Juggling Dynamite

Saturday’s Report on Business offered some rich insight on Canada’s housing mania.

Saying that real estate investing is “not like get-rich-quick because it’s something that takes time,” one of the featured couples goes on to explain that, in less than two years, they have gone from driving a dump truck full time to buying and optioning multiple ‘investment’ properties, by leveraging debt on debt.  Can’t help but wonder which prudent lenders are fronting these funds?

But not to worry, they’re “feeling more financially secure” now, and their friends are looking to them for advice on how to “get involved”.   This will all end swimmingly, no doubt.  See Real estate frenzy rips through Canadian housing market:

“Jacqueline Francis, 41, and her partner Leo, 40, started seriously getting into real estate investing in 2020. They did it to give their three children a better life. “We want to begin to create wealth for them, give them opportunities that we haven’t had,” said Mr. Francis, who grew up in a small, roach-infested three-bedroom apartment in Toronto with his four siblings and parents.

Before they started investing, Mr. Francis worked full time as a dump truck driver, hauling material out of construction sites. Many of the sites were residential real estate projects and his world revolved around developers and other professionals in the industry. At the same time, some of the couple’s friends and relatives were investing or becoming realtors. The Francises described real estate as being a constant presence in their lives, so they decided to give it a try and enrolled in investing courses. They decided to focus on small apartments also known as multi-residential buildings. “It’s not like get-rich-quick because it’s something that takes time,” Ms. Francis said.

The couple, who live in a house in Durham, Ont., own a condo in Toronto, two multi-residential buildings in Niagara – a 16-unit building and a six-plex – and have made deposits on two preconstruction units. They are also expected to close on a 12-plex in London. They used their home equity line of credit to buy the first multi-residential property in 2020 and raised cash from friends and family to buy the smaller one in 2021.

The couple described feeling more financially secure and say they will soon have more freedom. They said their friends are noticing and are starting to ask about real estate investing. “They want to know what we’re doing,” Mr. Francis said. “They want to get involved.”

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

With bond yields rising since last summer, the U.S 30 year mortgage rate moved above 4% this month,  up more than 1.25% over the past year. In Canada, the popular 5-year fixed-term conventional mortgage rate has been climbing too, today in the 3% range and expected to reach the 3.4% area over the next couple of weeks. Variable-rate mortgages and loans, of many forms, increase when central banks start hiking base rates, presently slated for March.

This leap in debt servicing costs comes as average home prices in Canada and the U.S. have increased 30%+ over the past year, and the average purchase loan size hit a record $453,000 in America, $372,000 in Canada, and $582,000 in the most expensive markets of the greater Vancouver and Toronto areas. Toronto, Vancouver, and Montreal are Canada’s largest mortgage markets. With nearly $350 billion in mortgages outstanding, Toronto accounted for about 23% of the country’s $1.5 trillion Canadian mortgage market (source:  Statista Q3 2021 data).

As home prices have become increasingly unaffordable for most households, up to one in 4 homes in high population areas, have been bought by ‘investors’ looking to flip or rent for a profit. In the process, rents have risen in the most populated areas by a whopping 30% on average over the past year, and economic activity has become excessively concentrated in real estate transactions.

These trends are counter-productive to financial stability and resilience and set the economy and balance sheets up for a painful period of normalization. The inevitable weakness in household spending has been evident over the past few months, with December retail sales revised from -1.9% to -2.5% yesterday, the second-lowest real growth rate since May 2020 (EPB Research) and the January non–seasonally–smoothed number was –18.5% month over month. These are foreboding numbers for economies heavily reliant on debt-enabled consumer spending for growth. Government bonds see the trend to slower growth and are rallying as risk markets fall again today.

David Rosenberg discussed these trends yesterday in the clip below.

David Rosenberg of Rosenberg Research talks about the latest inflation data out of Canada, reaching a 31-year high. He says more than three to four rate BoC hikes will hit the economy. He also talks about the “painful” impact of rising rates on the housing market.  Here is a direct video link.