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April 16, 2021 | To The Core

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.

Just three more sleeps before B-Day.

Will Chrystia and Justin drop the hammer on housing? Nibble around the edges? Throw gas on the flames? The debate has been raging. Some bankers (RBC, BMO) are literally begging for a govy intervention to save people from themselves. Other financial heavyweights (TD, Scotia) argue things will self-correct, especially as Covid fades and a ton of new listings hit the market.

Realtors are lovin’ it. Buyers are disgusted. Prices have spiked wildly amid cheap money, WFH, aggressive nesting and now dollops of FOMO. What a wicked combination this has been. It’s historic. I thought I’d lived through the worst housing escalation ever in the late 1980s. Nope. This is far more intense and, maybe, destructive.

The facts are arresting. Shocking, even.

  • More properties changed hands last month than… ever. Over seventy-six thousand sales.
  • The average national house price is up 31.6% in one year. Nothing in history has come close. It sits at $713,700, so the average household cannot afford the average place.
  • The insanity is everywhere. For the first time, a real estate bubble is more suburban, rural, small-town than urban. This is completely new and socially disruptive. In Bancroft, Sooke, Owen Sound and Nanoose, Wolfville or Peachland they wonder what the hell hit them.
  • Levels of inventory have collapsed. The long-term average was five months. Now it’s less than two. Another record.
  • Leverage is off the charts. Cheap money and the delusional belief rates will never increase have seduced buyers into new territory. Almost a fifth of borrowers now have debts equal to 450% or more of their incomes.

So sales are up 76% over last year and houses cost a third more. Nobody saw this coming in March of 2020 when something called Covid-19 caused society to go into lockdowns, quarantines and restrictions unknown in modern history. A year later over a million of us got the virus, 23,500 Canadians have died and our biggest provinces are going dark as the third wave hits. Five million people are still working from home and public finances are shot. These are uncharted times.

Should government act? Or let the market run hot and possibly implode? Will the greater fool be the fool who follows, or the one who bailed?

It was interesting to read the latest missive from mortgage broker/blogger Rob McLister. “The fear is that the market is like a nuclear reactor running too hot, i.e. prone to an accident,” he says. “It’s not Chernobyl by any means, but a Chalk River-style partial meltdown could be in the cards if market imbalances take values much higher.” And he echoes what a certain pathetic blog has been yammering about for months now…

This is truly a once-in-a-generation nationwide aberration that’s leaving young buyers with fewer and fewer homeownership options. Buyer desperation has been growing by the week and it’s leading a record number of people to pay as much as lenders will approve them for.”

Meanwhile mortgage rates are plumping a little, which has spurred buyers into action. The stress test will get more onerous starting June 1st, which has accelerated buying intentions. Federal immigration quotas are about to expand, adding buyers. Building material supplies have crashed and prices bloated, spiking construction costs. And FOMO – fear of missing out – is at screaming pitch as news of the March housing stats spreads. In short, the melt-up that could lead to a melt-down continues.

Oh, and did we mention benchmark housing prices nationally rose by an annualized 37.2% last month? In Woodstock (birthplace of legendary bloggers) the price jump was 8% in March. Yup, that’s 96% per year. And it’s rutting season. What will April and May bring?

Outta control, of course. “The pace of Canadian home sales and prices is simply in uncharted territory,” says BeeMo’s Doug Porter. “Given the extreme market imbalance currently at play, almost entirely due to fiery demand, look for the record pace of price gains to spread far and wide beyond Ontario.” The old record for price hysteria – set in the late 1980s, “has been shattered.”

As mentioned, TD economists are cautioning against government diddling in the market (which rarely works), and instead saying it’s time for the Bank of Canada to throttle back on stimulus and start raising rates. “The quickest route to cooling this market and squeezing out speculation comes down to the interest rate channel, and therein lies the solution. Canada had one of the larger downward movements in mortgage rates relative to other countries, and the current monetary stance may no longer be appropriate for this segment of the market.”

Well, Monday could bring one of three outcomes. The feds do nothing of substance. The market roars. They can try to help newbie buyers with more incentives. The market roars. Or they can bring in a national spec tax, start taxing windfall equity profits on a graduated basis, increase minimum down payments, tighten debt ratios, encourage provinces to reform rules around blind auctions and end the tax-free raiding of RRSPs for real estate. But that’s not happening.

So, let it nuke.

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April 16th, 2021

Posted In: The Greater Fool

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