Entries from July 2009 ↓

In case you missed the memo, the recession’s over. Buy a house. Buy a car. Go to Paris. Get a mortgage. Get a line. And stop that damn saving.

Central bankers in Canada and the US are at it again this week, saying the worst has passed, the economy will maybe (probably) likely grow (a little) next year and just to make sure, interest rates will stay low for a long time. In Canada, according to BoC’s head guy, that means 11 more months.

This should tell you something. The best and last hope governments in Canada and the US have of avoiding a deflationary mess is you. Massive stimulus programs may have papered over the banks’ problems, but they’ve failed to staunch the tide of unemployment, to create corporate profits, to open shuttered factories, to increase trade or lure private investment. And the economic diddling is massive – over $23 trillion (all of it borrowed) could be Obama’s tab, according to an estimate this week.

The wad’s blown. Deficits have exploded. We have just borrowed obscene amounts of money from people not born yet. We’ve ensured a few decades of tax increases and inflation along with crappy economic growth. Now it’s up to you, soldier. Just take that hill.

That’s Plan B. Maintain the cost of money so low the suckers can’t keep their hands off it. They’ll borrow and spend enough to create demand for goods, ratchet up prices and rescue us from deflation with inflation. Then, of course, interest rates will fly higher to corral unfettered prices, in a cruel blow to those who borrowed to save the nation, as personal and sales tax rates swell. But, hey, that’s the next prime minister and president’s problem.

Seriously, the US Fed and the Bank of Canada are now in the business of creating consumer spending. They are doing this with absurdly low interest rates, along with shovelling money to financial institutions so they will open the lending spigots. The best solution to the problems caused by a massive run-up in credit, a speculative frenzy in commodity prices and cowboy capitalism by investment bankers is this: More credit, more liquidity to grease prices, more debt and the mother of all bank bailouts.

The dilemma this poses for young couples and growing families is extreme. I hope in two or three decades they look back and at least know who to blame – the generation in power in 2008-9 that went for the easy one.

Hi Garth. Love your blog – wish I’d found it sooner. After owning Toronto real estate for eight years my husband and I, in our 30s, have decided to become renters again. We’ve just accepted an offer for sale on our house that closes in a month and would leave us with $200,000 in pocket. The big question now is what to do with that cash in the short term. We’re a little nervous about tying it up long term because we do want to buy a house again although it might be in another city (i.e., Edmonton or Victoria) as there’s the possibility of a job transfer in our future as well. And, to be honest, we’re fairly risk aversive all around. However, rates on term deposits, etc. suck. What do you think? Our wildly divergent friends are telling us “buy gold!” or “put it in GICs.” Both seem a bit extreme to us – is there a middle ground sans management fees? – Joan

First, congratulations on doing what most people never achieve: Selling your house at its moment of maximum value. These are the days to take tax-free capital gains from real estate, not to become encumbered, and not to believe what central bankers tell you.

Regarding the cash: Tying anything up long-term right now is a bad idea. Today’s rock-bottom rates are teasers only, and will not last. If you still have cash to invest in 18 to 24 months, you’ll find a much greater rate of return available.

Having said that, if you do park the money in a short-term government bonds, high-yield savings account or dividend-paying bank preferreds, then do a portion of it inside a TFSA. The tax-free savings account is best used like an RRSP, sheltering investment assets from taxation rather than as a place to put bank savings. Sadly, though, the two of you can deposit only $10,000 a year.

Your friends who recommend GICs want you to never get ahead and rival their possessions. So ignore them. Your friends who recommend gold desperately want you to lose your capital, for probably the same reason. Dump them. The last things you need are investment certificates paying 2% or pieces of metal whose price changes hourly. Far better is a basket of energy securities, with some nice tech and health care thrown in. And this…

Joan, baby, we are in an age of deflation right now when the economy is precarious and the next decade promises higher taxes and lower real estate values. Society is regorging on borrowed money, armies of people are mindlessly gambling their wealth on the kind of thing you just sold while the real economy fuses. This will bring heartache to the indebted, and opportunity to the liquid. So here’s a radical thought for you: Cash.

You’ll find out what a rare and precious commodity this is, if you ask for it on closing day. In twenties and fifties.

I’ll explain in the car.

Garbage could be the least of coming worries.

In the first 15 days of this month 4,437 houses sold in the greater Toronto area. That was a staggering jump of 27% over last July – when the world was bustling and we had no financial crisis.

In the same two-week period, buyers paid, on average, $394,750 for each of those houses, up 4% from the same month a year ago.

This is remarkable. Not only because real estate sales volume exploded by almost a third, not only because prices rose more than twice the rate of inflation, and not just because Toronto real estate has just achieved a new pinnacle of valuation. It’s incredible since we are in the worst recession since the 1930s, the industrial base of southern Ontario has been hollowed out, that 47,000 more people lost full-time jobs last month and governments are plunging the country into debt at the fastest pace in several generations.

What are buyers thinking? Or expecting?

A new report by the University of Toronto’s Rotman School of Management concludes the economy crashed by an annual rate of 6.6% in the last three months (10% is a depression). Ontario unemployment will top 10%, it says, and stay high for years. And the chief economist at High Frequency Economics says another 413,000 manufacturing jobs will be lost – which is 2.4% of all the workers in Canada. Already we have seen 221,500 factory positions eliminated in a single year.

Sadly, I’d say, most of these jobs will never come back.

But, it gets worse.

* I am told by bankers that virtually all of the new mortgages being written for first-time buyers have maximum 35-year amortizations.
* I am told by a CMHC analyst that the average downpayment in Canada (among all buyers), has collapsed to just 6% of the purchase price.
* The combination means a 10% drop in house prices in the next year or two would put all recent buyers into negative equity.
* And I am told by mortgage brokers that lenders routinely apply for high-ratio insurance to avoid appraisals of properties that are not worth the selling price, or to make unrealistic refinancings work. And it’s all approved.
* Our system of government-backed mortgage insurance means most borrowers are okayed, even for huge amounts, since the banks bear no risk. These high-ratio mortgages are securitized as mortgage-backed securities, of which there will be close to $400 billion by the end of the year and $1 trillion by 2011.
* This allows first-time buyers with a combined gross income of $100,000 to qualify for loans of $500,000.
* This has allowed Canadian house prices to rise to historic levels in the middle of a recession while US real estate has lost a fifth of its value in the past year.
* It has created a Canadian real estate bubble more significant than that rendered by the American subprime fiasco – which destroyed billions in middle-class wealth.
* And it is now all supported by artificially-low interest rates, which will not last.

“If the mid-month results carry forward,” says Toronto Real Estate Board president Tom Lebour, “we may see the best July on record.”

Remember this moment.

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