Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Sun, 05 Jul 2015 18:43:03 +0000 en-US hourly 1 OXI Sun, 05 Jul 2015 18:36:30 +0000 GREEKS modified modified

First, angry Albertans punted Tories and installed Dippers in the legislature. Then delusional Vancouverites voted down a tax funding the future. Now the Greeks have embraced economic suicide instead of financial servitude.

Come senators, congressmen
Please heed the call
Don’t stand in the doorway
Don’t block up the hall

At least, as I scribble this out on a Sunday afternoon, that looks to be the Hellenic epiphany. Exit polls and early results were all but decisive, giving more than a 60% mandate to the No forces, led by socialist PM (and now temporary hero) Alexis Tsipras. The margin of defeat for the pro-euro forces is relatively vast – at late as Saturday night it was still being touted as too close to call. But a 60-40 split? That’s massive, baby.

For he that gets hurt
Will be he who has stalled

We’re now entering the unknown, in a big way. Greek banks are still closed. The stock market, too. People have been wounded in less than a week, with cash rationing leading to starving stores. By voting against a package of reforms (higher taxes, fewer benefits, more austerity) the country is opting to gamble it can get a better deal from the great powers of Europe. And, if not, how much worse can it be than having 50% of your young people out of work?

Europe may cave and offer emergency bailout loans to keep the lights on and prevent the Greeks from taking an even more radical turn (Hello, Mr. Putin?), or it might decide this small country is just too irritating to bother with. After all, five months of high-stakes talks with Tsipras & Co led only to a pouty exit from the bargaining table, and this surprise referendum, peppered as it was with massive demonstrations.

There’s a battle outside
And it is ragin’

So Greece could be kicked out of the EU, lose use of the euro, default on almost all of its debt obligations, and within a month be forced to print its own currency. That, experts surmise, could lead to a 30% or 40% drop in average net worth, and a far worse outcome for the people. But Tsipras says no. He claims it was never a vote on staying or leaving Europe, but one of dignity. Now, he adds, he has the mandate to go back to the bargaining table and kick serious butt.

For other countries, central bankers, monetary agencies and markets it means turmoil. Maybe compromise. Perhaps not. After all, the establishment forced countries like Ireland and Spain to put up with similar belt-tightening and collaring in order to stay in the club. Now the Greeks have refused to come to heel, and still expect a seat at the table. Such. Hubris.

It’ll soon shake your windows
And rattle your walls

So last week Greece became the first developed country ever to miss a debt payment to the august International Monetary Fund. This week its citizens told the IMF to piss off. Some will argue average voters did not understand the complex 68-word ballot question, nor comprehend the implications of a No decision. They’ll say people misinterpreted this as simply a way of bolstering their government’s bargaining power, instead of choosing proud over practical.

But that’s the democratic flaw. When you ask people something, giving them the power to make it so, you must live with the consequences, as illogical as they may at first appear.

Tomorrow the banks in Athens will edge closer to having empty vaults. Those investors who bet wrong will be punished. The leaders of wealthy, powerful nations will shake their heads in disbelief and dismay. Average Greeks will face a crisis, and smile.

For the times they are a-changin’.

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Faltering Fri, 03 Jul 2015 22:50:19 +0000 DOG SCARED modified

“Every time I feel myself faltering,” says Nancy, “I go to your blog. Thank you for being a voice of reason in troubled times.”

Now I don’t include these nice words simply as an anecdote to all the slugs and inflated tools who are curiously drawn to this blog, but to illustrate something. Nancy’s a lawyer with years of fancy schooling, a fat salary, limitless borrowing power and a lit career. She’s smart and astute. “I work as a lawyer and I’ve watched family, friends and colleagues sink every single cent into real estate; some can afford it, others cannot. I constantly get asked when I’m going to buy a house (I’m a lawyer – of course I should own a $2M house with a $1.5M+ mortgage!) and get bullied when I tell people that I think this market is built on a house of cards. I save in any given year 50-60% of my income, invest in the market and travel the world guilt and worry-free when I’m not working.”

She gets it. But even Nancy is not immune.

“The financial literacy of even highly educated people truly shocks me. However, it’s easy to get sucked into the hysteria. I too would like a garden and a big kitchen to entertain. I didn’t think that at 33 (with the income I have), I would even have to think hard about owning a home. Yes, I could go out tomorrow and get approved for a massive mortgage but I don’t consider that truly owning. Logic and reason would dictate that I stay out of this market, build equity and wait for the inevitable. Emotion and the fear of everyone getting rich and leaving me behind would say otherwise. Luckily, I am smarter and more rational than I am emotional or inclined to fantasy.”

Could this be the perfect woman? I’m thinkin’ maybe. But there is a larger point. The times are ‘troubled’ for her and so many other people because they simply don’t know what to believe. On the Internet, for example everything has equal weight. The doomers, the Zero guy or every sleazeball flogging gold, ammo or a new book tell you daily the world’s a tinderbox ready to blow. I tell you otherwise. The government, central bank, developers, real estate boards and agents tell you houses are a perfectly good place to put all your wealth. I caution you against it.

