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The retreat

Is our house lust now an economic threat? Should you lighten up on the maple in your portfolio because of rampant house-horniness? How is this possibly going to end well?

Fidelity portfolio manager David Wolf made waves saying he’s dumping some Canadian exposure in his funds because idiots are paying extreme, unsustainable amounts for houses. But who cares about some mutual fund dude?

Maybe you should.

Wolf joined the global fund manager seven years ago after service as senior policy advisor to the governor of the Bank of Canada. Lately he’s been helping to run the Fidelity Canadian Asset Allocation Fund, Fidelity Monthly Income Fund, Fidelity Monthly Income Class, Fidelity Dividend Fund and Fidelity Income Allocation Fund.

Here are his creds:

“From 2009 to 2013, Wolf served as Adviser to the Governor of the Bank of Canada, and served as Secretary to the Governing Council for Monetary Policy at the Bank of Canada. As Secretary to the Governing Council for Monetary Policy, he oversaw the analysis supporting the monetary policy decision process and acted as Editor in Chief for the Monetary Policy Report. In addition, he served as a representative of the Bank of Canada on a number of international bodies, including the G-20, the International Monetary Fund (IMF) and the Organisation for Economic Co-Operation and Development (OECD).

Prior to his work for the Bank of Canada, Wolf served as the Head of Canadian Economics & Chief Strategist for Merrill Lynch Canada from 2005 to 2009, where he was responsible for fundamental analysis and asset allocation strategy. Previously, he served as the Chief Interest Rate Strategist & Senior Economist for RBC Capital Markets, where he worked from 1997 to 2005.

Hmm. Smart guy. So what does Wolf say now?

“Housing is becoming a dominant player in GDP in a way that is dangerous, like in Spain, Ireland and Greece,” he states. “These turned out to be epic housing bubbles that led to severe recessions.”

These days real estate accounts for a direct 10% of the economy. But that’s misleadingly small. Residential mortgage debt is almost $1.7 trillion, and growing by $200 billion a year. The entire Canadian economy is $1.8 trillion – so figure it out. Real estate’s reach is massive. Over 250,000 people are employed in flogging properties across Canada, 130,000 of which are agents. Then add in all the mortgage brokers, insurance dudes, home inspectors and closing lawyers, and the number swells. This does not include builders, contractors, renovators, drywallers, roofers, electricians, plumbers and virtuoso Italian tile guys.

Is this why the recent federal budget wimped out in dealing with the housing bubble? You bet. Real estate is being left to run hot because politicians would rather have buyers and borrowers shoulder the risk than the government. Besides, at this point in the neverendum pandemic, all growth is good growth. Even when homes are made unaffordable and society is set up for an inevitable, painful correction.

By the way, here’s an example.

No. 380 West 62nd Ave in Vancouver sold for $4.28 million in February of 2018. Uh-huh, you read that right. That’s a ‘4’. At the time the province’s assessed value for the 50-foot lot was $3.2 million. Eighteen months later the owner tried to move it for $4.3 million. No takers. Over time the asking price was reduced to $3.9 million. Still not deal. Now it’s for sale at $2.9 million. Oops.

In what universe, you might ask, is an old, ugly beater house in Canada’s third city worth even three million? How could anyone have been so myopic and possessed as to pony up well over four mill? Meanwhile, as reported here, a rural home outside Ottawa recently went for $1 million more than the listed price, and the average sale price in Toronto is now 111% of asking. Nationally residential real estate gained 31% in the last 12 months, and more homes sold in March (during a global pandemic) than any previous month.

By the way, it’s worth recalling the last time a real estate bubble turned negative. What followed was a long period of stagnation. In the GTA it took seventeen years for the average house price to restore.

What could go wrong?

Lots. A ton of new listings could hit the market, overwhelming demand, knocking prices back. That could put recent buyers under water – and remember almost a quarter of GTA purchasers have debt-to-income ratios of at least 450%, considered to be in the red zone.

Interest rates could rise (the CB last week said as much). Mutated mutant virus variants could up the misery and spike the economy. Or the vaccines might work great, defeating Covid, repopulating downtown workplaces and making WFHers in faraway hick cities panic and sell. Maybe we just hit the price wall. Disgusted potential bidders quit. The market loses momentum and sinks.

Who knows? But experience tells us this much: bubbles do not deflate. They burst. And Wolfy wasn’t born yesterday.

About the picture: “The celebration of canines in your blog helps keep us all focussed on what really matters and so I hereby submit a photo that might be of interest,” writes blog dog Jack. ” This is Meggie (left) and Pepper, our 2 unrelated miniature schnauzers who each lived a nice long 17 years.  Here they are trying to figure out how to access a squirrel, their constant nemesis.”

