Gasbags

gasbag2 modified

When stock markets bubble to record levels, people smell risk and run. When house prices bloat, the homeless moaners come here and blame me. Why?

It’s simple. People expect equity prices to rise and fall. They fear the declines more than they enjoy the gains. And human nature being what it is, when the price of a financial asset plops, the naïve think it could go to zero, so they bail, turning a paper loss into a real one.

But with houses, Canadians now expect only gains. In their minds, every price peak’s just another step on the ladder. The more that people talk about and obsess over houses, the less risk there seems to be. After all, everybody’s doing it. So the government would never dare change the rules, or raise interest rates! The only losers are those who listen to Garth and invest their money instead of getting a mortgage, because now they’ll never be able to buy in (insert city).

It’s classic bubble mentality. Buy now or buy never. Conditions will never change. Trust us.

This is a great lesson in how people totally misunderstand the nature of risk. Their financial lives are built around a single asset on one street, which means they have no diversification or balance. When troubles brew, houses can also turn illiquid. Centring your life around a 30-foot lot with an aging structure on it is unquestionably bizarre. Yet millions are caught up in it.

The main question to ask yourself is this: what do I really care most about? Financial security for my family, or a house? My thesis is the two are not the same. In fact in the years ahead I expect they could be negatively correlated. If I’m remotely correct, there’s a big surprise coming for most people you know.

The solution?

(a) Buy a house if you can afford it, if it stabilizes your living costs, and represents a reasonable amount of your net worth (ie, 90 – your age = % of net worth dedicated to RE).

(b) If you can’t afford one, don’t go near it at these levels, no matter how cheap mortgages are. Things will change.

(c) Invest in liquid assets with equal fervour. And don’t for a moment think that financial markets pose more risk than, say, a house in suburban Calgary or a condo in Etobicoke.

Thursday was a good example. The Dow shot to the 17,000 level for the first time, taking other markets with it, which was music to realtor ears. “TSE hits record high. Where is @garthturner when we need him to start talking bubble territory!” Tweeted a Toronto condo-flogger. Of course, equity markets advanced for a reason – 288,000 new jobs created in the US in a single month, the fifth consecutive one with at least two hundred thousand extra positions. The jobless rate is now barely above 6%, and falling. America’s recovery continues.

Is this a stock bubble? Maybe. Margin debt is at a record high – meaning lots of investors are borrowing to buy more securities in the belief they’ll gain more. Never a great sign. And stocks are expensive at the same time bonds are dear. In fact, prices for most financial assets are elevated these days.

But compared to Canadian residential real estate – where mortgage debt is now $1.1 trillion, prices relative to incomes and rents are off the chart, and 90% leverage is the norm – equity markets look like benign little puppies. Stock prices expressed as a multiple of corporate earnings are actually about 50% of where they were back in 1987, and far less than during the Tech Bubble or back in pre-crash 2007. In fact, they’re running just slightly higher than the 25-year average.

Of course, the more people with jobs, the more consumer spending that takes place, which breeds profits and plumps stocks. At the same time, the US central bank is on track to eliminate stimulus spending by the end of the year and this week’s boffo jobs numbers will just accelerate things. Now, says strategists at Scotiabank, “the most likely scenario is that the Fed starts raising interest rates in the second half of 2015.” As this approaches, expect bonds to fall and equities to rally – even with a temporary correction now overdue.

Clients are being told to “stay overweight in equities until the early part of the next rate hike cycle.” They’re also being informed that the Fed might well move on rates much sooner, if US economic data continues to be this bullish.

Well, you all know what that means. Govern yourself accordingly.

Meanwhile we’re at the six-month point in 2014. To date this year the 60/40 balanced portfolio that I yak about so often has returned 6.88%, or an annualized 13.76%. The compound annual rate of return for the past four and a half years is 11.28%, which means $100,000 invested at the beginning of 2010 is now worth $150,730.

Real estate? Houses have appreciated an average of 5.9% during this time.

Less return. More risk. The people’s choice.

126 comments ↓

#1 Yogi Bear on 07.03.14 at 4:17 pm

288,000 new jobs created in the US in a single month

500k full-time job losses. 800k part-time job gains. Virtually no wage growth.

It was not really a great jobs report.

Beat the crap out of Canada. — Garth

#2 T.O. Bubble Boy on 07.03.14 at 4:17 pm

Well put.

I have definitely never heard the phrase “take some money off the table” or “cash in your gains” when it comes to housing.

And – the ironic part – if your gains are in a primary residence, you don’t even have taxes (capital gains) to worry about! Some people would avoid selling certain investments because of tax timing, but that doesn’t apply.

#3 T.O. Bubble Boy on 07.03.14 at 4:23 pm

(a) Buy a house if you can afford it, if it stabilizes your living costs, and represents a reasonable amount of your net worth (ie, 90 – your age = % of net worth dedicated to RE).

Which means, for Toronto or Vancouver, a typical “working family” with 40-yr-old parents and young kids should have a net worth of $2M before buying that $1M tear-down bungalow or dumpy semi.

Or, assuming a $500k mortgage on the $1M house (i.e. $500k in net worth in the down payment, and $500k mortgage), that “working family” should also have at least $500k in investments.

What % of people you know are in this situation?

#4 Randy on 07.03.14 at 4:24 pm

Who will they blame when the wealth effect from real estate vaporizes ?

#5 enthalpy on 07.03.14 at 4:27 pm

People around me still continue to try and climb the ladder.

A semi detached in Milton for almost 600k? sounds awesome…. :/

#6 Thomas Elliott on 07.03.14 at 4:30 pm

Third!

#7 Nemesis on 07.03.14 at 4:41 pm

#You’reTauntingMe,Aren’tYou?…

Just between the two of us, AuldPol… I don’t think ever seen a Vet with a larger… Ah… Ah…

Kitty?

#8 Montrealer on 07.03.14 at 4:41 pm

So, should be invest in VTI? I have $25k to invest sitting in cash, should I wait the overdue correction or just buy in and wait out that correction?

#9 Suede on 07.03.14 at 4:42 pm

Garth, you must be enjoying NS with these early posts!

I need a vacation back to Rio de Janeiro. What a city.

BIG NEWS

Don’t be afraid of stock market highs. Go dig up some research (readily available at U of G) and you’ll find that buying at new highs is a good long term bet.

Think how many 52 week highs have been hit in the past 4 years

Chuga chuga chuga chuga CHOO CHOO!!

Spike highs, or 50% jumps in a short time is something to fear.

aka the hockey stick

#10 DM in C on 07.03.14 at 4:43 pm

Yeah, def better than RE — who here again says that 7% on investments is impossible?

Rates of Return Summary
YTD 1 Year 2 Year 3 Year 5 Year
6.2% 20.9% 18.1% 9.0% 10.9%

#11 T.O. Bubble Boy on 07.03.14 at 4:46 pm

@ #5 enthalpy on 07.03.14 at 4:27 pm
People around me still continue to try and climb the ladder.

A semi detached in Milton for almost 600k? sounds awesome…. :/

“sounds awesome”? more like: sounds bubbly.

why would anyone move to Milton for that much money and still not be in a detached house?

#12 Retired WI Boomer on 07.03.14 at 4:49 pm

Well, Garth with the move in the stock market up there is a slightly higher risk when buying than if one were to buy at a plop. (there is always some risk in owning equities, or a car, or a house). Not a big deal.

The more Liberal US government has delivered the goods where the conservatives delivered the miseries. Need to remember that when selecting potential new management.

I would never buy stocks using leverage, nor a home without at least 20% down – never did.

Bonds might move north of 3% for 10 year treasuries, but they’re in no hurry.

I still like than 60% / 40% stock bond split. 5% in REITS among the equity side, and a handful of quality dividend payers to pay for this old farts needs.

As for a home, if I were in Vancouver or TO, I would have sold it yesterday, Elvis has left the building, and the train is moving away on track 6.

Naturally the retired will wait until at least a 100 GRAND has evaporated from the price at listing, then panic and sell for even less when buyers get fussy. Story of stupid, look it up .

Celebration tomorrow here! July 4th

#13 GTA Landlord on 07.03.14 at 5:03 pm

The amount of rental units in Toronto is now bordering ridiculous with too much competition that I’ve has to lower rents to attract renters. Can you imagine buying a property today and trying to make money? I couldn’t afford my property today if I had to buy. The best part is I am making more money today then 15 years ago.

#14 van guy on 07.03.14 at 5:06 pm

Garth,

im on board with you. Loaded up with sime puts today on IWM & QQQ. Shorted some individual names too. Ill be back to let u know if im rich or broke. :)

#15 Smoking Man on 07.03.14 at 5:47 pm

#14 van guy on 07.03.14 at 5:06 pmim on board with you. Loaded up with sime puts today on IWM & QQQ. Shorted some individual names too. Ill be back to let u know if im rich or broke. :)

……..

Should have waited for Batman for max return.
But then again, VIX is screaming for a big short.

#16 kommykim on 07.03.14 at 5:54 pm

RE:#8 Montrealer on 07.03.14 at 4:41 pm
So, should be invest in VTI?

