Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Mon, 22 Dec 2014 03:04:24 +0000 en-US hourly 1 Urges Sun, 21 Dec 2014 22:38:16 +0000 KIDS 2 modified

Blaine and Jenny are having a baby. If it happens this week, “we’ll name her Holly,” he says. I told him that was lame, but you know how new parents are.

Actually there are three things people do when they first have kids. (a) Have a sudden, overwhelming desire to take out insurance. (b) Buy a house with a backyard and four bedrooms. (c) Open an RESP. Only one of these makes immediate sense.

It’s not insurance. This is a 99% emotional buy, since the odds of new parents keeling over or going down on a rogue Airbus are pretty slim. But it’s part of the nesting thing. So just ensure you get the right kind (term, not whole life or universal), and that you do it in a dispassionate way (don’t talk to an insurance salesguy first). You can snorfle up $250,000 worth of it for about thirty bucks a month without a medical, which means this is a pretty cheap emotional baggage solution. Compare the rates at a site like this.

It’s not a big house, either. Baby won’t care if you’re in an apartment for at least two years, and won’t know if you rent or own for another five. After that, why would they care? No newborn requires a swing set or a Jungle Jim, and the parents don’t need a higher monthly or a heaping big mortgage. Besides, real estate is precarious these days even in the top markets, with rates set to rise in 2015 and the oil thing fading the economy. The most responsible action you can do for your family is to stay out of debt, not go shopping for a backsplit.

But an RESP? Well, that makes sense. In two decades the cost of a university education will be staggering, and for many parents today (procreating well after the big 3-0) that could mean putting the kids through school scant years before you start stressing over retirement. The good news is 15 or 20 years is a perfect period of time to be growing a big pot of money. If you do it correctly.

First, never talk to the nice lady or smooth dude who calls you right after the child pops. These are baby vultures, almost always working for RESP-selling outfits with fat fees and low returns. So, never give money to anyone who has the word ‘scholar’ on their business card and drives an Audi. The RESP you want is self-directed, which means it can live at any bank or with any advisor, and into which you can place any investments you wish.

What’s an RESP? It means ‘registered education savings plan,’ and it works like a TFSA but with a few wrinkles. The money you put in there will grow free of taxation, and can be removed without any amount being withheld for tax. But the contributions you make are not deductible from your income. A maximum of $50,000 can go into an RESP, but don’t do it all at once, because you’ll lose a bunch of grant money.

Grant money? You bet. The government will give you money simply for dating, getting hitched, being pregnant for nine months, enduring childbirth and taking on a life-long financial commitment! What a great country.

The grant equals 20% annually of what you contribute, to a max of $500 in one year and $7,200 over the life of the plan. To receive the maximum amount, a contribution of $2,500 per child is required. And if you miss starting an RESP until junior is five years old, you can go back and catch up on those missed years one at a time, so no grant moolah is squandered. (By the way, all financial institutions and advisors will apply for the grant on your behalf.)

The biggest mistake most people make (other than being ensnared by a baby vulture) is not investing the RESP money in the right stuff. Crippled with emotionalism, many opt for the safest assets possible since they fear taking any risk where there kid’s concerned. Ironically, this puts them at greater risk – of running out of money when the little one wants to pursue a doctorate in Blogology.

Here’s the difference: $2,500 a year plus a $500 grant invested in a 2% GIC over 17 years will yield $64,236 by the time little Angelica’s a freshman. But the same money invested in ETFs (balanced, diversified) yielding 7% will equal $101,997 – enough for her to buy a yellow Porsche and disappear in.

In reality, that won’t happen because initial withdrawals from the plan are restricted, and the money has to be used for legitimate schooling. Withdrawals are taxed in the hands of the student, but that usually means nothing is owning. And if you have more than one child, a family plan RESP will let you shift the funds between them, as required. Thus, if one decides to throw his life away by becoming a rock star and earning billions, you can move the money to the more deserving kid.

And what happens if they both choose to eschew school? Then up to $50,000 of the RESP money (your contributions) can be taken out, tax free. The government grant must be returned. And the growth can be rolled over into your RRSP, if you have available room, if the plan’s at least a decade old and your children are 21 or older.

So, there you go. Get insurance and pay money for something you’ll probably never use. Buy a house and know you’re paying too much while walking into a debt morass. Or invest in an RESP, with taxless growth and free government money to enhance your kid’s future. Tough choice.

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The willful idiot Fri, 19 Dec 2014 23:16:49 +0000 BIKER modified

“My partner and I,” says Jeremy, “are looking into buying a new home.  I’m really glad I stumbled on your site now. I read a few of your posts and things started to become quite clear (that I have no clue what I am doing and have been a willful idiot for most of my adult life).”

Jeremy’s in Vancouver, where the average property now costs about $830,000. Even in Toronto realtors are telling virgins they need at least $700,000 for an ‘entry-level’ house – and that won’t even get you a detached in most of 416. Van’s worse.

“Basically I’m writing because I want to take control of my life and what I’ve got,” he continues.” My savings are in a TFSA/mutual fund around the 30k mark and I have no clue what to do with it.  I’m in the Architecture profession so my disposable income is laughable so I’d like to make good use of what I’ve got.  I’ve just had a coffee — it is midnight and I’m on a mission to read your entire blog.”

