Entries from June 2011 ↓

Drew’s buddy recently moved to godless Toronto from riotous Vancouver. Sold his BC shack. Went house-hunting. Posted this on FB: “Put an offer in this morning on a house.. scheduled offer presentation time is tonight. Our agent just called to let me know there are now a total of 10 registered offers. Welcome to real estate in TO.”

Says Drew: “I told him to check out your blog in a rather joking non-committal way (I don’t want to be too closely associated with all the doomers who camp out in your comments section between weeding their gardens and cleaning their guns). Write him some scathing advice and I’ll send him the link :)”

Well, Drew, there is a difference between Van and the GTA. Besides counting four million more people, it has an actual economy and nobody expects to win any hockey games. Or ball games. Lacrosse. Football. Or croquet. The mayor’s slobbish, unlike preppy Gregor. We have a 16-lane highway instead of paved logging roads. There are two land transfer taxes and you pay to have your garbage picked up (unless you’re one of those low-emission annoying eco freaks with their Hummer-baiting bicycles).

The average SFH costs 35% less than one in Vancouver, and incomes are 16% higher – and still listings are down, sales are mediocre and most people think housing values are ridiculous. The average price increased about 8% last year or one-third of the romp experienced in Vancouver. There are no basement-less, butt-ugly, two-bedroom, stucco bungalows in the GTA selling for $1.4 million with 130 people at the open house. In Toronto, bidding wars are quietly desperate and civilized executions and would likely not exist if listings were at normal levels.

Does this mean TO real estate is worth the bucks? Hardly. The average SFH in 416 costs almost $800,000, which is eight times household income. This market will correct, and could languish for some time thanks to condo over-building, a slowing economy (at least there is one) and the inevitability of higher interest rates. But while the price adjustment will be painful to all those fools who bought with little or nothing down, overpaid to be near a Starbucks or have all their wealth in one asset, it will not be anything like Vancouver. As I’ve said, the technical term there is Biblical.

Simply, people in Toronto, as shallow and vacuous as they may be, are just as horny for houses as any other Canadians. This is why we’re setting ourselves up for one mama of a deleveraging over the coming few years. Stats Can reaffirmed it this week – record debt, most of it snorfled up to buy real estate. The debt-to-disposable income ratio keeps rising, now at over 147%, which means we owe more than the Americans – where the average house costs 50% less, mortgages are tax-deductible and they have Lady Gaga. Like, no contest.

But while rising house values plump up the equity side of the household balance sheet (household net worth is about $184,000), the rise in debt, says an RBC economist, “has exceeded that of both new assets and net worth.” So what happens when real estate values correct? Right. The equity side goes down and the debt side does not. People get less wealthy fast, and start spending less. Thus, recessions are born.

This, Drew’s friend, is why you are so lucky to be in Toronto and not Vancouver. A rerun of the Nineties real estate crunch is probably in the cards – wherein prices dropped about 15% in most hoods (more in the desperate burbs), but then took almost 13 years to recover. Compared to what awaits Vancouver, this is but foreplay.

There are many reasons, but population’s a good place to start. More people mean more prospective buyers, more economic activity and more resilience. Second, price excesses bring excessive corrections. Just as Miami, Vegas and Phoenix boomed, so they crashed. Van prices have attracted global attention with their lunacy, and everyone loves a car wreck. Third, HAM is fleeting and while it’s been a factor in parts of the GTA, Asian money in the Lower Mainland has whipped people into a frenzy. But it won’t last. Classic herd behaviour within a homogeneous group can turn crack shacks into mansions, and back again just as fast.

Finally, demographics. BC has an older population than Ontario, thanks to the mouldy weather. After all, you don’t need to shovel bacteria. Just as Florida and Arizona have attracted more US retirees – and paid for it in a housing implosion – so the same may be in store for much of Vancouver Island, the Okanagan and swaths of the LML.

In fact, aging, wrinkly, hideous old Boomers with jelly biceps are being singled out increasingly as a time bomb for all North American real estate. Says a California demographer this week: “What we’ve gone through recently could be nothing compared to what we have five years from now. When the boomers start to sell off their houses, there are going to be too many boomers and not enough buyers.”

Of course, the more of these oxygen-suckers there are in a region, the messier things could get.

In short, buddy of Drew, your escape from Van was well-timed. Now you can just ride up the CN tower and watch the distant mushroom cloud rise in the west, secure in the knowledge Torontonians may be crazy, but they’re not delusional. Unless they act like you.