Yes, but you should also have a balanced porfolio of bond etfs, international etfs, canadian etfs, etc. Or use index mutual funds to lower your trading costs.
To save on exchange rate costs, look at VUN as a CDN$ alternative to VTI. Read more here:
http://canadiancouchpotato.com/

#17 LH on 07.03.14 at 6:05 pm

Re:

Houses have appreciated an average of 5.9% during this time.

Yes Garth, the average condo or house in Canada may have performed like that. But it was a better story in downtown Toronto!

In Aug 2009 I closed on a SFH in M5R with 25% down.
Fair market price from recent comparable sales is ~80% higher. This return excludes effect of leverage, and the positive carry from rent over the years.

In Jul 2010 I closed on a SFH in M5T with 20% down. Fair market price from recent comparable sales is ~60% higher. This return excludes effect of leverage, and the positive carry from rent over the years.

I think the lesson of the crash of 2009 was that if one backed up the truck on any asset, with leverage (S&P 500 on similar levels of margin would’ve worked even better!), one is sitting pretty right now.

LH

#18 Victoria Real Estate Update on 07.03.14 at 6:22 pm

. . . . . . . . . .Victoria House Prices. . . . . . . . . . . . .
. . . . . Percent Decrease Since May 2010. . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 0%. . .*. . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-1.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-1.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-2.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-2.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-3.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-3.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-4.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-4.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-5.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-5.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-6.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-6.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-7.0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-7.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-8.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-8.5% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-9.0% . . . . . . . . . . . . . . . *. *. *. . . . . . . . . . . .
-9.5%. . . . . . . . . . . . . . . . . . . . . .*. . . . . . . . . .
-10.0%. . . . . . . . . . . . . *. . . . . . . . .*. . . . . . . .
-10.5%. . . . . . . . . . . .*. . . . . . . . . . . . . . . . . . .
-11.0%. . . . . . . . . ..*. . . . . . . . . . . . . *. . . . . . .
-11.5%. . . . . . . . *. . . . . . . . . . . . . . . . . . . . . . .
-12.0%. . . . . . . . . . . . . . . . . . . . . . . . . . *. . . *.
-12.5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . *. . .
-13.0%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . May. ./. M .J. J. A. S. O. N. D. J. F. M. A. M.
. . . . . . 2010. ./ . . . . . . 2013. . . . . ./. . . 2014. . . .

(Index data from Brookfield RPS)
(Index link)

This monthly price chart includes price levels from May 2013 to May 2014 as well as the peak (May 2010).

Based on this data, house prices in Victoria have fallen 12.2% from the peak that was established in May 2010. May 2014’s monthly price level was the lowest of any month since August 2007 (except April 2014, when prices were slightly lower).

House prices in May 2014 were 1% lower than in May 2013.

In contrast, house prices in many other Canadian cities were higher (year-over-year) in May.

Victoria: – 0.83%
Vancouver: + 6.67%
Edmonton: + 4.42%
Saskatoon: + 5.87%
Winnipeg: + 5.13%
Hamilton: + 11.16%
Toronto: + 5.55%

Lax lending standards and historically low interest rates have fueled Canada‘s housing bubble for over a decade and that housing market stimulus remains in place today. As a result, Victoria’s housing market should be reaching new all-time price highs (like many other major Canadian markets), but that simply hasn’t been the case.

In the US, no housing market experienced a major price decline until 2007 , when the country’s household debt-to-income ratio stopped rising and turned south (third chart). After that, the weakest housing markets in the US experienced major price declines. The same will happen in Canada.

Victoria’s housing market is the weakest of Canada’s major housing markets. Victoria’s future will not be without big price declines. Massive housing bubbles always deflate. Victoria’s housing price run-up was similar in size to the price run-ups in Miami, Phoenix, Los Angeles, Las Vegas, etc. and Victoria’s price correction will be much deeper than the 12-15% correction that has taken place so far.

Similar incomes in Canada and the US should equate to similar house prices. That long-time housing price parity will be restored after Canada’s housing bubble deflates. The US housing market is currently not in a bubble so it gives us an idea of where house prices in Canada would be if no bubble existed.

Let’s take a look at house prices in Indianapolis, Indiana, where there is no housing bubble.

House criteria:
* min. 3 bed, 2 bath
* min. 1800 sq. ft. of above ground primary (main) living space
* 2004 or newer
* attached double garage

In Victoria, a house like this would probably cost $700 K or more.

In Indianapolis, the combined value of these 6 houses (that fit the above criteria) is about $701 K.

$113 K ( 3 beds, 2.5 baths, 1,839 sq. ft.)
$113 K ( 4 beds, 2.5 baths, 1,992 sq. ft.)
$111 K ( 3 beds, 3 baths, 2,000 sq. ft.)
$118 K ( 3 beds, 2.5 baths, 2,050 sq. ft.)
$122 K ( 3 beds, 3 baths, 1,965 sq. ft.)
$124 K ( 3 beds, 3 baths, 2,050 sq. ft.)

Girls and guys, think of Victoria’s 12-15% price decline as a head start, with the understanding that bigger price declines will be taking place in the (not-too-distant) future.

Continue to rent and stay out of Victoria’s deflating (bubble) housing market.

Until next time – Cheers!

#19 shawn on 07.03.14 at 6:25 pm

Net Worth Needed to Buy a House

T.O Bubble Boy at number 11 applies the Rule of 90 as folows:

Which means, for Toronto or Vancouver, a typical “working family” with 40-yr-old parents and young kids should have a net worth of $2M before buying that $1M tear-down bungalow or dumpy semi.

Or, assuming a $500k mortgage on the $1M house (i.e. $500k in net worth in the down payment, and $500k mortgage), that “working family” should also have at least $500k in investments.

*****************************************

I agree with the first paragraph and not the second. Assuming the rule of 90 applies it should apply based on the full cost of the house not the equity or downpayment or net worth in real estate.

This is because in a full recourse system the buyer is at risk for the full cost of the home not just the downpayment.

Leverage increases the risk to the equity but the risk in dollars is proportional to the full cost of the house.

I don’t particularly know if the rule of 90 should apply but if it does then I think it must apply to the full value of the house.

One does not reduce risk in real estate by making a small down payment even though that reduces Net worth in real estate.

One does not reduce risk in real estate by borrowing agains the equity and investing elsewhere. One adds to risk by doing that as both a portfolio and a house could decline in value at the same time despite the diversification.

#20 concerned on 07.03.14 at 6:26 pm

Gosh, is that what happens when you feed cats a corn-based diet?

#21 R on 07.03.14 at 6:35 pm

Garth, what effect any does traffic congestion in the GTA have on RE market prices? If investments in transit move ahead as planned over the next years, will this be beneficial? Or does the cheap money mania overshadow all other factors?

#22 Some dreams are actually nightmares on 07.03.14 at 6:42 pm

A Saint John couple is trying to pick up the pieces, after being forced out of a Manawagonish Road home that’s now sliding down the bank.

The home, purchased through a private sale, passed inspection, and no problems were raised on the disclosure.

more:
http://www.cbc.ca/news/canada/new-brunswick/saint-john-couple-forced-out-of-house-sliding-down-slope-1.1351654

Hmmm….
A four foot crack discovered the day you move in?
No problem!
Wait for it to ‘settle’ and resell it as a beachfront house with water access.

#23 jess on 07.03.14 at 6:51 pm

“Instead of helping distressed homeowners, SunTrust’s mismanagement drove up foreclosures,
disseminated individual credit, and increased costs for hardworking men and women across our nation,”
said Attorney General Eric Holder.

SUNTRUST MORTGAGE AGREES
TO $320 MILLION SETTLEMENT
Money Will Provide Relief to Harmed Bo rrowers and Establish Prevention Fund
CHARLOTTESVILLE, VIRGINIA – United States Attorney Timothy J. Heaphy today announced
an agreement with SunTrust Mortgage Inc. (SunTrust) that resolves a criminal investigation of SunTrust’s
administration of the Home Affordable Modification Program (HAMP).
As detailed in documents filed today, SunTrust misled numerous mortgage servicing customers
who sought mortgage relief through HAMP. Specifically, SunTrust made
material misrepresentations andomissions to borrowers in HAMP solicitations, and failed to process HAMP applications in a timely
fashion. As a result of SunTrust’s mismanagement of HAMP, thousands of homeowners who applied for a HAMP modification with SunTrust suffered serious financial harms.
http://www.wcyb.com/blob/view/-/26785522/data/2/-/ogr8mq/-/Suntrust-settlement-7-3-14-pdf.pdf

===========

#24 Mr Zipper on 07.03.14 at 6:54 pm

“When stock markets bubble to record levels, people smell risk and run. ”

So…every one…..you should suddenly become a genius daytrader and sell t the first signs of trouble in the media. The accounting of this practice is a big expensive headache……and usually only benefits the CRA. Wow…aren’t we all glad we didn’t run for it when we were told that ‘its May so we should run away’. We would have missed the best market the TSX has seen in 8 years. Don’t even listen to what you read in the paper or hear on TV…buy right and sit tight. The rest is all noise.

Buy good companies that pay dividends. Companies that have raised their dividends consistently for 20 to 40 years are called dividend all stars….buy those.

