Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate http://www.greaterfool.ca Book and Weblog - Authored by Garth Turner Fri, 31 Oct 2014 23:11:22 +0000 en-US hourly 1 http://wordpress.org/?v=4.0 Love your landlord http://www.greaterfool.ca/2014/10/31/love-your-landlord/ http://www.greaterfool.ca/2014/10/31/love-your-landlord/#comments Fri, 31 Oct 2014 23:11:22 +0000 http://www.greaterfool.ca/?p=9987 DAVE modified

So, a big mistake people reading this pathetic blog make is thinking they have to choose between real estate or a financial portfolio. They don’t. It’s just fine to have both (in which case my Rule of 90 applies).

But if you must choose one, take the money. That way you have more liquidity (62% of all house-sellers in Canada were unable to find a buyer in the last six months). You have diversification, instead of one asset on one street in one city. You have balance, with assets that pay interest or dividends, or the potential to yield capital gains. And you have less risk of loss, given all that real estate leverage. Plus you get to live for less.

That last point is a giant one. Every time I hear of another moist virgin succumbing to her mom and buying a condo with a heaping mortgage, I despair. Do the kids not know they could be a lot richer if they rented and just “paid somebody else’s mortgage”?

Lincoln is one smart little Millennial dude who gets it. He writes:

“It’s amazing how much difficulty I have convincing friends that landlords are very heavily subsidizing renters in many many parts of the country. They steadfastly maintain that buying a house is a good investment. “You’re always building equity!” They say. While I have tried to explain just who amortization schedules favour (hint: if you think it’s not the bank, you’re dead wrong), there is a serious head in the sand attitude here.

“My personal favourite is “Well, there may be a bit of a bubble, but it can’t possibly affect us much here [Kelowna] – real estate has been dropping slowly for a couple of years now!” Apparently it’s not just people in the major metro areas who believe that they are special snowflakes.

“I’m renting for about 2/3 of what I would otherwise pay for housing here. I’m going to have my student loans paid off about one year after I graduate. And until this housing gasbag deflates in a major way, I’m going to work on making out my TFSA. And when things break around the house I’m going to keep picking up my phone and saying “Hey, you’ve got a problem to fix over here.”

But let’s bring in the experts at the International Monetary Fund to prove the point I’ve made here repeatedly: it’s less costly to rent than to own, even with 3% mortgage rates. Property prices have swollen to the point where we’re way past the rest of the world in terms of crappy affordability, and have shot through historic norms for rent/price ratios.

See what I mean?

international-price-to-rent-ratios-deviation-from-historic-average_chartbuilder

Now, we have another little problem. The economy. Unlike the US, which I explained this week is in fine shape (all things considered), Canada’s seriously lagging. The American economy is growing at the rate of 3.5% (down a little from the 4% earlier this year), while we’re barely doing a third of that.

In fact, on Friday Stats Canada delivered the latest bad news. Already the oil plunge is hurting GDP, coming as it does on top of a weak jobs market, a floundering manufacturing base and our hipster-inspired condo economy. So, like Jian Ghomeshi’s reputation and Facebook Likes, we’re shrinking by the day. The economy in August contracted at an annualized rate of 1.2%. Ouch.

And poor Alberta. Oil and gas extraction plunged 2.5%, the second drop in a row – and there appears to be more coming as crude barely hangs on to the $80 mark. (Commodities in general are being spanked as money flows elsewhere – gold was nailed for a $30-per-ounce loss Friday, and is now at $1,170. Drop since 2011: 38%.)

Manufacturing output also shrank, which sucks, because we’re turning into a nation of salesmen and kids with two arts degrees. Tough to see how that will generate a ton of prosperity, or exports earning hard currency.

There’s a reason our dollar’s dropped to 88 cents and the Bank of Canada is freaking over deflation. We’re struggling. And what does Ottawa do? The feds promise $26 billion in tax cuts for families, based on a budget surplus which doesn’t yet exist, and probably won’t next year.

Sigh.

Rent, save and invest, children. You shall inherit the dirt. Cheap.

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Joy http://www.greaterfool.ca/2014/10/30/joy-2/ http://www.greaterfool.ca/2014/10/30/joy-2/#comments Thu, 30 Oct 2014 20:17:36 +0000 http://www.greaterfool.ca/?p=9978 JOY modified

If you ever wonder why contrarians always get the girl, read the comment section of this blog.

The moaning, drooling and quivering on display yesterday was awesome. Moments after I laid out a case for continued growth in the US economy – and solid reasons to be invested in financial stuff – it began. The dissing of America was classic. The belief markets are manipulated, government stats are rigged, governments run by morons and that central bankers can’t Google was endemic.

It’s staggering how many think the world’s going to end. Just as it’s improving. And that brings us to today’s lesson. It’s simple. Get invested. Stay that way. Stop reading blogs. It’ll kill ya.