It’s official

A few lenders are pushing five-year mortgage rates close to 4.5% this week. Ten days from now we’ll be a lot closer to 5% home loans. The stress test hurdle will be approaching 7% in late June.

On Monday the Bank of Canada brass told a key committee of MPs (of which I used to be a troublesome member) that its benchmark rate could exceed the ‘neutral’ mark in order to tackle crazy inflation. Neutral is when monetary policy neither stimulates nor retards economic growth. This means something north of 3%. That sounds like a nothingburger until you realize it’s about 2.25% more than right now.

Yikes. That would take the chartered bank prime to almost 5.5%, pushing most HELOCs to 6.5% and seriously increasing the sale of Tums to folks with variable-rate mortgages.

In light of this latest news, it’s more likely Tiff and his crew will jack the BoC rate by three-quarters of a point on June 1st. The US Fed, meanwhile, lights the fuse under its rate rocket next Wednesday. Once used cars are added into Canada’s inflation basket (next month?) our cost-of-living stat will charge ahead to 8%, says Scotiabank. While this is happening, the Chinese Covid lockdowns (26 million people in Shanghai) and the Ukraine war (Russia is waving the nuke threat again) further mess up the supply chain and add to prices.

Pandemics and wars eventually end, granted. But it takes a long time to dampen inflation, which is why CB tightening cycles typically last a year and a half or more. We’ve just started this one, and already Canadian residential real estate is collateral damage.

It’s official. Prices peaked in February. Every single week in March saw a decline. The retreat has picked up in April. Average prices in the GTA burbs, for example, have dropped between 10% and 20% says broker John Pasalis (who hates me). Detached homes in the core are down by single digits. Condos are flat. Sales overall are off by almost 25% – very weird for April (prime rutting season), while listings are up by half. And sales of new homes have cratered. Down 21% last month. (See more below.)

The core issue, say realtors and builders, is extra supply.

But it’s really about price. People stop buying things they cannot actually afford when the cost of financing rises from absurdly cheap to something approaching normal. And look at what new builds now command in Canada’s biggest market:

The benchmark price for new condominium apartments reached a record price of $1,252,515 in March, which was up 17.7 per cent over the last 12 months. The benchmark price for new single-family homes was $1,838,396, which was slightly less than February’s record high, but still up 27.3 per cent over the last 12 months.

Yup. You read that right. The average box on the 34th floor of a slab is $1.2 million. No dirt. Monthly condo fees. Land transfer tax. Property tax. And a vacant home tax if you don’t stay there enough. Oh yeah, and a flip tax if you sell it too soon.

As for newly-built (or pre-con) SFHs – detached, semis or towns – last month total sales of 838 in the GTA were exactly half the number a year earlier, and sit 32% below the 10-year average. But at almost two million bucks each, how can anyone be surprised? Especially when the cost of borrowing money has doubled? And they’re made out of fake wood and face brick?

So, is it any wonder as rates rise sale prices will crumble? FOMO is turning fast into FOOP, in both the new and resale home markets – and increasingly across the nation. Buyers must accept the very real prospect their newly-acquired digs will be worth less in a month, or three, or six. Maybe considerably less. More than the down payment. Then they’re in negative equity, owing more money than their residence is worth.

Meanwhile, foreign buyers have been banned. Vancouver is raising its under-utilized house tax to an insane level of 5%. Ottawa and Toronto are following suit with new ‘vacancy’ taxes. NS has brought in a stiff anti-Canadian ‘welcome’ tax and is making non-resident owners pay crippling come-from-away annual levies. BC is legendary for whacking Alberta owners. PEI hates everyone equally. Just when residential real estate is rolling over, politicians are piling on to pummel the carcass.

By the way, here are some current sales stats for select GTA communities, courtesy of the real estate cartel. Below is the percentage change in low-rise deals in April, compared to March (and remember that almost always sales rise – not fall – in this month of the year).

Aurora -44%
Markham -32%
Mississauga -22%
Oakville -37%
Pickering -46%
Oshawa -29%
Vaughan -26%


And for the urban core, the decline is just 14%. Yes, Bunnypatch, WFH is so 2021. Surely you knew this was coming…

About the picture: “This is our girl Rosie,” writes Astrid, in Nanaimo. “She was one of approximately 60 puppies that were taken from a puppy mill on Vancouver Island by the SPCA 11 years ago. She enjoys her daily walks and wants to say hello to every person she meets. Thanks for all the investment advice over the years. Because of this blog we are in good shape to face whatever financial storms are on the way!”