When markets are up…buy stock…..when markets are down…buy stock…..this is called dollar cost averageing and it works wonders over long periods of time…..and how did you suddenly get the smarts to day trade successfully anyway. 99% of day traders go broke. Selling just makes you pay accounting fees and taxes when you really didn’t have to.

The trick is to keep buying more dividend cash flow. It becoems a virtuous circle. You get a cheque from someone every month and you can increase positions in stocks you want to balance up against other holdings instead of selling to rebalance winners you buy more stock in companies that have lagged. You buy more stock, you collect more divvies…the more divvies you collect the more stock you buy…which increases the divvies you get…so you increase your cash flow…to buy more stock and increase your cash flow until your portfolio is just sweet mother of a cash flow machine.

Right now I’m hearing a lot of managers and news bo’s talking about how we need a correction….thats just nonsense….these are people who missed the first leg and want in at a cheaper price….much like the whiners on this site who want to buy real estate in 1979……ain’t gonna happen baby. In the market it’s called ‘climbing a wall of worry’.

Look at the macro……don’t listen to the noise. Buy right and sit tight……and for Gods sake don’t panic. There are trillions on the sidelines waiting for a good home. I bought more CP, AGU and AAR.un today….with dividend flow of course.

#25 Catalyst on 07.03.14 at 6:56 pm

Here’s the problem with your logic. If consumers are doing so well, enjoying disposable income from all those plumb new jobs, then housing prices must be reasonable since they allow for disposable income after housing costs.

Whatever takes down real estate will also take down stocks in my opinion.

Actually those are US jobs, not Canadian ones. Pay attention. — Garth

#26 Nemesis on 07.03.14 at 6:59 pm

#WisconsinIsFun! #RapscallionBirthdayMusic. #ForBoomingRetirees. #SouthOfThe49th. #EntreAmis.

http://youtu.be/4m7RPjQxjmA

[NoteToBoomingRetiree: You do realize that whole LittleBigHorn thang wouldn't have been a such a rout if the 7th hadn't insisted on putting on their new ArrowShirts. Right? PS - The GaryOwen starts about 1 minute in.]

#27 hohoho on 07.03.14 at 7:01 pm

> … if you were a union member you were likely paid more than the value of your work warranted …

this gets repeated frequently, but is the statement true??
it seems most of the better run countries in the world have public sectors similar to ours …

#28 JustMe on 07.03.14 at 7:05 pm

Why China is building empty (ghost) cities:

http://www.theepochtimes.com/n3/782131-the-secret-of-chinas-housing-bubble-revealed/

“Houses are not built for living in.”

China’s empty (ghost) cities. CBS News – “60 Minutes” 12 minute video

http://www.youtube.com/watch?v=ei0FpwI1dqg

China rebuilt Paris in China, but it is empty. SBS Dateline. 15 minute video.

http://www.youtube.com/watch?v=V3XfpYxHKCo

#29 Vanecdotal on 07.03.14 at 7:13 pm

A contractor we were spending a lot of quality time with this spring after a crawlspace flood lamented he wanted to get the h*ll out of his Langley townhome, but despite being on the market for several years could not sell it for what he paid for it a few years earlier. Said dude, “we don’t want like living there anymore, nothing within walking distance, not enough space, no privacy, hard to get in and out of the development in the morning & evening during rush hour, (endless queues of cars), so we’ll probably end up renting it out”. For a loss I am guessing. I feel for the guy, I’ve heard almost the exact refrain from several friends and colleagues in the past year or so, who bought in similar suburban Van. areas in recent years and are now underwater on the mortgage, aren’t happy with the home, neighbours, or area, and can’t “afford” to liquidate. This is just tip of the iceberg, and many of these poorly planned high density suburban developments are already on the fast track to becoming the ghettos of tomorrow, especially if there is a flood of reluctant landlords needing to rent to anyone with a pulse. Yet new ones keep coming online as fast as the city can re-zone. Coincidently, bought something off of craigslist last fall from a guy in another Langley townhome development who echoed the contractor’s sentiments almost verbatim. I get the sense many in these situation are already trapped in their homes both financially, and somewhat literally.

On another note, when looking up the BC assessment data this spring, and seeing what the local 2013 sell prices – assessed values in the local ‘hood were, (single detached) there were some MAJOR declines from 2013 sale prices already. Some declines in the $10′s of thousands, some in the 6 figures. In ONE year. Ouch. Prices in this area have been drifting downwards from peak for @ 4-5 years now. Well priced homes are still moving in a less than a year. Those with yesteryear “market testing” pricing are slowly drifting down after a year or more going unsold.

#30 van guy on 07.03.14 at 7:15 pm

smoking man,

Shorts on indexes are hedged for now. Will add to shorts on the way up. And UVXY too

#31 van guy on 07.03.14 at 7:18 pm

Smoking man,

whats batman? A double top pattern?

#32 T.O. Bubble Boy on 07.03.14 at 7:21 pm

#19 shawn on 07.03.14 at 6:25 pm

Net Worth Needed to Buy a House

*****************************************

I agree with the first paragraph and not the second. Assuming the rule of 90 applies it should apply based on the full cost of the house not the equity or downpayment or net worth in real estate.

This is because in a full recourse system the buyer is at risk for the full cost of the home not just the downpayment.

Leverage increases the risk to the equity but the risk in dollars is proportional to the full cost of the house.

I don’t particularly know if the rule of 90 should apply but if it does then I think it must apply to the full value of the house.

One does not reduce risk in real estate by making a small down payment even though that reduces Net worth in real estate.

One does not reduce risk in real estate by borrowing agains the equity and investing elsewhere. One adds to risk by doing that as both a portfolio and a house could decline in value at the same time despite the diversification.

I agree with this definition… I believe that Garth’s “official” definition just factors in net home equity (not total value), but I have always preferred the total value definition of the “Rule of 90″.

So, if someone has a $1M dumpy house in Toronto/Vancouver, they should also have $1M in non-house assets.

Or – put differently, you should be a millionaire before buying a detached home in Toronto/Vancouver!

#33 eddy on 07.03.14 at 7:23 pm

Hey Ontarians, remember e-stealth? That’s right, Dolt On e-Guilty lost one Billion of our tax dollars. By the results of the last election no one cares. Remember his apology?
“I’m Sorry” is what he said. Then he boldly refused to apologize for the gas plant fiasco.

Contrast that with this: a Japanese politician apologizes. No subtitles but he was using public money for personal stuff.

https://www.youtube.com/watch?v=Gviufzt7dgk

#34 Tony on 07.03.14 at 7:23 pm

The next rate hike cycle may well be over a century away in time. This is barring a run on the U.S. dollar. The job figures will continue to be pulled out of a hat each month until too many lies are told then all the jobs figures will be revised down so no more interest rate hikes maybe forever only interest rate cuts. All you have to know is how ponzi schemes end.

#35 Tony on 07.03.14 at 7:28 pm

Re: #24 Mr Zipper on 07.03.14 at 6:54 pm

That type of logic doesn’t work anymore. That was scores and decades ago. Today people are buying into a ponzi scheme or pyramid and they’ll only figure it out when they lose all “their” money. Basically America has been in a recession since 2004 and things have only gotten a lot worst since then.

#36 Detalumis on 07.03.14 at 7:32 pm

Hmm lies, damn lies and statistics, the participation in the US was what, 66.1 in 2004, it’s now 62.8 and still sinking. They do this number fudging in Canada as well. Towns with lots of old retirees and people on social assistance like Hamilton will have a lower unemployment rate than Toronto but I can guarantee you that it’s a lot easier to get a job in Toronto than Hamilton.

Using these cheerful numbers, if people just give up looking for jobs, take early retirement at 55 with a meager half-pension, go on disability, “anxiety and depression” is now the new “bad back”, or take some lousy survival temp job, the participation rate may actually sink but golly-gee we can ignore that and say we have a lower unemployment rate.

Ontario also says they are reducing the numbers on Ontario Works but leave off the corresponding increase in people flocking to ODSP, it makes better press.

#37 T.O. Bubble Boy on 07.03.14 at 7:35 pm

Vancity (B.C. bank / sub-prime lender) is getting into the payday loan business:

http://www.theglobeandmail.com/report-on-business/vancity-shakes-up-payday-loan-industry/article19454493/?cmpid=rss1&click=sf_rob

#38 Piccaso on 07.03.14 at 7:37 pm

Two or three part times jobs now is the norm

Full time is a past era

#39 Retired WI Boomer on 07.03.14 at 7:54 pm

#26 Nemesis

Larry Verne – ‘Please Mr. Custer’ (you tube) fits well…
Original Caste ‘One Tin Solider’ “” ” ” ”

Enjoy – no video just aural

#40 Son of Ponzi on 07.03.14 at 8:05 pm

Vancity (B.C. bank / sub-prime lender) is getting into the payday loan business:
——————–
VanCity, once a leader in ethics and community spirit, is now leading the race to the bottom.
What a shame.

#41 TS on 07.03.14 at 8:08 pm

Garth,

I sold a suburban Ottawa townhome condo in 2010 for 194,000. I remember my two neighbours coming out to congratulate me because they were able to go to the banks and get their home equity lines of credit increased because of my sale. Free Money! They said.