I have no idea if he consumed all 1,900 posts overnight. If so, he’s likely dead. My advice will be irrelevant. But on the chance he survived, Jeremy deserves to be spanked for even thinking about buying a house with net worth of just $30,000. Sadly, however, our rapacious bankers make such things possible.

For example, you need only 5% down to get conventional bank financing, which would be about $40,000 in Vancouver. And while Jeremy and his squeeze don’t have enough, they can borrow the rest – on a personal line of credit, with a loan, or putting it on their plastic. They can find a lender who offers a cash-back mortgage, in which case they get free money but a slightly elevated interest rate. They can withdraw from the Bank of Mom.

The necessary mortgage insurance can be added to the mortgage principal, so no cash is required. Land transfer taxes are reduced or waived for first-timers. There are even federal and provincial tax credits and grants just for virgins.

The point is, the system has made it ridiculously easy for people to walk into the massive debt required to buy. So even a self-avowed willful idiot like J can end up with a house, despite lacking enough to cash-buy a decent car.

No wonder banks are rich. RBC, for example, made $9 billion in profits this year – up about 8% from 2013. Half of all that came from personal and commercial banking, and much of that was from a massive mortgage portfolio. But as I pointed out yesterday, change is in the wind.

This week even the nation’s largest bank admitted housing is overdone and 2015 may be the year everyone feels it.

CEO David McKay now says prices could fall by 15% as interest rates start their inevitable ascent. “There could be some price correction, particularly in a rising rate environment,” he said Thursday. “I don’t see it to the extent that the Bank of Canada does, but I do think you could have a 10 to 15 percent price correction.”

McKay was referring to the central bank’s musing that big-city house valuations are too high by up to 30% – roughly the drop that caused the US middle class to collapse under its own debt load. He’s also acknowledging there’s no way rate hikes in 2015 will be avoided, or that they’ll be temporary. Those who think otherwise are simply not paying attention to the US economy’s fundamental strength, or the fact Canada cannot resist raising rates for long after the Americans pull the trigger. If it did, the loonie would be done like dinner.

Moreover, the RBC guy says all of this – higher rates and cheaper houses – is healthy for the economy. “A slowing market is absolutely a healthy thing right now, so we’re not concerned.”

He’s right. Rates will go up. Property values will come down. It’ll be good for the long-term viability of Canadian society. But it will also kick the crap out of many people who (like Jeremy almost did) borrowed excessively, bought more than they can afford, and have virtually no equity. Even a 15% correction would put them seriously under water, destroy their personal net worth and saddle them with a giant, expensive and illiquid asset. About the last thing a young person needs.

As for the wrinklies so many angry kids on this blog love to disparage, this also sucks. Maybe worse. Most of them don’t have corporate pensions nor are they public servants. Most have surprisingly little saved or invested. Most have plowed their net worth into a single asset. And half believe they’ll have no choice but to sell or downsize in order to generate a living income. So, what happens if prices fall and markets slow just when they need to bail?

Years ago I wrote about the two groups who would eventually be most at risk when the inevitable occurred. Years later, I’m still at it. Maybe I should just get a life.

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Going negative Fri, 19 Dec 2014 00:19:01 +0000

In case you missed it, Wall Street exploded higher on Thursday (421 points), but oil resumed its slide ($54.11) and the layoff notices are flowing in Calgary. This is the kind of world this pathetic blog told you to be on the lookout for. And prepare for. It’s a world in which you want to own financials, not stuff. More US and less Canada.

In the ‘stuff’ category is houses. And it’s started.

Home sales in the first two weeks of December didn’t really move from last year. Says local perma-bull realtor/pumper Mike Fotiou, in awe: “Sales could fall below year ago levels.  Falling sales is a precursor to falling prices.” And listings are bloating while sales stutter, showing lots of cowboys have decided to absence is the better part of valour. New listings have spiked 35% and active listings are up by a third compared to last year.

Says Mike, now on a Prozac-and-JD diet, “If sales drop off in 2015 as many expect, inventory will continue to grow and result in depressed prices.”

Ex-realtor and housing consultant Ross Kay, who has the same relation with CREA that Sony does with Kim Jong-un, says he saw this coming. “Calgary went negative on December 15th,” he tells me, “and Toronto went negative on December 16th, a week earlier than we predicted.”

That means, according to his numbers (which weed out the usual realtor number-massaging) that Calgary sales are down about 1% from last year, while Toronto’s are flat. “As of December 17th sales volumes in both Calgary and Toronto are now in the negative, comparing apples to apples.”

Of course, most people haven’t heard this, because they get their news from the MSM, which gets it from the real estate boards. According to the Toronto cartel, sales increased by 1.9% in the last two weeks (over the same time last year), and “Greater Toronto Area households remain upbeat about buying a home, as evidenced by the increase in sales compared to last year.” The board also says the average price is 8.6% higher than a year ago, but fails to mention it’s $24,259 lower (a decline of 4.1%) than in April.

Meanwhile, more and more souls are starting to discover this dichotomy between financials and bricks. The Bank of Canada now warns houses are inflated, joining the IMF, World Bank, The Economist, Morningstar, most US ratings agencies, Robert Shiller and Demographia (among others). I gave you a hunk of a column by CBC editor Don Pittis the other day saying similar. Now pesky little Rob Carrick at the Globe is back on board.

