to me, 18 months ago, he was starting a website that would plot local real estate stats. Now it’s a fixture (http://TorontoRealEstateCharts.com).

“I was going back through my old notes,” he said this week, “and saw that I first contacted you on January 5, 2017 with this chart (aka “peak crazy”):

Wow. That chart said one thing: higher prices as a growing cadre of buyers chased a dwindling supply of houses. Plus, if you recall, mortgage wars raged. It was a race to the bottom as lenders pushed home loan rates down to the 2% level, and sometimes even below. Just a few months later, as a result, we would erupt in peak house with an orgiastic spray of FOMO. And now we are making that inevitable descent down the other side.

“It’s been 1.5 years since that time,” says Hanny, “and now the same chart looks like this:

Another wow. This chart says the opposite – demand faltering while supply explodes higher. It portends falling prices and market stagnation, especially since mortgage rates have jumped dramatically and a universal stress test means everyone has to qualify at 5.34%.

“The last time supply and demand for Toronto detached looked like they do today,” the stats guy tells us, “annual price increases were 0-5%. But that was in an environment when interest rates were mostly declining and politics felt more stable. Since there does not appear to be a mass exodus from Toronto, it appears that it’s quite possible that investors are selling properties (that’s my theory anyway).”

And it’s a good one. The writing’s on the wall for condo owners who thought they could ride a wave higher for years to come. They can’t. She’s done. The first salvo came from what’s-her-name, that disgraced Ontario premier (for one more day) who ushered in universal rent controls capturing all those new units. Then came the standardized lease form and a law saying tenants must be paid to vacate at the end of their leases. Meanwhile the B20 stress test happened, kicking out 20% of buyers. Then price appreciation slowed and four in ten landlords found they had negative cash flow. Finally, there’s the blood-curdling spectre of a Dipper Premier lusting to legislate rents, spank landlords and squish the market with a spec tax.

The result, of course? Fewer rental units available and ultimately higher rents.

This note to me from Adam is typical – a solid glimpse into what’s happening widely.

My wife and I have been renting in downtown Toronto for 4 years now.  Despite not buying a unit, I’ve still been able to save a good chuck of change, take vacations, buy a car, and pay for a wedding without incurring a single penny of debt. Now, our landlord wants to sell and we may have to vacate.  We have the option of buying our own place or finding a new rental.  Problem is, rents have gone through the roof!  While we currently pay only 20% of our income on rent, we’d now have to cough up closer to 35% – for a smaller unit, that is.

For only a few hundred more, we’d be able to carry a mortgage, condo fees, and property taxes.  Assuming a 4% interest rate and even a modest (by today’s standards) 3.5% appreciation, we’d come out ahead in 5 years if we bought a unit.  We’d also have the security of knowing we wouldn’t be kicked out during that time – especially important if we decide to have our first kid.

We aren’t alone in our predicament.  Many of our friends that rent condos have received that dreaded N12 form as their landlords cashed in on their investment.  Every time this happens, they’d be forced to find new units at up to 150% more rent.  This seriously impacts our ability to save and is increasingly seeming like a poor financial choice.  With rental vacancies so low, it’s been incredibly stressful apartment hunting, and the majority of places are investor-owned condos.

Given how intense the rental market has become, do you really think renting remains the wisest approach?

Given Hanny’s chart, the drip-drip increase in mortgage costs, stupid condo costs (the average is over $601,000) and a blizzard of new supply. I’d say you’d be foolish to buy and count on 3.5% annual appreciation to justify the higher costs. As a tenant you have no money tied up in equity, no property taxes or condos fees beyond your control, complete freedom to move, no maintenance costs, no market or interest rate risk and your monthly costs will be less, allowing you to build diversified wealth.

But Adam has to deal with emotion, his spouse, hormones, a potential kid, his friends and fear of missing out. Yes, pooched.

More important, it’s the wave of listing/selling now washing over the market that will shape events. Nobody builds apartment buildings any more since cap rates are pathetic. More than half of condo sales in recent years have been to speculators and amateur landlords who shoved them onto the rental market. That was a bad idea, so people like Adam are being punted and the rental crisis grows. Vacancy rates in the GTA and Vancouver have essentially gone to zero. Renters are forced to buy – and may now be doing so into a declining market.

The inventory of properties for sale in the GTA (unlike the LM, where the Dippers are obviously practicing mind control) is bloating – smashing last April’s record – while sales are fading.

The fundamentals won’t change much with the election outcome, while sentiment might. Looks like a PC win with a strong opposition of orange people and the extinction of the Libs. The odds of Premier DeWalt nixing the foreign buyers tax is about the same as him opening up protected green space to developers. Nil. Hanny’s charts, therefore, will continue to track a market destined to eat its young.

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June 6th, 2018

Posted In: The Greater Fool

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