Here’s what I mean:

CHART2

The above is a 10-year chart of a balanced portfolio, with 40% safe stuff (such as bonds and preferreds) and 60% growth (Canadian, US and international ETFSs, plus REITs). This is not theoretical – it’s real. I know. The portfolio was routinely rebalanced to sell winners and buy losers and keep the weightings in line.

Note this: what was invested in 2004 has more than doubled now. The average return over that period is 7.3%. If you had a hundred grand then, you have two hundred now and enough for a new Kia.

This period of time included (a) the greatest stock market crash since the 1930s, (b) the 2011 debt ceiling crisis in the US, (c) the American real estate bubble and collapse, (d) the aftermath of the dot-com/tech plunge, (e) the Euro debt debacle and (f) everything else the doomers sweat over – debt accumulation, Ebola, Miley Cyrus, central banks, Vlad Putin, the Baltic Dry Index, ISIS, food stamps, Hamas, high-frequency trading and Goldman Sachs.

In other words, all the gnashing and flummoxing was for naught. The market timing failed. Those who freaked, selling in dips (because everything was going to zero) or buying the highs (because they were so smart) were creamed. In contrast, people who understood how to invest quietly multiplied their wealth – even through volatile times populated by fools who know everything.

Here’s another chart. Same portfolio. This time it’s about risk.

60-40 modified

The bottom scale is risk – the further to the right, the greater. The left scale is return. The various dots, with the exception of “60-40” refer to various components of a balanced portfolio – and you can see that emerging markets (EEM) or real estate investment trusts (XRE) are higher risk-higher return than, say, bonds (XBB). The “60-40” is the actual return/risk of the balanced portfolio – averaging 7% over a decade, with considerably less risk than the US stock market (SPY) or Toronto equities (XIU).

This is what a good portfolio should do – give reasonably predictable returns without giant swings, letting you sleep at night and ignore stock market emotion and the bleatings of the nihilist, gold-rubbing losers who pray for pestilence. (By the way, bullion crashed below $1,200 an ounce on Thursday. As expected.)

So here’s the thing: investors with a good, well-built and routinely-maintained portfolio full of boring stuff were able to ignore markets for the last decade, double their money, and get on with their lives. Will this be repeated in the next 10 years? Beats me. But if we have the same events – a boom, several busts, multiple crises, wars, debt, a generational crash and confusion – there’s a decent chance.

In case you missed it, the US economy has just capped the strongest six-month period of growth in more than a decade – the best since 2003. Jobless claims there are now at the lowest level since way back in 2000. Almost 250,000 people were hired last month and the unemployment rate is down to where it was in 2008. Gas prices are set to hit a six-year low, and consumer confidence is increasing. Meanwhile the Fed has stopped its stimulus spending, and the stock market immediately gained 200 points.

So, you can moan and dribble over things you cannot control. Or you can cede life is to be confidently embraced. You only get one.

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50 shades of taper http://www.greaterfool.ca/2014/10/29/50-shades/ http://www.greaterfool.ca/2014/10/29/50-shades/#comments Wed, 29 Oct 2014 21:49:43 +0000 http://www.greaterfool.ca/?p=9975 50 modified

Warning: The following post deals with explicit fiscal and monetary policy. It does not contain flogging or whipping. Jian Ghomeshi has left the site. The safe word is ‘yellen.’

Cast your mind back to the summer of 13. Fed boss Bernanke said his central bank would start to taper back on its stimulus spending, as the US economy was gaining strength. Of course, many people went nuts. Stocks turned volatile, bond prices tanked and yields spiked. Juicy assets like preferred shares and real estate investment trust fell about 15% in value. This pathetic blog was overrun by people screaming ‘sell’, while the contras said ‘buy.’

For years Washington has been soaking up massive quantities of bonds – $85 billion a month through most of 2013, for example. Why? To inject rivers of cash into the US economy so corps will create jobs, and keep interest rates low by Hoovering up bonds.

It worked. Unemployment went from over 10% to under 6%. Families paid off $1.5 trillion in low-cost mortgages. Corporate profits plumped to pre-recession levels. The stock market gained 160%. The American economy resumed growing at 4%, and inflation stayed under 2%.

After toeing to the edge of the economic abyss in early 2009, it all came back. Now the once-massive government deficit is at an eight-year low, plus consumer confidence has shot up with more jobs, affordable houses and cheaper gas. No, it’s not all ponies and rainbows. But by every measure that counts – productivity, employment, inflation, GDP (check out today’s news) – the storm is well passed.

The metalheads and bullion-lickers refuse to believe this, and were arguing up to 2 pm Wednesday that if the Yanks actually withdrew this stimulus, stocks would tank, the US cleave and the Z-times begin. Fail. Not even close.

For all of 2014 the Fed, now run by the sweet old lady, Janet Yellen, has been ratcheting back on its stimulus (known as QE, or Quantitative Easing). That $85 billion had been tapered back to just $10 billion by this week, and is now kaput. The Fed did exactly what it said it would, and this should have surprised nobody.

