L’épiphanie

First, the French Revolution. Then, American Independence. Finally, the Demented Beaver Report. Please take your seats. Quit that damn Instagramming. Turn off your phone. Leave all children outside. Dogs are welcome.

The election in France matters to the world since it pitted the forces of Trumpian populist against a more centrist view of the world. Marine Le Pen is one scary mademoiselle, anti-immigration, anti-globalist, anti-corporate, pro-nationalist and promising an isolated France-for-the-French. She didn’t win the first round, and is unlikely to change that on the second. So markets figure photogenic, T2-clone Emmanuel Macron (who sort of married his mom) will end up president. As a result, the Dow shot ahead 200 points and European markets roared.

After getting beat up with Brexit and Trump, this was a big day for free-traders, globalists and others who think the world is okay and moving ahead. Volatility plunged 25% in a single session. Gold and gold stocks sank. My obsessed Portfolio Manager partner Ryan drove his Porsche at 110 km through crowded Toronto streets and over sidewalks so he could get to the bank tower and send me this note:

  • With the perceived positive outcome in French election, the S&P 500 broke above its short-term downtrend
  • The S&P 500 has been consolidating in a descending triangle but with today’s breakout it’s broken out of this consolidation pattern
  • Next resistance is the March high of 2,400
  • Looks like Europe might finally be breaking out relative to S&P 500
  • With cheaper valuations, improving political environment (if Le Pen loses this would follow Netherlands loss by right wing candidate) and improving technical profile, we could consider reducing US and adding to Europe in the next round of changes

I found the part about the ‘descending triangle’ particularly arousing. In any case, the point is the French thing, at least until le deuxième partie on May 7th, may be signaling that the populist movement is running out of gas and all the 1%ers can stop buying elephant guns. Markets eat this up, since big corps can continue their global operations, moving money and labour around for the efficient manufacture of profits for shareholders.

Now, on to America. More dopamine and endorphins for investors. On Wednesday the poster boy for populism makes good on his campaign promise to slash the US corporate tax rate about in half – right down to 15%. The impact of this, if enacted, would be huge. Stocks which look sort of pricey now on a P/E ratio (that’s the relationship of stock prices to the money the underlying companies actually earn) would end up looking cheap as profits plump. Yup, higher highs, higher lows – extending a pattern that’s been in place now since 2009.

Of course, fatter profits, rising markets and an expanding US economy will also bring more of a response from the Fed. So, if the Trump tax cut comes to pass (or even if it doesn’t) you can expect two or three additional interest rate increases in 2017. The Bank of Canada will follow a few months later, but in the meantime the bond market will adjust mortgage rates upwards. This is not speculation. It will happen.

Meanwhile, in the land of the flat-tailed, house-horny, buck-toothed rodent, taxes are going up, not down, our most indebted province just announced it will give people free money to live on in three cities as a universal income pilot project, and property lust has apparently hit a new high along with debt and risk.

Nik Nanos’ current snapshot of how Canadians are feeling reveals a people detached from economic reality. The number of us who think house prices will rise from nosebleed levels in the next six months has soared to almost 49% – the most on record – while only 10.8% think they could decline. The rest are terrified.

“Bullish sentiment on real estate in Canada continues to drive consumer confidence,” says my pal Nik. Which is strange, given what is happening with household finances. Nanos asked people how they’re doing relative to a year ago, and found that almost 30% of people report their situation has deteriorated – almost twice the number who think it has improved.

So how can people keep buying houses that have never cost more, with record amounts of debt about to become more costly, believing they will continue to inflate even as their own situation worsens? Yup. They believe it’s different here.

Sure got that right. Have you listed yet?

Victims

Apparently every eighth property sale in the GTA last year (and there were 113,200 of them) went to a person who already has real estate. This ratio exploded in the last decade according to government stats. More than 120,000 locals now own multiple places.

So what?

So if foreign buyers (according to local realtors) equal 4.9% of all deals, if 50% of all condos (according to Urbanation) are bought by people with no intention of moving in and if 14% of total buyers (according to the province) already own homes, then the changes announced last Thursday are doomed. The centrepiece of Ontario’s big douse-the-fire program was a 15% tax on foreign buyers (who don’t move here), but the numbers show the real culprit for runaway pricing is clearly old stock speckers.

By bringing in an anti-foreigner tax, spanking realtors, extending rent controls and opening the door to an empty-houses levy, the province missed stomping out the hot coals responsible for this conflagration. Forget Chinese dudes, assignment clauses or rich people with a downtown condo for game nights – prices have romped because GTA properties (ditto in Vancouver) are now an asset class, and part of the futures market.

The mania to acquire real estate is unlikely to be abated by anything last week delivered. Nothing Ontario did will immediately reduce sales or prices. A detached house will be just as unaffordable to the average moister couple in July as it was in March. That won’t change until government has the backbone to create a serious speculation tax of the kind last seen in the 1970s.

On April 9th, 1974, out of the clear blue came a bolt of lightning that sautéed the rear end of every speculator and multiple-property owner in Ontario. The province imposed a 50% tax on any and all profits an investor might realize from the sale of any piece of real estate. The only exceptions – your farm or your principal residence. And this was on top of the federal capital gains tax.

It was an astonishing thing for a conservative government to do, but it worked. Sales collapsed overnight. Within days, prices followed. The 30% year/year price gain which triggered this draconian action (currently the bloat is at 33%) was arrested, then interest rates started to rise and the party was truly over. Real estate remained relatively affordable until the next bubble formed in the mid-1980s (burst by mortgage rate hikes in the early 1990s).

The hate mail this pathetic blog has garnered over the past three years of suggesting locals, not dudes from Guangdong, were responsible for peak house, is impressive. I’ve been told what to do with literally every orifice on my bronzed, taut body. Most Canadians have bought into the meme that shadowy foreigners and traitor realtors have conspired to steal houses so they can launder their stolen fortunes. They want to believe it. They hate people who reject it. Life’s so much more understandable when you’re a victim.

Well, victims they are. Of their own frenzied obsession with dirt.

Renters are discriminated against. Household debt levels are reckless. Our media’s obsessed (“Buy now or risk saying bye-bye to affordable Montreal home ownership,” said the Gazette on the weekend). Our kids have turned into condo junkies. Financial balance has been sacrificed on the altar of potlights and polished cement. Worse, this bubble we’ve created for ourselves has turned many of us into xenophobes, racists and generally despicable, envious, venomous people. So we get the government actions we deserve – a tax on foreigners and collars on agents. Tomorrow houses will cost a little more. Risk on.

Frenzied buyers line up outside the sales office of Brad Lamb’s latest condo development on the weekend in downtown Toronto.