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July 8, 2018 | The Soft Touch

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 month 88% of detached houses listed for sale in Vancouver failed to find buyers. So far this year, 39,900 properties in the giant GTA market have sold. That compares with 54,500 at the same time last year. Sales were down 30% in Vancouver. In Calgary transactions were off 11% and listings up 32%. In Edmonton sales are lower by 10% and prices 4% cheaper.

Is this the soft landing the Bank of Canada so craves?

We won’t know that for a year or so, but there’s little doubt momentum and sentiment have changed. It was the soggiest spring in two decades. Like, phfft, people just stopped talking about real estate. Mortgage originations have plunged. Eighty per cent of the largest brokerages in the GTA are pounding salt. No crash. Just an eerie silence over the entire market.

B20 is at the heart of this, plus rising mortgage rates. They go up again Wednesday as the Bank of Canada adds another quarter point. The decent jobs stats on Friday pretty much guaranteed that outcome. But now there are other uncertainties in the air that also have buyers recoiling. These are among the things that’ll probably take house prices lower:

  • The benchmark stress test mortgage rate will be almost 5.6% later this week or next and 6.5% within a year. Remember there’s an inverse relationship between rates and house prices.
  • The Trumpian trade war is just hotting up. He whacked China this weekend. If he slams the Canadian car business, the southern Ontario housing market is in the crosshairs.
  • BC’s Dipper government’s taxes are only now starting to have an impact. The speculation tax, the 20% anti-Chinese-dudes tax, the eat-the-rich tax plus the empty-houses tax are market-killers.
  • Trade wars will lessen economic and business activity everywhere, with Canada especially vulnerable. More than a third of our economy depends on trade.
  • If Trump levies the 25% tax on Canadian-made cars, production will likely shift out of Canada. The estimate of additional cost per vehicle to Canadian consumers: $9,000. Imagine what that does to family finances.
  • Speaking of which, household debt just hit a new high. LOCs are outta control. Yes, wages are risen 3.5% year/year but debt is increasing at about 8%. More borrowing, less spending. Not good for realtors.
  • And because we’ve foolishly, selfishly allowed real estate to become such a driver of overall economic activity, the landing now – soft or hard – will be impactful. Sales decline first and prices drift down later, so buyers are probably wise to stay on the sidelines.

Every market is unique, however. So we should probably expect a lot more agony in YVR than the GTA; in the 905 than the Six; and less in regions, like Montreal and Halifax, where prices never did go crypto.

Meanwhile, each interest rate increase (at least one more this year, maybe three next year, say economists) takes us closer to the point at which the Bank of Canada thinks the cost of money is “neutral.” That seems to be about 1% away, based on the central banks’ inflation forecast. So two key points: (a) why would you buy now?, and (b) if you do buy, be careful about the kind of loan taken. For example, a five-year variable is 2.6% at RBC while the five-year fixed rate is 3.4%. The cheap one looks appealing, but odds are it will be 3.6% in a year – seriously eating into your ability to pay the loan down over 60 months. And for those with existing bargain-basement mortgages in place (anything sub-3%), it makes no sense to be aggressive about paying it off. Instead of shoveling cash against the loan, invest it, then use gains at the end of the mortgage term to pay the principal down. Your net worth will probably be higher.

So, soft landing?

In some places, yeah, it looks that way. In others, pad your codpiece.

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July 8th, 2018

Posted In: The Greater Fool

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