“The ugly stuff going on in the stock market lately could happen in housing,” he warned the other day. “So follow the same 10-year rule as a home buyer that you should as an investor. If you can’t wait a decade or more for your transaction to make financial sense, don’t do it.”

Did he clear that with the advertising department, I wonder? Or the dinglenuts on the city desk who use words like ‘hot’, ‘torrid’ and ‘steamy’ to describe every realtor release? (Now I’m a little aroused.)

Apparently not. “It’s time to start getting real about housing – the longer it keeps rising, the sharper the ensuing adjustment will be. We live in a jittery, news-saturated financial world today that can take shifts in sentiment about assets such as oil or stocks and amplify them into wipeout trends. Houses don’t have immunity. They are financial assets, just like stocks, gold bars and gallons of oil, which is to say prices move both up and down.”

Absolutely. But the trouble is, with 49% of all real estate buys now being done by virgins, many of them weren’t even little wrigglers when the last housing wipeout occurred in the early 1990s. They have no idea that 10% or 20% of their equity can be blown off in a few months, or that interest rates weren’t always 3% (and soon won’t be, again).

Worse – as the wise people now flooding realtors’ offices with listings in Cowtown know – real estate can get colder than you spouse when you buy her a Dyson Cyclone Upright for Christmas. Houses become illiquid astonishingly quick. The slower sales get, the more listings accumulate and the more reticent buyers become. Only meaningful price hacks can entice the brave to buck the trend and buy. Wait. You’ll see this is so.

Meanwhile, why did investors storm Wall Street this week? Because cheap oil, that’s hurting Calgary (where houses cost twice what they do in Houston), will accelerate growth by increasing the disposable income of millions who now spend less on gas and home heating. Ditto in Europe, Japan and China. All the leading indicators are green, and 2015 looks to be one promising mother of a year for financials.

No surprise here, though. How many times have people been told that with epic debt and a single, swollen asset, all we needed was one economic shock to change everything?

Looks like it landed.

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Bad choices Wed, 17 Dec 2014 23:27:07 +0000 COON modified

Andres says he’s a hipster at odds with his messed-up generation. “If I was anyone else in Vancouver I would probably be buying a postage stamp condo and patting myself on the back for having a proper down payment,” he says. But he’s different. Praise be.

“I’m currently up to $107,000 in RRSPs thanks to an old government pension plan buyout and $12k in my TFSA,” he tells me. “The problem is that currently $70k of my RRSP is not invested, nor is $12k of my TFSA. I’m sort of paralyzed right now, where I have no idea where to park these funds and I’m losing money to inflation while adding about $5k a month into this stagnant pool. What do I do?”

Sarah ives in Edmonton, is single, 29, and has a government gig. “Just paid off my student loan earlier this year.  Car was stolen a few months back (Edmonton, remember?) and I decided I don’t really need one, so no plans to replace.  Rent and all utilities (incl. phone) is less than $1000/month.  I owned a house once; it was awful… not going to make that mistake again!”

Now she’s got twenty grand to invest and, like Andres, can’t pull the trigger. Should I try to time the market, she asks, or just do it?

“Your answer will likely be “don’t try to time the market, just go all in”… to which I will reply “but… but… with the economy in a bit of a shit storm, shouldn’t I try to buy what’s low now, and then just add/rebalance as the other funds drop in price?

“My divorced parents both own $700,000 houses making $70K outside Vancouver.  They do the low interest savings account and mutual fund thing.  I mentioned ETFs a few weeks ago, and they both had mild strokes.  My friends (in Van) are poor and don’t have money, so they don’t know anything about investing.  So… thank you for being the voice of reason for financial orphans like myself!”

See how people keep asking me questions they know the answers to? It’s weird. I feel like the pope.

Of course these two should invest. They should have done it days ago, weeks ago or months ago. They’re young with vast time horizons. Temporary market fluctuations become irrelevant over the sweep of decades, so long as you cling to the three guiding principles: balance, diversity and liquidity. A 60/40 portfolio of ETFs – a basic four or five for Sarah and double that for Andres – will probably do as well in the next decade as it did in the last (which included the GFC and endless moaning).

Market timing usually doesn’t work because people have lives. They fail to rebalance. They have no actual idea where a top or a bottom is. And they’re massively influenced by the idiot bleatings of the mainstream media, friends with phobias but no money, and their petrified parents. In time, most fail. So don’t do it. Mr. Market will eat you.

This week gives a fine example. On Monday everyone was pissy and morose with markets falling, oil unloved and sentiment negative. By Wednesday there were massive gains – for a few reasons. The US central bank gave a signal that economy is strong enough for rate increases this year as retail sales, industrial production and housing starts all surged. Oil stabilized at fifty-five bucks, and suddenly energy stocks – beaten up badly – looked too low not to love. Money is still cheap, inflation is nowhere, America is growing and gas is on sale. All of that outweighed the meltdown in Russia, and the growing list of layoffs in Alberta. So markets exploded.

