Entries from December 2015 ↓

Hang in there


In 2015 most investors were spanked. No wonder.

Greeks in revolt. Chinese diddling. Oil price collapse. Fed rate hike roulette. Loonie plunge. Meltdown on Bay Street. Donald Trump. More Adele. Almost too much to bear. As mentioned often here over the past year, people with too much maple in their accounts paid a high price for that home-country bias. Sadly that involves a majority of Canadian investors.

So the TSX finishes the year down more than 11%. Oil gave up 40% of its value since the summer. The rig count is the lowest in a quarter century and the globe is swimming in crude. Over 80,000 people lost their jobs in Alberta alone, in the patch or construction. The office vacancy rate’s 18% in Calgary. So we could be back into recession in the first quarter of 2016.

If it weren’t for real estate values – at least outside of oil country – most people would be feeling considerably poorer than at the close of 2014. For that, you can thank the Bank of Canada. It shocked markets in mid-January with a rate cut, then surprised everybody again in July with a second. The first cut ignited the spring real estate market, and thenext kept it alive with artificially low mortgage rates.

You know the result. Prices in our bubbliest markets have increased by six times the inflation rate, and far in excess of average wage gains. As a result, household debt hit a record high in 2015, and finishes the year accelerating. This happened despite the oil collapse, a 16-year tumble for commodity prices, dismal job creation in Canada, blood on Bay and the new T2 crew’s higher down payment rules (albeit not here until February).

Now the Fed has raised its key rate for the first time in a decade. The cheap money party’s ending. Our economy’s limping and there’s no hope on the horizon for crude. Mortgage rates have probably hit bottom, as evidenced by the bounce higher since the Fed moved. No, the Bank of Canada isn’t about to jack up the cost of money while the economy is whacked, but that will eventually happen. Nor will they lower it much since the dollar will flinch bad.

In short, what conditions exist to support more housing gains in 2016? Beats me. What conditions exist to make real estate leverage risky? Lots. Remember – unlike governments, actual people have to pay their debts back. And debt taken over the past few years will certainly be renewing at a higher cost from 2016 onwards. If it’s repaid on assets which are losing value at the same time (likely) then that sucks hard.

So your first resolution should be to deal with debt. Lock it in. Make it tax-deductible. Or sell assets to reduce borrowings. With property values still stupid in the GTA or YVR, it’s exactly the time to consider the strategy. If you balk, believing you’ll never be able to buy in again, especially some soulless condo in an urban forest, reread the previous paragraphs. You’re dreaming.

As for investing, however, 2016 is looking decent. Global growth is finishing the year at about 3%, the US is lurching ahead with its jobs juggernaut and recovery, Europe is benefiting from trillion-euro stimulus orgy, Japan’s market is hot, China seems to be stabilizing, the Greeks have mercifully shut up and most people think commodity prices will improve a little. Even if they don’t, few expect oil to lose a fraction of what it did last year.

This is an environment in which a balanced and globally-diversified portfolio should do fine, even if it’s another stinker for those with a beaver-and-moose fetish. A minority of your assets should be in maple again this year, with two-thirds (at least) in US and international securities, and 20% of holdings in US$-denominated stuff. Of course, you should also cram as much as possible into a tax-free box.

Starting Friday, that’ll be harder. The annual TFSA contribution limit was ripped from ten grand a year to just $5,500 in a crass political move by the new regime in Ottawa. Making it more taxing for people to save, invest and prepare for their retirement is bizarre, but this is now a country on the move to the left.

Or is it?

A Nanos survey just published finds that 48% of Canadian support or somewhat support cutting the TFSA limit while almost an equal number – 46% – oppose or somewhat oppose it. That’s interesting, given the fact only 7% of us have actually maxed out the tax-free account or make the full annual contribution. That suggests people are finally realizing while they may not utilize the gift now, it will be there for them in the future. To attack the TFSA just because it’s under-utilized is myopic to say the least. Combined with all the tax incentives to buy a home, it sends out the message that Ottawa would rather have you indebted and dependent than solvent and free.

Which is, after all, what modern liberalism’s about.

Well, you have $46,500 in TFSA contribution room as of tomorrow. Use it. And not for a down payment.


Thanks to blog dog Scott for the Kits liquor store pic shot today.


