Defying the odds, spitting in the eye of convention, shattering the predictions and expectations of financial markets across the entire globe, a slim majority of Britons voted last night to take their country out of the world’s biggest free trade zone. It was dramatic and unexpected by those who felt UK voters would not be myopic enough to opt for nationalism, protectionism and a new form of isolation. But they did.
Financial markets had made the opposite bet, so the reaction is pretty much what you’d expect. A knee-jerk move down for stocks, a surge up for safe haven assets like bonds, the US dollar and gold, plunging bond yields and a devastation of the British pound. The Canadian dollar sank as the greenback surged and oil prices toppled, in an immediate one-two blow for Canadians.
Politically, David Cameron is gone as UK prime minister, ushering in a new period of volatility and uncertainty there. Scotland, which voted to stay in the EU, is now grousing about a new independence vote. There’s talk an emboldened France may want out of the Euro zone for the same reason most Britons did – to control immigration. As such, it could conceivably lead to the eventual breakup of the whole thing, plunging 700 million people into an unexpected and potentially difficult reality. It certainly would thwart the efforts of institutions like the European central Bank to stave off deflation and fight the unemployment that’s plagued the region.
While stock, bond and currency markets will find their level again – likely posing some massive investment opportunities (as did 2008) – the economic and political fallout is something else. No doubt about it, people are in a mood. It’s anti-establishment, iconoclastic, pissy, defiant and visceral. This is the same sentiment which has propelled a talentless bombast like Donald Trump to the threshold of power in the States. Dangerous.
The celebration of the UK’s questionable decision here on this pathetic blog last night is astonishing. So many people see this not as the backward economic and financial step that it is, with global implications, but as revenge for the little guy – against forces they felt powerless to change. Until now. As a cowboy I understand this perfectly. As a financial guy, it’s insane.
Along with my two Portfolio Manager partners, we held a special Brexit conference call with all of our Turner Investments clients at 11 am EDT today, June 24th, to weigh the consequences. The recording of this call is posted below (in mp3 audio format):
All doubt that government intervention in the country’s bi-polar housing market is on the way was erased by the finance minister on Thursday. It’ll be here in ninety days. Get ready.
Bill Morneau already hinted this was coming two weeks ago, then his boss confirmed it. When Trudeau called market conditions “a crisis” and lamented in Vancouver that housing is now “inhospitable to middle class families”, the pooch was gone. So there’s now a task force of the feds, Ontario and BC officials, plus poohbahs from the GTA and YVR, with a goal of action this autumn.
Officially, here’s the mandate: “to evaluate whether further steps can be taken to protect borrowers and lenders to help maintain a stable and secure housing market for Canadians.” Does that mean higher down payments? Less CMHC support and more risk heaped on lenders? A tax on Chinese dudes? A flipper-specker penalty? Mortgage restrictions? A deliberate hosing-down of Toronto and Van, while trying not to further depress Halifax, Montreal, Edmonton, Regina, Winnipeg, Saskatoon or Calgary?
Yes it does. At least some of the above will be in place a few months from now. But will the social and economic damage already have been done? After all, household debt’s at a record level and continues to expand. As mentioned previously (it bears repeating), a majority of million-dollar home buyers are already taking 30 or 35-year amortizations and four in ten have at least 450% more debt than income. The last thing they want is lower prices – which is exactly what Millennials crave.
More evidence of this came yesterday (like we need more). RBC’s regular housing (un)affordability report has hit a new and evil milestone. Even with a h-u-g-e 25% down payment, it now takes 119.5% of gross income of the average Van family to afford the average Van house. Yes, 119% – which is a fifth more than people earn, or 150% of take-home pay. Absurd. It’s more than anywhere else in the nation, at any time in recorded history.
So owning a single-family detached house, even an unrenovated beater, seriously ugly Vancouver Special, has “become out of reach for all but just a minority of higher-income households.” And yet, people keep buying. It’s a quirky law of rising markets – higher prices breed higher prices. Until it all stops, with people looking into the scared vacuity of each other’s eyes muttering WTF have we done? This is the day Mr. Morneau wishes to see arrive.
RBC also found Toronto is nuts. But less so. Over 71% of average gross income is now required to afford the average house (again, with a giant down payment already in hand). The after-tax cost is therefore close to 100% of cash flow. RBC calls this “significantly stretched.” Worse, “We expect such market conditions to fuel further rapid price increases in Canada’s hottest markets in the near term. This would mean that owning a home — especially a single-detached dwelling — at market price is likely to become even less affordable in those markets.”
Meanwhile blog dog Dave has a proposal for me. “Garth – would you like to go halvsies on this sweet little bungalow in the Dunbar area? It’s a nice one. And it’ll only go up. Forever and ever. What a crock!”
Well, here’s the house. A new listing, Dave and I are going in for the $5.5 million asking.
The lot is fifty feet by 130, the house is 101 years old, tenanted, 2,400 square feet, two baths, four beds, free mold and nine grand in property tax. Says realtor Evan Ho: “This is a perfect opportunity to buy a large oversized lot in the Dunbar area. This property is located in a central location near shops, transit and much more. Lord Byng Secondary School catchment and close to St George and Crofton House private school. Currently tenanted with lease ending at the end of July 2016.”
So, yes, it’s being sold for land value only. That’s $850 per square foot of dirt in West 29th Street. This is not the typical house, of course (the average detached price in Van is only $1.7 million), nor will it go to the typical family. But if Bill & his task force buddies need any more tangible proof we’re headed for a really big cliff, here she be.
“We are still renting,” says Dave. “We’re saving $2,200 a month over what we would spend on a mortgage here in Vancouver. It’s starting to add up. And we are on track to work only for fun by age 60. Not bad.”
Now, back to Brexit.
The pound is pounded as ‘Leave’ forces take early lead in UK referendum.