Nobody tells you this is about to happen. So what most market-timers do is avoid perceived trouble (Sarah says the economy sucks, so she hesitates), then jump in when things pop and they feel more confident. In short, they buy rising assets and avoid or sell falling ones. They suffer from recency bias – believing what just happened will happen in the future. It’s classic. And fatal.

This is why investors fled screaming from stocks and equity mutual funds in the winter of 2009, just before markets rebounded. They thought losses would beget more losses. Like many of the doomer dipsticks who read this blog (because it’s free and warm) they believed everything was going to zero. History shows us they should have bought, not sold. Like now.

Things we know: the world still runs on oil. When it falls by half, well, duh. Second, US growth is solid and entrenched, so you should have more exposure there. Third, Europe, China and Japan will all benefit from the energy collapse and are some of the biggest economies on the globe. Why wouldn’t you want them when the needle’s at cheap? Fourth, volatility is here to stay, so the more balanced and diversified your holdings, the lower the risk. Fifth, when you can shelter thirty-six thousand (as of next month) from all taxes, present or future, inside your TFSA, and invest in stuff that’s proven it will grow an average of 7% a year even when the lights go out, why wouldn’t you?

By the way, how did we get such wimpy kids?

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The obvious Tue, 16 Dec 2014 23:18:46 +0000 USELESS modified

Now I’m worried.

I write six million tedious words on this blog warning housing is overvalued and Canadians are horny debt snoflers. Nobody cares. Then the Bank of Canada, no less, suddenly agrees with me. People, it says, are paying between 10% and 30% too much for real estate, and household debt is the biggest single threat to the economy.

Meanwhile this pathetic blog carries the torch for realism, arguing that house-lusty locals, not rich dudes jetting in from Guangdong, are mostly responsible for properties average folks can no longer afford. Our debt levels prove it. Your condo-craving twentysomething daughter proves it. Real estate has morphed from a cult to a disease, for which we are responsible. The Asian guy in the big house down the street did not make you do it.

And now Canada Mortgage and Housing, no less, says it agrees. And can prove it.

CMHC just issued a report based on interviews and site visits with owners, managers and supers of 20,000 buildings across Canada (which is probably more research than all the puffed-up bigots who hang around this site’s unsavoury washroom conducted) and the stats are in. Nationally, about 2% of investment condos are owned by foreigners.

In Toronto, it’s 2.4%. In Vancouver, 2.3%. In Victoria, 1.1% and Montreal, 1.5%. Concentrations are higher in downtown cores, with the tops being in 416 (4.3%) and the Burrard Peninsula (5.8%).

Seriously. Two per cent. This is even lower than data I have presented for the total of foreign buyers in all of Vancouver and Victoria over the past months. It puts all of those racist, anti-newcomer comments from people wanting to blame someone else for their own issues, in context. Canadian real estate prices are insane because we’re a nation of idiots. Get over it. You did this. Most people you know have a one-asset investment strategy which usually involves extreme leverage. I just hope events of the last few days are making them think twice about their choices.

What’s next, CREA sending me a Christmas card? Letting me use the word ‘realtor’ again without being sued?

Well, it’s time homeowners sobered up. Fast. Look at Russia to see just how quick a modern, advanced economy can circle the drain. The currency lost 19% of its value before lunch on Tuesday. Russian bond yields spiked to 16%. The central bank raised interest rates from 10.5% to 17%, but that did squat. The stock market shed 12% of its value. Russians are sucking their savings out of banks before they wobble and currency controls are leveled. The Moscow real estate market has frozen. And gold took a hit on the assumption the country will have to dump its reserves to survive, now that oil revenues have collapsed.

Nobody’s suggesting anything remotely similar will transpire here. But I wouldn’t expect normal, either. Even the MSM is starting to sound like me, without the attitude or the tawny animal magnetism. The Globe carried a column on why people should actually listen to the Bank of Canada’s warning on fat house prices. And CBC editor Don Pittis wrote, “A sharp decline in house prices could happen once rising U.S. interest rates begin to push mortgage rates higher. The longer we let house prices continue to escalate, the more dangerous it becomes.” His thesis: hey, if oil can lose half its value in six months, why can’t real estate?

That won’t happen. At least not in 416 or 604, or in smaller markets where people curiously think of real estate as shelter, instead of a futures contract. In those places, houses will stop going up, flatline, and then begin a descent later in 2015 as it becomes clear oil hurt the economy and rate will be rising. The toll could be far worse in Calgary, Fort Mac, Edmonton and the bigger cities in the flat provinces next door.

Today (Wednesday) the Fed makes known its current thinking on the US economy after a two-day meeting. It may signal a change in interest rate intentions, but might also wait until after the holidays. Nonetheless, it’s coming. The American central bank will start to normalize the cost of money in 2015. At the same time OPEC says it will likely take no action to stabilize oil until its next regular meeting, in June.

The year to come, with the world feeding on cheap energy, will bring more dichotomy. A big tailwind for the US, a boost for deflationary Europe, recessionary Japan and stumbling China, but a whack on the head for the producers – like Canada and Russia.

By the week before next Christmas, you’ll wish you had less house and a bigger portfolio.

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The unicorns Tue, 16 Dec 2014 00:13:29 +0000 POOCH modified

“We’ve dodged a bullet.” Says Janet. “And we have you in part to thank.”

