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April 18, 2019 | Laying an Egg

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.

Easter. Woo-hoo. Bunnies. Crocci. Chicks. Grass. Eggs. And, of course, house-horny moisters. Millions of them. Now in their early twenties to mid-thirties, Millennials make up almost a third of the entire population – 10.1 million of the little peckers. As the Boomers turn into wrinklies, enter their Thirsty Underwear Years and make funeral homes happy, the Mills are taking over. One month at a time.

But here’s the thing. That generation has a serious case of adultus interruptus. Fully 35% of Millennials still live with their parents – something unseen since the country was an agrarian backwater. A mere 16% are married (or whatever) with established households. Two-thirds of this cohort own no property.

Of course real estate for the moisters is not what it was for their parents. Mortgage rates may be near historic lows, but house prices border on record highs. Meanwhile linear careers have given way to a gig economy; excessive and costly levels of education are now the norm; the 2008-9 crash begat a generation terrified of risk; helicopter parents created cloistered, clingy kids; and millions of Mills have elevated expectations crashing up against financial reality.

So a new bank survey states the obvious. Over 80% of this group aspire to be homeowners. To achieve that they’re willing to sacrifice as no other generation before ever has… six in ten say they’ll cut back on $5 specialty coffees, 56% report they will try to curtail shopping and half will pay the ultimate price and reduce entertainment spending. Smart phones, tats, nose hardware and weed are not included. There are limits, after all.

Now the interesting point is while a big chunk of the Mills want downtown, urban living, two-thirds say they’d be willing to head to the suburbs, if they must, in order to get an affordable property with more space, in a kid-friendly hood. In other words they’re turning into their parents and (like trout) returning to the same place to spawn. But 73% say they’re unwilling to commute in order to own a place of their own.

Big change here from the Boomers, who understood there’s no replacement for displacement and a man can easily be judged by his fuel consumption. The moisters, in contrast, have given the world Uber, Lyft. ZipCar, rental scooters and all those damn bike lanes. The sharing, collaborative economy so in vogue these days is antithetic to cul-de-sacs, regional shopping malls, arterial roads, grassy backyards and four-bedders with double-car garages. But this moment was destined to come. And now it’s spring, 2019. Big urges.

This brings us back to the B20 stress test, which is the main obstacle standing between the 30-year-old MLS virgins and the real estate they lust for. By requiring new buyers to qualify for a mortgage at 5.4% when they can borrow at 2.8%, the test has reduced credit by a fifth, kicked about 100,000 people to the curb, toppled sales numbers and helped reduce prices across the country by about 5%. In some places, for some types of houses, the decline is closer to 20%. But those are homes few can afford.

In fact by dropping the amount most people can borrow, the test increased competition for cheaper real estate. The typical garden shed-sized downtown Toronto condo now costs over $554,000, up about 8% in the last year – at the same time detached house values have fallen. The test also pushed a lot of buyers into the voracious arms of subprime lenders, happy to make bets on higher-risk buyers who end up paying twice or three times the rate available at the banks. This, CIBC concluded a few days ago, is a big deal. When borrowers go to alt lenders because the banks won’t give them money they slip out of the insured mortgage world. So when the next recession comes along there could be a whack more personal failures. That’s how real estate crashes start.

It’s worth noting that the alt lenders now constitute the fastest-growing portion of the entire mortgage market. Four years ago these guys had about 5% of the business. Today it’s tripled. In addition, real estate-drenched credit unions have moved in to sop up a lot of business the banks rejected because clients failed the test.

“For this reason,” writes veteran mortgage broker Rob McLister, “some are calling on policy-makers to regulate the entire mortgage market. While this seems appealing on the surface, it could drastically limit liquidity and leave tens of thousands of borrowers with no viable lending options. Private lender red tape could result in a surge of defaults and bankruptcies, as many borrowers are left with no “lenders of last resort” to turn to. Indeed, that “cure” would be far more devastating than the illness.”

It’s a dilemma. The kids want digs. The market needs cooling. Alt lending is a danger. And Millennials are now the biggest voting block, with a troubled government heading to the polls. Will the test be nixed? Or will the government force the Mills into a soulless suburban gulag, imprisoned for hours a day – hollow-eyed, stressed and defeated – in a machine hurtling down some death expressway, spewing carbon?

You must ask?

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April 18th, 2019

Posted In: The Greater Fool

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