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It’s here

HUGS1

A recession, eh? What does that mean? Does it matter?

In case you missed it, StatsCan revealed Tuesday the Canadian economy has, unlike Mike Duffy, contracted monthly. It’s called ‘negative growth,’ and if you’re the sitting prime minister, it’s the worst news. When an economy shrinks for two consecutive quarters, it becomes recessionary. Thanks largely to oil, that’s us.

And while the price of crude took a giant leap up (27%) in the last week or so, it’s volatile, unstable and unpredictable (look at Tuesday’s drop). More worrisome has been a relentless plop in business investment in Canada – down 11% during the winter and 8% over the last few months (witness today’s 1,000-job oil patch slaughter).

As you might expect, things are getting worse in the People’s Republik of Alberta where the Dipper government has announced not only a recession but a provincial deficit of almost $6 billion. Oil, drought, blazes and ideology are whipping the former cash cow province into submission. Oil rig activity has fallen by 50%, big money has gone into fighting wild fires and the government is goosing social spending, bloating the budget to over $50 billion for the first time. Concurrently an extra $500 million is being removed from often-struggling corporations in the form of higher taxes. Go figure.

Of course, news we’re into the R-thing is manna for the Muclairs and Trudeaus among us. After nine years of Conservative rule, they’ll point out, we have almost $200 billion more in federal debt, epic personal indebtedness, structural unemployment, eight years of deficits and now a recession. It’s hard to know if this will affect the outcome on October 19th, but hard to see how it won’t.

Anyway, what does a recession mean to us wage slaves and house-snorflers?

The last one of consequence hit at the end of the Eighties and extended through to the mid-Nineties. It was caused by high inflation and climbing rates, which makes our low-inflation, cheap-money recession all the more remarkable. But it’s interesting to note that residential real estate, which spent most of the 1980s in bubble territory (as now) suffered a US-style crash once recession gripped us.

The peak-to-trough decline in the average price of a Toronto house, for example, was 24.5%. Ouch. And during that entire period, mortgage rates got more affordable – with no measureable result. As I mentioned here yesterday, houses were cheaper in 2000 than they were in 1990. It took 14 years for the price of a house bought in 1989 to recover – not even factoring in inflation and buying/selling fees. Double ouch.

However, being a sunshine-and-ponies kinda guy, I have to point out that this recession is likely to be shorter and shallower than the one that hit the last time. The decline in business activity in the second quarter was less than in the first. That’s good. While business investment was way down, household spending was up – a lot. So you can thank all the idiots running up the LOCs and taking mountainous mortgages for mitigating the commodity price collapse. The US is motoring ahead (as the labour stats Friday morning will show), and that’s always good for Canada. Finally, the $3 billion largesse the desperate Conservative government bestowed on parents in July is also a factor, seeing it all got spent on Huggies and Heineken.

Now, despite recession being official, don’t look for cheaper interest rates. Ain’t gonna happen. Even economist David Madani, beating the drum for a third rate cut ever since the second one took place, has thrown in the towel. “Overall, this latest economic data is broadly consistent with the Bank of Canada’s economic projections presented at the time of the July policy meeting. Accordingly, we now expect the Bank to hold off lowering rates any further for the time being.”

In fact, given that the Fed will raise its key rate in September (odds are 44%) or October (odds overwhelming), fixed-rate, five-year mortgages in Canada will cost more by Thanksgiving – regardless of what happens with our central bank. That means 2015 likely marked the bottom of the interest rate cycle. This might even have been the cheapest money you’ll see in your lifetime.

So the real consequence of this could be political, not economic. Canada will get back on its feet when global growth moves higher and commodities respond. But in the process it might take a dramatic swerve left. As Alberta has started to prove even in the nascent days of NDP control, spending and deficits go up, and taxes follow. Is the answer embracing bigger, more costly government and less disposable income? I guess we’ll find out next month.

You might wish to prepare.