Ahh, that’s so sweet. Especially coming from a couple of 30-year-old virgins in poor Edmonton. She says they’ve been renting a one-bedder downtown for a mere $850, have a hundred grand saved and make $180,000 between them. Jealous yet? “So in Oil Country,” she says, “we’re unicorns.

“When our landlord told us they needed to move back in, I’m ashamed to say we thought about buying. For about a minute. We never thought we would be seduced by a 4BD / 2.5BA but after years of sharing a small space and wanting a baby, we were tempted. And hey, what do you know? Housing prices had come down a little.

“A quick read of crude news, a dose of reality from your blog, and a sharp reminder from my dad (a retired oil fielder) on what is coming, and we avoided a cataclysmic mistake.”

Janet says they just found a whole house to rent, for about two grand a month, “to rest in for the next year while poop hits the fan. Hopefully our jobs survive (my husband is in IT but I work in public service so my resume is ready to go). I could be vengeful and rub this in the faces of everyone who told us we’re “throwing money away” renting just to make themselves feel better, but it seems pointless. They’ll just blame the oil, like no one could have possibility seen this coming.”

Smart. The fact is, we can see a lot coming. Not only will Janet and her squeeze be able to save serious money by renting, but they might be positioned for a Big Vultch by about this time next year. On Monday oil prices fell again (by another 4.3%, to just over $55), and the ripples are showing up everywhere. Russia’s central bank bloated its key interest rate to a withering 17% (from 10.5%) to try and stem an oil-induced collapse of its currency – now at a 16-year low.

Meanwhile cheaper energy and more jobs are igniting the US economy. Industrial production soared last month by the most since 1998. Confidence among homebuilders is now at a nine-year high. “With consumer demand and business demand strengthening together, it is self-reinforcing,” Laura Rosner, a U.S. economist at BNP Paribas in New York and a former New York Fed researcher, told Bloomberg. “The gain in production sets us up for a solid pace of growth next year.”

So, count on an increase in US interest rates in 2015. Maybe sooner than expected.

And, like Janet says, the yahoos buying particle board palaces in Edmonton and Calgary maybe should have seen this coming.


The thinking now is that oil will be $50 of thereabouts for most of next year. After that, who knows? But this is plenty long enough to destroy the Alberta government’s budget, cause a mess of layoffs, probably cancel a raft of energy projects and reshape the real estate market. Not just in the prairies. Everywhere. Energy is a big chunk of this country’s economy and an even bigger piece of our exports. Consequences will be inescapable – as we are already seeing as our currency (like the Russian ruble) takes a major dive. By the end of Monday it was in the 85-cent range, taking a hit along with commodities in general, including gold.

So, this all hurts the Canadian economy, while cheaper energy boosts the US. As I have said here before, if American interest rates start to edge higher in a few months, then our currency is due for a major dump, given the oil situation. Will the Bank of Canada have any option but to edge up money costs here as well (like the oil-producing Russians) in order to stabilize the currency? And then might we not have the perfect storm for Janet – oilageddon and fatter mortgages, just when most people are steeped in debt?

By the way, did you catch the latest numbers? StatsCan says our collective debt just set another record. We borrowed almost $25 billion in the last three months in fresh mortgages alone, and the rate of new debt surpasses growth in disposable incomes. That’s right. Every single day Canadians are borrowing against the future to finance what they can’t afford now.

That might be okay if we had steady, strong growth, lots of new jobs, inflation and good markets for the stuff we sell. But we don’t. We’re struggling. Says TD economist Leslie Preston: “The recent collapse in oil prices likely to have an adverse effect on Canada’s growth over the next year, and particularly on incomes in oil-producing regions. Now, household debt risks are heating up once again.”

Ten days before Christmas this is not what a lot of people expected. But how many are preoccupied with the holidays? How many are in denial? How many remain too house-horny to see straight? And then there are the billions who don’t read this pathetic blog and think I play guitar.

Janet feels smug now. Just wait a few months. She’ll be insufferable.

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Race to the bottom Sun, 14 Dec 2014 22:40:52 +0000 HUMMER modified

Melissa Hart is desperately unhappy, and rutting season is only a few weeks away. Her sad story in a moment.

First, oil. It looks like tomorrow (I’m scribbling this on a Sunday afternoon) will be hard on Calgary. Not only did crude crumble to $57 and a half bucks on Friday (down more than 12% on the week), but it’s about to get worse. The OPEC dudes are, like, totally serious about crushing the oppo.

Listen to what spokesguy Suhail Al-Mazrouei said on the weekend: “We are not going to change our minds because the prices went to $60 or to $40. We’re not targeting a price; the market will stabilize itself. We need to wait for at least a quarter to consider an urgent session. We will not have a real picture about oil prices until the end of the first half of 2015.”

In other words, now that he’s said it, $40 oil is distinct possibility. OPEC is intent on flooding the world with cheap oil, which will render uneconomic the stuff flowing from Venezuela, Russia, the shale fracking in the northern US or the oil sands in Alberta. Too much production has collided with falling demand. You know why. Japan is in recession. Europe’s fighting deflation. Russia’s savaged by sanctions. China’s slow.

