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December 27, 2018 | Ready?

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.

In about a week local real estate boards will bravely issue December stats. There could bear an uncanny resemblance to stock markets of late. 2018, it seems, has turned into the no-place-to-hide year your momma warned you about. At least equities don’t come with realtors, mortgages or illiquidity. Like in Calgary.

Days-on-market there are creeping to 70. Sales are down by a fifth again this month, listings are up 13% and prices have lost another 2.5%. This is a market that peaked ten years ago – proving that bears roar the prairies, as well as Wall Street. A similar experience is unfolding in Victoria, Edmonton and now into the 905.

As for Van, John sent along this flyer his local agent in Kits mailed out the other day. Yup. Sales down 42%, and the price of a detached house has cascaded lower by 45%. Ouch.


You can mitigate unexpected loss when investing with a balanced and diversified portfolio. But when all your precious eggs are in one property, not so much. What the market does, dictates your net worth. In Kits, says the Zwick Chimes Real Estate Group, that just dropped by almost half.

Well, on to 2019. Lookin’ any better?

In terms of mortgages rates, you bet. Given the last few weeks of capricious stock markets, Trump tantrums, political upheaval, real estate wobbles and Fed-bashing it’s a safe bet central banks will be throttling back on the testosterone. Four hikes next year in the States could turn into just two. Maybe one. In Canada our guys might chicken out completely, despite strong economic numbers.

Bond yields have been crashing. The Canada five-year which was pushing 2.5% in November has flopped to 1.9% today. In the bond world that’s stunning. Of course as bond yields plunge, bond prices surge (and a reason why your balanced portfolio has bond ETFs in it). Lower yields means a drop in five-year mortgage rates is coming, just as soon as the banks stop weeping.

How about the stress test?

Yes, the heat’s already been turned up on the T2 gang. They know about 25% of the entire economy’s now related to residential real estate and (more importantly) that dewey and house-horny Mills were responsible for a Liberal majority in 2015. More than any other single factor, the ST has been responsible for dousing deals, restricting credit and the early termination of untold numbers of Audi leases. Every aspect of the housing and property industry has been lobbying Ottawa to cap it or trash it.

Here’s an interesting chart from Rob McLister’s Ratespy depicting the impact of B20 on the income needed to buy a home, city by city. Orange represents the test factor, and blue shows the impact of price increases.


Click to enlarge

So given the fact 2019 is an election year, that Trudeau desperately needs the moisters to win again, and real estate’s become massively more unaffordable under his reign, expect changes. Yes, yes, I know – the stress test is a creation of the bank cop (OSFI) and not the federal government. But it’s funny how stuff happens…

As this blog has shown you over the last few months, the stress test has killed sales, but not lowered the cost of entry-level real estate. Au contraire, by reducing credit and pushing buyers down the price pyramid, it’s created more demand for stuff the kids can afford – like condos. So prices at the bottom have increased while at the middle they’re sticky and tumbling at the top. If you want a $3 million house in Kits, this is your lucky day. If you just need a $500,000 house somewhere, try Lethbridge.

By the way, the stress test is also creating more renters while it’s responsible for fewer buyers. Increased rental demand and more expensive condos have resulted in higher rents. Plus more pissed-off Millennials. Justin gets that, too.

Finally, don’t be shocked if CHMC announces a rule change in the next 100 days allowing the return of 30-year insured mortgages or lifting the $1 million cap. Both would be dumb moves, like gutting the stress test. Houses people can actually afford to buy won’t happen if lending regs are relaxed at the same time central banks take their foot off the gas. But, alas, this is politics.

In other words, if you liked December and enjoy The Walking Dead, you’ll love next year.

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December 27th, 2018

Posted In: The Greater Fool

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