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July 25, 2018 | The Stressor

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.

The plot thickens.

On Wednesday the boss of the European Union called Trump’s trade tariffs stupid, which just stiffened the old man’s spine. Speaking of stiff things, fresh evidence emerged of the president buying sex. Or at least paying to hush it up, according to his former lawyer-turned-stooge. Meanwhile senior economic advisors to the Donald are telling reporters the guy’s on the verge of whacking $200 billion in car imports with a monumental 25% tariff.

So good bye Oshawa. Windsor, Oakville, Brampton and Woodstock. Over 120,000 plump, blue-collar jobs in the factory heartland of the country could be offed if the White House goes through with this. And, sources say, it’s coming. The sex-Russia-Putin drama just makes it more likely Trump will pivot, change the channel and ramp up the trade war. Better rush out and buy that souped-up Dodge Challenger now.

Well, what timing.

Central banks are tightening. Bond yields are upping. Inflation and stock markets are swelling. And credit is tightening. If Trump’s anti-Trudeau trade tempest tumbles into cars, hollowing out assembly plants and emptying area malls, why would real estate be immune? On what planet would any of this be remotely positive for the value of housing?

But, wait. There’s a more immediate problem. We’re being stressed to death.

Pissed since the first mortgage stress test was introduced a couple of years ago, and seriously incensed since it became universal this January, the country’s mortgage brokers are fighting back. They plopped a major report on politicians’ desks this week claiming 18% of all new buyers have been punted from the market by the 2% hurdle.

These young’uns who can’t actually afford real estate are being victimized, cry the brokers. It will destroy their lives since we all know renters are losers.

“More and more young people are getting used to the idea that they may never own a home and become permanent renters. With an increasing concern on income and wealth inequality, current policies that create a permanent generation of middle-class renters could increase wealth inequality as the ability to own homes and generate long-term equity becomes more and more difficult.”

And here’s the argument that if real estate values are forced lower by rising rates and heaving legislators, the economy itself will be tattered:

“Policies which cause house prices to fall will reduce home equity and this in turn would impair consumer confidence, resulting in reduced spending, slower economic growth and diminished job creation.”

But amid the BS there are some gems of wisdom. Here’s one (from real estate economist Will Dunning) that could have been lifted from this pathetic blog: “While we would normally expect falling prices to generate an increase in demand in the housing market, we have seen historically that this can actually reduce demand. Significant price drops put into question the reliability of the market as a whole, causing prospective buyers to fear that values will fall further.”

He’s right. Human nature is like that. People lust after assets spiralling higher in price and recoil from those in freefall. They sell into storms, maximizing losses, thinking values might go to zero. They buy into frenzies, paying a big premium, believing prices will rise forever.

So the sum of all mortgage broker nightmares is that the stress test, combined with Trump, sprinkled with rising interest rates and peppered with job loss will create a negative feedback loop. Sales drop, making buyers wonder what’s going on. Prices decline, causing people to wait for deeper discounts. Then the buying stops since nobody wants to pay too much for an asset they fear might tank. Risk, after all, trumps greed. Among emotions, fear reigns.

The brokers say about 100,000 Canadians have been prevented from buying a home because of the 2% stress test. Without the test in place, tens of thousands of sales would have happened. Their survey also discovered more than half (54%) of those wanting to buy in the next five years expect “significant negative impacts” from the new measure.

So here we are. Sales have fallen nationally 13% year/year. Many markets which lack the momentum and population base of 6ix or YVR are nearing a state of poochedness. We’re certainly closer to a sales-price spiral than at any time since 2009. Canadian real estate peaked in early 2017, yet governments failed to see how it was rolling. In BC the actions of Comrade Premier Horgan to cool speculation and improve affordability pose a huge threat to the equity of the entire house-horny, delusional population. If the market cracks and valuations plunge, there’ll be no hungry horde of buyers moving in. Mortgage brokers fear the drop could be epic.

By the way, Loblaws just said its grocery prices will be rising, thanks to the trade war. Bananas up. Bungalows down. It will be a riveting autumn.

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July 25th, 2018

Posted In: The Greater Fool

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