It’s a remarkable achievement. We’ll all benefit from it.

In an orderly fashion for a year, the tap has been turned off. Far from starving the economy of cash, ushering in recession, killing markets or precipitating a crash in bond prices and a spike in interest rates, it’s been serene. The S&P is 14% higher than a year ago this week, and the TSX is ahead 11% – even after its blow-off two weeks ago. The US dollar has surged along with the recovery, which has knocked commodities and gasoline prices lower. Over 80% of companies currently reporting quarterly profits are ahead of expectations. Over 60% have higher sales.

So, what now?

Easy. More of the same. US interest rates will rise, but not until later in 2015 when the bankers are sure the economy can take higher mortgage costs and tighter business loans. Yellen has made it clear there’s no rush. It all depends on jobs. But, without a doubt, rates will normalize. People borrowing to buy houses in Toronto or Calgary today will not be renewing at 3% or less.

As for investors, this might be a Goldilocks moment. Not too hot – with the removal of all that stimulus money and Fed hand-holding. Not too cold – with inflation expected to come back with oil prices and sustained growth. Stocks have weathered tapering just fine. Bonds, ditto. Investors who bought the dips – like REITs last summer or the TSX weeks ago – now look smarter than Jian in a frock. With a paddle.

Well, if you’ve been quivering in cash since 2009, believed the gold nuts in 2011, or haven’t built a balanced portfolio because you thought rates would rocket and stocks waver, it’s time to reassess. The US is fine. Europe is about to do its own QE, and the results will be similar. China’s weird, but unstoppable. Corporations are fat. There’ll be no pandemic, and the ISIS numbnuts are losing.

We’re running out of things to worry about. Unless you just bought a condo.

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Too late http://www.greaterfool.ca/2014/10/28/too-late-3/ http://www.greaterfool.ca/2014/10/28/too-late-3/#comments Tue, 28 Oct 2014 23:45:26 +0000 http://www.greaterfool.ca/?p=9973 TEXT modified

Let’s review, class. The TSX is ahead more than 9% in 2014 and 12% from this time last year. Yes, even though oil’s tanked and kinky Jian Ghomeshi along with it. Eighty per cent of major US corporations have exceeded expectations for quarterly profits, and two-thirds have topped sales estimates.

That stock market meltdown lasted a few days, blew off some froth, was reversed even before the moaning and gnashing could end. Now cheap gas, lower mortgage rates and more jobs are a giant tailwind for the Yanks. Even the Ebola-in-Texas thing is over.

The Fed seems sure to carry out its commitment to end stimulus spending in a week or two, and yet the economy’s chugging. Now the S&P is up 15% from last autumn and within a whizz of its all-time high. American unemployment has gone from 10% to 5.9% and something profound has happened to our southern neighbours.

Americans have reduced their mortgage debt by $1.5 trillion over the last six years, while we’ve bloated ours. And the savings rate there has doubled since 2007, while ours has collapsed – and some places that shall remain nameless (British Columbia) now have a negative savings rate.

Yes, our house-horniness has overwhelmed personal finances, even while the home ownership rate in the States is at the lowest point in 20 years. (It’s at 70% here, 64% there, and still on the way down.)

I mention this stuff in light of the latest survey by the Conference Board of Canada on how screwed Canadians are becoming. Most of it’s self-inflicted.

The results: 60% (including the sexy 55-64 group) say they haven’t stored enough for retirement. Ironically, most of them save. But they can’t save enough. As a result, people are pushing out the age at which they expect to stop working. Now it’s over 63 years of age, with a fifth saying they’ll never be able to retire and half believing they’ll labour part-time. That Freedom 55 stuff with martinis on the yacht? We are so not there.

You may be wondering what all these things – stock markets, the Fed, US stats and failing Canadians have in common, not to mention Ghomeshi, handcuffs and udder cream. It’s simple. Most people (especially women, says the Conference Board) are on the wrong path, and things will not turn out well as a result. Americans learned the bitter lesson. While Canadians are house-huggers and bank account addicts, the Yanks have fallen out of love with real estate and embraced financial assets.

Granted, Boomers in both countries are somewhat pooched, given that corporate pension plans have evaporated and their kids have turned into human sponges. But the risk level for Canadians seems vastly more elevated, thanks to our slagging economy, personal debt levels and horniness. As this pathetic blog has argued, real estate peaked some time ago, and will not be delivering the returns most people expect. In fact, recent buyers could be in line for painful losses. Worse, expect illiquidity – exactly what anyone within years of retirement doesn’t need.

Combine this with the findings that 60% don’t have enough put aside, that 51% couldn’t survive a week with a missed paycheque, and 40% have trouble making the monthlies, and you can see where it’s all headed. Sadly, nothing will change unless everyone understands why they need to have more ETFs and REITs, and less Moen and Miele.

But that’s not going to happen. The masses will carry on until it’s too late. The 1% (and the aspiring) will invest and earn. The wealth gap will swell faster than a broadcaster in bondage.