Well one 5 doors down is for sale right now for $198,000. So 4 years later and there’s little to no increase.

So a 5.9% increase probably means somebody got 10% and somebody got 0%.

And forget about any house or condo in Ontario with electric baseboard heating. Nobody is even thinking about buying those puppies

#42 Financial Freedom at 40 on 07.03.14 at 8:20 pm

Have decided renting is trendy – part of the new “sharing economy”.

Excited to see you can borrow the Lego death star set now from Pley, monthly fee for all the Lego sets you could ever want. Just need to bring it to Canada.

“Ownership is old school,” said Pley co-founder Ranan Lachman to Forbes in March.

#43 Freedom First on 07.03.14 at 8:24 pm

Yes, the all-in house worshipers think interest rates will never rise.

Once and a while, just for the hell of it, I tell them I bought 10 and 20 year Real Return Bonds through my Self Directed Investing Account as a part of my fixed income. First, they ask me what are RRB’s, and after I tell them they automatically say: “But interest rates are never going to rise”, and then give me all the reasons why this is true. Of course I never told them of the Dividends I was making from my R.E.I.T.’s , and other Dividend paying diversified ETF’s.

I really enjoy Garth’s Blog. It is one of the few connections to financial sanity so easily accessible. No surprise his blog is the #1 Personal Finance Blog in Canada. The house worshipers and house sales people arguing with Garth, you’re a riot. Idiots, but still a riot.

All in on 1 financial asset is financial lunacy. No exception. None.

#44 Smoking Man on 07.03.14 at 8:51 pm

#31 van guy on 07.03.14 at 7:18 pm

Yes, dubble top = Batman
Camel toe = double bottom..

And when batman shower his face, it’s going to be a beauty free fall… $$$$$$$

Also, I now see the start of a hockey stick on Toronto Real Estate., if it continues which likely won’t happen as we hit the summer fall slow down, but if it’s hot.. Spring will be the top..

But thus herd is so trained, so programed anything is possible,. They associate ownership with winmenship.

Christ they elected Wynne..

#45 Julia on 07.03.14 at 9:05 pm

#13 GTA Landlord on 07.03.14 at 5:03 pm
The amount of rental units in Toronto is now bordering ridiculous with too much competition that I’ve has to lower rents to attract renters

I rented out a beautiful apt in a good area in Toronto for years and there were many times when finding good tenants was a challenge. Can always get smokers with pets and several kids.

Is the situation particularly bad now, GTA landlord?

#46 BobC on 07.03.14 at 9:24 pm

Jobs report tells half the story.

http://www.google.com/gwt/x?u=http://cnsnews.com/news/article/ali-meyer/record-number-americans-not-working-june&ei=ZwG2U5H7DaaZsQfq2YCACQ&wsc=yh

#47 ozy - but you can't live in a portfolio in the winter on 07.03.14 at 9:30 pm

but you can’t live in a portfolio in the winter

so, I select the house and do not give a shit when TXT falls 500 points a day, for 4 days a week

When did that ever happen? — Garth

#48 Shawn on 07.03.14 at 9:36 pm

How much to Risk in a House for Young People?

Actually, I don’t think net worth really comes into the picture. Young people can have a negative net worth but still be okay buying a home.

What really matters for young people is the price of the house as a multiple of income. Or the monthly affordability (including an allowance for rates to rise) And the stability and the potential of their earnings matter.

This is why lenders and mortgage insurers focus on the affordability of the monthly payment (mathematically equivalent to a multiple of house price to income assuming the same interest rate and amortization period.)

Clearly a pair of young doctors with huge student loans and big negative net worth can safely buy a house. They don’t have to wait until they have ANY financial assets outside the house. That can come later.

#49 marnic on 07.03.14 at 9:42 pm

“America’s recovery continues.”

Garth, please explain your rationale for statements like this. A QE-fuelled 17,000 DJIA and a bunch of McJobs (at the expense of half a million full-time positions) do not constitute an economic recovery. Please tell me you’ve got more than that…

Can’t blame QE much longer. The Fed is dismantling its stimulus program because the economy no longer requires it. You can move on to chemtrails. — Garth

#50 TheCatFoodLady on 07.03.14 at 9:48 pm

#13 – GTA Landlord: rents are starting to soften in a lot of Ontario communities. Vacancy rates are creeping upwards & prices being asked are stagnant. A lot of landlords are offering ‘sale prices’ for the 1st year. In areas with few jobs, jobs with no prospects – kids are heading west. The broke are staying with the parents or doubling up to save money.

#37 – T.O. Bubble Boy – effectively Van City is loaning at ‘standard’ card rates or close to them. That’s high enough to cover the inevitable fails & low enough to grab a lot of business from the payday loan sharks. This is not the picture I mentally have composed about credit unions which have always sold themselves as a low cost, COMMUNITY based financial services system. This is nothing but greed.

#42 – Financial Freedom At Forty: It makes a lot of sense to me to borrow/rent what you can, especially if the time you’re likely to use it is limited. For kids, many of the better toys are far from cheap – why not a toy rental/loan library? That also eliminates the problem of stuff disposal later on down the line. We do it, increasingly, with vehicles. The concept can be applied to a lot of things.

Housing: I shake my head at the propensity of so many, especially the young, to buy cookie cutter places in the burbs. Sure, many people grew up that way – it’s a familiar norm but outside the big markets there are so many other options for both buying & renting.

Some choices – because they’re seen as a bit off the wall can come surprisingly cheap. I’d be careful there buying but you can score some amazing rentals if you’re willing to look outside the box. Before lofts were cool, desirable spaces, they were alternative housing.

#51 Fiendish Thingy on 07.03.14 at 9:48 pm

Great News! The folks at http://www.eximus.com are flogging the Cedar Landing townhomes,in Aldergrove. Full page ad in my local Maple Ridge paper with the half page headline “Do you and your partner earn $14.50 an hour?”

This is what desperation smells like…

#52 Mr Zipper on 07.03.14 at 9:49 pm

” if you were a union member you were likely paid more than the value of your work warranted …

this gets repeated frequently, but is the statement true??
it seems most of the better run countries in the world have public sectors similar to ours …”

Is that why all ‘the best run countries in the world’ are all in debt up to their eyeballs and staring blankly into the abyss?

#35 Tony

Dude….the cash flow from dividends is real. Is the power/electric/ industrial company you buy today going to stop paying dividends and go out of business any time soon? Will we all end up in tee pees on the prairie? Will this screen go blank just before the zombies chew through the door?

Your concerns are real….but misguided. In spite of all the BS the world will not come to an end. The stock market is a forecasting tool ….that’s why the market is going up while main street in still up to it’s armpits in doo doo. What stocks are telling us is that in time the little glimmers we see now on the macro horizon will be the dawn of a new day.

Some people who have been douched by the recession will never recover….. long term victims are the ones who didn’t adapt to the new reality. My suggestion is to hold your nose and dive in to the sewer.

#53 Babblemaster on 07.03.14 at 9:56 pm

“Houses have appreciated an average of 5.9% during this time. – Garth.

———————————————————-

Yes, but in many cases that is on a highly leveraged asset. The returns are much, much greater if considering the money actually invested.

So is the debt. And the risk. — Garth

#54 courage and poo on 07.03.14 at 9:58 pm

DOW 17000 !!!!!

You just keep me hanging on…

https://www.youtube.com/watch?v=5-ltDECc2bA

#55 Babblemaster on 07.03.14 at 9:58 pm

So now the predictions are for a rate increase starting the second half of 2015. Yeah, sure. Heard this tune many times before.

Most economists have been consistent in suggesting the Fed will move in 2015. — Garth

#56 Inglorious Investor on 07.03.14 at 10:23 pm

#27 hohoho on 07.03.14 at 7:01 pm

” ‘> … if you were a union member you were likely paid more than the value of your work warranted …’ this gets repeated frequently, but is the statement true??”

The primary objective of a union is to artificially limit or cut off the supply of labour, which drives up the price of said labour and makes labour more expensive than it otherwise would be in a true free market.

This is also why union workers are typically less productive than non-union workers. You know… only Joe is allowed to hold the wrench on the left side of the bolt, while only Sid is allowed to turn the wrench on the right side of the bolt. And only between the hours of 9:00 and 10:00 am on every other Thursday during a waxing moon.

#57 Sheane Wallace on 07.03.14 at 10:34 pm

Dow is going to 30 k, oil to 200, interest rates to 10 %, houses to 40 % of current valuations.

#58 Inglorious Investor on 07.03.14 at 10:40 pm

(c) Invest in liquid assets with equal fervour. And don’t for a moment think that financial markets pose more risk than, say, a house in suburban Calgary or a condo in Etobicoke.”

As stocks are the most liquid asset one can own, stock prices are far more volatile than home prices, which makes them riskier on a short time horizon. This is also why it is very risky to buy stocks with borrowed money: a relatively small decline in prices can wipe you out.

But people think nothing of buying homes with 75, 80, 90% leverage or LTV. And it’s with leverage that you make real money with an investment. I am all for investing smartly in stocks, but this is the perception among average people.