So, we’ll see what happens. But if the big producers are willing to let prices fall another 20%, and stay there until next summer (at least) it might change a lot. Remember the Alberta government has based its whole shtick on $90 oil. It things go to forty, that province plunges into deficit. Last week poor Jimmy Prentice, the new premier, was forced to say this: “I won’t cushion it. We will have to make some tough decisions and the impact will be felt in every corner of this province.”

Ya think? The shortfall in revenues could be $10 billion. Imagine the impact of that in a province with a surplus now of less than $1 billion.

But this is not just about Alberta. An oil collapse itself is deflationary in an economy like ours, barely growing and having developed a condo economy. It means a big reduction in foreign revenue through crude exports, as well as lost investment and jobs at a time when employment gains have been elusive for more than a year. The consequences would probably include further losses for investors in energy companies, reduced economic growth, seriously tough times for real estate in Alberta, Saskatchewan and northern BC, cheap gas, a way-lower dollar and constipation at the Bank of Canada.

On one hand, the central bank cannot let the dollar plunge to 80 cents and wildly inflate the cost of imports while the economy is struggling. At the same time, it can’t jack rates much to support the loonie when the population is pickled in debt and still curiously horny.

Which brings us to Melissa.

METRO modified  Last week this was the front page of a daily paper which floods the transit system.

She wants a house. Bad. Just a day or two after the Bank of Canada said properties cost 30% too much, and yet Re/Max claimed they will jump 4% in 2015, it means only one thing to Melissa – buy now, or buy never.

“Hart, 33, and her husband Brian owned a home briefly but found themselves stretched too far financially. Since then they’ve rented a two-bedroom apartment in the east end while standing on the sidelines – watching and waiting for a housing correction that hasn’t come.

Now the couple, like many others who had the same hope for a correction, find themselves facing another grim reality. They may have inadvertently joined the ranks of renters-for-life. “It’s all we think about every day – that if we had just bought a house back when we first started looking, we would have overpaid, but at least we would have been in a house,” says Hart.”

The theme here could not be more obvious: ‘renters-for-life’ means failure. Melissa and Brian epitomize a wide swath of the population who would gladly trade steaming heaps of debt and living ‘stretched too thin financially’ for being in a place they think is their own. Even though it costs half as much to rent. Even when owning will mean no savings, no investments, no Plan B, and financial failure if real estate values flatline, let along decline. What happens if they have a kid? Lose a job? Retire with no pension?

All in all, I’d say things just got more dangerous.

As I mentioned last week, almost 60% of the debt being carried is by people who owe 250% or 350% of what they earn annually. Those are extreme numbers. They should worry everybody, since most of that debt is attached to the one asset Canadians have chosen to mainline, and in which they store the most wealth. The decline in oil may make it cheaper to drive around (thankfully for me) but it’s nothing but misery for the economy – exactly the opposite of what will happen in the US.

The argument for a diversified financial life grows stronger. God help Melissa.

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Market update Fri, 12 Dec 2014 22:32:46 +0000 TRUCK modified

Mark Jennings-Bates is a realtor in Kelowna. His house is for sale. In fact, it’s been listed for three years. Says Mark, “There’s barely been a showing and I have many friends in the same position.”

So he was confused, he says, when the latest Re/Max report came out. Here’s how it was reported by the chicklets at Global:

KELOWNA – Re/Max is forecasting some great news for housing markets across the country in 2015. Regional Executive Vice President of Re/Max Western Canada, Elton Ash, predicts Kelowna will see the highest increase in average home prices in the country. “Kelowna is a destination market, recreational property is a big plus here and then the local economy is doing really well. So if you take those three factors and put them together, it means it’s a great time for Kelowna real estate prices,” says Ash.

And here’s how the local Kelowna media spun it:

Kelowna’s real estate market is booming; sales are up, prices are up, everything is up. A new Housing Market Outlook Report released by RE/MAX Canada shows nothing but positivity for the upcoming year.  The report indicates there is considerable optimism in Kelowna’s 2015 real estate market, as consumer confidence continues to rebound as a result of low interest rates, steady job growth, and a strong prairie resource market.

“People are feeling better about their job situation and the overall economy. Just go around to the restaurants and out in the city, people are out and about buying goods and services, including real estate and cars,” says Cliff Shillington of Remax Kelowna. “I am very happy to say that the vibe in Kelowna is the most positive it has been since 2008.”

According to Jennings-Bates, this is a crock. Of course, we all know Re/Max ‘reports’ are unadulterated hyperbole, but they still get reported as news. The influence on the gullible, naïve and unformed is hard to know. And it could not come at a worse time. More on that in a moment.

I thought you might like to know what Mark posted as an antidote:

“To suggest that recreational markets are a big plus in Kelowna is more than a little foolish. We have one ski hill that has just gone through foreclosure with no offers and another one that is unable to open and proceed with development plans plus a behemoth project on Kelowna’s south western corner of the lake that is rumoured to be in big trouble.

“The truth is plain and simple. The Bank of Canada is afraid of debt levels in Canada. Kelowna has seen more than its fair share of businesses close down this year, houses are not being listed because they are not getting the value the owners want (which is precisely the reason for the low inventory), the Canadian dollar is seriously weakened and oil is back to levels we have not seen for as many years as good real estate prices.

