The sucker

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When 263 Wright Avenue, in Toronto’s leafy west end, hit the market last Spring, it was sad. Vacant. Neglected. The listing agent said it must sell in an “As is, Where is” state. The pitch: “Attention Builders, Investors And Contractors, An Opportunity To Bring This Gem Back To Its Glory. Private Driveway With Detached Garage.”

In other words, a beater. But in a good hood. The price: $979,000.

Well, it sold in seven days. Bidding war. Lots of emotion. Cars lined up down the street on offer night. The final sale price was $1,303,000, or $323,000 over list – a premium of 31%, plus double land transfer tax of $44,320.

But if you missed out on this tarnished gem the first time, here’s another chance. Six months later it’s for sale all over again. “Attention Builders, Investors And Contractors, An Opportunity To Bring This Gem Back To Its Glory,” says the new listing. “House Being Sold In ‘As Is’ Where Is Condition.”

In other words, nothing’s changed since it changed hands in the Spring for $1.3 million. Except the price. Now it’s on the market for $999,000. Says an experienced local realtor who shared this with me: “Unless this sells for north of $1.42mm, this sucker will absolutely lose money (and this doesn’t count for carrying costs or a penalty for breaking a mortgage). Either the house was crap (which it is), or they realized there’s no money to be made (also likely true). This is too funny.”

Well, here it is…

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So on Thursday Bloomberg ran a story with this headline: “Why 2016 may be the year of ‘Peak Housing’ for Canada.” This proves (a) Bloomberg’s a lot smarter than most Canadian media outlets, probably because (b) they read this blog, which is where ‘peak house’ first appeared (May 31st). So when you read about Moisters visiting [email protected] in the New York Times, you’ll know.

Three years ago in Canada there were three bubbly, frothy, horny, outta control housing markets in Canada. Two years ago two were left. Now there’s one. And as more properties like 263 Wright find their way to market, we might be on our way to zero. After all, the arguments against real estate are piling up by the day. TD raised mortgages again yesterday, this time for rental properties and long-am borrowers. The latest onerous regs brought in by Ottawa clicked in this week. CMHC’s boss in recent days has suggested minimum down payments rise, that borrowing should be linked to the income of the borrower and Chinese dudes are not responsible for stupid prices in Vancouver.

Where have you read those things before?

Bond yields are backing up and the Fed will be raising its key rate in 13 days. The latest GDP numbers for Canada (much better) guarantee the Bank of Canada’s next rate move will be up, not down. US rates will rise again twice in 2017, observers believe, and Canadian mortgages will swell right along with them. Meanwhile the Moister Street Test is having an impact on first-timers who now qualify to borrow less than they did in September. Up to 20% of them, swear mortgage brokers, will be punted from the marketplace by the new rules.

Meanwhile sales are down about 40% in VYR, and this week I detailed for you the landlord-rental crisis sweeping Alberta and Saskatchewan (as well as Atlantic Canada). How much evidence is needed to make the obvious, well, obvious?

So what did Bloomberg mean by peak house now being in the rear view mirror?

Simple. The economic stats this week were great, with the exception of one thing – a collapse in residential real estate investment. The downturn was the worst since the financial crisis and seems to be based on a sharp decline in the “Audi A7 Index” – in other words, realtor commissions. They were sitting at an elevated level almost identical to that achieved in the US just prior to that country’s housing gasbag rupturing and blowing up the indebted middle class.

This is interesting:

“The run-up in residential investment as a whole in years past, and this segment in particular, bears eerie resemblance to what transpired south of the border in the 2000s, Doyle observes. If history repeats itself, moving past this peak in real estate commissions won’t necessarily be a harbinger of imminent doom, but rather an early warning sign that a key driver of economic growth has been tapped out — which could foster more widespread weakness further down the road. Ahead of the U.S. housing bust, the downturn in brokers’ commissions and other ownership transfer costs started in the fourth quarter of 2005, well before the beginning of the financial crisis.”

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What does it mean? That’s simple, too. Since we’ve allowed real estate to become such a large part of the economy (bigger than all manufacturing, more profound than oil & gas and mining) as property sales and values unwind and the epic household debt remains, things get a lot slower. The dollar takes a hit. Banks, as mentioned here days ago, could lose $17 billion in earnings if houses shed 30% of their value – as happened in Toronto during the last correction.

By the way, did you hear house prices will drop by 8.7% in Vancouver next year? It means if you own the average detached house, you will see a loss in tax-free equity of $139,000. That prediction was just issued by the BC Real Estate Association, and represents at 14.5% reduction from their last prediction – three months ago.

