On Friday night I received reports that so many people were camped outside a new homes sales trailer in Milton, that the cops had to move in and clear the roads. The attraction was a new release of townhouses, starting at $230,000 for a thousand square feet.
As usual, Mattamy Homes was selling from drawings for homes that will likely not be ready for occupancy until the Spring. Also usual for the area, electrified young couples showed up days early to camp out. Finally, as usual, they will surely sign for the biggest purchase of their budding lives, short on sleep, gassed up on emotion, without lawyering the contract or likely even reading it. After all, why spend the night on wet grass in 12-degree temperatures drinking Tim’s and peeing in the bushes if you’re not going to buy?
Exactly. It’s marketing. And it’s scary good.
Of course, these kids could be securing home ownership at a bargain price. Or, they could be committing financial suicide. I guess we’ll all know on closing day. But the odds are at least 50-50 that whatever they pay (prices in this development range from $230,000 to $634,000), the homes they’re buying will be worth less on the day they get the keys.
After all, there is simply no denying that – coursing hormones and granite lust aside – residential real estate is a pile of glowing embers right now, with flames but a distant memory. It will be several years before Americans can forget the sting of houses destroying their family net worth. And it will be 2011 or 2012 before Canadians actually understand this.
So why are people camping out in Milton? More on that in a moment.
First, a letter of interest, written by a realtor from Vancouver Island to his gadfly MP, Keith Martin:
Thank you for taking my call regarding the huge concerns and hardships in the new mortgage qualifications regarding suite income and people having to qualify.
This is the way that it used to be: you could take the suite income, say it was $1200/month and they would add it to your mortgage qualifications as a $200,000-$250,000 increase in your qualification amount, now what they do is take the amount of the rent: $1200 /month, multiply it by the 12 months in a year and add it to your income, making only an extra $ 40,000+ to your qualification amount.
This is why the market has completely softened. The market is completely dead. Brand new houses in Sooke, down to $299,900 from $399,900, no calls. The market has dried up all due to financing. I talked to 7-10 mortgage brokers and many agents while I was at the Victoria Real Estate Board golf tournament and everyone is scared. Hundreds of foreclosures coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite).
So what happens when their term of mortgage is up and the banks need them to re qualify? They are doomed. Please look into it. Last month there were 300 home sales on the Lower Vancouver Island with 4700+ listings. One of the worst ratios ever. End of June is supposed to be the closing day of the year. Every Realtor has a few nightmare bank stories right now. Keith, this will put us into a huge recession.
Shayne Fedosenko
Pemberton Holmes Ltd.
Our realtor buddy is lamenting a recent change in CMHC rules aimed at closing a loophole encouraging people to rent out their basements. Formerly homebuyers could get a huge additional amount of financing based on the income a suite might produce, without ever having to actually find a tenant. More importantly, they’d be able to borrow an amount their employment incomes would never qualify them for.
This suite deal from CMHC was one of the factors contributing to an unholy explosion in residential real estate prices in Vancouver, a city with so many basement dwellers there’s a new mutant race of blind pale people. And the changes were needed. Badly. This was another example of taxpayers’ money being used to inflate a basic asset (shelter) beyond the point of affordability. Sure, it may have encouraged more subterranean living, but the costs for all far outweighed the benefit for a few.
In any case, if Shayne and his golfing buddies are correct and this is responsible for a virtual collapse in the housing market, then that collapse was coming anyway. Besides, I thought this was because of the HST. Or the hot weather. Or the Bank of Canada. Or locusts.
The bottom line is that easy credit and sloppy rules combined with industry greed, voracious sellers and idiot buyers to create a housing bubble. Bubbles never last. And all booms end badly. That anyone should be surprised – let alone an experienced realtor with politician friends – is a surprise. This, Shayne, is just the start.
Now, back to Milton. Why are the buyers stacked so thick that Halton Regional Police moved in?
Like I said, sticky marketing – preapproving prospects, holding back product, creating an event, and using sophisticated direct marketing to target your demographic. In this case, many young people are the children of recent immigrants whose families have a strong tradition of home ownership before all else.
Nothing wrong with that. It’s a free country. We can’t look out for everyone.
Just too bad nobody is.
Do you remember May? The riot dog?
