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November 1, 2018 | Half Way There

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.

Katelyn’s condo is in DT Toronto. “Perfect location,” she says. “Perfect building. So why can’t I sell it? I have to.”

It’s been a couple of months since she listed. Price reductions: 2. Relistings: 1. Showings: 16. Offers: 0. A year ago – even three months into the past – there’d likely have been a sale within a week. Multiple offers, even. Her agent, Pamela, tells me, “The market is weird. All I can say about it. The new buyers are just not showing up.” When the official realtor stats are released at the beginning in a few days, it’ll be an interesting tale. Seems we have entered a new phase.

Increasing DOM, relistings, reduced prices and scared sellers are just a few indicators of a market in the throes of transition. It would be hard to argue that a one-two punch of higher rates and the stress test has not done serious damage. To buyer confidence. To available credit. And now to sales and prices.

This statement by a prominent Toronto broker struck me this week: “In this late stage of Canada’s housing and credit cycle where house prices are moderating and interest rates are rising it’s not the time to be increasing your overall debt load – it’s time to deleverage.”

Hey, that sounds like me. But it’s not. Instead these are the words of veteran realtor John Pasalis. Together with Teranet he wrote a report on how pooched a large cohort of debt-pickled GTA homeowners are, now that the cost of money is normalizing and the stress test is getting truly stressful. Scary stuff. For example, the share of homeowners refinancing debt, using their houses as banks to suck up high-interest loans and inflate their mortgages, has jumped from 12% two years ago to 20% now – a 67% increase. Even scarier: “More and more homeowners are turning to higher interest private debt.”

In other words, regular people – who have jobs, new iPhones, kids, Netflix and pets – are struggling with existing debt service costs, and being shoved into the jaws of the sharks, who charge rates (sit down) of between 7% and 20%. All so borrowers can avoid the stress test.

Many buyers looking to take on additional debt when refinancing their home (to consolidate debt or to finance a renovation) are having a hard time qualifying with traditional banks under the new stress tests. As a result, owners are turning to private lenders to fill this gap. Private lenders serve as the lender of last resort for most home buyers and owners.

Now, kids, remember that these are the “lucky” people who own residential real estate already. You know, those folks that all the entitled moisters and Boomer-haters come here to dump on as being rich, privileged and out-of-touch. Turns out many of them may, in fact, have been the greater fools – buying inflated assets with a massive pile of borrowed money destined to reset to higher rates (as this blog forecast with nauseating regularity). As money gets more dear, houses become less so. It’s a vicious circle. There is no escape now for those who flung all their eggs into a single basket.

Here is Pasalis’ stark news. And be aware – this is coming from a person who makes his living flogging houses. Some truths can no longer be hidden:

So, who are all of these homeowners turning to private lenders? Do they resemble the sub-prime owners in the US who had poor credit and no income? Not at all, according to a panel of mortgage brokers specializing in private lending who spoke at a housing conference I recently attended.

They described home owners with great credit and fantastic jobs who are simply living beyond their means. Owners who accumulate debt each year because of countless expenses they hadn’t budgeted for that they can’t say no to (like house repairs, surgery for the dog, and hockey lessons for the kids who suddenly want to play).

Unfortunately, there are two problems with this trend. Firstly, interest rates are only expected to rise over the next couple of years which means people who are having a hard time making ends meet today are going to have an even harder time a year from now.

The other problem is that the amount of money people can pull out of their home to finance their lifestyle is finite – especially in a market where house prices are not rising rapidly. Eventually, that well will run dry and owners will have no choice but to sell their house.

If this is correct (and it is), a large deleveraging in the real estate market is inevitable. It will be the consequence of over-buying, over-borrowing and raw financial illiteracy. Real estate went up because rates went down. Now we’re reverting to the norm. The impact over time on house values in those places where debt was snorfled with gay abandon should be dramatic. Yup. The GTA. Van. Victoria. Prices and sales dribble. Listings gush.

Some solace is taken by those who argue the central bank will turn tail once real estate descends, and plunge rates – especially if the country heads into a housing-induced recession. But, a faint hope. In fact, in the last few days The Ploz himself moved to quash it.

Testifying before my old buddies on the House of Commons Finance Committee, Governor Poloz said the Bank of Canada intends on pushing its rate up to “neutral levels” from the rock-bottom depths of the past few years. This won’t happen overnight, of course, likely within the next 18 months.

What does this mean?

So far we’ve had five rate hikes. The bank rate has achieved 1.75% and Poloz has told us ‘neutral’ is about 3%. This means five more increases – so we’re 50% of the way into the tightening process.

Want cheaper houses? Just wait.

About the picture...

“Seen on Learmouth Road in Coldstream, BC,” says blog dog Barb, who snapped it. “A metaphor for all manner of captions…*grin*…”

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November 1st, 2018

Posted In: The Greater Fool

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