Economic DEFLATION: Greater Toronto Area housing market home prices up almost 10%, But SALES VOLUME down 39% from the same time last year – June 4, 2022,
Hard to imagine a scenario in which Canadian homeowners owe more mortgage than their homes will sell for? Unlike in the past in which the housing market, which includes the Condo market has a whole lot more speculators in it than it did prior to the Federal Government bowing down to the Real Estate special interest groups, which for the most part are protecting SPECULATORS.
It’s one thing for an actual homeowner who purchased a home to live in it, to be underwater with their mortgage, it’s something else if it’s a speculator, who bought with the intention to either flip or use it for positive cash flow purposes. An economic downturn is VICIOUS, money that was once abundant can no longer be found, travel and tourism which propped up AirBnB might not be there like it once was, jobs that you thought would be there, aren’t there, and gas prices that allowed Canadians to spend money more freely, no longer a reality.
If we’ve reached the top of the market, the only savior for the people underwater with their mortgages will be a PERMANENT debasement of the Canadian dollar, which by the way is what I think is going to happen. In Ontario recently, Doug Ford a Progressive CONSERVATIVE politician made part of his slogan raising the MINIMUM WAGE.
Now, I want to make something very clear to the reader, the value of the Canadian dollar DOMESTICALLY differs from the purchasing power of the Canadian dollar INTERNATIONALLY. If you listen to certain “thought” leaders who do business internationally, they’re making money hand over fist, why? Because the U.S dollar and the Canadian dollar, but more OUTSIDE of Canada than they’ll buy inside of Canada, meaning that IMPORTING things into Canada is beneficial in this deflationary environment.
Purchasing labor in Canada is getting more expensive, as an example, getting someone to fix up your home in Canada is likely to get more expensive, this is a DOMESTIC issue, that Canadians have to pay for, but if you’re doing business internationally using Canadians dollars, and even paying Canadian tariffs, you’ve done what the government asked you to do, you’re preventing shortages, but truth be told, your business operations in Canada, are more expensive now and you have to pass those costs onto the consumer.
Now, sure the consumer/voter/taxpayer can run to the government and demand price CONTROLS, but the response will be SHORTAGES, as was the case with RENT controls, this silly law, led to a SHORTAGE for rental purposed housing. Now, this shortage of rental purposed housing was made worse, by the Federal Government intervening in the housing market.
The vast majority of borrowers pay their mortgages, so purchasing mortgage debt is considered a low-risk investment. It’s only when a high number of homeowners stop paying their mortgages that the value of MBS erodes.
Canada Mortgage and Housing Corporation(CMHC) with the help of other Federal Government initiatives INCENTIVIZED builders to build Condos, instead of rental purposed housing, well, this fueled a speculative market. Sure CMHC wasn’t involved in all the building and mortgages, but once CMHC does get involved, the Canadian government does NOT want to see housing prices DECLINE, because as we all know the value of CMHC relies heavily on housing prices remaining high.
The article below talks about SALES VOLUME in the purchasing of homes coming down from last year, BUT, PRICES ARE STILL UP 10% from the same time last year. This is what I imagined when I thought the Canadian economy would eventually come to a GRINDING HALT! Canada has price controls all over its economy and a lot of these price controls work EXCLUSIVELY in Canada because the U.S is our largest trading partner.
But housing differs because it’s DOMESTIC, not only is it domestic, no economic activity comes from housing, it’s actually a DELFATIONARY asset, it appreciates primarily because our fiat money is becoming worthless. If the Canadian dollar was backed by gold as an example, our housing market would look utterly ridiculous, most Canadian dollar holders would cash their Canadian dollars in for Gold.
Justin Trudeau and the economy he’s built is a disaster, however, because the Canadian dollar is currently RESPECTED on the world stage, the Foreign exchange value of the Canadian goes further globally than it does domestically. I think in some Latin countries a few million pesos can buy the same amount of house as a few million Canadian dollars can buy in some Canadian cities.
