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August 15, 2018 | The Illusionists

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.

Is this news believable?

OTTAWA — The Canadian housing market is finding its footing after a prolonged stumble in the first half of the year, shaking off the impact of stricter mortgage rules and rising interest rates. Home sales increased 1.9% compared with June, according to the Canadian Real Estate Association.
The Greater Toronto Area led the increase in July, while more than half of all local housing markets reported an increase in sales from June to July. Compared with a year ago, sales in July were down 1.3% due to fewer sales in major urban centres in British Columbia.
The actual national average price for homes sold in July was just under $481,500, up one per cent from the same month last year. That marked the first year-over-year increase since January, CREA said.
“Supportive demographics and an undersupply of new homes in the GTA/GVA are underpinning prices, though poor affordability, a tougher borrowing climate and the non-resident buyers’ tax likely rule out a return to the earlier mania in these two regions,” said Sal Guatieri of BMO Capital Markets.

The real estate and financial cabal would have you think so. They want house lust. Need it. Live off it. Profit from it. Since residential real estate accounts for at least 15% of the entire economy, there’s no shortage of important people telling you that after a brief hiccup, she’s good again. Ready to roll. Uppa, uppa.

However at the same time we may know too much. Close to a third of all houses listed for sale in the GTA, for example, are empty. Why would that be? Simple – speculation. Over 7% of all families in the region own multiple properties, a huge number of them bought to play the market. Now that things have turned, many are listed. Empty, unloved and unsold.

We know mortgage rates have risen and the stress test bar is rising. We know the Bank of Canada will run up money costs another full 1% in a year. We know about the Trump tariffs. The 100,000 moisters punted from the market by the new regs. We’re wise to lower sales, motivated sellers, swelling listings and realtors who’ve moved nothing in a year. In fact, it’s estimated as many as 80% of large brokerages are currently losing money. This is a market that’s traveled from FOMO and panic-buying 18 months ago to FOPI now (Fear of being Priced-In – unable to sell or unlock equity).

So let’s ask a reasonable question: why would the housing market fall so slightly then recover so quickly after blowing the momma of all bubbly gasbags? Now that interest rates have risen considerably and a serious trade threat materialized, why would buyers rush back into houses at near-record levels? Household debt is still massive, and rising. Credit has been tightened. Taxes have risen. Why a real estate renaissance?

Or is this an illusion? A trap?

Veteran broker Alex Prikhodko thinks so. Here ‘s his note to me today:

“Let me give you my perspective on what is happening with a real estate market. I’m gonna refer you to THIS infamous graph:

“Indeed the prices have somewhat stabilized in some areas, but with 32,000 active listings and a new interest hike, this is a temporary situation. We’re currently somewhere in between the “bull-trap” and the “return-to-normal” stage, where some optimistic suckers are hoping the market will rebound.

“However, there are no reasons for such optimism. I’ll give you a few very specific cases:
1. The person who bought his property and then extorted $350,000 in cash back last year that you featured on your bog last summer, ended up selling it at a LOSS, is now trying to sell his personal properties, and is about to hit a divorce. He’s also being sued from all angles, including, unpaid contractors, real estate brokerages and just people who he borrowed money from, and that’s besides the CRA, which is questioning him claiming all of those properties as his primary residence and thus avoided paying property gains for years.
2. Another friend of mine bought a detached in Markham for what seemed like a reasonable price of $950,000 last year, even though her husband and I advised her to stay away from real estate for the time being. I advised her to sell that property immediately without proceeding with the renos. After completing the renovations 7 months later, she’s been unable to sell her house after multiple price reductions. She’s unable to carry a mortgage on that fantastic investment, so she will likely incur a significant loss.
3. There are several people I know who bought from the builder with closings coming up. They were all sure they would be able to sell their current residences at a healthy profit but currently unable to sell. These are a particularly disturbing group as they are FORCED to sell for whatever they can get as they borrowed equity from their current residences to pay the deposits to the builder. Some have borrowed so much, that they are unable to sell without going under water. I presume this is the main category of people that will force the market to decline further, since they have no other options.
4. Construction industry. I know a guy who runs a luxury kitchen fabrication factory. The guy used to snub jobs under $50,000 for a custom kitchen. This year he quoted $2m+ worth of work with only $70,000 in actual sales. This guy is not an installer, but owns a factory with over a million dollars in equipment and $5,000 in monthly lease payments. My other friend has asked the guy to provide a quote for a kitchen from this guy and, since he’s short on business, he decided to quote him 50% off, or about $20,000. My friend opted for an Ikea kitchen for $15,000 instead, which was of great personal insult to the kitchen guy, since quality of his products is significantly better than what Ikea has to offer.

“Long story short, here’s my prediction. Detached homes prices will continue to decline at an accelerating pace, as more mortgage holders (especially multiple property mortgage holders) continue to get squeezed.

“Condos are about to get hit hard, expect a typical $600,000 downtown condo lose $100-$125k over the next 12 months. This winter is going to be a nail in the coffin for overpriced downtown condos.

“A lot of brokerages are going to shut down. In the last 3 months we got a major influx of resumes from agents, coming from brokerages that have closed down operations. The latest victim is TheRedPin brokerage, which appeared to be healthy on the surface for a while, even though I seriously doubted their business model.”

Like everyone else with boots on the ground, this realtor knows the facts. They’re brutal. And a large establishment of people is doing all they can to gloss ’em over. The real estate market’s fuel is confidence, emotion and desire. If the propagandists can fool enough people, they can rescue the market. If they fail, the fools buying now may be the greatest.

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August 15th, 2018

Posted In: The Greater Fool

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