Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Tue, 27 Jan 2015 22:51:35 +0000 en-US hourly 1 The quick & the dead Tue, 27 Jan 2015 22:51:35 +0000 BIG SMALL from Geoff modified

In a funk over lousy oil-induced earnings at Caterpillar, irritating Greek people and a blizzard, American stocks shed a few hundred points on Tuesday. In fact, so far this year (all 27 days of it), the S&P is down about 1%. In Toronto, despite the oil mess and the dingdongs at the Bank of Canada, the TSX is ahead 1.5%.

This volatility worries some people, especially those who waste their youth and kill brain cells reading sites like the Zero guy. (Suicide is far more efficient, plus you can cancel your Internet provider.) Well, days like these – when you have no idea what’s coming next – show exactly why a balanced and diversified portfolio works.

It’s simple. Take an account that has 60% growth assets (such as large-cap equity ETFs and real estate trusts) and 40% secure stuff (like bonds and preferred shares). When worried money comes out of dipsy stocks, it looks for a safe haven. So while equities get squeezed, bonds get plumped – and the price rises. Or when central banker poodles drop the interest rate, money looks for the best yields, jacking REITs, for example. Or when an unproven leftie who lives in a tenement with his unemployed spouse wins the Greek election, money moves into stable companies in safer lands. The TSX gains.

Since the middle of December, the ETF holding a basket of real estate trusts, XRE, has added about 13%. Bond funds (like XSB or XBB) are ahead 2-4%. Preferreds are up 2%. It all means a balanced and diversified portfolio is positive by several points in the last four weeks despite all the financial mayhem we’re reading about daily.

In contrast, if you like despair, moaning and endless nihilism as much as the wackos who post here daily, there’s always Calgary.

The situation just keeps getting worse, now with monthly sales plunged 36% and active listings swollen by 81.4%. There are 4,500 properties for sale, of which almost 2,700 materialized in the last few weeks. And while there have been Januaries when more houses were up for grabs, this sets a record for the greatest tidal wave of panicked sellers.

No wonder. It seems a safe bet now that oil prices aren’t going anywhere, except maybe down. Goldman Sachs says thirty bucks is possible. Other smarties are projecting a cheap-oil era lasting more than 10 years, with a semi-permanent imbalance between supply and demand. It’s the worst kind of news for the Albertan oil sands, where it costs a relative fortune to dig, heat and suck a barrel of the gooey stuff out of the earth. Of course, this is just what the carnivores in OPEC were hoping for. And are getting.

Suddenly the huge run-up in house prices in Calgary, and to a lesser extent Edmonton and across the line in Saskatoon, looks speculative and rash. When job security and incomes are at stake in a deflationary environment, it matters not how cheap interest rates get or if the banks drop their primes to 2.85% and mortgages to 2%. People used to six-figure salaries now contemplating EI realize quickly how easy it was to buy a house, and what a bitch it is to sell it.

This is the worst part of deflation. Real estate gets illiquid, and the debt grows more difficult to pay. Until you have been in a situation like this – and most people have not, especially the moist Millennials now clamoring for mortgages – you cannot imagine. It’s the deepest of wealth traps.

And expect it to grow deeper, says the brain trust at TD Bank. In fact these guys believe housing prices will fall in eight of 10 provinces this year, with only parts of Ontario and BC being supported by rate-induced hormonal house lust. Even there price gains will be in the 2-3% range

As for Alberta, says TD, expect a 20% sales plunge and prices lower by an average of 3.5% amid “extreme signs of weakness in the housing market.” Of course, it could be a lot worse. And I suspect it will be, given what’s happened in the last thirty days. The layoff avalanche, it seems, has not really started rolling yet. From the hottest province a year ago, Alberta is destined to be the most frigid in terms of growth, possibly slipping into recession.

Now, you may not be able to sell a house in Calgary this month, you also can’t live inside an ETF. So the message here is simple – buy real estate you can afford, as shelter, and never pretend it’s an investment strategy. Follow my Rule of 90 (ninety less your age = % of net worth in your home). Forget mortgage rates. They don’t matter. Ten-year home loans are 1.1% in Japan, and there’s no real estate boom. People in that land have learned in a weak economy nothing beats liquidity.