Athens burned for a while, until Europe’s leaders got together and threw $145 billion at the problem. That fixed things for a few days before the euro crashed and protesters took to the streets again, accompanied by a homeless dog who just keep showing up whenever there was a tasty cop to bite.
But this isn’t about Greece.
Yesterday the Royal Bank got shellacked on the market when profits from its global trading division crapped out. The revenue plunge was Greece’s fault, since that country’s profligate ways and pissy unions caused a credit crisis which gummed up markets, tanked bonds and sent investors to the hills. Everybody knew this was going to happen, just like they knew that trading activity (and bank earnings) would recover in the following months.
Nonetheless, the equity cowboys decided to take a run at the country’s biggest bank, and down she went. The common stock ended the day off over a buck and a half, or 3.4%, to $48.95. A fat 10 million shares changed hands, with traders making money on each transaction. It’s what cowboys do.
But this isn’t about the Royal.
It’s not even about those numbnuts who come to this blog on such days to tell us this is the start of the end. They seem to root for the prospect of a major banking collapse, presumably so their gold wafers and coins will be worth so much that someone is sure to mug them. Of course, there is no bank problem. Nor will there be one in this lifetime – not in Canada. The Royal actually made $1.3 billion in the third quarter, which is $433 million a month, or $100 million a week. That’s not revenue. Just profit.
If you’re scratching your buns and saying — hey if RY was at $62 in April and it’s $49 today, could this be a buying opportunity? – you get it.
But this is not about buying stocks.
Actually I don’t recommend buying any individual stocks unless you have enough money to get a mess of them and achieve diversification. Like a million dollars. Then individual securities can work nicely into a balanced portfolio which also includes fixed income, trusts, preferreds – and no mutual funds.
So the point of this post is to say that anyone who had Royal Bank stock today lost some money (if they sold). But people who owned bank stock ETFs fared better. For example (and it is just an example – I do not endorse any individual securities), the iShares Canadian Financials ETF, which trades under the symbol XFN, was off 1% while Royal was down 3.4%.
This is simply a function of diversification, because sector ETFs like this one give you exposure to all the banks at the same time, which means one of them can have a bad day and you are insulated. It’s the same with ETFs that pace energy companies, gold miners or the entire blue chippers. For people smart enough to be buying into markets as deflation talk rages, debt worries mount and the equity cowboys spank any company they don’t fancy, ETFs are the way to go.
So, what are they?
ETF stands for ‘exchange-traded fund,’ so these are like mutual funds which trade on the stock market, where prices are continuously changing. But unlike mutuals, nobody is driving the bus, so there are no big management fees to suck off your profits. And unlike mutual funds where the fund value is until the end of a trading day, ETFs are totally visible and priced in the open market, minute by minute.
ETFs offer tons of liquidity for that reason. You can jump in or out in moments, which is an absolute necessity in this wonky world. ETFs also pass through dividends from the companies in which they invest, which means you get paid income while you wait for capital gains.
Some ETFs contain shares in every company in an index, like the TSX 60 or the S&P 500, and are therefore called index funds. Some have shares in companies only in a narrow sector, like the banks. Hence, they are sector funds.
ETFs are cheap to own (fees can be as low as one-tenth of a per cent), easy to buy, quick to sell, can give both dividend and capital gain income and offer the small investor the kind of diversification once only available to rich dudes, or through equity mutual funds which make financial advisors rich. I mean, what’s not to like?
The world may look daunting right now, but there are some markers.
- Residential real estate is one of the most dangerous places possible to have the bulk of your net worth, or to place new capital. Stay back.
- Bond markets have popped, forcing prices up and yields down, so you missed the big chance I outlined for you months ago. Wait. Things will improve.
- Preferreds and REITs continue to spin off steady, tax-cheap income. If you want 6% and to sleep at night, bed down with some of these.
- Cash is fine for the pizza guy, but it’s not an investment strategy. Most people simply do not have enough money that they can afford to hide in an asset class giving a negative return after inflation and taxes.
- Smart people see the equity markets for what they are. Barometers of human emotion. And when a good company gets spanked for the hell of it, when casual investors are running for cover, and when we all know more economic growth is a slam dunk, why would you stay out?
Danger and opportunity. They’re eternal. Read the news. Then run from the herd.
