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February 2, 2021 | Careful What You Ask For

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.

An addendum to yesterday’s tale of cowboy capitalism, boomeresque youth and hot wheels. Besides starting a business and buying a giant hunk of steel and displacement, Dorothy and I also built a home four and a half decades ago.

Granted, it wasn’t much. We got the lot for peanuts, since it was a bald knoll in the corner of a field in the middle or rural, godforsaken nowhere. The siding was nauseous green aluminum and inside the subfloors were covered in cheap wall-to-wall carpet. But it was ours. And it cost $63,000.

We managed to wrestle up the downpaymnt of 10% (double today’s requirement), and were happy to get a mortgage. But being self-employed we faced a higher rate than the normal 12%. Also uninsured, it came in at 13.5%.

In those days high rates kept house prices down. They dampened speculation, too. Real estate was for living in, not flipping. It sure wasn’t a retirement strategy. Or even a wealth-builder. So, yeah, most working couples could get a house somewhere. In a field, maybe.

The distortions came later. Politicians thought they’d ‘help’ by letting people use RRSPs for down payments, by dropping the deposit requirement (all the way to zero for a while), by allowing extra-long mortgage amortizations, plus giving first-timers grants and tax credits. Then when a long secular decline in interest rates began, capital requirements were eased at the banks allowing them to loan more for less.

Real estate values popped higher and it took only a decade or so for houses to turn into financial assets. The first super-boom reached its apex in 1989. Then a recession. Then it began anew. Canada even  escaped the US housing meltdown in 2005-6, paving the way for the next FOMO-driven property orgy when the cost of money collapsed in 2009. Now the emergency rates of Covid have taken us to an entirely new place.

I mean, gaze at this. A semi in the GTA hinterland of Pickering was recently listed for $850,000 and sold for $1.035 million. Yes, half a house. In the eastern sticks. A mill. We have lost our way.

A report using data from StasCan, CMHC, CREA and RBC spells it out clearly. Of the largest 50 communities in Canada, almost 40 are seeing deterioration in the ability of average people to afford average houses. Yes, despite 1.5% mortgages – and also because of them.

Cheap money has fueled asset inflation while not having the same effect on wages. In the decade between 2010 and 2020 properties in Toronto, for example, jumped 104% in value while household incomes grew by less than a third – just 32%. While pro-real estate government policies have fueled part of this appreciation, most has come from the ridiculous cost of money. The inverse relationship between the cost of a roof and the cost of a loan has never been more evident than now, with mortgage rates at the lowest point in history.

There’s only one way out. And it will be painful.

Interest rates may be rising faster than anticipated, some economists say. Despite the iron grip this slimy little pathogen has on our lives, despite the variants, the lockdowns and the crappy, bungled vax roll-out, the economy is gaining strength and CBs may withdraw stimulus way before the anticipated date of 2023.

When could things start to change? Maybe as soon as April. Especially if the first Chrystia budget brings in another whack of spending, allowing the Bank of Canada to throttle back on emergency rates. There are, says Scotia’s Derek Holt, “potentially strong policy implications for the Bank of Canada that is increasingly looking as if it over-committed itself to keeping rates on hold until 2023. The prudent thing to advise heavily indebted Canadians is to plan their finances around rate hikes commencing considerably sooner.”

You may not want far higher mortgages now, kids, but without them you’ll be indebted your entire lives. And you will envy us. Wrongly.

*      *      *

If you believed the Reddit/Hoodie mob and bought GameStop stock on Friday, well, suck it up. They got you. HL&S. The loss yesterday was over 30%. Another sixty today. What was $470 is now $100. Soon it may be half that. The AMC blitz fizzled, too. Same with silver.

Read the three posts on this topic published here last week – two by my hand, one by Ryan’s. What social media and a trade-for-free app did for a few stocks was not a revolution. It was not the democratization of finance. Nor was it a righteous rebellion of the little retail investors against the fat hedgies and Wall Street oinkers. It was merely the latest iteration of a classic market manipulation pump-and-dump, cloaked in social outrage and designed to profit the few while leaving the many poorer than they were before they heard about r/wallstreetbets.

If you get your investing ‘advice’ from a chatboard of avaricious self-named ‘degenerates’, ‘autists’ and ‘retards’, prepare to be fed lies and relieved of your money. As the SEC and other regulators will doubtlessly conclude, using crowdfunding and false flag information to purposefully inflate an asset’s value is a crime. Activities like that threaten market integrity. And, yup, there’s still a heap more of that in the blackest of broker hearts than all the manbuns of a million Hoodies.

Gambling is not investing. And they are not cool.

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February 2nd, 2021

Posted In: The Greater Fool

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