Dude. Never, ever go after a house that’s a combat zone. Nobody ‘wins’ a bidding war. There are so many pre-approved zombies roaming the streets, unfearing of debt, that you’re guaranteed to pay too much. Forget the hot new listings. Don’t play the favourite realtor game of listing under market value then accepting offers at a specific time. It’s all designed to create a testosterone-laden competition in which expensive decisions are made in mere, terrifying moments. When the correction comes (as I said), the debt remains.

So rent a nice condo. Get subsidized. Wait.

You know it’s time to buy when we win something.

Two days ago a friend emailed me in anguish. “Do you think the stock market is going to crash again? I’m getting that feeling. How can we be protected if it does?” Turns out he was sneaking into doomer web sites, where gold and silver pumpers scared the crap out of him.

In fairness, you don’t need slimy sites like The Economic Collapse to render you impotent and slobbery. The TV news or a daily paper is more than enough. Greece. US debt. Wars. Disasters, Riots. Falling markets. It’s all there waiting for the dots to be connected.

Hell, you can even smell the napalm here. While I warn people away from borrowing to invest in a gasbag asset bound to fall in value, others use this pathetic site as a podium to preach mayhem. They tell you daily of a conspiracy to rig stock markets, a successful plot by the global elite to enslave you and how (a) Goldman Sachs, (b) banksters, (c) Jews, (d) liberals or (e) the Chinese will consolidate wealth and influence by stealing yours.

Some here praise guns and self-reliance. Others tell you to put 100% in precious metals in your garage (which is why you need guns). Many exhort you to hide in cash. And every time I write about assets you should consider – like bonds, REITs, preferreds or ETFs – the weeds come alive with those who equate them with perdition and bladder failure.

In fact, doomer is sexy. Dark’s the new black. It’s infectious and narcotic. But also misleading, debilitating and probably wrong. While I completely expect a real estate correction, ranging from the mild to the Biblical (depending on the economy and location) there’s no rerun of 2008 on the horizon – despite the risks and challenges. A housing crunch in Canada will not bring a financial collapse, as happened in the US. Greek default does not mean German banks keel over. Trillion-dollar US deficits will not cause hyper-inflation and a currency crisis. There are no FEMA camps being set up to pen millions of rioting Americans. Gold will not replace money. Jesus is not coming.

Let’s just talk stocks for a minute.

Equity markets are the most sensitive barometer we have of economic health, investor sentiment, trade, credit, liquidity and confidence. After rising 88% since the panic month of March 2009, US markets have now fallen about 7% and the TSX is off a dime. So does this mean they’ll lose another 40% or (as some people on this godforsaken site attest) 90% of their value?

Not if you believe stock prices are most influenced by corporate profits. The latest survey (Bloomberg) shows US companies expect to earn 18% more this year than in 2010 – which means stocks are cheap. How cheap at these levels? The lowest price-earnings ratio in 26 years.

Actually, if profit projections are right, the S&P 500 would, as Bloomberg reports, trade at 12.8 times income – the lowest level since 1985, save for the 100 days after Lehman collapsed in 2008, and the doomer cult was born. If this is true, then equity markets will likely rebound later in 2011, making those who buy the dip look like ballsy capitalist heroes.

But how can this be when the world is disintegrating, and nutbar sites like The Coming Depression keep soiling themselves in terrified anticipation?

Because by the time the doomers finish putting on their Depends and licking their gold bars each morning, markets have already assessed the risks of sovereign defaults, climate change, deficit financing and US real estate collapse. Crappy economic news has already been factored into current prices, along with the Japanese earthquake and bombing raids in Tripoli.

Markets are bolstered not only by government stimulus spending, but the conviction that the US economy will prove resilient, technology will advance, smart people will find new ways of making money and global fiscal and monetary policy will be coordinated as never before. Markets think a 2008 rerun is impossible. Now I agree.

Of course, idiot people who jumped giant houses with 5% down, buying at the top and borrowing at the bottom, could be wiped out here as they were Stateside. For them, depression. But not for the system. Every Canadian bank has a failsafe housing meltdown plan in place, not to mention a taxpayer backstop. You can’t stop stupid. But you can escape the splatter.

As for investors, nothing’s changed these past weeks, save one detail. You should still have a balanced portfolio with a fixed income anchor giving revenue and gains potential. You should avoid taxes with dividends and cap gains. You should reduce real estate exposure. You should have assets which are negatively correlated. You should avoid direct equity market risk and use exchange-traded funds. You should run from mutual fund fees. And if you don’t know how, find a smart person to help you.

Oh yeah, one more. Avoid the dipsticks. Buy the dips.