And the media’s no help, decimated economically as it is. When markets fall, it’s on the front page. When they soar, it’s nowhere. Education? That’s a joke. Daily we turn out graduates who think TFSA is a designer drug.

Well, time for a concrete example. So let’s pick on Calgary, where men are men because they like to rope and torture calves (starting tonight).

Yesterday the local daily ran a fat headline saying the housing market is stabilizing. It even found a realtress to offer these encouraging words, “Even though overall sales activity is slower than recent years, what many people aren’t aware of is that there are several neighbourhoods where demand has been stable, including prime areas in the inner city.”

Bolstering this was an RBC report suggesting the worst may be over for Cowtown real estate. But the cynical might look at the numbers and conclude it’s all a transparent attempt to sucker buyers into a market with serious downside potential. For example, sales fell 18% in June, the average price dipped 2% and the length of time it took the 2,184 sellers to find a buyer increased by 40%. In fact, more and more homeowners are giving up – active listings tumbled 18%.

No wonder. Oil is back in the $50 range and energy sector layoffs seem to be building momentum. Alberta now has a socialist government, which has already goosed taxes on profitable corporations and higher-income earners. Oil exports have plunged, pipelines are cancelled and the ‘Alberta Advantage’ is gone. Taxes will increase further, as will spending. The Dippers plan on saddling small business with a minimum wage 36% higher than anywhere else in Canada.

Well, actions have consequences. They’re arriving already.

Here’s another view, from housing analyst Ross Kay, who says Calgary provides a “classic example of what happens when real estate markets are misrepresented to the public.” How many Calgarians, he wonders, have been told what’s really happening to their single-biggest asset.

  • Calgary is now in its 12th consecutive month of slowing sales. (this is very, very important to understand for post June 2015 through the rest of the year ).
  • In the first six months of 2014 Calgary houses sold on average for $25,000 more than the average for all of 2013
  • In the first six months of 2015 the homes they sold for $9,000 less than the average for all of 2014
  • The average home was already over $9,000 cheaper on June 30th, 2015 than it was on June 30th, 2014 and the spread is getting worse each month.
  • Calgary is on pace to record fewer than 19,000 resales in 2015 which would see people moving 50% less than they were in 2006.
  • Only 46% of all sellers have been successful so far in 2015 while in 2014 81% were successful in the same first 6 months.

See what I mean? It’s a confusing world. Everybody has an agenda, and pity the fools among us who can’t figure it out correctly.

By the way, in Toronto (where they only eat calves) there are currently 10,000 condos listed for sale – on Kijiji alone. Another 8,000 condo resales sit on MLS. If this is not telling you something, you’re not listening.

Okay, that’s it. I’m now taking bids for Nancy’s email addy.

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Happily ever after Thu, 02 Jul 2015 21:57:52 +0000 KIDS modified

Donna’s husband died fifteen years ago. Smoker. “Too early,” she says. “He never listened.”

Sam left the house and fifty thousand in RRSPs, so Donna – with only her government pension – invested the rest for a monthly income stream. Grand total: $425,000. “Don’t take any risks,” she told the advisor (whom I know). “I can’t afford to lose a cent.” But it seemed like a big pile of money to her, so she rented a nice place and drew off $2,500 a month – from a portfolio making just 4%.

For seven years he told her to lighten up. For seven years she would not. “No way,” Donna said, “will I ever outlive it.” Then 2008 happened. Her portfolio dipped by a third (while the stock market sagged 55%). Against the advice of her guy, she cashed in, crystallized the losses and put the remainder – now less than $200,000 – into a savings account at the bank. “Good move,” TNL@TB told her. Her plan was to keep it safe, and dip as required

Last year Donna, now in her early eighties and quite healthy, ran out of money. The savings account is empty. Credit cards are maxed. She has to move into the kind of place she thought only downscale people lived. “I guess I am one,” she said this week when she called for help (her son reads this pathetic blog). It was wrenching when she cried.

Her mistakes were simple and common. Donna thought losing money was the greatest risk to guard against. It wasn’t. She allowed her emotions to overrule logic, selling at the worst moment. And she didn’t trust anyone with her money as much as herself. Now she’s old and poor.

You can be young, impoverished and happy. But never so at the end of your life.

This is sad, but destined to be common. There are over nine million Baby Boomers in Canada, and more of us turning 65 every year than at any other time in our history. Some are rich – about 5% of the cohort has a million in addition to their real estate. Most aren’t, with seven in ten devoid of corporate pension plans, the bulk of their net worth in real estate, and scant financial literacy.

This might not be a serious problem if we weren’t at a dangerous point in the economic cycle. But, alas, the perfect storm is gathering. Peak house means more and more net worth has been sucked into a single asset, even as the economy slags. Interest rates will be rising in the years ahead, impacting the market, reducing equity and scaring off buyers. Commodity prices have slumped, with oil back at the mid-$50 mark and a 79-cent dollar. The savings rate has tanked and 93% of people have not maxed their TFSAs.

So what are they thinking? That houses are safe, and the only thing they need own? Oh dear.