I can’t tell you how many people I talk to today that are utterly convinced a home is a sure-thing investment. Did all these folks forget what happened in the US just a few short years ago? Oh, I forgot, this is Canada. We’re special here. Isn’t ‘special’ the euphemism often applied to the mentally retarded?

#59 saskatoon on 07.03.14 at 10:43 pm

799,000 part-time jobs created (which is the most since 1993)

…BUT

523,000 full-time jobs were LOST.

288,000 jobs “created” is the net offset…

take a guess as to why the msm headlines don’t read “U.S. ECONOMY LOSES 523,000 FULL-TIME JOBS”

incidentally, U.S. labour force participation rate is at 35 yr. low.

#60 Sheane Wallace on 07.03.14 at 10:55 pm

By the time sheeple realise the game there would be no escape from the inflation as everything would be already very expensive. But it will become even more and more expensive with time. Good luck in negotiating wage increase though.

What do you think was the purpose of QE? to give banks cash to buy stocks offloading crap (bonds, MBS from their balance sheets)

Then inflation shows up, bond market deflates and currencies depreciate rapidly while stock market keep going up. and up. and up.

Then suddenly gold goes to 5 k and the end result is:
making the same money if lucky but everything is 3 times more expensive except houses that decline by 60 %, interest rates at 10 %, savers and people on fixed income wiped out and a lot of room to further grow debt.

Makes sense (making money).

#61 retired WI Boomer on 07.03.14 at 11:09 pm

#58 Inglorious Investor….well said!

I still can’t understand using leverage (at this stage of a bull market run) to increase one’s risk.

I will never understand the allure of buying RE at such nose-bleed valuations as now in Canada.

#57 Sheane Wallace

Don’t know where you get your crystal ball, but I certainly hope your prognostication is correct. However, oil at $200 creates instant recession. That cures Canada’s housing gasbag, unfortunately also your economy (and ours).
While the US could embark on a great urban mass transit upgrading (rail, etc) interest rates at 10% would not get that funded, and the vast majority of over-indebted consumers would surely choke on increased credit rates, falling employment as all employers adjusted to much higher oil, and interest costs. Add in Canadian mortgage resets….and you have a receipt for near total depression.

On second though, that is NOT what I want to see in either country, though choking the car culture would be a wonder to behold. Interest rates could normalize, but is the largest debtor in the history of the world going to allow that if it is in their power to prevent it?

Therefore your crystal ball is deemed defective.

#62 Basil Fawlty on 07.03.14 at 11:12 pm

“Can’t blame QE much longer. The Fed is dismantling its stimulus program because the economy no longer requires it. You can move on to chemtrails. — Garth”

After the chemtrail analysis, check out the increase in US T-Bill purchases by Belgium. Their purchases directly correlate with the decreases in QE.

Since Q1 2008, dividends and stock repurchases of the S&P 500 companies have totalled $3.8T, out of cumulative net earnings of $4T. This has resulted in the inflation of financial assets and does not represent new productive capacity.

#63 LH on 07.03.14 at 11:12 pm

Re 19 shawn

Hear hear!

Debt only amplifies risk
Exposure to asset is full market value

#64 Panhead on 07.03.14 at 11:21 pm

#57 Sheane Wallace on 07.03.14 at 10:34 pm
Dow is going to 30 k, oil to 200, interest rates to 10 %, houses to 40 % of current valuations.

Please send me some of whatever you are on …

#65 hawk on 07.03.14 at 11:38 pm

#60 Sheane Wallace on 07.03.14 at 10:55 pm

=================

How can interest rates go to 10% and savers be wiped out at the same time?

#66 Lucky to have a pension on 07.04.14 at 12:21 am

Mr Turner,
Can you advise how you revise your rule of 90 for a family lucky enough to have dual indexed pensions?(assuming of course nothing happens to them long term)

#67 Ronaldo on 07.04.14 at 12:28 am

My 70 Equity 30 Fixed up 11.38% ytd. Rebalanced on January 2nd. Reduced U.S. portion which was up 38% for 2013. Increased my exposure to energies and pm’s. Currently 30% Fixed 70% Equity (U.S. 5.5%, Intl. 8.5% Canada 56%). Global Prec. Metals fund up 30.5% ytd (7% of portfolio) and Global Energy fund up 22.3% ytd. Currently reviewing for next rebalancing and I think it may be time to park some cash. Last year up 12.8%. Average MER 1.3%. I’m a DIYer but I also have an advisor with the company I deal with that I can call upon at anytime for advice at no extra charge.

#68 Mr Zipper on 07.04.14 at 12:40 am

So now the predictions are for a rate increase starting the second half of 2015. Yeah, sure. Heard this tune many times before.

Most economists have been consistent in suggesting the Fed will move in 2015. — Garth”

It may be that they’re circling the wagons…..much the same as ‘the experts’ on global warming…..er…climate change……er…hey…wasn’t it ‘global cooling’ just a few years back? Economists…..like climate change monkeys… are fed by whoever hands out the banana’s.

It is impossible to imagine ‘The Fed’ turning up the heat on itself. We’ll see a ‘version’ of rates changing…..a ‘rhyme’ as Twain said…..but not a direct rate hike. 1/4 will sink the treasuries on two sides of the Atlantic and sink the third world who are up to their ying yangs in our exported paper ( which is why as you know why we haven’t seen any inflation here except the consumer kind) …..

Our guys…the Wall Street guys….the guys selling our governments phony paper second hand through secret Caribbean banks……..seeking higher yields….and finding extremely corrupt politicians in the 3rd world have shoveled money to countries willing to pay 7 and 8…and even 10%.

If rates go up here….then the money leaves there and we get……a freaking meltdown globally. Nope….no rate hike……it will be seen in the form of something else….yet to be named….something unknown, precise, inscrutable.

#69 Cha Ching on 07.04.14 at 12:59 am

“Canadian residential real estate – where mortgage debt is now $1.1 trillion…”

yabbut real estate is increasing in price across the board and Canadians are sitting on more than $1 trillion in cash soooo… that makes the mortgage debt pretty much irrelevant. so sorry.

http://www.nationalpost.com/related/topics/Canadians+sitting+trillion+cash+mountain/2044036/story.html

#70 Nemesis on 07.04.14 at 1:01 am

#IndependenceDayBreakfastZen. #ForSaltierDogz.

http://youtu.be/eL7ETLLkQTY

#71 Ford Prefect on 07.04.14 at 1:07 am

There is a dimension to the real estate phenomenon that I rarely see discussed on the “bear sites”.

Where I live, the Comox Valley, prices started to go crazy around 2000, peaked at ridiculous levels in or around 2010 and today are still relatively near the peak – maybe down 5 – 15%. Thus if a young person of say 25 wanted to buy real estate in 2000 but did not because prices were ridiculous, he or she would now be pushing 40 and still waiting to buy. I realize that renting is the sensible financial option but of course it does not provide the sense of security that ownership provides to many people. So it is easy to see why many people have thrown in the towel and purchased. This bubble seems to go on forever.

#72 wayne on 07.04.14 at 2:11 am

Obamacare/ACA will look at how many FULL TIME employees a company has had in the trailing 6 months to determine, among other things, costs that the employer must bear. This means June 2014 was the last opportunity to dump any full-time employees that could be replaced by multiple part-time employees to reduce health care costs.

The coming months will be more reliable indicators of job growth trends in America.

#73 Jensen on 07.04.14 at 3:51 am

$$ Talks while BS Walks.

Vancouver detached home prices have just hot a record high. Even a 30% crash will leave the average home at over $1.5 Million.

And you guys talk about CMHC rules and interest rates??? FYI, there was $1.08TRILLION in illegal outflows from China in 2013 (source bloomberg).

#74 Dean Mason on 07.04.14 at 6:44 am

Thousands of Detroit residents that are at least 2 months delinquent on their water bills are going to get their water cut off soon.

I guess it will be hard for them to stay liquid!

#75 Jonathan on 07.04.14 at 6:56 am

Comparing home ownership to financial assets is like comparing apples to oranges. People are always gonna need a place to live but I can’t say people have a similar need for financial assets. So you’re either stuck paying rent to a landlord or you take out a loan to buy.

Oh, so people don’t need to worry about cash flow? — Garth

#76 jess on 07.04.14 at 8:22 am

???Electronic devices driving up demand for electricity, IEA says
Agency calls for less wasteful standby mode for laptops, tablets, game consoles
charging stations
==============
This week, Kitchener city council approved a plan to set up a public charging station at the city parking garage at Charles and Benton streets. The station will likely open by September and allow people to charge their car for $1 an hour. It takes three or four hours to get a full charge.

colour coded Google server farms
Buildings are so large Google even provides bicycles for engineers to get around them
Read more: http://www.dailymail.co.uk/sciencetech/article-2219188/Inside-Google-pictures-gives-look-8-vast-data-centres.html#ixzz36V8wbxqq
Follow us: @MailOnline on Twitter | DailyMail on Facebook

=======
http://www.therecord.com/news-story/4615036-mississauga-draws-line-on-neighbours-dirty-laundry/
bylaw Wednesday restricting clotheslines to less than three metres high, at least 1.5 metres from the fence line, never in the front yard and in one straight line only.

