Entries from April 2017 ↓

Rexit

Imagine buying a house worth $1.5 million to $2 million in 15 minutes. Without seeing it. Not built yet. And the deal’s firm. No second thoughts. No backing out or cooling off. No conditions, No second-guessing.

Come early. Line up for a couple hours with a few hundred strangers. No bathroom. Feel stressed and competitive. Bring at least five personal cheques for deposits. Plus photo ID. And you’d better be pre-qualified for a mortgage, or have bundles of cash. Because – did I mention? – there are no conditions. You sign it. You bought it. Thirty-eight-foot lot. Move-in date is two years out. Maybe.

Such is the reality for new-house buyers in the GTA. Yes, it’s insane, illogical, demeaning and fraught with risk. But the three builders who will unleash this madness on the morning of Saturday, May 13th know that supplicants will camp out overnight and the new ‘Impressions in the Village of Kleinberg’ will sell out in a day. Maybe two.

K village, by the way, is about 50 km from downtown Toronto, and the drive takes between one hour (good day) and 90 minutes (regular day) in traffic which can best be described as lethal. Also, to carry a $2 million house requires a minimum downpayment of $450,000 and an income of $260,000 – and that’s with the lowest mortgage rates ever, around 2.5% for a fixed-rate loan.

No sane person, even a rich one, would agree to buy a major property under such conditions. And yet purchasers believe the moment they walk out and climb into their CLA or E-class that they’ve just made money. Appreciation is relentless, unstoppable, expected and a mandate from God. After all, the price romp in that hood has exceeded even the shacks down the road in urban 416, as speculative buying has exploded in the exurbs and hinterland where cows, groundhogs and rustic rednecks in F150s were driven from their natural habitat.

This is why residential real estate is assuming more and more and more of Canada’s overall GDP. Actually, it’s scary. The entire economy is worth about $2.07 trillion, and personal debt (two-thirds of it mortgages) is now at $2.08 trillion. Never happened before. Residential real estate accounts for half of all economic growth, as we busily sell each other houses. At 13.2% of the GDP housing exceeds all manufacturing (10.5%), oil & gas (8%) and even the banks (7%). And yet it’s held together with the gossamer threads of emotion and confidence, and reinforced with the duct tape of cheap money.

We’re more dependent on housing than was the US before the real estate crash that peeled 32% off valuations. Before California’s property plunge, taking the state (larger than Canada) to the brink of bankruptcy. Canadians carry more debt than Americans did at the height of the Ninja mortgage, use-your-house-as-an-ATM madness of 2005-6. With each passing day the overall risk to the economy grows, since the housing boom cannot last. When half the growth is related to real estate (there are 48,000 realtors in the GTA alone and 110,000 in Canada) any reversal in this industry is serious stuff. And it all runs on hormones.

Needless to say, the threats are growing. Governments are seeking ways of ‘cooling off’ the market and, if they succeed, the landing will not be soft. US tax cuts (announcement Wednesday) will help expand the US, drive interest rates higher and increase mortgages here. The protectionist poop just thrown at our lumber industry by the Trump White House could be a harbinger or what’s yet to come – an assault on dairy or the gutting of NAFTA. Our dollar has gone into reverse, stoking inflation (thank goodness fresh cauliflower season’s at hand). And our main export, oil, is at the mercy of US overproduction. Wage growth is stagnant. Nik Nanos (I told you yesterday) finds a third of people say their finances are deteriorating. So all of housing’s gains are coming on the back of fresh debt.

Just as sane people do not spend $2 million on the strength of a salesman and a brochure in a few minutes, smart folks who have scored windfall gains in an unprecedented housing mania should seriously consider rexit. Nobody ever was destroyed by selling too soon. Millions have seen it happen by getting out too late.

See you on the 13th.  Historic.

Like watching the last bison go over the edge.

L’épiphanie

First, the French Revolution. Then, American Independence. Finally, the Demented Beaver Report. Please take your seats. Quit that damn Instagramming. Turn off your phone. Leave all children outside. Dogs are welcome.

The election in France matters to the world since it pitted the forces of Trumpian populist against a more centrist view of the world. Marine Le Pen is one scary mademoiselle, anti-immigration, anti-globalist, anti-corporate, pro-nationalist and promising an isolated France-for-the-French. She didn’t win the first round, and is unlikely to change that on the second. So markets figure photogenic, T2-clone Emmanuel Macron (who sort of married his mom) will end up president. As a result, the Dow shot ahead 200 points and European markets roared.

After getting beat up with Brexit and Trump, this was a big day for free-traders, globalists and others who think the world is okay and moving ahead. Volatility plunged 25% in a single session. Gold and gold stocks sank. My obsessed Portfolio Manager partner Ryan drove his Porsche at 110 km through crowded Toronto streets and over sidewalks so he could get to the bank tower and send me this note:

  • With the perceived positive outcome in French election, the S&P 500 broke above its short-term downtrend
  • The S&P 500 has been consolidating in a descending triangle but with today’s breakout it’s broken out of this consolidation pattern
  • Next resistance is the March high of 2,400
  • Looks like Europe might finally be breaking out relative to S&P 500
  • With cheaper valuations, improving political environment (if Le Pen loses this would follow Netherlands loss by right wing candidate) and improving technical profile, we could consider reducing US and adding to Europe in the next round of changes

I found the part about the ‘descending triangle’ particularly arousing. In any case, the point is the French thing, at least until le deuxième partie on May 7th, may be signaling that the populist movement is running out of gas and all the 1%ers can stop buying elephant guns. Markets eat this up, since big corps can continue their global operations, moving money and labour around for the efficient manufacture of profits for shareholders.

Now, on to America. More dopamine and endorphins for investors. On Wednesday the poster boy for populism makes good on his campaign promise to slash the US corporate tax rate about in half – right down to 15%. The impact of this, if enacted, would be huge. Stocks which look sort of pricey now on a P/E ratio (that’s the relationship of stock prices to the money the underlying companies actually earn) would end up looking cheap as profits plump. Yup, higher highs, higher lows – extending a pattern that’s been in place now since 2009.

Of course, fatter profits, rising markets and an expanding US economy will also bring more of a response from the Fed. So, if the Trump tax cut comes to pass (or even if it doesn’t) you can expect two or three additional interest rate increases in 2017. The Bank of Canada will follow a few months later, but in the meantime the bond market will adjust mortgage rates upwards. This is not speculation. It will happen.

Meanwhile, in the land of the flat-tailed, house-horny, buck-toothed rodent, taxes are going up, not down, our most indebted province just announced it will give people free money to live on in three cities as a universal income pilot project, and property lust has apparently hit a new high along with debt and risk.

Nik Nanos’ current snapshot of how Canadians are feeling reveals a people detached from economic reality. The number of us who think house prices will rise from nosebleed levels in the next six months has soared to almost 49% – the most on record – while only 10.8% think they could decline. The rest are terrified.

“Bullish sentiment on real estate in Canada continues to drive consumer confidence,” says my pal Nik. Which is strange, given what is happening with household finances. Nanos asked people how they’re doing relative to a year ago, and found that almost 30% of people report their situation has deteriorated – almost twice the number who think it has improved.

So how can people keep buying houses that have never cost more, with record amounts of debt about to become more costly, believing they will continue to inflate even as their own situation worsens? Yup. They believe it’s different here.

Sure got that right. Have you listed yet?