*   *   *

Yesterday you read a real-life example of why the BRA (buyer representation agreement) can ruin your day. Unless you happen to be a realtor. The document, pushed by organized real estate across the country as a way to ensure lame buyers don’t jerk around agents, can also entrap and ensnare unwary first-timers. Most reasonable people would never expect an agent to be owed commission on a deal they had no part of, but that’s exactly what a BRA can end up doing.

That seemed to be the case with Karan, whose story I told you. He engaged an agent to make an offer which failed. Then he bought a FSBO on his own, and received a $9,400 invoice because he’d signed a BRA potentially covering every property in the city.

After that blog post, there was considerable movement. The manager of the real estate brokerage called me to claim, “my agent introduced that property (the FSBO) to the buyer, and even sent him the phone number of the seller.” The company alleges Karan tried to wiggle out of his obligation to pay commission, “and now he’s trying to use you as well.”

Of course, I have no idea who’s telling me straight. Including Karan, who Tuesday night said he received a text from the agent saying, “I will let you go this time, but don’t ask any realtor in your life to give u any assistance.”

The horror.

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Careful http://www.greaterfool.ca/2014/10/27/careful-5/ http://www.greaterfool.ca/2014/10/27/careful-5/#comments Mon, 27 Oct 2014 22:23:46 +0000 http://www.greaterfool.ca/?p=9971 PAW modified

Karan called me late Saturday night during my religious dog-walking time. “I need help,” he said. I growled. Email me.

He did. “First, I want to apologize for calling you at that time,” he said. “But, truly speaking, I am so confused and do not have any expert to get advice from. I came across your blog and hope you can help me.” After reading the rest of his story and corresponding with him, I agreed. It’s a cautionary tale destined to make you think a little less of organized real estate.

K’s a moist first-time homebuyer who spent time shopping in Kitchener, where nice houses still cost less than three bills. On September 9th he teamed up with an agent from Brampton, Karambir Sira, to make an offer on a K-W property. After a couple of sign-backs, the deal fell apart, Karan says, because of multiple offers.

“The thing is, he got my signature on a BRA (buyer representation agreement) when we put in the offer, by telling me that it is just a legal paperwork for that particular property.” In fact Karan claims the agent said it was “all routine” and he signed the form before it was filled out. (The agent has since disputed this allegation.)

Well, like I said, the deal went south. K went his separate way and started looking at other places. He says he found a FSBO he liked and on September 14th made an offer of $280,000, which was accepted. The deal closed Monday.

“I saw the property myself on Comfree,” he says, “meanwhile the agent also sent me an email regarding that same place, but I told him I already knew about it and would deal directly with the owner. He agreed to that. When I bought I told him, and he even congratulated me.”

Well, guess what? Agent Sira sent Karan an invoice for $9,492, representing $8,400 in commission (3% of the sale price) plus $1,092 in HST. “He is now harassing me,“ Karan says. And no wonder.

The BRA K signed is not for the property our guy originally made an offer on (which failed), but for any property meeting the description of “Single Family Residence” in the location of “Kitchener.” It is not specific to the day of the offer, but for a period of 10 days, plus an additional ‘holdover’ period of thirty days.

In other words, if Karan were to make an offer on any house in the entire region of Kitchener at any time during this 40-day period, then Karambir Sira will be paid, whether he is involved in the deal or not. This BRA also stipulates that the compensation Sira can expect is 3%, plus tax, of the price paid. If K found a house and used another agent, who was paid by the seller, then Sira would also receive payment – but this time from the buyer. Ditto for a FSBO deal.

Without a doubt, Karan signed. He admits it.

Did the agent explain this to you, I asked? K claims no. “He just said that that was routine and he is representing me to buy that day only,” says the distraught first-timer.

Well, I emailed Mr. Sira, of Save Max Real Estate Inc., to get his side of the story. No reply. So I called. “I will not be responding to your email,” he said, “because I spoke with my broker of record and this is a private matter, between me and the buyer. I cannot disclose anything to you.”

Did you explain the implications of the BRA to the buyer? “Yes, I always do.”

Do you believe the buyer understood he would have to pay you commission if he bought another home without your assistance? “Yes, absolutely.”

If K refuses to pay this, he’ll probably be sued. He’ll probably lose. Of course he can lodge a complaint with the toothless real estate regulator, but it won’t get his nine thousand bucks back. So instead of buying a house at a supposed discount from a FSBO passing along the savings from no commission, he ends up whacked himself.

BRAs are toxic agreements doing an excellent job of ensnaring unsuspecting buyers, which is why you should never, ever sign one. I have no idea if agent Sira explained this evil document to the buyer, or not, just as I cannot prove Karan’s statements. But the agent did cast a wide net, saying he would be compensated not just in one deal, but in any deal for any house in an entire city for over a month.

Karan was a fool. Most virgins are. He’ll pay handsomely for it. His folly was believing it’s ridiculous to pay a real estate agent a big commission in a deal the guy had nothing to do with, for work undone.

