Jar people

More about dog artist Topher Brophy here.

The big news soon in the GTA will be an increase in sales. “The scare is over,” wrote a realtor in a failing Toronto tabloid that shall remain nameless. When the local cartel releases numbers in a few days they’ll come cloaked in the patina of ‘recovery.’ The bleeding was staunched! We’re not gonna die after all!

Meanwhile in the Lower Mainland, lots of moisters never got the memo about peak house and the troubles coming. A ho-hum new townhouse development (starting at a garage-sized 500 square feet) in PoCo, of all places (30 clicks from downtown YVR) caused pandemonium late last week. Whipped up by a social media campaign, the kids were camping out in pup tents for four days and three nights prior to Saturday’s launch.

Here’s the vid posted by a triumphant marketing team at Montrose Square.


Well, does all this mean it’s over? The correction, that is. Was it, like geriatric sex, promising but achingly short? Or is this a head fake? A classic bull trap?

Many point to the Van experience as ‘proof’ the GTA will recover fast. Following the imposition of the Chinese Dudes Tax, then the Empty Houses Tax, plus the CRA Specker Tax crackdown, the market slumped and prices wobbled. But lately sales volumes and average prices have picked up, as the sales mix changed dramatically. Condos and towns are hot. Detacheds are not. Luxury properties are growing spores. Priced out of single homes, but horny as ever, Mills have been pouring into ‘affordable’ places, clinging to the belief they must buy-now-or-buy-never.

So cute. An entire generation that grew up with romping prices and declining interest, irrationally afraid of financial assets (their parents’ mutual funds were whacked in 2008), with the financial literacy of a Starbucks Iced Coconut Milk Mocha Macchiato, rushing to spend their pre-approved mortgage money so they can look forward to closing costs, strata fees, property taxes, maintenance and irrepayable debt at increasing rates. Are they smart to be camping on the side of a Port Coquitlam road and peeing in jars so they can buy something in four minutes knowing what’s coming, or is this youthful ignorance on parade?

Beats me. I come here for the dog pictures.

Well, it’s clear economists are concerned. Last week’s personal debt numbers plus fresh warnings from international central bankers were chilling. Looks like the US Fed is on track for four interest rate increases in 12 months with an expected December pop. The Bank of Canada will have one more (at least) this year, for a tripling of its benchmark in 2017. The Dotard-Rocket Man thing threatens to get out of control. Ottawa is about to tax the poop out of two million small business operators. And have you checked out weather events lately?

Mostly, though, the universal stress test is what has experts worried. Expected next month, it’ll add 2% to current rates in terms of income qualification. The impact? Removing between 5% and 20% of available credit (depending who you listen to), with a corresponding impact on pricing.

So here’s a key question: does a rebound in activity from the depths of July have anything to do with people accelerating buying decisions because of rising rates? Are those pre-approved for mortgages for 60 or 120 days scrambling to spend that money before home loans swell again?

Emile is one of those moisters in angst. “My wife and I just happened to get pre-approved for a 5 year fixed at 2.54% on the morning of Sept 7th (the date of the last rate hike),” he says. “We are eligible for this rate for 120 days. We live in a town where the average house is likely about 500k. If I wait till mid-winter and get the same house at 450k (10% drop) I would likely have to finance at a higher rate and the house would be no more affordable for me.  So the real question is this:  What do we do?”

That’s easy. Wait. Buying six months from now after the above takes effect will likely result in a lower price. Yes, rates may be higher so, yep, the monthly will be about the same. The big difference is a lower debt – in this case about $50,000 less. So assuming you stay in that property for a decade or more, two mortgage renewals lie ahead at uncertain rates. Money could cost more or less in 2023 and 2028 – but one certainly will be that you have a smaller amount to finance, minimizing the impact. Plus, if you convert your monthly mortgage into a weekly one, the effective amortization period will be sharply reduced – all for the equivalent of a single extra payment per year.