“Good economy? Skyrocketing? Think again.

“I think we should tread very carefully, I think we should write slightly more intellectual articles that dig in to the fundamentals that drive real estate markets and I think we should avoid the use of flagrant terms like “skyrocketing” because it sets us up for a fall. As REALTORS® we are meant to be professional mentors and guides to our clients not “cheerleaders” for a soft housing economy that has had a good year relative to the past few years.”

This is refreshing in light of the major developments now shaping the months to come. House prices, according to the latest Teranet-National Bank index, are falling for the first time in a year, down on a monthly basis in eight of 11 markets. The most stressed cities are Halifax, Quebec, Montreal and Winnipeg. As you know, detached homes are also declining in value In Regina, while in Winnipeg listings have exploded. Prices are now falling in Oakville, while sales are ebbing in Kingston and values in Victoria’s best hoods are back at 2008 levels.

This actually doesn’t mean a lot, since the real adjustments are yet to come. Now that the Bank of Canada has said housing may be overvalued by as much as 30%, we have a strong, credible voice (unlike the painful bleatings of a pathetic blog) warning the virgins from wandering over the cliff. Meanwhile the entire Canadian economy seems under assault. Oil is down to $57, and has been shedding about 3% a day. The Canadian dollar’s a disaster, at less than 86 and a half cents. And the resource-rich TSX has taken a drubbing. Alberta’s coffers will be $7 billion poorer as a result of this, and we’ve already started to see layoffs and downsizing in the vaunted oil patch.

Crude may hit bottom next week and bounce. Or not. But a quick return to seventy or eighty dollars is a stretch. The reason for the collapse – too much oil and waning demand – is not going away. The US will continue to pump it out in the name of energy self-sufficiency, OPEC will keep pumping to maintain market share, and demand will stay slack as the Chinese economy dips, Japan’s in recession and Europe fights deflation.

Eventually prices will restore, since the world runs on oil. Between now and then cheap energy will fuel America, which is why you should have exposure to it. But in terms of Canadian residential real estate, despite what Re/Max spews, there’s no good news. We are an over-extended, leveraged, delusional nation of people now at serious risk because we bought the hype of salesguys.

But brilliant salesguys. If they had ethics, they’d be perfect. Like Mark.

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Realtor® DNA Thu, 11 Dec 2014 22:35:11 +0000 NO BUBBLE modified modified

Carla was a real estate agent in the States for more than fifteen years. “Thought I knew the business,” she says. “But, ugh, I bought at the height. Had to rent the house out when my husband got transferred.”

She lives in Dallas now. “We may move to Calgary in June…..I know strange but what can I say.  I am happy to say my husband is not in oil and gas.  Obviously looking to rent there….hopefully now we can rent something reasonable. May have to put the house in Connecticut on the market in the spring, or get a new tenant.  What are your thoughts of our situation?  Be a landlord or get rid of the house?

“I found your blog recently and I am addicted…love….love…it.  I wish I found out about you over 10 years ago, before we made some mistakes in real estate.”

As you probably know by now, real estate agents are the absolutely last people on the planet to realize when housing is about to blow up. A realtor’s idea of diversifying is to purchase another condo. They believe it’s a great time to buy when prices are rising. And when they’re falling. Or stable. They think liquidity means plumbing. It’s hopeless.

Right until the very moment when America found itself circling the drain of a massive housing crisis, the National Association of Realtors was saying everything was okay. It was a great time to buy. And then, poof. Within two years, real estate nationally had lost 32% of its value and the middle class was done like dinner. Realtors who had told people to ‘buy now or buy never’ were learning how to cook fries.

I thought of that this week as realtors in places like Edmonton, Calgary and Kelowna were telling local reporters that houses there are bullet-proof. They might actually believe it. They’re not inherently evil, just really confused.

Well, on Thursday things got a little worse. As predicted, oil cracked $60 and is now in the fifties. That’s a 44% plunge since the summer, when we were all worried about Kim Kardashian’s butt. The Canadian dollar has also descended to a 5-year low, and sits at just over 86 and a half US cents, off half a penny. Stocks improved, which was no big surprise, since the selling over the past week was more emotional than logical. Lots of people are understanding better than cheaper energy means more global growth and more US expansion.

But as I mentioned yesterday, it’s the perfect storm for Canadian houses. Cheaper gas here won’t offset a big drop in energy export revenues, crushed government royalties in Alberta or the loss of untold numbers of bloated oil patch salaries which find their way back home as far out as Newfoundland. Meanwhile accelerated recovery in the US means the Fed will advance its timetable for starting its coming round of interest rate hikes. And given the collapse in the loonie – which badly inflates the price of our imports – it’s looking like the bank of Canada will also be on the move in 2015.

Underlying it all is an immense sea of household debt. I hope you picked up on my key point yesterday – so many young people have decided to commit financial suicide, usually with the help of a realtor. Over 20% of all debt is held by people who owe 350% of what they earn. Another 40% of the debt was borrowed by people who owe 250% of their income. (The average for all of us is debt equal to 164% of earnings.) The Bank of Canada says the super-screwed tend to be the youngest borrowers, which only makes sense since they’ve bought houses with weensy down payments. But these are also the most vulnerable workers – the least experienced with lowest seniority, and the first to be booted when troubles come to town.

