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Borrow until it hurts


The warning signs of an imminent crash or at least a significant dip continue to mount as we talk to professionals from all over Canada about the severity of our economic numbers in Canada. How about setting the record straight before we even mention the word “Gold” or “Silver”?


The entire Canadian economy is currently valued at approximately $1.97-$1.98 trillion. (For perspective-A, trillion has a lot of zeroes, twelve to be exact. It’s a thousand times a billion, which is a thousand millions.)


I want readers to understand that we support the notion of ownership of all types of hard assets and have discussed them at length over the years. But guess how much money households now owe? It’s $2.1 trillion.


This debt comes thanks to a colossal 41% increase in new mortgage borrowing in the last few months, contrasted to the same period in 2020. Just last month Canadian mortgage debt grew by an astounding $17 billion. The size of mortgages people are taking has also grown – by one-fifth.


We have seemingly managed to lose our common sense in 12 months. We no longer worry about debt. Work from home savings, artificially low rates, government handouts and severe FOMO (Fear of missing out) have befuddled our brains and brought us to the point when over 20% of all new borrowers have debt-to-income ratios exceeding 450%. 450%, say it with me 450%!


Equifax, which keeps tabs on our indebtedness and issues credit reports, had this to say recently: “Successful vaccine rollouts will be the critical factor in opening up the economy, which will have a big impact on consumer spending and debt management. Canadians should be preparing themselves for a point in time, which will likely come in this calendar year when governments begin to rein in support mechanisms.”


So there you have it, folks. The “gravy-train” is more than likely going to come to an end in 2021. The question is, what planning have you done to try and protect your wealth? What steps have you considered to educate yourself about assets that might perform very well under uncertain economic times? Have you considered reducing the load on assets that have made money, such as real estate holdings? Do you believe that the stock markets will rally under stable organic economic conditions to brand new highs or even double from here? Are you willing to chance it? Or do you need further evidence that we have collectively lost our minds?


Here is more.


New Canadian mortgage borrowing is off the chart, but it’s not just the younger generation of new buyers going to the well. More and more Canadians are refinancing their homes, turning them into ATMs, pulling out equity and using it for other purposes – like buying more real estate, and they are doing so all the while a record number of vacant jobs (600,000 to be exact) sit unfilled in Canada.


TransUnion reports that mortgage originations have surged 26% year over year. Much of that is due to buying activity, but a monstrous 55% comes from existing customers renewing and getting refinancing packages.


As we all know (or should), these interest rates will not hold for much longer, and everyone borrowing today will be renewing at a bigger number down the road under much worse inflationary pressures. So the question becomes whether or not we will be caught flat-footed as one market turns over and collapses while another one (precious metals) takes hold and journeys into the stratosphere.


The point? A disproportionate amount of the economy is wrapped in real estate with historic prices disconnected completely from incomes, a frothy buyer sentiment and outsized expectations. To make this even more ugly, we now have record levels of personal and housing debt mixed with teaser interest rates and equity overtly enormous amounts of home equity ATMs. What could go wrong? (Click this link. It is a reminder of exactly what did go wrong)


In any economic event there are always imbalances that skew the overall ability of individuals and families to mitigate their risk in a diversified manner. FOMO in real estate is the finest example I can think of. But there are options available to those willing to consider them. It is part of the reason why Delta Harbour Assets exists. If you believe, like we do, that there is trouble lying ahead then maybe now is the time to consider that mitigation of your risk. The choice is always yours.


Yours to the penny,


Darren V Long




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