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August 17, 2018 | The Scent of Disaster

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.

News from the Trenches:

It was listed in mid-February of 2017, when all the realtors, house-pumpers and misguided moisters who come to this pathetic blog (for unknown reasons) told us GTA houses were going up forever. Buy Now or Buy Never. Endless FOMO. Get in now before some Iranian dude pulls up in an S-class to outbid you. The new normal was 30% gains year/year, month after month.

So 28 Bobmar sold in five days. The ugly little East End bung with the squalid basement suite went for fifty grand over the asking price of $849,000. With double Toronto land transfer tax and a few closing costs the proud new owner paid about $940,000.

Well, so much for ‘investment’ real estate. Since then – despite what the realtor cartel tells you – housing has deflated faster than FB. The owners tried a flip and failed. After months on the market, with the place finally listed down at $749,900, it sold for $708,500. After commission that amounts to $673,075. The loss: about $266,000. The house went for 21% less than it commanded eighteen months ago, and the hapless investor took a 28% loss.

“These folks bought this place, tried to flip it and got crushed for 200k plus, plus,” says realtor (and blog dog) Dan, who watched the saga unfold.

The big news: this is not an isolated event. Never, ever believe those who tell you that the melt is over, that the market has restored or more losses do not lie ahead.

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Everything will be exacerbated, elevated, irritated and exaggerated as mortgage rates rise. Your friends, co-workers and idiot BIL probably have zero idea how the cost of money could surprise. As this blog’s been telling you for a while, the influence of the Inflation President is inescapable. Home loans will cost at least 1% more at this time next year, which is a 30% increase. And if you think the Mills are hurling over the mortgage stress test now, just wait.

So on Friday bond yields jumped with the latest inflation number. At 3%, it’s huge. We’re at the very top end of the 1-3% range which the Bank of Canada has had as its guiding principle since the GFC. It means your HISA is losing money, bigly. Meanwhile the odds of a central bank increase next month have jumped. The betting is two hikes in 2018 and another two in the first half of 2019. It’s even conceivable one of those could be a half point (not the usual quarter) since our bankers are so far behind the curve. Remember – the US Fed has hiked seven times to our bank’s four.

By the way, our dollar surged on the inflation news. It was pushed higher on the near-universal expectation our steamy, expanding mountain of $1.8 trillion in mortgage debt will soon cost more. Higher rates, of course, benefit the wealthy while sucking more disposable income from the middle.

The rich hold assets. The rest hold debt. The sooner you cross that divide, the sweeter your life will become.

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Finally, in the trenches, is Adam. We heard from him some months ago when his rented apartment went up for sale, making him wonder about buying it. Naturally, we talked him off the cliff. The tale continues….

Just wanted to give you an update.  Our landlord put up our unit for sale almost 3 months ago, and the place hasn’t sold.  Earlier this year, there were units in this building selling within a week. The owner first listed at $450, relisted at $500, and finally came down to $399k, but still no takers.  Each time, the realtor terminated and relisted the property, generating new interest with each relisting.  I’ve seen this happen for so many units in the buildings throughout our trendy east end hood.  Funny that TREB doesn’t include these terminated listings in their DOM stats.  Some of the realtors didn’t even know themselves (or wouldn’t admit it).

We’ve had to put up with over 100 showings (it’s been hell meeting that many realtors), and the owner only received one serious offer.  Can you imagine that, just one?  After that single offer, we thought it was finally time to begin packing up, but we were wrong – the deal fell through.  CMHC refused to offer mortgage insurance on the loan.  The reason?

Have you heard of the “condo blacklist”?  Apparently, there are properties that CMHC, Genworth, and Canada Guaranty refuse to insure due to any number of concerns, including outstanding construction liens against the building, poor financial management by the condo board, lacklustre reserve funds, or the condo’s involvement in pending lawsuits.  In the case of my condo, each of these issues apply.  There are numerous other examples in Toronto I’ve learned about, but unsavvy buyers wouldn’t know it, and the inaccurate DOM data sure doesn’t help.

To help pay for these financial hardships, the condo board has issued special levies for all owners of a few hundred a month.  Condo fees have also recently gone up 10%, the 5th increase in the 5 year history of the building.  The building is notorious with realtors, who advise their clients to stay away (the good ones at least).  After real estate lawyers read the status certificates, they also advise their clients to stay away.  For those foolish enough to try, CMHC refuses to play game.

It’s still possible somebody comes through with a 20% down payment, avoiding CMHC insurance and thus satisfying their lender.  Until then, I’m going to continue renting, saving money, and waiting these rate increases out.

Smart boy. We have only just begun.

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August 17th, 2018

Posted In: The Greater Fool

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