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April 6, 2021 | Too Much, Too Fast

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.

A survey by Merrill has found that 70% of Americans now own equities. Stocks. Funds. ETFs. Financial assets. The typical 401k (equivalent to our RRSP) is stuffed with liquid, publicly-traded, negotiable investment assets.

And here?

In 1991, 64% of us owned real estate. By 2016 that grew to 67.8%. And it has now touched 70%. Peak house.

US household debt has gone down in the last decade. Ours has soared. Now there’s every indication we beavs are on the cusp of a supernova real estate gasbag that will (a) eat the entire country and render seventy per cent of us landed gentry millionaires, or (b) blow up and end badly. Guts, spleens, mortgages everywhere.

How can there be middle ground, at this pace of events?

  • As forecast a few days ago, the GTA numbers have turned out to be epic. Scary. Historic. Sales of 15,652 properties in a single month, a 97% increase. Average property price is up 21.6%, to $1.1 million. Remember two months ago we were musing when the million-dollar mark would be hit? So quaint.
  • 416 is ridiculous. 905 is ludicrous. Sales in the burbs and little weensy hick cities surrounding the Big Smoke exploded 111% in March and prices jumped 31.4%. That was the most, ever.
  • Pollster Nik Nanos confirms the obvious – it’s FOMO fueling this rocket. His latest survey of consumer sentiment was taken just as Ontario went into a new month-long lockdown and as Covid was romping through BC, Saskatchewan and Quebec. It found 67% expect house prices to keep inflating. To put that number in context, the average has been 38% for the past 13 years, and it never before exceeded 60%. We are smitten. Obsessed. House lusty.
  • House prices have now outpaced appraised values. And that’s a problem. Blind auctions, bidding wars and delirious buyers have pushed sale prices past established market valuations. It means a growing number of people face a come-to-Jesus moment when they go to arrange financing and lenders balk to giving them enough to close the deal. Consequences of that are coming.
  • First-time homebuyers are officially pooched. The average price  (nationally) for entry-level digs is $433,000, says BMO, but given the typical income of newbies, the most they can afford with 5% down is a home selling for $248,000. In Toronto that’s about one-third of a garage. The average Canadian house value, by the way, is $678,000 which is 25% higher than a year ago – and during that time official inflation has been 1%.
  • Okay, so first-timers can’t buy. People who own homes can’t afford to sell them and repurchase. Fresh purchasers often can get financing because of bidding wars. Meanwhile sales are up a hundred per cent and prices are rising 12-15 times faster than the cost of living increase.

Conclusion: unsustainable. Impossible to continue. Irrational. Risk and danger.

The last time we had these conditions was in 1989. The market exploded over a couple of years. First-time buyers were shut out as a result. That fuel for the fire disappeared at the same time mortgage rates started to rise. Things collapsed. Prices were 32% lower within a year, and it took 16 more years for the average house to be worth what it had been in ’89.

Is there a catalyst for this to occur again?

Maybe. We’ll see. It could be a measure in the budget to tax speculators, punish investors or restrict mortgage credit. It might be rising interest rates as vaccines defeat the virus and the US economy explodes higher. It could be as simple as prices plumping to a point where even the most house-horny, desperate, FOMO-addled moister just gives up. Or it could be a withering of supply as existing homeowners realize it’s impossible to get back in after they’ve checked out.

In any case, current conditions cannot last. History tells us panic buying is a harbinger of collapse. Prices always shoot higher, faster just before the end. When a majority of people are absolutely convinced the party will never finish, it does. When average folk have no hesitation in swallowing excessive debt, risk is extreme.

So, kids, this isn’t my first rodeo. I kicked this dirt in 1989. And I know what’s coming.

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April 6th, 2021

Posted In: The Greater Fool

One Comment

  • Harry Clarke says:

    Again all these points about Canadians’ ignorant exuberance, without mention of the GREAT RESET whereby ‘Nobody will own Anything’. It ain’t some pie in the sky conspiracy theory. The WEF (aka communism for everyone) is on the global warpath to bring it about.

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