But that would just be fair. How naïve.

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Into the night http://www.greaterfool.ca/2014/10/26/into-the-night/ http://www.greaterfool.ca/2014/10/26/into-the-night/#comments Sun, 26 Oct 2014 14:57:23 +0000 http://www.greaterfool.ca/?p=9966 CORTEGE modified

On Friday at dusk I pulled onto Highway 407, from the 400.

“Cops,” said Dorothy. So I throttled back to two demerits. She was right. A black-and-white hit the shoulder, lights flashing. We sailed by. “More,” she said, and ahead were two other units, also ablaze. Then the trip turned historic.

We suddenly passed at least fifty vehicles – minivans, sedans, pickups – all parked on the side of a super toll-highway where nobody brakes unless they’re toast. In the gathering dark, all had their four-ways flashing. Yards ahead eight tow trucks were parked in formation, at a diagonal to the road, their orange strobes lit up.

Moments later, we slid beneath an overpass. Astride it were two fire trucks, in full illumination. Standing on the equipment were firefighters, in their regalia, helmets and visors. Below, shoulder-to-shoulder the entire length of the bridge – at least half a kilometre arching over eight lanes – were people. Hundreds of them. As we moved through we could see most were clutching flags they were draping down the sides of the concrete structure.

As dusk turned to dark, and over the next 68 kilometres, every bridge was the same. Local police and fire units – Mississauga, then Brampton, then Milton, Oakville and Burlington – packed the overpasses with all of their equipment, strobing in the night. Along the highway, Ministry of Transportation vehicles were lined up end-to-end, their operators in fluorescent vests, standing at attention.

CPL CIRILLO 2 modified

Near Highway 410, the first of the giant ETR 407 pixelboards appeared, hurtling a brilliant crimson Canadian flag into the night. Here the entire shoulder was taken with cars, now hundreds of them. All parked nose-to-bumper, all flashing. The bridges now three and four deep in shadowy figures. Hundreds had turned into thousands. By the time we neared Hamilton, tens of thousands.

Close to the end, eight more tow trucks, parked close with their jacks extended and laced between them a massive flag. Vehicles were positioned to shine their headlines upon it. It was black now, each bridge and the shoulder a cacophony of brilliance, against the failing light.

Close to the Hamilton cut-off, the opposite side of 407 ground to a halt. Drivers were leaving their vehicles, walking to the concrete wall separating east and westbound. I cut the engine and we waited. In a minute it was over.

With a single siren, Corporal Cirillo’s cortege pierced the night.

We’ve been discussing what drew all those people in the dark to a barren highway to watch a few cars roll by. Not just along our stretch, but the entire 600-km route from Ottawa – where this unarmed soldier was shot in the back at the base of a monument – to a funeral home in his home town. It drew crowds to the spot at which he fell, had people across the nation rummaging for last year’s poppy, and brought spontaneous anthem-singing among those who think Canada Day’s just another boozy long weekend.

NATHAN & DOG 1 modified  Dorothy said it was empathy. “So young. He could have been anyone’s son.” She also believes the dead soldier represents a loss of innocence. Despite our military record of valour and bravery, most believe Canadians are more peacekeepers than warriors. We let the Americans kill the crazies, then send aid. So seeing a jihadist shooting in Parliament, murdering a guy in a kilt – because he was symbolic – is deeply shocking. Going to the overpass and weeping was cathartic.

She’s right. There’s probably more, too. Patriotism is emotional and infectious. In a country where Toronto looks like Chicago and Red Deer looks like Rochester, where we watch US television and speak the same language, where Tim’s is foreign-owned and Stanfields are made in Asia, there are few things that draw us together. So when one comes along – a defender cut down unfairly, from the back, by a loser with a hunting rifle, devoid of respect, and trashing every rule – we rustle and rouse. We may be unable to revive this young man, but we sure as hell can honour him.

To the troubled shooter, Nathan Cirillo, in his dress uniform defending a pile of stones, said ‘Canada.’

On the bridges and the gravel Friday night, he was.

HIS DOG modified

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Wheels up http://www.greaterfool.ca/2014/10/24/wheels-up/ http://www.greaterfool.ca/2014/10/24/wheels-up/#comments Fri, 24 Oct 2014 20:56:47 +0000 http://www.greaterfool.ca/?p=9963 BROKE modified

A GreaterFool rule oft mentioned is this: buy what appreciates, rent what depreciates. Hence, it’s okay to buy a house if at the right price, in the right place. But it’s almost always dumb to cash-buy a new car.

You’d think most people would figure this out. Instead of shoveling over thirty grand for a soul-sucking minivan, they’d be far better of stuffing that money into their TFSA and investing it, and letting the dealer or the bank give them the car. After all, in ten years the TFSA money should double to $60,000. The minivan will be worth (maybe) ten thousand.