Well, as I pondered Donna’s situation a new poll on this subject popped up from Angus Reid. And it’s a shocker. We’re a little more screwed than we all thought, even without the Canadian economy now trying to slide into recession. The pollsters found 48% of retired people say they were forced to stop working by circumstances – usually job loss. Of that group almost a third said they “are struggling” to make ends meet. Another 46% report they get by, but can afford only essentials. In other words, about three-quarters are living meagre or deficient lives. Some retirement.

Half of these folks fear they’ll end up like Donna, outliving their money. They’re probably correct. But there’s more. The pollsters included working people, too, finding 74% of them are also worried they’ll deplete money before they exit life.

And this: among the retired, 57% say government pensions are their main source of income. That’s an average monthly payment of $618 for CPP and $564 for OAS, or $14,200 per year. Yikes.

So, here’s a concrete example of what happens when a government engineers low interest rates, and the central bank boss says he wants to encourage more citizens into real estate. People stop saving. They increase borrowing. They flock to houses, inflating prices and increasing debt. Everybody’s risk rises, especially in a society where the number of retired people will go from 6.4 million today to 15 million over the next two decades.

The politicians can ignore a few hundred thousand Donnas. They can’t look away from millions of them.

If I were, say, 30, this would scare me a lot.

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On guard for thee Wed, 01 Jul 2015 22:05:41 +0000 BEAR modified

In my home town yesterday people lined the street in droves, wearing every tacky thing in their wardrobe – so long as it was crimson or had a maple leaf. Dogs sported red bandanas. The tourist horses sprouted little flags from their halters and harnesses. Down the main street a few old cars carried old politicians, the MP included. Then a band. And the cake. This year it was about ten feet square, hauled by a Jeep and covered in chocolate hockey players. The proud baker walked behind, her pony tail flipping. A thousand people marched with her to the park, where it met its Waterloo.

While we celebrated Canada Day, the world spun. The people in Greece has a crappy time. The prime minister there flip-flopped. First he sent a letter to the Euro gods says his country would accept a deal like the one he’d walked away from. Then he gave a speech condemning it and asking people to vote it down on Sunday. Meanwhile the economy disintegrated hourly.

American stock markets shot higher, now that it seems more certain Greece will blink. More importantly, the numbers just keep improving for the US economy. A private jobs report showed companies boosted their payrolls in June by 237,000 workers, the most in six months. This comes after 280,000 more positions were created in May. And when the official government report comes out Thursday it’s expected to show 233,000 new hires.

This is the longest, strongest run for job creation in decades. It also came with news Wednesday that manufacturing expanded again in June, which demonstrates the internal strength of the American economy. Global demand may still be weak and the high US dollar is a barrier to exports, but it doesn’t matter. Consumers are happy with more jobs and higher incomes. They’re buying cars, houses, iPhones and dishwashers. Only the fruitloop doomers still insist the government’s lying and America’s in trouble. Americans disagree.

All this is remarkable for two reasons. Oil prices have collapsed (there was a huge drop on Wednesday), decimating the US shale fracking industry. And the Fed is about to raise interest rates for the first time in a decade. Both of those are negatives for the market, and corporate profits. But certainly not enough to dent a market that added almost 50% in just three years.

Yesterday I moaned a little about the situation here. US household debt is falling steadily, and here it bloats a little more each month. Our economy shrank for the last four months, and theirs expanded. The Fed will raise rates at least once this year, maybe twice, while the Bank of Canada head says our economy would have croaked without his recent cut. Canadians love houses. Americans own more stocks. Home ownership here is at a record high. There it’s at a 30-year low.

None of this I say to dis Canada. I adored the parade. The cake. The patriotism. I was beyond proud to sit in the House of Commons for nine years. I love my country.

But we’re probably going in the wrong direction, and the reward for that will be years of a subpar economy. This week’s oil tanking, plus raging wild fires in the western provinces, the mounting drought in BC, recessionary GDP stats and a 79-cent dollars are all sapping strength. The contrast with the US is stark. A few years ago our currency was worth more than the greenback, our arrogance was on display in Vancouver and you could buy a nice, distressed house in Phoenix for 70% off. My, how the tables have turned.

Well, this pathetic blog doesn’t run the country, so we have to deal with the hand dealt. Soon we’ll be swallowed up in a federal election campaign, the consequences of which could be dire. If you think the world looks askance at us now, just wait.

So, what to do?

For starters, the growth portion of your balanced and globally-diversified portfolio should be twice as weighted outside of Canada as within. These days about 17% Canadian, 21% US and 18% international is about right. And while having roughly a fifth of the assets in US$ is always a good idea, you can buy exchange-traded funds that give you American exposure but are purchased in loonies.

As for the fixed-income part – the safe stuff – put half in rate reset preferreds (paying 5% these days, with a big tax credit), and the other half in bonds. If you don’t understand why you should have bonds, revisit what took place Monday. When equities swoon (it happens), bonds usually go in the other direction. They stabilize and anchor a portfolio, tamping down volatility as well as your emotions. Just make sure you have the right kind.

Of course, given what may lie ahead politically, you should also flesh out your tax shelters. Today, for example, a couple can have more than $80,000 contributed to their TFSAs, but only a small fraction of people do. Make sure you’re among them. If you can’t afford higher mortgage payments, lock in now. But if you have money to invest, and the confidence to do so, then grow it until the mortgage renews, then make a big payment. If you don’t own real estate, wait. If you do, and all of your net worth’s in there, get out. If you work in the oil patch, find new work. But not as a realtor.