#77 TD Bank says no bubble here! on 07.04.14 at 8:39 am

Back to bed folks! LOL

http://www.huffingtonpost.ca/2014/07/03/house-prices-canada_n_5555457.html?utm_hp_ref=canada-business

The same bank said the opposite six months ago. Were they fibbing then, or now? — Garth

#78 gut check on 07.04.14 at 9:05 am

extolling the US economy & recommending that now might be the time to buy real estate.

looks like a shark jumper to me.

The American recovery progresses, as it has for the last two years. Undeniably. — Garth

#79 TurnerNation on 07.04.14 at 9:18 am

Silly realtor TSE is the official designator of the Tokyo Stock Exchange.

#80 gut check on 07.04.14 at 9:29 am

“The American recovery progresses, as it has for the last two years. Undeniably. — Garth”

I guess that you don’t mean “progress” in the same way that the little people mean it, then. Because for me (for most of us) ‘progress’ would be increased employment, higher wages, more job security, actual on the ground improvements in vital infrastructure and stable prices for the necessities of life.

But then again, you can’t be looking at US Q1 GDP growth, either (you saw the revised number, right? at -2.9%)

So I’m not exactly sure what you mean by either “economy” OR “progress”

definitions would be appreciated. :)

Since when was this blog for ‘little people’? They’re busy chasing debt and assets they cannot afford. — Garth

#81 ThinGreyLine on 07.04.14 at 9:45 am

What about the leverage component to home ownership in the example cited at the end. At 5% down, that’s only a 5000 dollar outlay on a 100,000 dollar asset. If the house rises an annualized 5.9% a year over 4.5 years, even at a 5% interest rate, the return on cash invested is around 150% so that 5000 becomes nearly 12500, actually beating the stock market return. Plus it’s tax free. No brokerage in the stock market would offer those kind of margin terms. I totally agree that housing has a huge amount of risk associated with it in terms of illiquidity and leverage and now in Canada those risks out weigh the benefits of potential leveraged returns. Nevertheless I’d say the average person compares the return of how much they put down on a house against their unleveraged investment portfolio and somewhat erroneously conclude that housing is the better bet.

If ‘average’ people were wealthy, I’d agree with you. They’re not. — Garth

#82 Hillbilly on 07.04.14 at 9:49 am

Basil Fawlty – comment # 62

Exactly!

Add in algo trading, low vlomes and voila – melt up.

#83 marnic on 07.04.14 at 10:25 am

The American recovery progresses, as it has for the last two years. Undeniably. — Garth

Haha, yup, an annualized -2.9 per cent Q1 GDP contraction screams this loud and clear.

One quarter is irrelevant. Growth for the year should be 2.5%. — Garth

#84 Mr. BigStuff on 07.04.14 at 10:32 am

I’m buying LT gov’t bonds and short-term corporates in this environment. Trimming equities after this run would seem to be wise

#85 young & foolish on 07.04.14 at 10:48 am

Higher vacancies in the GTA sound good to me. Now expecting my landlord to offer a rent reduction. Should I hold my breath?

Financial assets have done really well … but can you count on them going forward?

#86 liquidincalgary on 07.04.14 at 10:50 am

@ #44 Smoking Man

that’s not a camel toe.

check ‘urban dictionary’

#87 High Plains Drifter on 07.04.14 at 10:50 am

In general, it is reasonableness incarnate that we hear from the incredibly bright Mr. Turner. However to be a believer in Mr. Turner’s ideology, one must believe the system is not manipulative. Watching the Fed raise interest rates about 15 consecutive quarter points leading up to the 07 bust up, persuades most, that manipulation is the rule. I could die laughing at all the other examples available to prove my trust busting case.Still, you can try get on board the manipulation train and if you get to your destination before they find you in the baggage car freeloading,you win. At that point you should have a house-hideout or be able to live out your life in arbitrage (third world country).

#88 young & foolish on 07.04.14 at 11:21 am

“However to be a believer in Mr. Turner’s ideology, one must believe the system is not manipulative”

There it is … the crux of the main issue on this blog for many followers … is the system open and fair, or are we being led to the slaughterhouse. Mr. Turner has been on the inside … he was finance minister. He should have a better idea of how the system works than most.

Can we trust “the system” sir?

We are the system. It’s a naïve question. — Garth

#89 Ronaldo on 07.04.14 at 11:49 am

#87 High Plains Drifter -”Watching the Fed raise interest rates about 15 consecutive quarter points leading up to the 07 bust up, persuades most, that manipulation is the rule.”

Yes, and at the same time, prices of homes continued to rise due to the lax lending practices of the banks and their sub prime teaser loans and the fact that they were as in Canada backed by the equivalent of CMHC here. Nothing to lose but that is what the government wanted after the economy crashed after 911 when Bush got on TV and told the country that everyone should be able to own a home because that was their right and of course the “American Dream”. Well, it certainly turned out to be a “nightmare” in the end. We’re not different here. All time low interest rates are keeping home prices up but that won’t last forever either. We are long overdue for a re-awakening and that won’t be good for any markets.

#90 Musty Basement Dweller on 07.04.14 at 11:57 am

Here at the link below is an article for a good laugh.

The Royal Bank “study” and press release (quickly posted by the globe as “news”) reports that our debt problems are going away (not quite if you read the details).. but anyways..they say it is now ok for the Bank of Canada to raise interest rates.

Geez do you think there might be a slight conflict of interest involved for the Royal Bank here?

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/household-debt-worries-ease-as-mortgage-borrowing-slows-in-may/article19460253/

#91 Babblemaster on 07.04.14 at 12:20 pm

#58 Inglorious Investor

“I can’t tell you how many people I talk to today that are utterly convinced a home is a sure-thing investment. Did all these folks forget what happened in the US just a few short years ago? Oh, I forgot, this is Canada. We’re special here.?”

——————————————————-

I agree that Canadian housing is insanely priced and that it’s not supported by the fundamentals. I also agree that it seems naive for people to think that housing is a sure-thing. However, in historical term, long-term it has indeed been a sure-fire thing. And, we are special here. Toronto has a plane full of immigrants landing every ten minutes and we have a govt. hell bent on inflating the housing bubble with policies designed to do just that.

#92 Flawed on 07.04.14 at 12:47 pm

#49 marnic on 07.03.14 at 9:42 pm
“America’s recovery continues.”

Garth, please explain your rationale for statements like this. A QE-fuelled 17,000 DJIA and a bunch of McJobs (at the expense of half a million full-time positions) do not constitute an economic recovery. Please tell me you’ve got more than that…

Can’t blame QE much longer. The Fed is dismantling its stimulus program because the economy no longer requires it. You can move on to chemtrails. — Garth

***************************

Garth why do you continually dismiss evidence from your readers and make fun of them? Especially when most of the time your jokes are fact.

http://www.geoengineeringwatch.org/category/geoengineering/chemtrails/

#93 Waterloo Resident on 07.04.14 at 12:48 pm

Garth, you said that with houses, Canadians now expect only gains. Oh yeah, that is definitely true. Just like in the year 2000 everyone felt that Internet stocks would only go up and up, never down, now people feel homes in Toronto will only go up and up, never down. Well, so far, for the past 20 years they have been right.

I read a story about how Millennials have watched the crash of the markets in 2000 hurt their parents and they watched the fall of the markets in 2008-9 when they were in high-school, and now they’ve got employment they don’t want anything to do with the stock market no matter what. So the only thing left for them is housing, and for that reason they are investing 210% of their income straight into housing, with not even the slightest thought of placing cash anywhere else. Sad but true.

My lady-friend who bought her $310,000 condo on Fort York Blvd; she says that now the same sized units are going for over $400,000 so she’s now planning on buying a nearby townhouse, and renting her condo out to someone to cover the mortgage payments. I advised her very strongly NOT to do that, but she told me “WHY NOT, YOU CANNOT LOSE WITH TORONTO REAL ESTATE?”

I just shake my head when I hear things like that, and these days I hear something like that every week.

But really, seriously, who here is the bigger fool; me or her? Lets say that for the next 10 years home prices in T.O. continue to rise at 5% per year. Look how badly a fool I will look for not taking the plunge now and buying a condo or townhouse right now, even at today’s inflated prices. I’ll look like a total idiot for my renting of my place.

On the other hand, here in Waterloo, there is a townhouse complex that used to have a sign on the fence saying:
- “units available from $150,000 – 80% sold”
- Six months ago there was that sign plus a ‘for sale’ sign.
- Three months ago there was 2 ‘for sale’ signs.
- Now the ’80% sold’ sign is down, and there are 6 ‘for sale’ signs, all in a complex with only 34 units in total.

So to me that shows that here in that Waterloo townhouse complex, something is going on. Lots of people trying to sell, but very few actual sales.