Well, seems this is academic for most folks, anyway, since they don’t have any money. Car loans have exploded, and it’s no coincidence this has happened concurrently with a housing boom and a crappy job market. Real estate continues to skim off huge hunks of household cash flow, leaving precious little for wheels, investing, or a Plan B.

Moody’s Investor Service has just tallied this. Ugly. Seven years ago car loans totaled $16.2 billion, which is a giant pile of money. Today that pile is $64 billion – an increase of 300%, or 20% a year. But it gets worse.

As you know, these loans now have terms of eight or nine years, which exceeds most marriages and is longer than the lifespan of most Great Danes and almost all Kias. And despite a stuttering economy, the combination of cheap rates and ridiculously-long pay-back periods has created a boom in car sales. The dealers are having a banner year. Plus, says Moody’s, this also has people buying more expensive rides, so they can roll around and look like rockstar realtors.

So, record car sales. Record car debt. Oh, and record car loan delinquencies.

They jumped more than 13% last year, compared to a drop in missed payments on credit cards and lines of credit. “Credit losses have been low, but could rise quickly in an adverse scenario of unemployment increases or rapidly rising interest rates,” says the rating agency. “If the economy takes a turn for the worst, we could see these loans becoming problematic for the banks.”

Well, let’s turn to jobs for a minute. There must be a correlation between the labour market and an unprecedented demand for consumer credit. A constant run-up in debt would suggest most families are not bringing in enough income to sate their spending habits, which would support the Bank of Canada’s warning that household finances suck (a technical monetary term).

This is a thesis Randall Bartlett is proving. He’s a senior economist at TD Bank which has unveiled a new measure of the job market. Finally. The StatsCan monthly employment roller-coaster has turned into a bit of a joke among the biker-economists I hang with. The swings are so wild as to cast doubt on the validity of the data, with abysmal losses being replaced by flowery gains in a matter of weeks.

So the bank’s launched a Labour Market Indicator to try and get a truer picture on who’s working, and (as importantly) the nature of unemployment. If this is a better tool, we’re a little more screwed than we all thought. Says the bank:

  • “The Canadian labour market is currently experiencing more weakness than is implied by … the headline unemployment rate alone, and has been for nearly two years.”
  • About 20% of all the people out of work these days have been that way for at least six months – the long-term unemployed.
  • The bank says the numbers of people in this group jumped during the GFC, which is to be expected – but that levels have not come down since 2009.
  • Meanwhile the number of working-age Canadians (between 25 and 54) in the workforce is on the decline, down 2% in two years. This, says TD, “is a characteristic of a weak labour market.”
  • So while the official jobless rates is 6.8%, the bank says it’s actually about 7.2%. In the US, by the way, unemployment is now 5.9%.

And Bartlett confirms what this pathetic blog has started for a couple of years – incomes have flatlined. Wage growth of about 2% is running a little below the inflation mark, which means most families are spending more and actually making less. That’s supported by the Canadian Payroll Association, which claims over 50% of us could not last a week past one missed paycheque.

This is what you get when a country opts for a condo economy. Massive spending on housing and consumer goods, supported by an historic increase in debt because a weak jobs market and zero income growth mean Joe Frontporch is treading water. Our manufacturing base has shrunk and a quarter of the economy is now centred on real estate. Were it not for low rates that allow so many to meet their gargantuan monthlies, we’d be pooched. And none of this is coincidental.

Tell me how it works out well.

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It works. http://www.greaterfool.ca/2014/10/23/it-works/ http://www.greaterfool.ca/2014/10/23/it-works/#comments Thu, 23 Oct 2014 23:42:46 +0000 http://www.greaterfool.ca/?p=9960 HOMES modified

The tale of two nations. Part deux. This is certainly getting interesting.

The average moist virginal homebuyer in Canada is 29 years old, just emerged pasty and blinking from his parents’ basement, and plans to spend $510,000 in Vancouver and over $400,000 in Toronto to buy real estate. Almost all of these buyers take high-ratio loans, since they lack a 20% downpayment, and end up paying CMHC insurance – which can add $15,000 to that Van price.

But despite the fact this amounts to an awesome debt loan, the home ownership rate among the twentysomething set (according to BeeMo) is 50%. That’s down from the past level of 55%, mostly because houses are so stupid expensive.

In Canada the average place costs more than $400,000, says CREA. In the States, the average is $176,500.

So, you’d imagine US kids would be swarming to real estate, since mortgage costs are roughly equal (thirty-year loans are 4% in the US, but tax-deductible), as are big-city incomes. But you’d be wrong. Home ownership among this group hit 40.6% as the housing boom was ending in 2007, then fell to 34% last year and is now just 29%. Of new-home purchasers, just 16% are first-timers.

What could possibly account for this huge gap between the Yanks and the Maples?

Well, many US kids saw their parents get their butts roasted in the housing correction that bottomed about four years ago. The US middle class was vacuumed for about $6 trillion, and millions of families found that having a one-asset investment strategy, leveraged over a mountain of debt, was a toxic idea. A whole nation of house-hornies discovered real estate does not always go up.