So, we now have a dangerous, two-city housing bubble, with every other market about to be spanked. Meanwhile, in a world of freaking bankers, morose cowboys, crashing loonies and swooning, house-horny virgins, the dude with the balanced portfolio swaggers serenely through the financial detritus. Make my day, he says.

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Down she goes Mon, 26 Jan 2015 22:55:13 +0000 SIGN 1 modified

News you can use (as opposed to what you hear on Global):

Mortgages dip.
No, it is not because of the recent and knuckleheaded move by the Bank of Canada to nip its trendsetting rate by a quarter point. Instead, RBC is easing fixed-term rates a little to reflect lower yields in the bond market. So you can now get a five-year fixed for 2.84%, down one-tenth of a point – the same price brokers have been offering it for months.

The bank’s posted rate doesn’t move. More importantly, the prime doesn’t budge, either. So variable-rate mortgages – usually the beneficiary of a central bank cut – remain the same. And remember that even if banks relent and dip VRMs, monthly payments will not be reduced. Meanwhile, though, the amount of interest banks are paying on deposits has decreased. More proof saving is so yesterday and investing is so now. In the eternal words of Meatloaf, good girls go to Heaven. Bad girls go everywhere.

Overweight in the USA
Long ago I made the point your portfolio should contain a minority of Canadian growth assets. So, for every dollar in a Canadian equity ETF, you should have two in American and international securities. Looks like we have only started to feel the effects of the oil slide, with job losses, more consumer inflation, a lower dollar and big government deficits in the months ahead. Add to that a horny populace that thinks $800,000 bug-infused semis are worthy of epic debt.

Meanwhile, have you been following the US economy? The federal deficit was 9.8% of the economy in 2009. It’s on track now to be 2.6% – the fifth consecutive year of decline – as tax revenues shoot higher along with consumer spending, thanks in part to cheap gas. The jobless rate is expected to be 5.5% in 2015, about half the level of six years ago. The US economy has been growing by 5%, and the Fed will raise its key interest rate in a few months for the first time since the GFC.

Look at the US home ownership chart below. Could the contrast be any starker?


Cowtown Death Watch
Yes, I know this irritates the hell out of realtors there, lots of whom have been coming here lately to have a dump on this pathetic blog. But that’s okay. How can you really be angry at anyone who believes what they read in the Calgary Herald? We all have a responsibility to care for them. Like retired geldings.

Well, this week opens with a 38.3% drop in house sales compared to the same time last year – from just over a thousand to 640. The big story, however, is listings. At almost 4,500, there are 79.2% more of them than last January. New listings have jumped almost 40%, perfectly in negative correlation with the price of oil. I hear listings have bloated in Saskatoon, as well. Edmonton next. Fort Mac is already done. Interestingly enough, this could be just the start.

Finally, a smart economist.
Because he agrees with me, of course. Doug Porter is the chief egghead at BMO and he supports the notion that the Bank of Canada was a total dipstick in dropping its rate and stirring the loins of all those moist Millennials now begging to borrow money. How, he wonders (me, too) can this possibly be good for a country with a condo economy and citizens already pickled in debt?

“Far from helping growth, the rate move could actually increase consumer and employer anxiety and uncertainty,” Porter writes. “More fundamentally, the economy’s shape is arguably already heavily skewed by the persistence of negative real interest rates, and the cut threatens to make the skew grotesque.” (Negative rates happen when the cost of a loan is less than inflation.)

Porter says the central bank’s move is not the ‘insurance’ that boss Stephen Poloz claimed, and will “do nothing” to help the economy.

Is there more to come?
Porter may be disgusted, but he thinks the Bank of Canada may cut its rate again in the Spring. Capital Economics economist David Madani agrees. In fact, now that the BoC has turned poodle some people think it could take its benchmark rate, currently at .75%, down to .25% by the end of the year – even as the Fed raises the cost of US money.

Well, imagine what that’ll do to the loonie. Could there be a clearer admission the Canadian economy is pooched?

