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November 14, 2018 | No Hard Thing

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.

With five rate hikes in the bag and likely as many to come, Big Bro says it’s working. The central bank this week dumped data showing the proportion of greater fools and total idiots borrowing 450% of their income is falling.

Incredibly, it used to be an average of one in five households snorfling this amount of debt back in late 2016. In truth, that meant 0% in Timmins, Fredericton, Windsor, Lethbridge or Kamloops, and 100% in Vancouver and Toronto. The Bank of Canada began to gag with news that most households buying properties for more than seven figures were diving deeply into debt to do so.

So, the universal mortgage stress test came in. CHMC stopped insuring mortgages on million-dollar properties. And the cost of money started rising.

The result: now 6% of new mortgages equal more than 4.5 times income. Of course, this is just fresh borrowing. All the previous loan piggies are still in place. That makes the economy vulnerable, says the bank. But ‘loan quality’ is going up, “which puts the economy on a more-solid footing to withstand future adverse economic developments.” That’s so comforting.

While the urban uber-borrowers are dipping less as rates rise, a poll shows it’s the moisters who are freaking out the most at the swelling cost of money. Nick Nanos’ latest survey claims 51% of the 18-34 crowd believe what the Bank of Canada’s doing is having a negative impact on their lives. That’s a serious jump in the last three months. No real surprise here, of course, since most of this group’s debt is in the form of mortgages. Big ones.

Remember what banker boss Stephen Poloz told lawmakers in Ottawa when they queried im on exactly this topic:

“I have children who are adults, and I think they don’t understand this, because they’ve never experienced the kinds of interest rates that you and I have in our lifetime. It shouldn’t feel difficult. It shouldn’t be a hard thing for people to service their debt at those kinds of interest rates.”

Nah, it shouldn’t. My first mortgage in the 1970s was 11.75%. When I lost my mind and was initially elected to Parliament in 1988, Dorothy and I were paying 14%. In fact the average home loan over the last three decades has been pegged at 8%. So why are the kids moaning and gnashing over borrowing at 3.5% which may rise to 4%?

Simple. They borrowed too much. And they had to, because as rates fell houses inflated. But because rates are now rising, real estate will eventually follow – yet the debt incurred will not be reduced. And that, simply put, is the best argument possible for renting until this tightening cycle is long over.

Now, in fairness, the hipsters may have a point about real estate.

Millennials appear to be the most urban generation… ever. Just drive across the Granville Street bridge or downtown on the Gardiner and you can see what’s happened to Van and 416. The wall of condos is astonishing. Tens of thousands of little boxes piled atop each other in a density which is at odds with all of the rest of the country. This is moister ground zero, where developers have responded with bicycle elevators, buildings without parking and coffin-like cool cement ceilings.

Of course all that competition has jacked prices. So while detacheds are out of favour and losing value in many hoods, condos have continued to appreciate, even as sales are weakened by the stress test. And now comes some official confirmation that the city kids – many paying $1,000 or more a square foot – may actually know what they’re doing.

CHMC, no less, now says moving to the burbs to get a cheaper house price may not be worth it, once the cost of commuting is factored in. Looking at Toronto, where a stunning 2.6 million commute. Most of them (almost 70%) drive, which explains what TTC stands for – ‘Take The Car’. A million of these people spend 45 minutes travelling, and close to 40% of them take an hour to reach work. So, yeah, it sucks living in Milton, Halton Hills or Clarington where all the minivans go home to sleep.

It also costs a fortune. Like $800 a month when traveling from those places, compared to a fraction of that cost for city-dwellers. And not included is parking – which can easily be three bills in a downtown lot, bringing the commute bill to $1,100. Add in daycare (a median cost of $1,750 in Toronto) and you need about $44,000 in pre-tax income just to have a car and a kid. Ouch. Hard to afford tats and lattes when you’re shouldering such a load.

So while real estate costs less in the boonies, living might not. Guess where prices wither first?

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November 14th, 2018

Posted In: The Greater Fool

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