My feeling about the future is this:
Dow is going to 20 k, then fall back down to 15 k, oil will hover around $110 before falling to $80, interest rates in Canada will slowly slide towards negative % rates, houses will climb over the next 16 years to 240 % of current valuations

#94 Doug in London on 07.04.14 at 12:55 pm

In 2011 and 2012 Garth was telling us not to bet against America, while many doomsayers here were telling us the American economy would go from bad to worse. Now we see the Dow at 17 grand, and the U.S. job numbers improving with 288,000 jobs last month. Good call, Garth. You Americans have more good reasons to celebrate Independence Day!

Margin debt is at a record high – meaning lots of investors are borrowing to buy more securities in the belief they’ll gain more. That’s odd, shouldn’t investors have been getting margined to buy more securities while they were on sale, and now selling off some to pay down the margin debt?

#95 Calgary rip off on 07.04.14 at 1:05 pm

This blog makes it seem like there is one solution to the rent vs. buy mortgage dilemma. There isnt. Anything you do has risk. What is most important always is what decisions make a person most comfortable because that eases stress and less stress is worthwhile. Determine why you are really making decisions whatever they are and you can determine what you should do next.

So here is one example: I got a mortgage for $420K about 10 houses down from the house i was renting for $1700/month. The mortgage not including the city taxes, maintenance and everything else is the same price. I got a ways to go til retirement, assuming Im still alive then, say 30-40 years. So in the time period when I got the mortgage, I “saved” $55K on rent. Sure the principal didnt drop that much, however that same house is now assessed at around $500K. Go figure.

So over the last year two roofing companies came out to assess hail damage. These Einsteins said there was. The insurance guy came yesterday, said there was no damage. He also said that the remedied fix on the flashing around the roofing was done wrong, “it might leak” if there were snow and that the gutters(eaves) are a bit too far from the roof. Originally the housebuilder put the flashing in so the drainage went not onto the roofing tiles but straight down the chimney into the house. The previous mortgage owners solution was to paint the drywall, not get it fixed. So anyway, say if the out of cost solution is to get the roof redone, which isnt needed, that is still not the equivalent of $55K. So no matter if my wife is upset about how small the kitchen is, or if the roof fixing costs money, or if it was a house I wanted and she didnt, you still need a place to live right? And given that it is 300 meters at most from my daughters school until grade 9 and in a good neighborhood in the NW, what’s the big deal?

It is an exercise in futility to identify every little variable and thing that can go wrong at any time. The list is endless and if examined carefully it seems most people would want to crawl into a hole somewhere in the fetal position and suck on their thumb. All decisions are with risk. The best advice anyone could do is to examine why decisions are made and make decisions only for reasons that appeal to them rather than what is recommended by “experts” who likely bought their place or did whatever 40 years ago.

#96 happity on 07.04.14 at 1:13 pm

“America’s recovery continues.”

And there’s the rub, actually full-time jobs tumbled by 523K to 118.2 million while part-time jobs soared by 799K.

#97 Retired WI Boomer on 07.04.14 at 1:28 pm

Garth, I just don’t ‘get it?’

Numerous posters are dissing the US recovery. It may not be the ‘best’ or ‘fastest recovery’ the US has ever experienced, in fact it is the slowest. That said, it is none the less a recovery. Like all recoveries it has been uneven, the fruits have not been equally distributed, and in this country they never have been, and likely will never be!

Investors have done well, the stock market has recovered 150% from its 2009 low. Many dividend paying stocks have hiked their payout quite nicely handing the investor a 6-9-12% raise (depending on the stock). Gee, when I was working my labor rarely saw a 6%-9-12% yearly increase.

Enjoy the sun while it shines, it will again rain someday.
I also carry the umbrella, so let it rain. Just don’t gloom and doom when the facts say you are incorrect!

Right now, today, I have never had it better! It is a glorious bright sunny day, my portfolio hit a highpoint, the bills are paid, and the convertible beckons. Road trip!

Happy 7/4/2014

#98 Keith in Calgary on 07.04.14 at 1:28 pm

http://www.zerohedge.com/news/2014-07-02/how-few-wall-street-backed-firms-manipulate-entire-us-housing-market

Part of being an intelligent money manager is keeping your eyes wide open and researching everything that you can, whether or not you personally agree with it or even think it is important. Quite often what you may disregard as a non-issue because “you don’t want to believe it” is often the cause of your too soon to be true demise……

Was there really a housing recovery in the US as some people are trumpeting on this blog and elsewhere ? I never believed that there was…….

Regardless of what you believe, new housing starts rebounded past the million mark, average resale prices advanced 1% a month or better and a 32% overall decline in real estate values improved about 12%. That seems to be the opposite of getting worse. — Garth

#99 TheCatFoodLady on 07.04.14 at 1:42 pm

#85 – young & foolish: My guess is no, don’t hold your breath expecting an offer of reduced rent any time soon… with some exceptions. If your building is emptying out fast – current tenants leaving & not being replaced, if you’ve been the ‘perfect tenant’ – full rent always paid on time, no complaints/issues about you management has had to deal with, you may be able to get a tiny reduction.

Landlords generally aren’t stupid. They know the costs of moving far outweigh any rent freeze or reduction you might ask for so their answer is likely to be: “no.” If you live in a building subject to rent control, the allowable increase this year was only 0.8% for rent & as much as many would like to believe being a landlord is a licence to print money, it isn’t unless you’re dealing with a large landlord who can benefit from economy of scale when it comes to the logistics of the business.

Toronto always has people moving there – it’s a popular destination for many migrants because they can find a taste of home & more importantly, work.

#100 happity on 07.04.14 at 1:49 pm

RE in the USA for many quarters had been majority institutions buying.

Stock market in USA is buy back of stocks because interest rates are so low for so long, largest margin on record, and higher p/e since 2008.

USA is the largest debt bubble in Global history, the handling of that debt will not be pretty

A small fraction of US resales are to non-individuals. Stop making stuff up. — Garth

#101 gut check on 07.04.14 at 1:54 pm

Oooooh, okay. I think I get it now.

“Progress” = stock market ONLY.
“Economy” = stock market ONLY.

In that case then the US economy is progressing nicely.

The economy of the US is easily measurable. It’s growing. — Garth

#102 Mr Zipper on 07.04.14 at 1:59 pm

Defined Benefit Pension Plans turning civil service workers into financial morons.

http://business.financialpost.com/2014/07/04/teachers-on-brink-of-serious-financial-squeeze-as-spending-overtakes-108000-paycheque/

These people have ‘above average salaries’ and yet the idea of never having to save and being coddled for life has 20% of the population turned in radical financial idiots.

The drag on taxpayers that the civil services increased compensation demands will have an inflection point in the near future….where 100% taxation will be necessary to fund these outlandish lifestyles.

Subsidized DB pensions must be clawed back….all monies paid recovered, and civil service pensioners should recieve what they have saved in RRSP’s, TFSA’s and the CPP we all get equally. Otherwise we will see cut backs in everything and increased taxation just to keep pandering to this ‘elite’ class of financial illiterates.

#103 Flawed on 07.04.14 at 2:08 pm

More news from the Canadian class warfare frontline.

http://armstrongeconomics.com/2014/07/04/sovereign-debt-crisis-alive-well-in-canada-ontario-is-one-of-the-largest-debts-in-the-world-among-sub-sovereign-governments/

#104 marnic on 07.04.14 at 2:11 pm

One quarter is irrelevant. Growth for the year should be 2.5%. — Garth

JP Morgan are saying 1.4%.

JP Morgan says this: “Economic data releases since March show a strengthening economy, with improvements in business and consumer surveys, an improving housing market and tighter labour market. Investors have begun to question the Fed’s current dovish stance given the falling unemployment rate and slowly building inflation pressures and what this means for the path for interest rates.” — Garth

#105 Sheane Wallace on 07.04.14 at 3:07 pm

98Keith in Calgary

Zero hedge are extreme critics, they have been talking about stock market crash as imminent for the last 4 years.

US economy is recovering and by economy I mean what matters – the big international corporations.
Joe Schmoe is sinking fast but what do you expect with outsourcing and lack of competitive advantage in terms of skills?

Moderate to high inflation in short to mid term will fix everything – the debt, provide abundance of cheap labour. If you are looking for security you are already at the place to be in Canada/Alberta, the alternative is Europe.

If you have certain skills you will be fine everywhere.

The world will not end, just everything will be much more expensive and some people much poorer.

There would be no hiperifnlation or crash of the dollar.

#106 happity on 07.04.14 at 3:19 pm

A small fraction of US resales are to non-individuals. Stop making stuff up. — Garth

Blackstone became America’s biggest landlord since 2008. Just to name one…

I repeat. A small fraction of US resales are to non-individuals. — Garth

#107 Yogi Bear on 07.04.14 at 3:40 pm

#105 Sheane Wallace

Zero hedge are extreme critics, they have been talking about stock market crash as imminent for the last 4 years.

Garth and this blog has been calling for a real estate crash for well over 4 years, yet you still come here and read every day. Does that mean we should discount the stats and facts that are posted here?

ZeroHedge also happens to be the only group that looked into the BLS stats to point out that the “great” US jobs report is actually a massive shift from full-time jobs to more part-time jobs.

No one (and I mean no one) in the main stream media thinks the jobs report is anything but amazing, but a case can easily be made that 500k+ full time jobs is actually better than 800k part time jobs.