Sounds like a time bomb to me. But then, I don’t have a license plate that reads BUYNOW.

Well, back to Carla. Should she sell her house in New England before she moves to Cowtown? The median price of a house in Connecticut is going down again – off almost 5% in the past year, from $251,000 to $240,000. But foreclosures are reduced considerably, and overall sales volumes have increased. The question is simple: if Carla is not really making much money from being a landlord (probably a negative return factoring in her non-performing equity), and if the value of the place is shrinking, why the heck hang on?

A rational person would sell. But realtor DNA is different.

By the way, what’s the difference between a sperm and an agent? The little wriggler has a 1 in 250,000 chance of becoming human.

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Kaboom Thu, 11 Dec 2014 00:16:03 +0000 KABOOM modified

He sounded cold. “Actually it’s plus two here today,” the reporter said, “but it was minus twenty.” The poor guy was dispatched from the Globe’s cozy, warm newsroom in Toronto to go and cover the meltdown in Fort McMurray.

As this pathetic blog has suggested, Alberta could be ground zero for the Canadian housing correction which we now know is real. The Bank of Canada said so. Its routine risk report yesterday shocked those few people not addicted to this pathetic blog by suggesting the real estate market nationally is over-valued by something between 10% and 30%.

As a point of comparison, the US houseageddon shaved 32% off that market and almost tanked the world as a result. The American middle class lost $6 trillion in equity, and the country is still recovering. Besides, the BoC numbers were right up there with rogue economist David Madani’s 25% prediction, and twice that suggested by the IMF and most big US-based rations agencies.

Makes ya wonder. What the heck do they know at the central bank?

Fortunately, they told us. We’re pickled in debt and any shock to the system is likely to make the housing market roll over. Worse, the subprime mortgage market in Canada is growing rapidly, interest rates are set to rise (thanks to the gathering US recovery) and now we have the great oil shock.

Crude, by the way, continues to fade. The price of a barrel was down again on Wednesday (by 4% to just $61), which had stock markets in a dither. It sure looks like oil will test the sixty-dollar mark and could plow right through it tomorrow. While cheaper energy will be a magnificent boost to global growth, ensuring the US continues to power ahead and helping Europe get back on its feet, this is hell on wheels in Alberta. (It also pushes the loonie lower, suggesting the central bank may need higher rates to support it.)

So back to Fort Mac. The poor, banished scribe says he’s been following my regular dissing of house prospects in that city, and saw the dismal housing starts published here yesterday (showing a 65% plop). “But,” he protested, “the locals believe with all of the oil sands investment and infrastructure in place that there’s some kind of floor under the housing market, and that they will be insulated from things. They just have to wait.”

Aren’t people cute?

I explained the perfect storm. It’s bad enough in the GTA or Vancouver or Calgary that families have an average debt equal to 160% of their incomes (it was just 85% in 1990), but those cities have actual economies. They are not the creation of one major industry, the very economics of which has been shattered by market forces in just a few weeks. Worse, Fort Mac is like an ant farm. It sits in splendid isolation in the scruff and tundra, without satellite cities. In that closed world once jobs start to evaporate and the young turks aren’t Westjetting in every day, things change fast.

Besides, houses are hormonal. People buy them, accepting massive debt, when they feel strong and confident. When uncertainty and doubt slither in, it all changes. It doesn’t take much, as millions of American found, for negative equity to appear as house values slide below financing levels. Hardest hit are the last in – those who paid more, borrowed more, and have the least job security.

(Actually, this is a national problem. Almost half of all real estate buyers are now first-timers, and they’re carrying the greatest debt. The Bank of Canada points out that 12% of households have debts equal to 250% of income – and yet represent 40% of all debt. Yikes. Another 20% of all debt is shouldered by people who owe 350% of what they earn. And these super-debt monkeys tend to be the young, who are the first ones punted when a local economy tanks.)

Now depressed as well as freezing, the reporter had to listen to my reminder of the last great downturn in housing. The 20% tumble in 1990 in the GTA was not reversed for 14 years. So those who bought a place for their new baby at the 1989 peak didn’t see their house worth the same amount until they had a teenager. And Toronto, unlike northern Alberta, is a place where people actually want to live.

Well, I see that Re/Max’s latest report addresses the impact of cascading oil on Calgary. “It would have to be a sustained, long-term depression of oil prices to the point where it would have to start impacting jobs and the overall economy, and we’re not anticipating that for 2015,” says the company. Really? The Alberta economy is already looking at a $6-billion shortfall in revenue as royalties shrink. Layoffs and downsizings have materialized concurrently with the dip below seventy bucks a barrel. It is the kind of shock which will reverberate through a city where housing values were thrust higher 10% a year, by locals who have turned into Canada’s greatest borrowers.

But this is not about Alberta. Real estate’s been a disease everywhere. It’s kept people from doing what they should – saving, investing, diversifying into fat, happy little TFSAs and using once-in-a-lifetime cheap rates to trash debt. Instead we’ve borrowed our way into oblivion to buy stuff that may soon be unsaleable.

Whether your BIL believes the Bank of Canada or Re/Max could decide his fate.

I can guess.

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