Despite the above, I say again, it’s a hell of a country.

My Canada Day was great. Far better than the MP’s.

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So much for that Tue, 30 Jun 2015 23:40:23 +0000 CEMENT modified

If the crazy Greeks did anything wrong, it was to borrow like they’d never have to pay it back. Kinda like us. Oops.

While stocks improved on Tuesday and the lefties leading euro’s G-spot started wavering, things got a bit worse here in Canuckistan, on the very eve of our glorious 148th birthday. In fact, probably a lot worse. Turns out we’re more like the Greeks than, say, the Germans – whose leader told Athens yesterday to piss off. Hey, nobody ever said leadership was pretty.

So last month we added a whole lot more mortgage debt, because loans were cheap and we’re not. The latest numbers show mortgage debt increased 5.5% in the last year, and Canadian households now owe $1.835 trillion, which is 1,835 times a billion. That’s an amazing amount of money for a country with only 12.4 million households. By the way, 70% of all debt is housing debt – mortgages. Talk about a nation of one-trick ponies.

This lack of diversification should alarm you, unless you’re part of the problem and think it’s reasonable to have a house, a mortgage and no liquid assets. The condo economy Canada has created over the last six years is, in its own way, as dangerous as the one they forged in Ireland, or Spain – where real estate bubbles burst and no recovery ensued.

In fact, did you catch the latest econo news? We are already reaping what we sowed. At the same time families plunged into new debt and houses in our bubble markets inflated further, the overall economy was contracting. The eggheads call it ‘negative growth.’

This is amazing given the fact interest rates have been in the ditch for years, the government has forked over billions on tax credits, infrastructure programs and giveaways, and collectively we’ve borrowed and spent hundreds of billions of dollars buying houses from each other and building enough condos to blot the sky. Meanwhile the US economy has shot into recovery mode while our dollar has faded – the perfect scenario when we send the vast majority of our exports south.

And still we’re negative. Economists were not expecting April would be yet another month of declines, nor that we’d all suddenly be talking about the possibility of a Canadian recession. This was the fifth losing month in the last six, suggesting the oil price shock may have given us more to regret than just socialists. Speaking of Alberta, wildfires there (did I mention climate change?) have caused some additional oil patch shutdowns, which may mean bad numbers lie ahead for the next few months.

So, we have a disconnect. The Bank of Canada said the economy should grow a feeble 1.8% in 2015, but so far we’ve shrunk 0.6%. Soon we might actually be told that the recession started in the spring, just about the time detached houses in the GTA averaged $1.4 million for the first time, and ditto for YVR digs at $2.2 million. This would also be during a period of record-low mortgage rates and robust borrowing.

Does this mean rates will fall further? Will the Bank of Canada panic again, as it did in January, and drop its key rate just as the Americans are preparing to raise theirs? Wouldn’t another rate cut torpedo the dollar by signaling we’re in trouble, desperate for another debt fix?

Some people think so. But where does Stephen Poloz, the guy in charge of our central bank, stand on the issue?

Well, he ain’t saying. But he sure isn’t talking up Canada on the world stage. During a presentation at the Bank for International Settlements a couple of days ago he compared our nation to a dying patient, and excessive debt to a post-surgical complication.

“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow. Other issues must be subordinate and I think of them as side effects.” But in the bank’s own words, our household debt is a ticking time bomb, a “key financial system vulnerability.” And it begs the Greek question: how can you possibly continue to borrow your way back to prosperity?

Poloz had this zinger, too, admitting that he knows what his policies are doing to the real estate market: “When we cut rates to stabilize the economy we don’t picture some heavily indebted household going out and adding to their debt pile, rather we picture a household with no debt at all deciding finally to buy a house and taking out a mortgage.”

So, there you go. Our policymakers are intentionally encouraging people to borrow money and buy houses at their most bloated levels in history, using cheap money which will surely reset higher for all the decades of those mortgages. That’s bad enough. But it isn’t working. Sure, houses are now unaffordable and people are sautéed in loans, but the economy is also shrinking.

By the way, that same international banking body Poloz was addressing doesn’t agree with him. Cheap money is no fix, it says. It just makes stuff worse. “They in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.”

Calling Canada a “small, advanced economy”, the BIS said our rates have already been too low for too long – creating a giant gasbag of a credit bubble that “far exceeds historic standards, paving the way for widespread pain once the central banks inevitably launch a new tightening cycle.”

I hope you get the picture. The economy’s shrinking. Jobs will be lost. Yet all your idiot cousin and the people at work want to do is buy houses. So they borrow. Because money is cheap. The guy in charge of rates says we’d be dead without the last cut. So he might cut again.

Too much debt. Too little growth. Nuts in power.

Our flag should have a pita in the middle of it.

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The kneejerkers Tue, 30 Jun 2015 00:17:24 +0000 RUNNING modified

Planning a Greek holiday later this year? Cool. Book the flight now. But not the hotel or the car. Just show up with cash. Haggle your way to epic low prices. Pick up a villa while you’re there. And get used to the idea that all your gain is some Greek’s pain.

