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November 7, 2018 | The outcome

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.

So much for that. As predicted and expected, Americans have not lost their minds, after all. The elections yielded a split government, libs in the House cons in the Senate. Trump is on a shorter leash. The 2020 presidential election has already started. Mitt Romney is back. Oprah’s energized. Women roared. The polarization continues. And markets are happy.

Investors crave certainty. This is certainty.

History shows us two important things, as referenced here yesterday: markets do okay with a gridlocked government (up 545 on the Dow today). And, second, the third year of a presidential cycle (this one is 2016-2020) is generally positive for equities. You can add another positive – if the Dems thwart Trump’s growth-at-all-costs agenda, it might placate the Fed and slow the pace of rate hikes. After all, it was fear of 4% bond yields (and the elections) that got everyone bent in October.

Without Congressional support, Trump can’t wave his hand and get more tax cuts. Or fund that ridiculous wall. Or dismantle health care. The president will also be forced to spend more time on personal defence, as an inquiry into his missing tax returns is likely plus a probe of how his family might be benefiting from the Oval Office. (Just look at what he did today to Jeff Sessions, in preparation.) In short, the next two years should be a tad less frenetic than the last two. More comfort for Mr. Market.


Katelyn’s tale continues. Not good.

I told you days ago the aging Millennial’s DT Toronto condo had been for sale for weeks and weeks. As the market weakens, lots of showings, price reductions, no offer. Until the weekend. “It was not what I wanted, but okay,” she told me. “So I took it – only conditional on them getting the financing they wanted.”

Yesterday, the bad news. Turns out the buyers are a young couple from upstate New York relocating to Toronto where he’ll be a resident doctor at one of the giant hospitals on University Avenue. Lots of income, but no stomach for what Canadian politicians have done to the toll of housing.

The condo deal was for $750,000, but the Yanks were flabbergasted to learn of the 15% premium because they’re not yet permanent residents. That adds $112,500 in tax to the purchase price. Oh yeah, then there’s the double land transfer tax imposed by the city and province. Another $22,950. And now the condo costs…ta da… $885,450, of which $135,450 goes to government.

Sorry, no sale.

By the way, the foreign buyer tax is actually called the ‘Non-Resident Speculation Tax.’ Here is the description: “The NRST is a 15 per cent tax on the purchase or acquisition of an interest in residential property located in the Greater Golden Horseshoe Region (GGH) by individuals who are not citizens or permanent residents of Canada or by foreign corporations (foreign entities) and taxable trustees.” The buyers could possibly get a rebate, but only after paying it and working for an extended period of time. And the tax has zero to do with speculation.

Katelyn, as you might imagine, was ticked.  In colourful moister language she asked how the @%#&! any of this makes houses less expensive or helps a young person like her. I had no answer.


Naturally, rising rates make everything more difficult. Sales slow. Buyers qualify for less debt. Prices come under pressure. There’s an inevitability to what’s happening, even as the bulk of the population stays oblivious, convinced they’re richer than they think.

This week TD rang the bell. For the last quarter century, its economists said, every time people renewed their mortgage, it was at a lower rate. Those days just ended. Home loan rates, on average, will rise by about 1% over the next year. Here’s why that’s a big deal: “About a quarter of fixed rate mortgages come due for renewal every year. So, in about four years’ time nearly all households with a fixed-rate mortgage will face a higher interest rate.”

More money for the mortgage means homeowners have less to spend on tats and Netflix, which is obviously a tragedy. Meanwhile higher rates bring lower real estate values, because of the inverse correlation between the two. But there’s more.

Now, says Ottawa, we have a HELOC emergency. “There is a pressing need for us to help Canadians realize that not using HELOCs responsibly can have serious repercussions on their financial well being,” says the Financial Consumer Agency of Canada – which confirms at least a quarter of people with lines of credit are making no payments against them.

It’s a red alert, since home equity lines are demand loans with fully-variable rates. Every time the Bank of Canada hikes, the cost goes up. So if folks can’t pay more than just the monthly interest now, they may well be in a state of true poochedness in a year or so. Of course, if real estate values fall (they secure the HELOC) then it gets worse. By the way, we now have almost $235 billion in outstanding HELOCs – up about 30% in eight years.

Do you smell new regulations coming that mandate  principal payments on outstanding balances? I do.

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November 7th, 2018

Posted In: The Greater Fool

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