2 million pesos, might buy you the same amount of house as 2 million Canadian dollars can buy you in Toronto. Sure Toronto likely grants you access to more resources, than in Latin America, but I hope you understand what that symbolizes for the Canadian dollar. Now, if the speculators owe more mortgage than their property will sell for and the property owner is cash flow negative, meaning they can’t even BORROW AGAINST their property, this means they’re STUCK in a bad investment.
Mar 26, 2020
The Canadian government plans to triple the amount of mortgage debt it’s buying from banks in an effort to pump money into the economy.
Canada will purchase $150 billion ($137 billion) in insured mortgage backed securities from financial institutions,.
If the market is deflating and property owners REFUSE to lower their selling prices, which is in their right to do, what it equates to is all of this DORMANT inventory on the market. Could this equate to lower rent prices? I don’t know, because there’s a cost to rent out your apartment, and the person you rent to might cost you more money than you’re making in profit and if there are only a handful of buyers because either they don’t qualify or they don’t want to commit to the large mortgage during a deflationary cycle, what’s the government to do about that?
I argue, that 100 amortization might be coming, I like to point to Japan as to where the Canadian market is heading, but even 100-year amortization, will only lower mortgages by maybe a few hundred dollars and if 100-year amortization leads to HIGHER prices, eventually, you end up right back to where you are now, except they’ll be even MORE debt.
I see ZERO appetites for austerity measures at the moment, the easy fix would ofcourse be to sell CMHC to avoid forcing the taxpayers to finance these stupid ideas. But I don’t see too many people pointing at the CMHC as the culprit, what many aren’t comprehending is WHY the housing market likely won’t see price deflation.
Canadians aren’t comprehending that if the housing market crashes, the Canadian taxpayer is on the hook. Mortgage-backed Securities, via the CMHC, exist and they’re the buyer of last resort. Most investors would stay far, far away from these investors because most investors, know most of these homes are NOT owner-occupied.
Making matters worse, homelessness in Canada is on THE RISE. This is ofcourse something you pay close attention to as an INVESTOR, but something a government will ignore in order to save the economy from collapse. An article I point to in this article is dated back in 2020. Now, what happened in 2020? The housing market crashed in 2020 and the current Prime Minister of Canada SAVED it.
In 2020, Canadian HOMEOWNERS had no rainy day fund, within 1 month of the pandemic not only did Canadians need help SERVICING their mortgages, but Justin Trudeau also had to send them cheques in the mail. People have short-term memories, ofcourse they’ve forgotten the deficit has increased and that the average Canadian is still one missed paycheck away from DEFAULTING on their debt obligations.
But this all ties together with LOWER sales volume. People hoarding real estate will hold for as long as possible before being forced to sell at a loss, but selling at a loss is the only way to bring housing affordability down? This is where things get ugly because I nor anyone else for that matter can predict what the future looks like in Canadian housing, I speculate a HARD RECESSION, but there are still tools available to stimulate growth.
The problem with stimulating growth in this environment are all the PRIOR price controls on the Canadian economy. We can talk about supply management in poultry, dairy, and eggs, we can talk about provincial price controls for liquor, car insurance, health care, and all other sorts of things. Once prices are out of whack, to avoid shortages, the government usually has to SHRINK.
Because if a price control prevents profit-driven sectors from making a profit, they’ll exit the market, or as I like to point out CHANGE THEIR BEHAVIOR. Maybe they’ll fire people and replace them with robots, or use foreign labour, all sorts of things can happen and it tends to equate to a lower standard of living and oh, by the way, prices don’t come down while this transition occurs, the opposite tends to happen, prices GO UP.
But because of the possible strength in the Canadian dollar INTERNATIONALLY, what you’ll find during these periods are hoarders of Canadian dollars spending their Canadian dollars where they’re being treated best. Now, sure some politicians can attempt to ban Canadian dollars from leaving the country, but wealthier people could simply dump Canadian dollars for Euros, U.S dollars, or even gold.
When Government is too expensive and fiat money is considered a commodity, certain flaws in the system are EXPOSED and as I’ve said, the only fix is austerity measures and I currently see NO appetitive for austerity.
Interesting times ahead!