So stock markets laid a small egg Monday on news Greek banks shut, capital controls were imposed and people were restricted to withdrawing 60 euros a day to live on. The market decline was more pissed-offedness than panic. Lots of traders and bully investors took long positions last week when it looked like Athens would not be dumb enough to commit suicide. They were wrong. Monday was spanking day.

Of course, the doomers were all over this like mold. The mainstream media, which never reports a 300-point market increase, made this the lead story. That was all it took for DIY investors to log into their online accounts and start dumping perfectly good assets.

Sigh. Some things never change. People buy stuff that’s rising in value because it’ll obviously go up forever. They sell things in decline before they’ll go to zero. Amateurs pay too much and sell at a loss. It’s why the pros love them.

Most of the major banks took Monday seriously enough, however, to scramble out a message. TD sent a video. RBC’s Eric Lascelles circulated a hastily-written multi-page epistle which concluded: “We will know much more over the next seven to nine days. Greece is slightly more likely to remain in the eurozone than exit, but the risks are growing given the imposition of capital controls as well as a rising chance of a major uncoordinated default.”

What does it mean? Should you worry?

Yesterday I said Greece is old. There are better things to vex about than a small country (three million fewer people than Ontario) with a puny economy (0.5% of the global one) and a new socialist government willing to take it to the brink. We’ve seen this movie before. And in 2011 it was a lot scarier.

Since then a lot has changed. Hardly any international banks have exposure to Greece any more. Private investors long ago split. Despite Monday’s kneejerk reaction, global markets are vastly more prepared now for any Greek outcome than they were four years ago, when we had the last crisis. As portfolio manager Doug Rowat points out: “The Athens Stock Exchange is still more than 50% below its 2011 peak when local markets were completely caught off-guard by the developing crisis. European banks are also much more prepared now, having reduced their exposure to Greece from a peak of €128 bln in 2008 to €12 bln in 2013, effectively reducing systematic risk. We are also many years removed from the financial crisis of 2008–09 and major global economies, such as the US, are on a much stronger footing than they were in 2011 further adding to global market stability.”

Also don’t forget that Europe has been on a roll this year, thanks to a fat stimulus program by the European Central Bank – which has injected a trillions euros into the economy. That has richly rewarded investors with a globally-diversified portfolio, yielding double-digit gains in the UK and Germany so far in 2015. Prospects for the European economy have brightened considerably, with growth estimates seriously higher than six months ago.

It’s therefore hard to believe Greeks would be thick enough to vote themselves off this island. Polls show seven in 10 want to stay in Euroland, knowing full well the economy will turn to dust and life savings will vanish if the country is punted or is forced to come up with its own comic-book currency. Europe can afford to toss Greece, which makes up just 1.9% of the regional economy, but Greece cannot survive without Europe.

What about contagion spreading to other debt-pickled places like Portugal, Spain or Italy?

Unlikely. But if it started, the EU is ready. The European Stability Mechanism is a permanent rescue fund with enough money in it to buy three Portugals.

Finally, the world knows Greece’s unfortunate government is just playing politics. If it was serious about a referendum the question would have been, “Do you want to stay in Europe” instead of asking people to vote on a 4,000-word technical bailout-conditions document. The vote also would have happened before tomorrow, which is when the country had a key debt payment due. And it’s telling that the left-wing prime minister who cooked this up is now campaigning for the ‘No’ side. This is about ideology, not the people. Like all socialism.

Well, stocks went down on Monday, but bonds went up. So people with a balanced portfolio were, by design, somewhat shielded from this temporary silliness. The best possible defence, however, remains insufferable indifference.

The gold nuts can’t take that.

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It only looks big Sun, 28 Jun 2015 19:05:36 +0000 BIG DOG modified

Imagine going to the bank. But it’s closed. You try the ATM. It’s empty. That’s the deal in Greece today. Every bank is shuttered, and could stay that way for a week. By Saturday morning 500 of the country’s 7,000 ATMs were out of cash. Twenty-four hours later, half of them were dry. Credit has evaporated. The central bank doesn’t have the money to support the commercial banks. It’s a mess.

(In fact overnight Sunday capital controls were imposed. No citizen can withdraw more than $66 a day.)

None of this is a big surprise after the country’s new socialist government bolted form last-minute rescue talks two days ago. Last week it looked almost certain Europe’s biggest deadbeat debtor nation would agree to reforms lenders were insisting on, so stock markets rallied. But that was a sucker punch, and now Monday could be ugly.

Kicking leadership to the curb, the crew in Athens is opting for a public referendum on the bailout, set for next Sunday. In the meantime, out of money and pickled in debt, the country will spiral and decay for a week. Depending what the vote yields, it could be kicked out of the Euro zone, default on a mountain of debt, or self-destruct.

By the way, here is what Greeks will be voting on next week – a complex, inter-connected series of reforms that would goose the existing 23% GST, increase personal and corporate income taxes, delay retirements and crack down on tax evasion. Plus lots more. So, a government elected because it promised it could end austerity measures and tell Europe to get stuffed, now looks more like Twitter. Will the Greeks vote for more tax and greater penury? Don’t hold your breath.