I hear daily MLS sales in Toronto and Van are up. Poor sheeple.

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Sheeple Sun, 25 Jan 2015 17:25:49 +0000 DROWNING IN DEBT modified modified

When I was in Ottawa the last time as an MP, sitting in the government lounge behind the green curtains to the right of the Honourable Speaker’s chair in the House of Commons, I first heard the expression.

“Wonder what the sheeple are thinking?” Seems to me it was John Baird who uttered the words. I don’t recall the issue of the day, but I was struck by the word. Sheeple. He meant citizens. Voters. The manipulated.

I thought of that on the weekend when I read a comment posted on this pathetic bog by an insurance guy from Ontario. “People here are so mistaken if they believe house prices will soon fall,” he wrote, “especially now that mortgage interest rates will be dropping soon.”

This is exactly what the feds (including Mr. Baird) and the Bank of Canada want the sheeple to believe. And a lot have already fallen for it, with a torrent of calls last week to real estate agents in Toronto and Vancouver. On CBC’s suppertime TV show Saturday night a woman with babe in arms said to a reporter: “It’s great they’re putting the interest rates down because we just bought a new house last month and we’re going to sell ours next week.”

Since the wheels came off the economy in 2008, this has been the government’s primary strategy – make money so cheap it’s irresistible. Then tell people things are getting better. The sheeple will respond. They will borrow to excess and spend beyond their means. So the economy will get better.

Only it didn’t. So, the manipulators have done it again, now that the oil price shock guarantees incomes in Canada will be softening, along with our overall fortunes. If the herd was that gullible the first time, they’re saying in the government lounge, it’s a sure thing it’ll happen again.

Of course, it’s not 2008 anymore. Seven years later we have houses that are far more unaffordable, an epic new level of personal and household debt, less economic growth and now the prospect of collapse in our key export industry. So it’s simply astounding what one quarter-point nip in the Bank of Canada rate can do – especially when (so far) it means not a single mortgage or line of credit payment is cheaper than it was two weeks ago.

Let’s talk about oil and real estate. And deflation. As I’ve been yammering on about for well over a year here, this is the beast you should most fear, not the absurd idea you’ll be priced out of the real estate market forever. If what’s happening in Alberta and elsewhere is an indication, real estate could end up being the black swan few expected to swoop in.

As this week begins, year/year sales are down 33% in Calgary and listings are up 79%. Last year at this time there were 2,400 properties for sale, and now there are 4,400. That may not be a big deal historically, but the rapidity of this buildup has been breathtaking. It correlates perfectly with the job losses and employment insecurity now sweeping the region. But this is not just a Calgary story, since this misery is expected to crash economic growth in all of Canada in 2015, send governments spiraling into deficit and has already nuked the dollar, sending the cost of a new Harley up 20%. The agony.

Here’s what Cowtown permabull realtor Mike Fotiou writes on his blog: “At this pace, month-end inventory will cross north of the 5,000 mark, making it the 3rd highest January level since 2006.    High inventory, low sales: too early to expect the benchmark price to be affected significantly this month but if this market imbalance persists, we’ll see price deflation.”

Of course we will. And things, says a TD economist, are destined to get worse.

According to Dina Ignjatovic, oil (now at $45), will drop to around forty bucks on average for the first half of 2015, then achieve only $53 by the final months of the year. This is low enough to roundly spank the oil sands industry, as demand for crude stays tepid while supplies pile up. (US oil inventories are at an 80-year peak.)

Officially, Calgary realtors are not ceding to reality. “People outside of our province have a much different perspective than Calgarians do. They think the sky is falling,” the president-elect of the Calgary Real Estate Board told the Toronto Star. “Don’t get me wrong, there is a lot of concern here. But people in Alberta have seen this movie before. I think they are a bit more level-headed in reacting to this.”

Well, the thousands of families rushing to the exits right now suggest otherwise. But we’ll see. Perhaps like the gullible in Ontario, Albertans will believe a small rate drop (that does not benefit them) will compensate for paying too much for housing while taking on massive debt, in a world bordering on deflationary contraction.

If so, the dudes behind the Commons curtains are geniuses.

Fleeced again.