SLOW modified

Time for a little year-end reality check, here on GreaterFool – where we have a surfeit of 1%ers surrounded by hungry, huddled, masses with their Whole Foods bags and selfie sticks, yearning to eat them. We also have Kory and Leanne. There but for the grace of God, go we.

“Got caught in the last round of layoffs at Telus,” he says.  “Could have been a bad situation.  Been reading your blog for around five years now, so we are well prepared.  If we were a typical Canadian family I don’t know how we’d survive the stress. As it is, we’re liquid, diversified, pay $1650/mo for a three story townhouse in downtown Calgary (my brother and his wife live with us and cover $700 of that).  Otherwise the only other thing we’re on the hook for is one year left on a Hyundai @350/mo. We went and splurged instead of one of those rotten Kias!”

Yes, they still have a modicum of taste.

“Anyways, instead of being caught up in the fear, we quickly settled our affairs (I took my lump sum in 2016), and we bought tickets to Mexico for two months. Not sure how 2016 will unfold but I think it might be best to pack up and head down to the US for a bit on the TN visa program.  My wife is an RN, and I work in computer network engineering.  I looked at the wages in several areas and if our luck holds out, we can both earn around the $100k region…easily $250k CDN per year with current exchange rates. But we are doing very well thanks in part to your advice, and no declining house!”

They also have freedom, flexibility and mobility. It’s a lesson a lot of people in Cowtown, Edmonton, Grand Prairie, Fort Mac, Saskatoon and Regina are learning. For example, there are about 5,000 houses for sale in Calgary today, and just over 800 monthly sales. And while that might suggest a buyer has to endure six months to sell (as opposed to the 49 days the realtors suggest), the wait for higher-end properties can be even longer.

Tough to put your life on hold for months just to try and figure out what comes next. But a renter can move in a relative flash. No realtor. No listing. No open houses. No vultching buyers. No commission or mortgage discharge penalty. You just split.

This is one of the first rules the huddled masses need to learn: real estate can be an anchor. Nobody needs to own a house to live in a home. When you strip away the emotional baggage (that nesting instinct, the visceral desire to have a cave of your own), it makes little sense to own in a major Canadian city. Especially now. The days of windfall gains are over, and only varying degrees of risk lie ahead.

Besides, from a cash flow standpoint, renting beats owning ten times out of ten. Only a year or two ago this blog was punctuated by comments from cowboys who decried Calgary rents and claimed it was cheaper to own. Well, with prices dropping and buyers evaporating, all those myths have been blown up. Imagine losing your gig at Telus and driving home to a $400,000 mortgage and property tax bill in a town where jobs are rarer than people admitting they voted NDP. #sucks.

Of course, every property market is local. Oil down at $36 suggests in all of Alberta and Saskatchewan things are about to get worse in 2016. But even in BC’s Delusia or the Kingdom of 416, where the metrosexuals herd, the new year will bring some serious real estate challenges. For most people, it’s all about debt.

BUBBLE BURSTS Top Canadian money managers were just asked what most keeps them up at night. Sixty-three per cent said the same thing – household debt. No wonder. Mortgage borrowing alone has hit a new peak of $1.23 trillion (that’s 1,230 times a billion). We have another $700 billion in lines of credit and personal loans. The serious part of this debt orgy is that most of it’s been taken out when interest rates were at historic lows and the world’s biggest economy had a zero-rate policy.

No longer. That ended on December 16th. And while the Canadian economy may be too weak for our central bank to follow suit immediately, that alone should worry you. The longer rates stay low, the greater the stress over job loss. So, back to Leanne and Kory.

Canada’s rock star money managers vex more about debt than falling house prices – although those will inevitably, inexorably come. Because Canadians have (apparently) no self-discipline when it comes to snorfling borrowed money, any downturn – whether from higher rates, less work, the commodity price mess or an earthquake in the Lower Mainland – will be neither shallow nor short. Mortgage debt is decades long. The rash, irresponsible borrowing decisions that millions of us have taken recently will be around to haunt the next generation.

So, what’s the No. 1 new year’s resolution for Canadians (at least according to a major bank)?

Yep, paying down debt. But don’t get too excited. That was picked by just 26% of folks in a recent CIBC poll. A close second was “keeping up with bills/getting by.” The third major selection was “don’t have a financial priority.” Sigh.

In 2016 this blog resolves to be less cheerful.