The banks are shut on the assumption that Monday (one day after the European Central Bank turned off the tap) there’d be a giant run as citizens clamour for cash. There are caps on ATM withdrawals, as well. And the stock market is dark. The country therefore moves rapidly towards an irreversible financial and economic meltdown. Complete default could happen on Tuesday, if the country misses a multi-billion debt payment – which it will if no more credit is extended.

So what does all this mean to us? Should you be freaking out, too, running to the closest banking machine, selling your ETFs or buying gold?

Nah. Don’t think so. Expect volatility until July 5th is over, but it’s highly unlikely a country crash will send shock waves rippling through the world. For starters, Greece is old. This has been going on for years, and markets long ago priced in an economic and fiscal collapse, along with the potential damage to Europe as a whole. While Spain, Portugal and Italy are also dogs when it comes to living within their means and fostering economic growth, nobody seriously expects some virulent form of contagion to develop.

And Greece is tiny. Just eleven million people and an economy less than half that of Ontario. This is a mere whizz in the Eurozone bucket, which at $18.5 trillion is the second-largest in the world. The trouble with the current Greek government, in fact, is that it thinks it matters.

Well, the point is that you should never, ever read doomer web sites which today are calling for a Holocaust-like apocalyptic Armageddon which will, a la Lehman, lead quickly to nations falling like dominoes, a systemic financial collapse, banking crisis and bail-ins which end up confiscating your wealth. But this is not on.

Of course, the weekend collapse could mean stock market volatility, especially as short-term investors move to protect the stretched positions they took last week. Between now and next Sunday some big swings are likely to occur – meaningless moves for anyone building wealth for retirement, their kids’ education or the rest of their lives.

Still on track is American expansion, higher interest rates this autumn and an unhappy spring real estate market. The best way to deal with change you cannot control – like the political nutbars now driving Greece into the sea – is to have a balanced and globally-diversified portfolio. When stocks swoon, money rushes into fixed income and plumps that part of your portfolio. When euro equities (which have been greater performers this year) stumble, you have lots of exposure to the bustling US economy. Meanwhile real estate trusts continue to churn out distributions and your preferreds pay you 5% with a big tax break just to own them.

Hey, it’s also summer. Canada Day. Beer ‘n babes. BBQs, bikes and the beach.

Who’s got time to panic? Silly doomers.

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Consequences Fri, 26 Jun 2015 21:50:45 +0000 TREE modified

Eight years ago, when we thought everything was okay and feisty, Garth-bating Dean Del Mastro was the prime minister’s Parliamentary Secretary, the rate on a 5-year Government of Canada bond was 4.5%. Fixed-rate five-year mortgages were 7% – about 1% below the 10-year average.

This week Mr. Del Mastro was led out of a courtroom in handcuffs and leg shackles after being convicted of electoral diddling (although I don’t like the guy, it was a complete and unnecessary humbling) and the current bond yield is 1.02%. Fixed half-decade mortgages are down to 2.48%, if you deal with a broker and borrow from a food truck, or around 2.74% at the most competitive banks (TD and BeeMo). The only better rates (0%) are available at the bank of Mom.

By the way, in 2007 the average GTA house cost $376,236, and today it’s $650,732. That’s an increase of 72.9%. The median household income in Toronto in 2007 was $61,900, and today it is $73,120. That’s an increase of 18%.

And noodle this: in 2007 a GTA house cost six times what a typical family earned. Today a house is worth almost nine times income. (In urban Vancouver it’s 12 times median income. Yikes.) So the conclusion is obvious – real estate has bloated dramatically as the cost of money collapsed – and not from an explosion in incomes. This is why there’s nothing more important for every homeowner to fixate on than interest rates.

Rates are low, of course, because the economy has sucked since the GFC. Central banks here (the Bank of Canada) and the US (the Federal Reserve) brought in emergency interest rates back in 2009 in order to flood the system with money and solve a credit crisis that threatened to paralyze society. Low rates were also an attempt to get consumers borrowing vast amounts of money, so a burst of spending would stimulate the economy and governments wouldn’t have to do as much.

In the US, it didn’t work. The middle class was so fried by the collapse in house prices that all people wanted to do was get out of debt, no mind what it cost. But here, a different story. We turned into little debt oinkers, snorfling up as much as the bankers would allow, then blowing it on ‘safe’ assets – houses.

You know the rest of the story. Today real estate’s not worth more because it is rare or precious (we’ve actually built too many homes since 2007) with current prices guaranteed to hold. Instead, houses cost what they do because you can borrow bags of money for five years at 2.5%. If mortgages were 7% again, as they were in 2007, the average Toronto house price would be $443,959 – or almost exactly $200,000 less than today (31%).

Now, rates will be rising. So real estate will be worth less. Get ready.

The question is, how much and when?

Last week I told you what the Fed is selling the world. The first US rate hike happens this autumn, and there may be another by December (according to a senior bank official). Fed chair Janet Yellen says we should then expect 1% more in each of the next two years, taking the rate from about one-tenth of one percent to 2.65%. That would arouse the bond market, and likely mean five-year fixed mortgages in the 5% range long before today’s borrowers have to renew.