So, to conclude, higher rates and less credit will reduce the cost of real estate. Surely you didn’t need 828 words to tell you that.



DOUG By Guest Blogger Doug Rowat

Warren Buffett once famously said that he “made more money when snoring than when active.” Buffett, of course, is well aware that most investors are terrible at predicting short-term market swings and that the best plan is to simply be boring and stay invested. Yet we mostly can’t help ourselves. As proof, the comment section of this blog will shortly be filled with individuals making short-term market predictions with many suggesting that the market is rigged, the economy doomed and that hiding in cash is the best option.

However, JP Morgan research clearly shows the difficulty of trying to time markets. Staying fully invested in the S&P 500 from 1994 to 2014 would’ve generated a 9.9% annualized return, but missing just 10 of the best trading days would have dropped the return to only 6.1%. Ten days over 20 years. Don’t tell me that you would have known when those 10 days would have occurred?

But note that, historically, the best days tend to arrive fairly near to the worst days. However, what’s the most likely scenario? The worst days would likely prompt a retail investor to move to cash with an almost zero likelihood that they would then shortly after re-enter the market in time for the strongest market days. What my nearly two decades in the investment industry has taught me is that once a defensive cash position is taken, it’s a position that remains, often for years.

Performance of US$10,000 over 20 Years: Missing Just a Few Days Cripples Performance

Source: Business Insider. JP Morgan Asset Management. Data as of Dec. 1, 2014. Measures return of S&P 500.

A favourite pastime of Canadian investors is also attempting to market time the loonie. We simply love doing this. It’s as Canadian as Tim Hortons’ coffee. However, market timing currencies is even worse than timing equities. This is because equity markets are much more forgiving—over time, they move higher. Not so with our Canadian dollar/US dollar exchange rate. Our loonie, for instance, currently sits at roughly the same level that it was at 30 years ago! Currencies tend to move in giant M or W patterns and timing each peak and valley is exceedingly difficult. An article in the Wall Street Journal a few years ago highlighted some of these issues:

Only about 30% of all retail forex trades are profitable, according to Aite Group [an independent financial market researcher], largely because of traders’ lack of education and experience in dealing with a market dominated by institutions.

Eventually, as you attempt to repeatedly time all the tops and bottoms, you’ll be wrong, and the incorrect timing could create permanent losses. With equity markets, an incorrect entry point will, of course, cost you time, but it’s very likely that, if you’re patient, you’ll eventually profit, most often within a year or two. But with a poorly timed currency trade, you could easily go a decade or more in a loss position. For instance, if you’d bought US dollars in 2002 when the Canadian dollar was at about 62 cents, you’d still be waiting for your ‘trade’ to be in-the-money.

In Roughly 30 years, CAD/USD FX Rate has Gone Nowhere…

…While the Canadians Equity Market has Advanced almost 600%.

Source: Bloomberg, S&P/TSX Composite return includes dividends

Forecasting the loonie is a fun pastime, but the best strategy is simply to convert currency on a consistent and routine basis, perhaps quarterly, to hedge risk.

Another timing-related question we get asked constantly: what percentage will XYZ market go up this year? Blunt answer: I have no idea. According to Vanguard, 13.7 percentage points was the average annual forecast error among leading market strategists from 1998 to 2016. In fact, if strategists had just given the historical average return for the market they would have been more accurate. And interestingly, no strategist predicted negative returns for years with the greatest losses (2001, 2002 and 2008).

What we aim to do is create a low-cost, balanced and globally diversified portfolio and then gradually shift asset mix and geographic weightings based on our longer-term economic forecasts and changes in broad fundamentals such as corporate profitability. With any luck, we’ll minimize volatility and generate a reasonably predictable long-term rate of return. But we’ll never be able to tell you the exact percentage return of any particular market in any given year. We’ll almost certainly be wrong.

And that’s a prediction I guarantee to be accurate.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.