Expect more days like Tuesday. The stock markets Stateside hit new record highs. Commodity prices fell. Gold tanked, yanking Toronto stocks down. Things eased in Cyprus. Robust car sales in the US, and tumbling sales here. Bidding wars in Denver, while in Victoria house prices fell 8%.
The pattern should be obvious. Trillions of dollars are moving back into equity markets after sitting, terrified and impotent, in cash and GICs for the past four years. Investor sentiment’s at the highest level in three years in the US. Almost 60% of people think this is a good time to invest, proving once again humans love buying stuff that’s going up, and run screaming from assets in decline. It’s why contrarians make money.
Every day comes a little more news to prove the US is ascending, while Canada isn’t. Cars and big orders for commercial aircraft were the latest. As more people get jobs and paycheques, American housing rises again. A John Hancock survey just found 65% of Americans think this is a great time to buy a house. The latest RBC poll found 86% of Canadians believe the opposite.
Big surprise. Canadian household debt keeps going up, while it steadily decreases to the south. Most people here have less disposable income, since houses cost twice as much and the home ownership rate’s 8% higher. Folks in this country have staked their ground, borrowed like pigs to get it, and are starting to reap the consequences.
So sales are weak, despite the fact it’s spring and you can get mortgages for 2.74%. The first major city to report this week is Victoria, where 15% fewer homes changed hands last month than during the same time last year. (Wednesday am update: Toronto numbers now in, realtors say sales tumble 17%, but actual number is 19.8%.) The realtors, of course, blame F’s murdering of 30-year mortgages last summer, and the ending of CMHC coverage for million-plus houses. But any market needing that extra stimulus was already headed for implosion
In this environment, most of your neighbours, relatives and work colleagues become lemmings, every day scuttling closer to the cliff. Seven in ten own houses, the majority don’t have pensions and four-tenths have no savings. Of those who do invest, two-thirds have 100% of their money in Canadian assets. Not so bright. So far this year the Dow is ahead 11% and the TSX has gained 2.1% – and there’s an excellent reason.
Over sixty per cent of our economy is comprised of consumer spending and almost a third of that is directly related to real estate, construction or housing finance. So guess what happens when there’s a 43% crash over two years in homebuilding in the GTA (as just occurred)? That’s right. Best Buy stores close and eight hundred people are sent home.
Yesterday a friend in the Lower Mainland made the wrenching decision to liquidate his multi-million-dollar, long-established construction company. “Due to lack of work volume, reduced tender opportunities, new NDP government in BC in May, I realized there is no time like the present to shut the doors. After more than 20 years, I’m calling it quits, instead of going broke trying to hang on for too long.”
The impact of small companies like this closing is inestimable. No wonder car sales are down, retail is struggling and real estate’s icy when it should be hot. So citizens of Lemming Nation, believing houses are risk-free, anything non-Canadian is inferior, America’s dangerous or junior Alberta resource stocks will make them rich, are in for some surprising years.
After skating through the worst of the post-2009 mess, letting the Euros fester and the Yanks get foreclosed on, people here won’t like what comes next. Stagnant economic growth, tepid markets, iffy commodity prices, structural unemployment and falling net worth seems inevitable. What looked so smart in 2010 could be a Nortel moment in 2015.
Of course, there’s a way out.
If you want, there’s still time to sell your house while prices are close to record levels. You can buy into the US renaissance on the next market correction (it probably won’t be too deep) with some smart ETFs. You can build a balanced, diversified and liquid portfolio, ensuring you have assets that pay you to own them (like preferreds, some corporate bonds or REITs) as well as stuff that grows (but no pricey mutual funds). You can shelter this in your TFSA, income split it with a spousal RRSP, or simply enjoy the tax miracle of dividends and cap gains.
Options abound. Clear thinking does not. And best keep this to yourself.