If incomes remain flat (the likely bet) then we could reasonably expect that average Toronto house to cost about 80% of today’s price, or $520,500. However, real estate is emotional. It will end up costing what people think it should, as well as what they can afford.

Most mainstream economists, like the eggheads at RBC, think the Bank of Canada will start to follow the Fed’s lead after a healthy waiting period – maybe as long as six months. So the central bank rate here will advance, beginning in the Spring of 2016. That will increase the prime, making business loans, your HELOC and all variable rate mortgages cost more. In the meantime, fixed-rates loans, which are priced in the bond market (and which 67% of Canadians have) will start to rise along with the Fed.

Capital Economics’ David Madani, a notable housing bear, disagrees.

“Domestic investment in Canada’s oil sands is still tanking,” he writes. “Governments remain focused on balancing budgets, so there’s little hope for any offset from public sector spending. Meanwhile, the scope for a lift in household consumption seems limited, since they are already heavily indebted. What’s needed is a much firmer US economic expansion buoyed by a far more competitive exchange rate to boost Canada’s exports and growth prospects more generally. This begs the question: will the Bank of Canada cut interest rates again?”

His answer: Yes. Twice. A quarter point on September 25th and another in December.

Is this credible? Beats me, but Madani is the odd guy out right now. If he’s correct, with our bank cutting the cost of money while the Fed increases it, then we should get ready for two things: a sideswiped loonie and an autumn real estate rush. That will likely be followed by a spring massacre.

Talk about criminal behaviour.

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The unimaginable Thu, 25 Jun 2015 22:06:27 +0000 BUMP modified

Your Boomer mom won’t believe it, but there seems to be trouble brewing in the homeland. Given what the second half of 2015 is likely to deliver, the current real estate market might be sucking air. Here are a few things to worry about.

Mike’s a big RV guy. Even writes for a trade mag on the recreational toy industry. “Is this a harbinger of things to come in Canada?” his note to me asks. “RV/Boat/Motorcycles sales are highly discretionary as you know. I’ve been following these stats for years – this is very reminiscent of trends in US recreational vehicle market 6-12 months prior to 2007-08 implosion.”

You bet. Year/year motorhome registrations in Canada plunged almost 12% in April, says the latest report from Statistical Surveys. Adds Mike: “The important spring sales season in Canada is a complete dud so far…”


On Wall Street they’re also gearing up for blood in the gutters. Especially in YVR. New reports have emerged of global macro hedge funds building short positions in those things they think will be pummeled in the inevitable Canadian housing bust – including subprime lenders and the loonie itself.

This ended up in print yesterday, from a New York analyst: “All of the big macro funds that were involved in betting against the U.S. in 2007 and 2008 and 2009, they’ve all studied Canadian housing for a few years. I know a number of them are shorting Canadian housing. It looks like an accident waiting to happen.”

And you don’t need to be a suspender-slapping, slick, Porsche-driving, greed-is-good Wall Street wolf to be thinkin’ this way. Hell, Bank of Montreal is. The chief economist there, Doug Porter, says he understands why many are calling for a “deep correction” in Canadian house prices.

His chart tells you why.

BMO CHART modified

That flat line on the left is the ratio of Canadian to US house prices between 2000 and 2005 – they paced each other. Then our real estate soared irrationally while American values corrected, and lately they’ve resumed pacing each other (up about 5% a year). The trouble is that our housing is now at nosebleed level, especially give our economy (weak) versus theirs (snorting).

“This unusual period of symmetry follows a wild 10-year period which saw the U.S. market boom, then collapse, then finally recover strongly for a spell,” Porter writes. “What makes this recent period of relative calm between the two national markets so notable is that Canadian prices took about a 60% step ahead of U.S. prices in a six-year span from 2006-2012. Then, after a moderate step back, they have largely stayed there, far above their U.S. counterparts. It’s this gap that – to this day – has so many calling for a deep correction in Canada.”

Well, now let’s turn to some research by American economist and academic Nick Bunker, of the Washington Centre of Equitable Growth. This guy has a bubble fetish, and has examined all the major gasbag events back to 1870. He concludes that there are four kinds – stock market bubbles; stock bubbles based on excessive credit; normal housing bubbles; and leveraged housing bubbles.

Stock bubbles are a bitch, but usually don’t cause recessions when they pop. Even ones based on a lot of margin, like the dot-com bust. Housing market imbalances are normal, especially in a growing economy, but real estate bubbles based on debt instead of rising incomes are toxic, Bunker argues.

That, of course, is the kind we have right now. And it was the kind that imploded to the south and ate the American middle class. This is a very real danger to the wider economy which takes, on average, about five years to recover.

Why would a housing bust be so much worse than a stock market dump?

Simple. More people own real estate. Stocks and other financial assets are more often the preserve of the wealthy, or at least those with higher net worth – the impact is therefore more muted within society, and impacts people who have increased ability to absorb it, or are comfortable weathering fluctuations.