Well, if you’re interested in 263 Wright, or taking over an A7 lease, leave your name with the blog concierge.

It works

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There’s an interesting pattern on this blog packed with deplorables. I write about bonds. They trash bonds. I explain preferreds. They tear ‘em up. I discuss REITs. The deps nuke them. I offer weightings for a balanced portfolio. They diss balance. I proffer diversification. They pick stocks. I explain rebalancing. They wanna day trade.

If I weren’t on a mission from God to save you all, I’d give up. But, alas. Can’t. It’s a Sisyphus thing.

Well, kids, today a few words on why, during 2016, the investing approach and philosophy presented here was the correct one. It’s been a corker of a year, after all. Commodities collapsed last winter and Canada slumped into recession. Then Alberta incinerated. After that came Brexit. Then an oil surge. Stock markets flirted with record highs for months. Terrorists tore up Paris, Nice, Orlando while Syria burned and ISIS raged. Trump defied all odds and became the first inexperienced, Tweeting, goofy billionaire president. And now we stand on the precipice of more change. Rates are about to pop. Trade’s in trouble. OPEC blinked. Donald is crazy.

The question is simple for many people: how do you possibly preserve wealth, yet make it grow, in an insanely volatile world like this?

Well, hate to say I was right. But I was right. If you went through 2016 with a properly balanced and globally-diversified portfolio, then you’ve protected your capital in bad months, grown it in the good ones, and ended up with a return somewhere around 6%. Keep on doing that for a decade or two, and life will be sweet.

There is one big lesson here the deplorables need to learn. Never exit an asset class. You have no idea what’s coming around the corner. Nor does any fancy financial advisor-cowboy who says he can “add alpha” by beating the market. He can’t. You can’t. Almost every fund manager on the globe can’t. But you can have a portfolio that lessens volatility and has a long-term track record of consistent gains.

So just because interest rates are rising and bond values falling as yields increase, is no reason not to own bonds. They keep volatility down, balance equity drops and provide some income. When Brexit hit, for example, stocks screeched lower and bonds streaked higher. People with a nice balanced 60/40 portfolio barely noticed the commotion. Just make sure you have the right combo of bonds (a little government, some corporate, some high yield and real return) and the correct durations (short).

Just because Canada was in the crapper back in February was no reason to dump maple and go all-America. Commodity prices recovered, and so has our economy. Look at the latest GDP numbers, a scorching 3.5% with a big surge in exports. So far this year the TSX is ahead 15.93% – one of the best performers in the world – so abandoning Canadian growth assets along with the deplorables here nine months ago would have been a losing strategy.  Make sure you have the right weightings for your growth assets (Canada 17%, US 21%, international 18%, alternative 4%).

Just because the US election was a massively weird thing pitting two of the worst candidates since politics was invented against each other and promising no good outcome, was no reason to dump equities and go to cash. Or, worse, run to gold. Kneejerkers who did that lost big. And while most of the world thought Clinton would rip Trump, and was shocked when the opposite happened, investors with a balanced portfolio needn’t have worried about the outcome. If markets tanked (like Brexit) then fixed income would soar. As it turned out, the opposite happened – which was even better. Meanwhile gold was creamed and cash did nada.

Just because oil cratered to $27 last February, then recovered and ended up in a mid-$40 swamp with supply overwhelming demand, was no reason to desert the energy sector. Look at what happened this week – the OPECers agreed to production cuts, resulting in a 9% surge in crude in a single day and romping oil companies in the same week the feds okayed two pipelines.

I could go on (and will eventually). But there are solid reasons why people who actually want to preserve their capital and still have solid growth, need to own all of these assets, and in the correct proportions. The goal is to have a portfolio with 40% fixed income (half a variety of bonds, half preferreds) and 60% in growth stuff (real estate trusts plus equity exposure to Canada the US and the world). That’s balance.

Then, unless you have at least seven figures to invest, eschew stocks and go for index ETFs. Picking a handful of individual companies is gambling, not investing. Buying mutual funds, meanwhile, is often a sign of mental defect (or you like paying fat commissions to your salesguy BIL). This is diversification.

Keep a little cash (5%) and never any GICs, since they’re tax-inefficient, low-yield and illiquid. And always worry about taxes. Interest, like rent or your salary, is decimated. Dividends are a lot sexier. Capital gains are a tax gift.

Mostly, though, stop reading this blog. Or at least the comments section. Ignore the news. Don’t listen to [email protected] Or the gold crazies. Or the zero guy. Set up a balanced portfolio. Get a golden retriever.

Just chill. You’re gonna need it.