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August 1, 2018 | The Disconnect

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.

Market odds are 80% that US rates will rise again next month. And 60% for yet another hike before Christmas. On Wednesday American 10-year Treasuries (government bonds) hit that 3% yield, while Government of Canada 5-year bonds (the ones that dictate mortgage rates) also surged higher.

Hmm. This came amid news Trump is ready to raise a proposed tariff on Chinese imports from 10% to (gulp) 25%, and at the same time is trying to officially shut down the Russia/Mueller probe. Big political battle there. Oh, and the world’s most profitable company is shooting for $1 trillion in market capitalization. No outfit in history has done that.

Did I mention the latest employment stats? No? Well, the ADP number in the States just blew past estimates. The next piece of news is Friday morning when Washington unveils unemployment numbers. They’re expected to be awesome.

Last Friday we heard the American economy is growing at 4.2%. Yuge. This week came the Canadian stats – the best in years. Year/year it was 2.6% and half a per cent in May alone (that’s a 6% annualized number). Inflation in Canada is now 2.5% which means almost everyone with a GIC is losing money.

So, in conclusion: we’ve moved from a low-rate, low-inflation, low-yield, low-profit, kinda-deflationary, turtleneck, Obama world into Trump Times. Crimson ties, orange hair, rednecks, big boasts, décolletage, jingoism, high-growth, fat profits, job-rich, expansionary excess. The GDP, cost of living & borrowing, employment and wealth gap are all swelling.

But, but… there’s a disconnect. It’s housing. Everywhere, almost.

While money is sucked into surging equity markets and rising bond yields, it’s flowing out of real property.

In the States home-buying intentions have dropped the most in two years. Existing home sales have slowed dramatically in 2018 and new home transactions along with them. Despite the fact millions more people are working than a few years ago, mortgage rates have risen a helluva lot faster than incomes, while house prices have jumped. Housing demand dropped 9.6% in June.

Sound familiar?

This is exactly the situation that’s felled detached house values in Vancouver and Toronto. But it doesn’t stop there. A combination of tougher borrowing standards and real estate prices that bear little relation to what people can actually afford has led to a global property thumping. In the UK (and especially London) values are a fifth to a third lower over the last few years – partly because of the uncertainties of Brexit (Britain’s version of Trump protectionism), according to Bloomberg.

Sales and prices are falling Australia’s major markets, where people have been even more delusional than in Canada, as regulators there (like here) finally freaked out over lax lending standards and elephantine household debt. Likewise, transactions in New York City have faded 17% and inventory risen more than 11% as prices are trimmed. In Beijing also, officials have moved to curtail borrowing and buying, pushing sales to a record low. In Toronto, the latest realtor stats show detached are down and condos are up after one of the slowest selling seasons in memory.

Why’s this happening at a time when financial assets boom?

Blame human nature. Following the 2008 financial route, stocks looked scary, rates dropped and the world felt dangerous. People nested. They choked down cheap debt, pushed house prices higher, created a bubble then told each other this was normal and real estate would rise forever – buy now or buy never. House lust combined with FOMO was too powerful. Prices roared to a peak. And, yes. There’s always a peak.

Now, on the other side, real estate values and the debt they engendered are a threat, not an opportunity. Buyers are cautious, skeptical. No longer delirious, frenzied. And while the appeal of real estate is eternal, it’s no longer the purpose of being alive. Meanwhile last year a balanced and diversified portfolio delivered more than 10% while real estate lost money.

Moreover, the costs of home ownership are epic – land transfer charges and legal fees to buy, big commission to sell, hefty insurance bills plus property taxes and rising mortgage rates in between. Compare that to the weensy cost of maintaining a financial portfolio. So, if real estate values are not romping higher, this is just really, really, really expensive shelter.

The tide has turned. Big news for those born after 1990. Something else to moan about.

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August 1st, 2018

Posted In: The Greater Fool

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