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Panic Fri, 23 Jan 2015 22:24:09 +0000 AUDI POTTY modified

Let’s put a fork in this week. And our national creds at the same time.

These are strange days here in Mapleville. First the feds trot out a $27 billion spending orgy to begin in six months, giving people extra cash to have kids and income-split. Then oil drops. So the finance minister cancels the budget. That was unprecedented. Then the central bank warns house prices are inflated by up to 30%. The second-in-command pledges no big moves in policy. Oil drops more. So the bank shocks everyone by cutting its rate for the first time in six years. The dollar plunges. People think money’s free and start shopping for real estate again. The prime minister says we’re cool.

Now we have (a) no budget, (b) a crushed dollar, (c) a wounded economy, (d) more house lust and (e) a government without a plan.

As economist Louis-Philippe Rochon wrote a day ago: “The (rate) move was a remarkable admission by the Bank of Canada that the Canadian economy was in far worse condition than previously believed. So much so, that they had to defy the expectations of virtually all economists, lowering rates now without any warnings.”

As you know, this pathetic blog has been urging you for a long time to have fewer of your nuts in Canada and more in the US and elsewhere. Growth here has ground almost to a halt. The oil thing is major serious. Job creation’s been horrible. The layoffs have started again. Your neighbours are pickled in debt. The whole world is slowing down. And now word of a 0.25% drop in rates that won’t actually help anyone has ignited new real estate horniness.

You think this ends well?

I don’t. Nor does Prairie Person, who left this comment last night:

“When a govt. panics, and what else can you call it when the federal budget is delayed, then there is a shocking cut in interest rates, except panic? If I were on a ship and it was having trouble staying afloat and the captain panicked, I’d be filled with fear. If the PM and his ministers are no longer in control and the best they can come up with is to lower interest rates, are we not going onto the rocks? Can you not hear the surf? This isn’t just about overleveraged homeowners. This is about the system no longer working. Does the Costa Concordia come to mind? The question is how can the blog dogs best prepare themselves to ride out whatever is going to happen? Garth, I think some serious advice and guidance is needed. Even you were taken by surprise by the rate cut. When you are surprised, I think we are in trouble.”

What can you do to mitigate the mess rising around you? I have six suggestions.

1. As deflation becomes more of a reality (and it is, or central bankers everywhere would not be doing rash things), understand this will punish real assets and reward financial ones. It’s a strong argument to have a balanced and diversified portfolio of the kind I’ve often described. What happened when the Bank of Canada shocked people? Stocks and bonds went up. It was an admission money is getting more valuable, and real stuff (like commodities) isn’t. So get with the program.

2. Expect surprises. More are coming. So never exit an asset class. A few months ago people were trashing bonds, but 2014 turned out to be a big win for people holding fixed income. After the rate cut, REITs took off, because their fat yields and stability suddenly looked irresistible. The point of having a well-built portfolio is to hold all assets in reasonable weightings because none of us can predict what’ll happen next.

3. Don’t try to time the markets. All through 2014 this blog was brimming with experts saying US equity markets were peaking. They weren’t. You are better to get invested for the long term and stop being paralyzed into non-action by the latest headline. Despite all of the crap past year – Ebola, terrorism, extreme weather, oil shock, ISIS, Ukraine, Hamas, deflation – a 60/40 balanced portfolio delivered about 9%.

4. Kill off your debt, however possible. The worst position to be in when deflation drops prices, incomes, profits, jobs and growth, is to owe money. Ask oil patch workers with McMansions in Calgary now losing six-figure salaries. No wonder listings are up 75%. They left selling too late. Don’t make the same mistake.

5. Don’t be a patriotic investor. You’ll regret being overweight in Canada. And yet, incredibly, 70% of all of us with investments have only Canadian ones. Now that oil has helped whack the economy, it should be obvious that at least two-thirds of your growth assets are better placed in US and international assets. This is part of being diversified, since Canada accounts for just 4% of capital markets and is likely to seriously underperform the US. Investing this way does not mean you have to convert your dollarettes, as there are C$-based securities available.