The credit-fueled housing crash, on the other hand, usually whacks those who have put most of their net worth into a single asset, then leveraged the bejesus out of it. They’re often living paycheque-to-paycheque without a lot of diversification or other financial resources. The impact is immediate and debilitating as equity vanishes, yet the debt remains. In short, they kneecap the middle class – those very people who spend the most, and support our consumer-based economy.

So the stock market can plop, and life on Main Street carries on. But when the housing market chokes, everybody’s nailed. They may even stop buying Harleys and RVs. How sad is that?

Of course, none of this can ever happen in Canada. We’re snowflakes. Special. The laws of economics do not apply here. It’s different. Joe Oliver says so.

So, basically, ignore the previous 821 words. Or prepare.

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The end Wed, 24 Jun 2015 21:34:22 +0000 NOT POOR1

“Living here in the heart of Silicon Valley, life appears to be incredibly blessed and privileged,” Sharon writes me. “I mean, constant sunshine… who can complain? No snow to shovel? Yes please.”

She may have deserted Canada, but not this blog (who can?).  “I must say, I still read it. Very interesting, to say the least. Perhaps it’s because of the lifestyle one leads here in the USA… but the money issues in your blog about what Millennials face and their parents face… seem incredibly distant to me right now. Almost unfathomable.”

So instead of stressing over the crap young people here are fixated on, like a cool condo, Sharon looks to the horizon. Retirement. Weird.

“I have a question for you. In your opinion, what is the amount of monies in cash or assets one needs to retire, to keep up one’s lifestyle, health care costs, vacations, cars etc? I know this is relative to the type of lifestyle one leads and where one lives, and where one vacations. But for hypothetical scenario, lets assume the average Canadian retiree, and as well, for my curiosity, the average American retiree at the current moment in time. If someone were to hit 60 or 65 and retire, and factoring a good long life is yet to come, how much money do you think one should have? I have a guess.. and I am thinking 3 million is not enough or even close.”

The question’s often asked. Never well answered. There is no answer, actually, since some people need bushels of money to chase their dreams and others think the goal of life is to be so frugal they might as well be a Chia pet.

Let’s start with the basics, since everyone gets a public pension. In Canada the average CPP cheque is $640 (the maximum is $1,065). You can collect a bit less starting at age 60 or hold out for a bit more starting at 65 (take it early – always). The OAS (Old Age Security) cheque is $563, which Millennials won’t start collecting until age 67 (at least – but probably later). This is clawed back depending on income, and disappears when you make $114,815. There’s also a GIS (Guaranteed Income Supplement) but that’s just for folks who are truly low-income, so we won’t go there.

That’s it – $1,200 a month, or $14,400 a year for a single person retiring in Canada. That’s grocery and gas money. Period. In the US, Social Security is critical to the support of a vast number of retirees. In fact, these benefits make up about 40% of the entire income of seniors, since a majority of Americans (51%), like us, don’t have corporate pensions. And 35% have no savings. No wonder 52% of couples and 74% of singles receive at least half their income from Washington. The average monthly payment is $1,300, or $15,600 – not much, but life ‘s cheaper in the south (maybe not Silicon Valley).

So layered on this is any corporate pension – and 70% of Canadians don’t have one. Defined-benefit pension plans are the preserve now of government workers, from cops to teachers to soldiers to bureaucrats, while the best that most people can hope for is a matched RRSP program. Of course money socked into retirement plans is taxable, so that must be factored in. TFSAs provide tax-free retirement income, but there’s no tax break when you contribute, and few employers offer matched-contribution TFSA programs.

So how much do you need?

Most financial dudes will tell you retirement income should be about 70% of the money you collected when you’re working. This would include all public and private pension cheques, cash flow from your RRSP (which must be converted to a RRIF during the year in which you turn 71) and income from investment accounts, including the tax-free portion.

So if you needed $70,000 a year that means roughly $55,000 has to come from sources other than the feds. (Ontario will have a pension plan in the future, too, but the average payout in 30 years will be just $10,000). If you want to generate fifty-five grand a year from investments and still retain the principal to pay for care when you’re a basket case or to pass on to your dog, figure on having about $1,000,000 invested to provide an average of 7%, with most of the returns in the form of dividends or capital gains.

To some, this may seem impossible, especially if they spend the middle three decades of their life saving for, carrying and financing a piece of inflated real estate. But I remind you of the simple money machine every Millennial has access to – the TFSA. If you start with $10,000 today and add that much yearly (eight hundred bucks a month), invested to get 7% (the historic norm for a balanced portfolio), in 35 years you have $1,489,134, of which $1.1 million was tax-free growth. Bingo. You rock.

Of course, 90% of kidults will never do this, and would prefer to spend $800 a month on property tax, house insurance and condo fees, while shouldering several hundred thousand in debt at rates destined to reset higher, knocking their equity lower. Millions more boomers, hitting 60 and beyond, will also soon understand they lack the liquid investments to throw off the cash flow needed to live happily. After all, they have another quarter-century to finance.

(Or, in my case, eternity. At least my leg.)

The bottom line is ugly. It’d be a shock if 10% of the population reached the $1 million mark by retirement, although lots of people will have paid-off real estate, and have spent their adult lives feeding it.

Sharon’s three mill? Probably obsessive. But she’s my kinda girl.

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