But that’s background. More salient reasons American millennials are renting are (a) student debt, (b) higher youth unemployment and (c) a lack of affordable properties. Sound familiar? So, we still don’t have an answer. Until we look at lending practices.

To get a mortgage in the States, you typically need a credit score of 750. Yikes. Not only that, but most lenders usually won’t dole out any funds unless a buyer can cough up a downpayment of 20%. Compare that with Canada, of course, where 5% is all you need, and the bank will give you at least half of that for showing up.

Of course we also have teaser-rate and adjustable-rate mortgages, which are now banned in the States. That’s how banks here sucker in people with 1.99% or 2.2% two-year terms. It’s also worth remembering the Canada Interest Act dictates all mortgage terms have to expire after five years, so you cannot lock into a 4% rate for the next three decades, as so many Americans are doing currently. (Refinancings have jumped 23% as bond yields fell.)

The result is obvious.

Half of our kids buy houses and the average price is $408,795. South of us, in a similar country, less than a third can buy – and homes cost $176,500.

This is no coincidence. Real estate doesn’t cost more here because it’s better-built, or since we have a larger population and a better climate, or because people in Seattle make half what Vancouverites earn. Prices are higher because houses are easy to buy, and debt flows.

It’s been deliberate. Pushing real estate’s been a key policy initiative of governments which are financially strapped, strangled by election cycles and bereft of other ideas. By pushing citizens into borrowing and spending massively, politicians don’t need to pare spending, enact stimulus programs or reform taxation, especially when the economy turns south. They just get the fool voters to do it. Simple. It works.

So we got forty-year amortizations and zero down payments, along with first-time homebuyer tax credits. This was layered over the Home Buyer’s Plan allowing RRSPs to be raided, and provincial grants to encourage newbies. Land transfer taxes are slashed or eliminated for the virgins and, of course, CMHC wipes away all lender risk for mortgages up to 95% of a property’s value. We now have an entire banking sector that’s grown fat on giving home loans to people who have been too challenged, lazy, undisciplined or juvenile to actually save any money.

The result?

Unaffordable houses and record debt.

Genius country, eh?

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October 22 http://www.greaterfool.ca/2014/10/22/october-22/ http://www.greaterfool.ca/2014/10/22/october-22/#comments Wed, 22 Oct 2014 23:44:26 +0000 http://www.greaterfool.ca/?p=9958 DOG SOLDIER modified

Al Jazeera, of all outfits, called me Wednesday afternoon from New York to comment on lax security in the Canadian Parliament. That turned into a theme after the gunfire. “Ottawa Attacks Shatter Canadian Innocence,” read Bloomberg’s headline. I guess we’re playing with the big boys now, in the same week that six of our old jets deploy against ISIS.

Financial markets can handle a lot of stuff, but not surprises. The TSX lost a few points on news a soldier had been shot at Ottawa’s War Memorial. It lost a lot more on reports of bullets in the Centre Block. Then, on claims of multiple shootings (the cops at first said three), plus the Quebec ramming days ago that killed another soldier, things hit the fan. Just a day after adding more than 200 points, the market shed 235.

That was not all that was worth fretting about. Oil crashed more than 2% on Wednesday, and a sad prediction of this pathetic blog last month – that crude would hit $80 a barrel – was realized. This is a big story for Canada. It’s a manifestation of the trends I’ve been yammering about for some time – less demand and more supply is exactly what deflation means. Next comes lower prices, less investment and lost jobs.

Calgary, Edmonton and Fort Mac have intense times ahead. I hope your daughter didn’t just buy a Cowtown condo from poser cowboy Brad Lamb.

The Bank of Canada jumped into all of this, citing the oil plunge as a likely reason interest rates now won’t be rising too fast in this country. No good news there, as the fedsters also said they’re worried about hormonal housing markets in Vancouver, Calgary and Toronto. The real estate bloat, of course, has been caused by absurdly low rates. What a dilemma we’re walking into.

And did I mention the dollar is at eighty-eight?

So, there you have it. Terrorist attack on Parliament. Oil price crisis. Deflating economy. Unaffordable houses. At least Doug Ford is losing.

For the last two years I’ve been suggesting your exposure to Canadian assets – whether that’s ETFs owning the Toronto stock market, or a house in North Van – be contained. Don’t fall victim to home country bias and have a portfolio full of maple assets. Incredibly, 70% of all Canadian investors with equities have only Canadian companies. Not only are they undiversified, but they’ve now hitched their wagon to the wrong star.

Meanwhile, today – and the poor, dead soldier on ceremonial duty – should count for something. We’re in harm’s way, which is unavoidable when you face up to evil. This is one more thing you need to factor into your personal strategy, and I will address that in coming days.