6. Above all, stay away from realtors. The lightly-educated and over-sexed masses may think this week’s rate cut means mortgages will never go up and housing can never drop, but you know better. A deflationary push – the very reason the central bankers panicked – is a death knell for real assets financed with mountains of debt. You can avoid that.

Or, you can believe the government.

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The confusers Fri, 23 Jan 2015 00:32:51 +0000 CONFUSER 1 modified

“You might be interested,” said a dude in Australia, “at how the news is being reported down here.” I was.

When the Poloz poodles at the B of C nibbled a quarter point off rates yesterday it not only shocked markets and stunned economists (more than usual), it was noticed around the world as something weird. That’s because just a few months ago it was widely reported that our central bankers thought Canadian real estate was overvalued by up to 30%. Danger, they hinted. Debt binge.

“So what gives?” the roo-jumper asked me in an email Thursday morning. “Are your bankers trying to chill the housing market, or turn it into the same bloody disaster that we have?” (The median house price in Sydney is C$844,000 while the median income is $67,000. Ouch. Anything actually habitable is above a million.)

Good question. Here’s the Reuters wire story most Aussies read:

(Reuters) – A surprise move by the Bank of Canada to cut interest rates on Wednesday could reignite Canada’s housing market and renew fears of a bubble, just as the market had finally begun to cool after a five-year run to record prices… “This means everyone is going to get back in the saddle and we’re going off to the races again,” said Toronto real estate agent Steven Fudge. “It creates a sense of relief that we haven’t seen the top of the market.”

Canada’s housing market paused in 2009 but didn’t collapse as it did in the United States, and prices have risen as low interest rates helped Canadians boost their borrowing to buy ever more expensive homes.

“The real estate market has nine lives. Every time it’s supposed to slow down, something keeps the party going,” said Benjamin Tal, senior economist at CIBC World Markets. “With the debt situation relatively elevated, cutting interest rates and adding fuel to the fire is not exactly the best thing for this situation,” Tal said.

James Laird, President of CanWise Financial residential mortgage brokerage, said the rate cut will have an immediate effect on the demand for mortgages, pushing people back into cheaper variable rates from higher fixed-rate products. “The Bank signaling that costs will be lower, even declining, should mean another year of growth for housing and real estate. We shouldn’t be surprised that when money is cheap people take more of it.”

Well, Zoocasa – one of the online house-porn sites for moist Millennials – said its traffic jumped by a fifth after the poodles did their thing. A realtor buddy of mine in Toronto called and chortled. “My phone is making love to me today,” he said. I looked at mine and felt quickly inadequate. “These guys sure know how to rescue a bad situation.” Back in November he’d been moaning weekly about listings over $1.5 million growing more frigid by the week.

So, you can see what the immediate emotional response was to this move. Lots of people think it means cheaper mortgages, the ability of people to therefore borrow more money, enhanced housing sales and (of course) higher prices.

Said one mortgage broker: “Those buyers who were capped at $800,000, this will allow them to go to the $850,000 that they really need to go to today, that tipping point in this housing market that makes the difference in a bidding war.” There ya go. Add $50,000 more devalued, depreciating loonies to the pile. The only trouble is incomes are not rising while rates are falling.

But one day after this boneheaded move, it’s becoming more apparent rates – at least mortgage rates – may not be moving at all.

The Bank of Canada does not impact fixed-rate home loans. The cost of those is set in the bond market and then filtered through the major lenders, the banks. And while bond prices have spiked and yields dropped over recent months as investors sought safety, these mortgages have yet moved little, if at all. The bankers are acutely aware of the fact bonds are at unsustainably low levels with yields liable to quickly back up. They also know loaning money at, say, 2% so people can buy houses at higher prices is going to bite us all in the butt years down the road when rates normalize. Is that the kind of risk you’d want your bank taking?

But the central bank rate does usually affect the prime rates at the Big Five and the cost of variable-rate mortgages. Except this time. The banks have not dropped their primes to 2.75%. In fact brave TD came out and said it wouldn’t. So, today, no VRMs have been nipped. No wonder. The banks are operating on thin margins these days with a big regulatory burden and new requirements to be richly capitalized. Once again, it’s all about risk, and keeping shareholders happy.

