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June 1, 2021 | Epiphany

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.

Will people give up on housing because conditions are, well, insane?

The latest real estate board stats (later this week) may shed some light on that. But the anecdotal evidence is sure flooding in. Realtors report fewer showings, a decline in bidding wars and ‘offer nights’ where an expected deluge of paper during a blind auction turns into a trickle of one or two contestants.

And look at the latest measure of consumer sentiment in the States – where WFH, the virus and cheap rates have created the same bubble as here. According to the University of Michigan (credible) when people are asked ‘is this a good time to buy?’ the results are staggering. It’s the lowest level in thirty years, with the seond-biggest monthly plunge ever.

The largest decline was a year ago when Covid hit and everybody prepped for a depression. Now they’re freaking over runaway prices, vendor greed, bidding wars and omnivorous realtors. Say the charts: it has never been a better time to sell. Never a worse time to buy.

Hmm. This is interesting. Especially in light of the most recent news.

First, there’s a new, scarier stress test as of today. The bar is raised even higher. Another 5% or so of buyers are knocked out of the market. An absolute minority of Canadians (estimated to be about 15%) can now afford real estate – of any kind.

Second, did you catch the latest GDP stat? Huge. The economy grew at 5.6% in the latest period. Think hippo. No, elephant. Maybe dirigible. This kind of economic spurt is not routine, and the OECD just said it will pass 6% for the year. The last time we had that kind of excitement was back in 1973, when the top song was “You’re so Vain”. My theme.

Runaway economic, post-pandemic-everybody-dosed growth means more inflation and therefore higher interest rates. Mortgage broker/blogger Rob McLister says he’s planning on eight (8!) Bank of Canada increases over the next few years. And this is exactly what the higher stress test is designed to do – prepare people for what’s ahead, when 2% mortgages turn into 4% and 5% home loans.

Here are some comments from CIBC economist Benny Tal, which McLister gathered last week: “These are emergency interest rates. When the economy is rising by 6-7% a year, it’s not an emergency. If inflation takes off…and the Bank of Canada and Fed try to chase inflation because they were late [in tightening monetary policy], they will raise interest rates very, very quickly.”

Meanwhile, keep on eye on the States. President Biden is one spendy guy, and the budget he dropped last Friday for 2022 is a humdinger. Trillions and trillions in new expenditures are planned – on green initiatives, critical infrastructure and social program spending. There is no way the Fed will sit on its hands and keep pumping out monetary stimulus (cheap rates and quantitative easing) when government is doing the heavy lifting and the economy’s whirring. Already inflation stateside is running at the highest level in a quarter century. Canada will follow. Interest rates, in other words, could double.

Now, cue the masses. Most people in the steerage section and on the subway will swear that, ‘rates can’t rise,’ that ‘the government won’t allow it’ and also that ‘the economy will collapse’ if this occurs.’ They’re wrong. It will happen and the negative consequences will be heaped upon those who overextended themselves. That includes more than fifth of all new borrowers who now have debt-to-income ratios of 450% or more. They’re pooched. No, they will not default. Just whimper a lot.

For most folks a doubling of mortgage rates will reduce borrowing power by about 20% (and possibly 25%) which will have a predictable impact on the real estate market. Like a dude in a lake, expect shrinkage. There is no other logical outcome. We’re already in extreme territory. Prices rose by a third in a year. Double that in some places (like Nova Scotia’s South Shore). Incomes have hardly budged, so buyers are stretching badly.

Also remember that as the vax defeats the bug, the country is changing. WFH will not be as much of a thing. Workplaces will gradually reopen. Cities repopulate. Some of the reason that home prices in Armpit and Bunnypatch exploded and supply disappeared will be gone.

Hey, look at the survey from Right at Home Realty which found only a small portion (18%) of people considering selling want to live in the sticks.  The reasons are simple – lack for work and the negative implications WFH has on a career path. “While the work from home outcome of the pandemic is undoubtedly impacting the housing market, we believe calls for a significant exodus from larger city centres and drastic shifts in the urban housing dynamic during and post pandemic are overstated,” says the company. “The vast majority of Ontarians have no plans to move or change city locations as a result of these new dynamics.”

So how many people did the pandemic actually send out of the big smoke? Maybe 3%, these guys claim. A nothingburger, even though the exodus was enough to poison house prices far beyond the city.

In summary, it’s a mess. And thus the conclusion many are reaching. Sell high. Buy low. This is high.

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June 1st, 2021

Posted In: The Greater Fool

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