January 9, 2020 | Bill’s World

Where’s real estate going this year?

As mumbled here with numbing repetition, all markets are local. Calgary is sick. Edmonton and the Peg are frozen. Vancouver is still decelerating. Victoria is stable. Toronto is tightening and troublesome. Montreal’s on a roll. Halifax is on hold. Taxes have sucked net worth out of detached houses in YVR and the GTA seems ready to follow suit (higher property tax, an empty house tax). So despite 3% mortgages, rising financial assets and a decent economy, nobody’s getting rich tossing properties. The prohibitive cost of buying and selling means in a relatively static market, the speckers and flippers are handed their butts on a platter.

But what next?

A lot depends on Chateau Bill, Canada’s billionaire finance minister, now working on a budget to be tabled in six weeks or so. The newly-returned and recently-foliaged prime minister gave CB a mandate letter some weeks ago instructing him to review the mortgage stress test and possibly modify it, to render it “more dynamic.”

Huh? Dynamic? Whazzat mean?

In a word, gut it. This is consistent with the thrust of the last election campaign, in which making housing more accessible to needy, moany moisters was a basic theme. The Libs brought in the enhanced shared-equity mortgage, new buyer credits and also seriously goosed the RRSP Home Buyer Plan. The Cons hung their hat on ‘modifying’ the stress test, which really meant defanging it.

As you know, to get a house now buyers must prove they have the income to carry a mortgage of 5%+, even if they’re offered one by a lender at half that cost. The real estate industry has cried foul since inception, arguing about a fifth of all potential purchasers were punted by the test. Of course, realtors are speaking in their own naked self-interest, but the industry has a point. By cutting the house-buying budgets of first-timers, the test pushed demand down the price spectrum and hiked competition for cheaper properties. So they’re not as cheap any more. Condos have appreciated in value at twice the rate of detacheds, for example. Affordability has declined, not improved. (Units in 416 up 8% year/year.)

This week the boss at RBC said this: “The stress test certainly delayed purchases, caused consumers in Canada to look at less expensive homes, and to adjust their desire for the cost of the home they’re purchasing, or delay. I think we have to be a little bit careful how we adjust it. But if done in the right way, and with the right objectives, (it) can be achieved.”

Hmm. Green light for the feds to diddle, it seems, from the nation’s largest bank. Ditto from the biggest real estate marketer, Royal LePage. The CEO, Phil Soper, said this in a news release today: “The federal government has signaled that changes could come to the mortgage stress test mechanism in 2020. The stress test pushed people out of real estate markets across Canada temporarily. For the most part, buyers have adjusted, yet it still represents a significant hurdle as families pursue the dream of owning their own home.”

LePage’s position, like that of the barbarian leader of AB, is the stress test needs to be regional, making it easier to buy in markets which have struggled and (ironically) seen price declines.

But that may not happen, seeing all the Mills who voted for anybody-but-Scheer are concentrated in those areas where real estate is nutso – the GTA and LM. Odds are a stress test adjustment will apply to the entire country, and nowhere will the impact be felt more than in Toronto.

Listings are down there, again. Sales up. Finding a detached house, not condemned, for under $1 million is rare. In mid-town a decent three-bedroom home with parking on a 30-foot lot often goes for $2.5 million or more. Downtown condos for $1.5 million or greater are now common. A thousand dollars a foot is a steal (you can spend two grand for 12 inches in Van these days).

In other words, imagine what unleashing more demand will do, after bottling it up for a couple of years.

By pretending real estate’s a right and everyone should be able to possess some, politicians have created a toxic mix of debt, expectations and hormones. These days the economy is okay, rates are low, credit flows freely and jobs are being minted. But this won’t always be the case. We got a taste of that two days ago, right? You should expect more. This is no time to bulk up on debt, especially when you use extreme 20x leverage to buy an inflated asset with all of your net worth that produces no income, with ridiculous closing costs and non-deductible loan interest.

But that’s not Bill’s world. All hearts and dividends. So you know what’s coming.

Garth Turner January 9th, 2020

Posted In: The Greater Fool

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