The debt trap

Here we go, kids. Hang on

The beaver economy churned out an incredible 259,200 jobs last month, about three times what the experts had predicted. Unemployment tumbled from 9.2% down into the 8% range – and all this reflected (a) the end of 100 days of lockdowns, vax and the reopening of the economy plus (b) a tidal wave of hoary house lust. In the US, also gains – 379,000 more. But we aced that.

And, whoa, look at how Mr. Debt Market reacted, pushing the yield on Canada fives back up to the 1% mark. Yup, more mortgage bloat coming.

What do the vaccines, business reopenings, tons more jobs, mass inoculations and swelling bond yields tell us? Well, the same as $1 million average ticky-tacky suburban houses, G1S plywood sheets nobody can afford and outrageous puppy price tags. Yup. Inflation. Evidence is mounting this is turning into a big deal.

At the pointy end of the problem is real estate, as you know. BMO economist Robert Kavcic now says we are “playing with fire.” He points out the last house crisis in 2017 was not nearly as evil as this one, since it was contained to a few major markets. This sucker’s everywhere. Low mortgage rates have exacerbated the threat, becoming a bottomless debt trap. Cheap money means people borrow more, spend more, push up prices further and crush affordability. But if rates rise, indebted household finances wobble under the load.

Kavcic likens this to thirty years ago. Yikes. “If mortgage rates stay where they are, but prices keep doing what they’re doing, we’re back into the late-1980s territory by this time next year.”

And what happened then? I was there. In the thick of it. Real estate hit a wall. The market corrected brutally – falling just over 30%, and taking 17 years to recover. So if rates stay the same, pooched. If they follow inflation and bonds, more pooched.

By the way, real estate – thanks to our unsated residential desires – comprises more of the economy than at any time in history. It is double the share of housing in the US economy, and about 50% higher than when the American property market blew up in 2005/6 – dropping prices nationally by 32%. It took ten years to get over that.

So, is this what we’re doing to our nation?

Monthly GTA sales – this is not normal…

Click to enlarge. Source: Stephen Glaysher, MLS Sold Data

You might find insightful this note I received from a veteran Toronto realtor yesterday:

As of this morning there were 59,700 agents (Brokers & Salespeople) in Toornto. This represents 42% of the Realtors in Canada. (There are 142,160 according to CREA).  In a market that is best described as robust, the local industry has seldom been sicker. In the GTA more than 20,000 agents do not record a single sale in a given year, and another 20,000 only record one or two sales. Imagine going for heart bypass surgery with a surgeon who has done one procedure in the last few years, Gulp.

On the surface, it would appear that all of this competition would drive down commission rates, but because most agents are going for that single home-run a year, there is no incentive to lower fees. At 5%+ HST the owner of the average $1 million dollar Toronto home will pay $56,500 to have the SOLD sign erected on the lawn. To put that in perspective the owner could get ALL of the following non-insured medical procedures for the same cost:

1) Face Lift
2) Neck Lift
3) Eye tuck
4) Nose Job
5) And a Brazillian Butt Lift, (whatever that is)

All procedures performed by highly skilled and extensively trained Medical Doctors.  Garth if you choose to use any of this, best let me remain anonymous, don’t want my car “keyed” in the parking lot.

Meanwhile, all governments have been silent on this matter, preoccupied as they are with the virus. A couple of brave bank CEOs have worried aloud. Now a growing number of economists are hoisting red and yellow flags – like my long-time doomer buddy David Rosenberg. Normally I feel Rosie enjoys eating broken glass and shooting himself with a nail gun, but this time he’s stating the obvious: “This might be one of the biggest bubbles of all time.”

It is. And since Canadians keep the bulk of their net worth in one asset class, have borrowed $1.6 trillion in order to afford it and live in an economy dependent on it, real estate has the potential to kick ass. All that behavioural finance stuff we talked about yesterday – recency bias and confirmation bias especially – ensure most are blissfully unaware of the potential for reversal. Many weren’t yet out of Huggies in 1989.

However, Friday’s data speaks for itself. Be careful what you buy. Be unafraid to take gains. Be balanced. And good luck with the butt lift.