#108 happity on 07.04.14 at 3:40 pm

I repeat. A small fraction of US resales are to non-individuals. — Garth

US consumers are unable to chase home prices into the stratosphere and instead have opted to rent. They bailed since 2008. When more than 50% earn less than $ 35k per year and loans are harder to get, if institutions aren’t biting who is?

“US resale home sales rose 4.9% to a seasonally adjusted annual rate of 4,890,000 in May from 4,66,000 million in April, but remain 5.0 percent below the 5.15 million-unit level in May 2013.” Wow. Almost 10 million houses were bought and sold in the last 60 days. So much for your theory. — Garth

#109 Sheane Wallace on 07.04.14 at 3:53 pm

Yep, rates will rise.

It is really simple principle like the milking of the plant lice by ants:
You feed them (give them loan with low rate) then you squeeze them (increase rate and collect interest), it is called the Business (but really the Credit) cycle.
Ants get it. Why don’t we?

Noting to do with Japan, they had strong economy with significant exports and trade surplus, room to grow debt, significant savings and very low real unemployment. Plus they had real deflation. Plus they cared about their citizens (although this is being reversed lately as it is a very expensive sentiment for which they are going to pay now and in the future).

We can’t repeat Japan, it is that simple.

But hey, keep dreaming that you are going to get a house and get ‘rich for free’ leveraged 20 times (with 5 % down payment).

#110 Omg on 07.04.14 at 4:33 pm

69 Ca Ching
“yabbut real estate is increasing in price across the board and Canadians are sitting on more than $1 trillion in cash soooo… that makes the mortgage debt pretty much irrelevant. so sorry.

http://www.nationalpost.com/related/topics/Canadians+sitting+trillion+cash+mountain/2044036/story.html
———–
Yah but the people with the $1 trillion in cash are not the people with the $1 trillion in mortgages.

Maybe in a few years the people with the $1 trillion in cash will be buying out the mortgaged people for 50 cents on the dollar.

Remember that how it went down in the US.

#111 Sheane Wallace on 07.04.14 at 4:43 pm

#108 Yogi Bear

Agree, they/zerohedge have very valid points focusing on the moral aspects of the game but the overall message is of extreme negativism of everything. It sells though.

If you use their rants as investment advise you are doomed. The same with another very smart person – John Hussman, very valid points, the guy is very, very smart and convincing in his models except that it seems he is using the wrong models and is still fully hedged.. in whatever he uses as a hedge, very successfully losing money for his investors in the best stock market run the world has ever seen.

Garth has been very accurate in his advice and predictions on the markets and he would be also right on the housing market, just wait.

Listen to zerohedge at your own risk.

#112 bill on 07.04.14 at 5:03 pm

> … if you were a union member you were likely paid more than the value of your work warranted …

this gets repeated frequently, but is the statement true??

it depends I would think. certainly not in the wood industry I worked in.
a non union sawmill was an unsafe jobsite coupled with ancient, wornout inaccurate machinery and a very unmotivated workforce.
they couldnt begin to compete with ”union output”

#113 Shawn on 07.04.14 at 5:22 pm

Sitting on Cash?

OMG at 111 said:

Yah but the people with the $1 trillion in cash are not the people with the $1 trillion in mortgages.

*******************************************
Agreed. In fact one man’s savings is another man’s debt.

The fact that the saver and the borrower in the net have no debt on average is a mathematical tautaology.

But it does not help the debt slave.

So called “cash” usually represents money on depoisit in banks. But the banks have loaned in out.

(Fractional reserve fearing dum dums who don’t believe this, need not bother replying, I know your views)

I also see mis-guided comments that companies are “sitting on cash” rather than piutting it to work. Typically such cash is “in the bank” which means it is out at work as it was loaned out.

Money and the way it circulates in the economy is very complex. Simplistic observations on the matter lead to wrong conclusions.

#114 James on 07.04.14 at 5:27 pm

#110 Sheane Wallace on 07.04.14 at 3:53 pm

“with 5 % down payment”

Where is that proof? Do you have numbers to back that? This has been used in this blog so carelessly.

#115 jess on 07.04.14 at 5:55 pm

There were 21,000 fewer workers in finance, insurance, real estate and leasing in May, the third decrease in four months. The recent losses contributed to a year-over-year employment decline of 33,000 (-2.9%) in the industry.

http://www.statcan.gc.ca/daily-quotidien/140606/dq140606a-eng.htm

job matching – one door leads to another
http://thehill.com/policy/technology/206891-comcast-goes-for-shock-and-awe#.U34zCphEJd0.twitter

http://consumerist.com/2014/05/23/comcast-spending-big-on-legion-of-lobbyists-to-try-to-win-approval-for-twc-merger/

The Federal Trade Commission (FTC) on Tuesday said it is seeking a court order to permanently bar T-Mobile from “cramming,” or charging cellphone customers for spam text messages that they did not sign up for.

#116 kommykim on 07.04.14 at 6:04 pm

RE:#92 Flawed on 07.04.14 at 12:47 pm
Garth why do you continually dismiss evidence from your readers and make fun of them?

Hey, the guy has to get some sort of reward from all the work he does writing this blog.

RE:Especially when most of the time your jokes are fact.
http://www.geoengineeringwatch.org/category/geoengineering/chemtrails/

Yea, sure, jet exhaust condensing is a government conspiracy!
Maybe educate yourself a bit:
http://en.wikipedia.org/wiki/Contrail

#117 TheCatFoodLady on 07.04.14 at 6:05 pm

Seriously rude & remiss of me – Garth, IF you happen to be in Lunenburg – stay dry & safe tomorrow.

Make sure the Amazons have brought in or tied down anything loose & get all that good hurricane stuff done. Have a bottle of the good plonk ready to go, all you need to run a bubble bath for your long suffering wife & treats for Bandit.

Do NOT take any chances with your ankle or I’ll hop a box car, cat food in tow & personally lay a clawing on you.

Be safe & hopefully it’s nothing more than a good, solid wind storm.

#118 Trading Naked on 07.04.14 at 6:06 pm

#86 liquidincalgary on 07.04.14 at 10:50 am

The hell it is a camel toe. Technical traders aren’t cool enough for urban dictionary.

#119 happity on 07.04.14 at 6:41 pm

“US resale home sales rose 4.9% to a seasonally adjusted annual rate of 4,890,000 in May from 4,66,000 million in April, but remain 5.0 percent below the 5.15 million-unit level in May 2013.” Wow. Almost 10 million houses were bought and sold in the last 60 days. So much for your theory. — Garth

Your quote provides no information on whether buyers are institutions or consumers.

But your argumentum ad hominem continues…

#120 happity on 07.04.14 at 7:22 pm

It’s simple,

USA trade gap ex Petroleum is horrid.

Central banks and commercial banks have admitted to manipulating markets.

The leverage of paper (debt) to tangibles is 100 to 1 or worse.

IMF submitted a paper on expropriation of paper assets to pay off the debts of nations.

There is no USA economic renaissance, just a coming revelation of the population how messed up things really are.

#121 Ogopogo on 07.04.14 at 8:28 pm

#25 Catalyst on 07.03.14 at 6:56 pm
Here’s the problem with your logic. If consumers are doing so well, enjoying disposable income from all those plumb new jobs, then housing prices must be reasonable since they allow for disposable income after housing costs.

Whatever takes down real estate will also take down stocks in my opinion.

Actually those are US jobs, not Canadian ones. Pay attention. — Garth

I love the cocky types who come here with their “gotcha Garth!” insolence, only to be instantly pulverized by The Bearded One. One of the many reasons why one should read all the comments. Free entertainment doesn’t get better than this!

#122 Keith in Calgary on 07.05.14 at 11:51 am

Regardless of what you believe, new housing starts rebounded past the million mark, average resale prices advanced 1% a month or better and a 32% overall decline in real estate values improved about 12%. That seems to be the opposite of getting worse. — Garth

——————

That it happened is not what matters, but why it happened is what counts.

You seem to be conveniently ignoring that fact…….which, of course, it what the world’s central bankers need us to do in order for their scam to perpetuate……..

What scam? — Garth

#123 Smoking Man on 07.05.14 at 8:51 pm

Of course rates will rise. — Garth

Why don’t you be a sport and create a chart showing the unemployment rate, next to interest rates.

Then one that shows interest rates vs cpi.

I did it on my blog, that’s when CSIS took me out for a beer.

So if rates rise, your calling for massive job creation, which hurts the probability of a housing crash.

Sorry you god damn magnificent Word Smith, leave the crystal ballmenship to me..

I got a pretty good track record….

#124 Smoking Man on 07.05.14 at 9:29 pm

DELETED

#125 Smoking Man on 07.05.14 at 10:59 pm

A day behind and I’m still deleted

You’re a something..

#126 Greg on 07.07.14 at 12:07 pm

Your math is wrong. You say your 60/40 portfolio gained 6.88% in the first half of this year, which you double to 13.76% and claim that’s the annualized rate of return. However instead of multiplying by 2 you need to raise the half-year rate of growth to the power of 2:

1.0688^2 = 1.1423

or 14.23% annualized.