Kids

KIDS 1

On this day 25 years ago a five-year mortgage cost 13.75%. Seriously. And that was an improvement from where it had been a few months earlier. Discuss that with your basement-dwelling, condo-lusting Millennial spawn over dinner tonight. They’ll think you’re a scaremongering old fossil.

I mention this because RBC did, sort of. The bank’s latest non-affordability report says Vancouver’s insane (we knew that) while buyers in Toronto are “approaching 1990” conditions. That means it’s almost as hard for folks to buy digs in 416 today as it was back when Linda Ronstadt could still wear Levis.

Of course high rates aren’t the problem now. Five-year, fixed-rate mortgages are available everywhere in the 2.5% range. The problem is price. In 1990 the average Toronto house traded for $255,020. Ten years later the same house was worth less – $243,255 – because rates stayed high. By 2010 it had mushroomed, to $431,276, as our current era of cheap money began. Today the GTA average is $609,236, and rates have bottomed.

Logic then dictates the negative correlation between house prices and the cost of money is bad news for the next decade, as we head towards rate normalization. (The US Fed kicks this off in the next few weeks.) It also means when RBC uses a word like “risky” regarding home ownership, this is probably the time to be doing anything with your money except buying a house – at least in the bubble markets.

Well, here’s Ed. I include his note to prove that even the 1%ers among us can sometimes lose their way. Fortunately, they all read this pathetic, free blog. It’s a cult thing.

“You don’t seem to have a shortage of these emails,” he says, “but thought I would throw my hat into the ring. Here’s my story…”

So Ed took my advice and sold his McMansion plus six rental properties in BC, and now has $3.5 million, “in a fully diversified GT-style portfolio” managed by two smart guys he pays 1% to. In his late fifties, he earns $200,000, rents for $2,300 a month and is starting to mull retirement. “We might buy in a couple of years when the current lease runs out, maybe a 20-year house, leaving feet first.”

So why is Ed writing, other than to piss off all the little socialist, Norway-loving, Millennial underachievers who stumble in here by mistake just because Stephen Harper hates me? Family, of course.

“Our son earns $100,000 a year and our daughter-in-law has a classic case of house horniness, which is somewhat reined in by her husband, by watching their investment portfolio of $250,000 grow, and by reading GreaterFool.

“So here’s the question.  Part of the reason for the current situation is that my wife and I have been (I think) diligent about not cultivating a sense of entitlement – either in our own or our kids’ lives.  Of course we can afford to lend/give significant $ to our kids to give them a leg up in the housing market (and want to) but feel that in order to be productive and useful to society we (all) need to be a bit “hungry” as well. Where’s the balance? Any ideas as to how much, when, etc.?”

First the legal stuff: there are no restrictions in Canada on gifting money or property to your adult children. We have no gift tax (unlike in the US) so none of this money will be hung on them as income nor any investment proceeds considered capital gains. You’re free to slide your adult kids all the cash they need to max out their TFSAs, for example, with all the tax-free gains going to them. Or you can hand over your real estate without attribution or consequence, for that matter.

But should you?

First, there’s the incentive argument. Gifting a million bucks (or half that) to your kid so he can move his family into a luxe house is not exactly an exercise in building character. This is not akin to handing over equity in the family business, of course, or even cutting your adult son into half-ownership of your scallop boat. It’s simple, unadorned largesse delinked from financial merit.

Second, Ed, why would you finance a real estate purchase for your horny DIL when you yourself have decided this is an abysmal time to be invested in property and a great time to be on the sidelines? How’s it doing them any favours to grab an asset with a precarious future?

Third, does the kid really need it? Just because he’s your seed? After all, the couple seem to be doing fine in terms of income and savings. Perhaps the best path is to leave them with their own accomplishments and rhythm, instead of blowing it up with parental moolah.

Finally, is there nothing better to do with money you don’t need than give it to someone who doesn’t deserve? How about saving homeless donkeys? Or those poor Syrian refugees throwing babies over barbed wire fences? The mutts in the local shelter? The humanity on the Lower East Side? Terry Fox?

Dammit, Ed. Now I’m all misty and altruistic. Kills me.