By the way, I turned Al Jazeera down. No interest on my part in talking about the guys who failed to keep a dude with a gun from the front door of Parliament. I know many of the guards, and have walked through those brass doors beneath the Peace Tower hundreds of times, smiling at them. That is a public building, through which rivers of tourists flow daily. In recent times security has been beefed up, and vehicles prevented from cruising past ambling MPs. Gone are the days I could park my bike beside the PM’s black SUV tank, and so irritate his Mountie driver.

But there’s certainly more security to come. The two aging guards at the front door will likely be given guns. That will sadden me.

Godspeed Cpl. Cirillo.

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Darwin http://www.greaterfool.ca/2014/10/21/darwin-2/ http://www.greaterfool.ca/2014/10/21/darwin-2/#comments Tue, 21 Oct 2014 22:18:19 +0000 http://www.greaterfool.ca/?p=9956 SELFIE modified

Let’s irritate the millennials more. It’s fun. They’re so cute and defenceless. Like baby skunks.

Almost nine million people born yesterday (between 1981 and 2000) which is roughly equal to the number of wrinkly Boomers. Incredibly, half of the M-people still live with their parents, and about a million of them who could work, don’t. Six years ago, the number living at home was just a third. Go figure.

Millennials account for about 20% of all income earned in Canada, while the Boomers, many of whom are now at the end of their piteous careers, constitute 30% and their kids (Gen X) who are in mid-career, represent 46% of all earnings. Of course, this last group – saddled with houses, kids, dogs and SUVs – also spend hugely.

Well, so what?

Hmm. This is an ugly demographic mix for the little skunks. I hope their moms are teaching them to forage, and hide their nuts.

Our social system – much of the economy, in fact – is based on working people supporting old wheezers. Today there are four-and-a-half workers for every senior. So, the Boomers never have to worry about their CPP or OAS or health care. But when the average 25-year-old millennial is 65, there will be just two people with a job for every retiree. Oops.

This is because our population’s aging quickly. Like Japan’s. Within twenty years a quarter of the nation will be collecting OAS – that’s $4,000,000,000 a year (four billion) in pogey. CPP payments add another six billion, but that program should still be self-funding two decades from now. Forty years out, I’m not so sure.

The implications should be obvious, but aren’t to most millennials, 70% of whom have smart phones but no savings. For starters, real estate is demographically doomed. With an aging population in financially strapped times, demand and prices are destined to fall. Survey after survey of Boomers (most of whom are in denial) already show between a third and half understand they’ll have to downsize their property in order to raise cash for living expenses.

That only makes sense. Over 70% don’t have defined-benefit corporate pensions, and have saved a quarter of what will be needed to survive 25 years without working. They’re house-rich and financial asset-poor, not to mention unbalanced, non-diversified and potentially illiquid. The big need in the years to come will be income, not enough garage for two minivans.

So, the current millennial fixation for real estate, as we ridiculed yesterday, is beyond dumb. These kids are buying into a mindset which will facilitate a giant transfer of wealth from them to their parents. The wrinklies end up with the cash. The kids get the debt – pledged against assets likely to fall in value as rates inevitably rise. Double screwed.

Second, the whole system of social transfers could be threatened by the time the millennials are lining up for metal hips and plastic hearts. Today, when there are twice as many taxpayers and half the dependents that will exist in forty years, we already have a persistent federal operating deficit, and an accumulated government debt (the feds, provinces and cities) of $4.1 trillion. That’s about $245,000 for each of us. And these are the good old days. Every year more than $60 billion in taxes goes to pay interest in this debt – so imagine what happens when rates drift higher over the decades ahead.

So, yes, the millennials would be fools to expect their lives to unfold as carbon copies of their parents’. No profligate hippiedom, no finding-myself-in-Europe, no sha-na-nah for them. This is Darwin, baby. And you’d best know that now.

Some months ago I gave you a Millennial Portfolio. It was met with thunderous neglect. So let’s try again.

First, the investment vehicle of choice for all the kids should be the TFSA. Forget RRSPs for now, because they’ll end up being tax bombs you deeply regret in a few decades, when taxation rates are inevitably higher. You may not get a break for making a TFSA contribution, but you’ll pay nothing on the growth or any withdrawal.

Second, these savings accounts are not for savings. Get out of the bank or the orange marmalade outfit and into a place where you can hold a bunch of low-cost ETFs – exchange-traded funds. Divide your money into five piles and buy a fund holding the TSX 60, another containing the S&P 500, one with a basket or preferreds, one comprised of a bundle of REITs and the last containing a good mix of bonds. Now you have balance, diversity and liquidity.

If you start with five grand and add that much in a year, securing just a 6% annual return (assuming a slow-growth world), in thirty years the balance will be $494,000, of which almost $300,000 would be tax-free growth. That’s half a million in taxless wealth, all for contributing $100 a week.

Or, you could buy a condo for $400,000, with a $390,000 mortgage, pay twice the amount per month that a renter does, and end up losing all your equity. In a vaguely deflating world populated with annoying and condescending old people who won’t give you money even though you’re special, why would you?

Ask your phone. There’s an app for that.

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