As the editor of Canadian Mortgage Trends points out, if competition forces the banks to drop VRMs, they’ll likely just reduce the discounts they now offer from prime. So, effectively, no change.

In other words, nobody with an existing fixed-term mortgage will pay less. No new borrowers taking out five-year loans will get a break. No existing variable-rate mortgage customers will see a discount. Not even an existing line of credit or business loan has been reduced.

This could change. Or not. Or stay confusing.

Regardless, in their haste and folly, the poodles have telegraphed to the world that Canada embraces debt and house lust as its economic salvation. To that end, we’re happy to sacrifice the dollar, starve the savers, enslave the kids and beggar the future. At least until the election.

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The Second Coming Wed, 21 Jan 2015 23:38:49 +0000 LOONIE

- Illustration by Gary Clement, @garyjoelclement

The last time central bankers cut the rate was in April of 2009. You remember that, right?

How could you not? Just weeks earlier stock markets had hit the lowest point of the financial crisis, plunging the most in 80 years. Investors saw 55% of the value of equities erased, Meanwhile the auto sector was being decimated, with mass layoffs happening there and across the economy. Wall Street banks were smoky black holes. Credit markets were seized. The media was running pictures of hollow-eyed people from the 1930s.

We’ve now had the lowest interest rates ever for six years. The result? Household debt has exploded, savings and investments have decreased, the economy sucks and house prices have largely doubled. If cheap money was intended to create a myopic society based on people borrowing their brains out to buy ever-inflating houses from each other, it was spectacularly successful. If it was meant to retool, rebuild and re-employ, it failed.

Six years later, there’s an economic shock as oil loses half its value. Now a detached piece of junk in Van costs $1 million, listings in Calgary bloat by 70%, half of us say we can’t save a dime because of excessive mortgage debt, and what does the bank do? Right. It cuts rates. It makes loans cheaper to acquire.

Because 70% of Canadian homeowners have fixed-rate mortgages, the move means nothing. None of their payments drop. Borrowers with lines of credit, and some variable-rate home loans benefit. But a 0.25% nip on a $200,000 LOC means a weekly saving of $9.60. Wow.

Meanwhile you can bet that every Audi-leasing, bottom-feeding, frenzied, buy-now-or-never realtor will be making this BoC move sound like the Second Coming. Like a mess of crazed posters here yesterday, they’ll claim it’s fuel for the housing bonfire, that prices will launch as a result, and it’s never been a better time to buy. Add to that the voracious bankers. Remember the awesome debt-creating offers of last Spring, capped by the 1.99% two-year special? Imagine what lies ahead in a month or two.

In short, the rate cut does diddly to ease our epic debt load. But it could do a lot to increase it. So why would the prunes at the central bank do such a thing? Why send the borrowing binge over the edge while making houses even less affordable and punishing savers with GIC rates soon to be pounded to sand?

Simple. Deflation. It’s out there, and it seems to be winning.

The Bank of Canada’s move was not unique. Last week the Swiss shocked markets with a deflation-fighting currency move. The Japanese central bank just pumped up its lending program. The Bank of England has thrown in the towel on a rate increase. Tomorrow the European Central Bank will unveil a trillion-euro stimulus package.

Inflation is most places is on the ropes. In Europe it’s now negative. In Britain it will soon be zero. In Japan it’s expected to drop by half. Growth has slowed in China by the most in 24 years. And now the collapse in oil, which fuels the world, is massively deflationary, especially as it carves $24 billion from expansion plans in Canada and throws people out of jobs. It was this, more than anything, that freaked Stephen Poloz and his Bank of Canada poodles.

The move shocked a lot of people. Bloombeg polled 22 economists prior to the move and the number predicting it was zero. By taking such rash and potentially destructive action, Poloz managed to cream the dollar, guaranteeing indebted families will be paying a lot more for their lettuce, hi-def televisions and Kias.

Not long ago smart Maples were taking my advice to buy cheap houses in Phoenix with $1.10 loonies. Today those houses cost 50% more and the dollar’s worth 25% less. Given the central bank’s admission we’re now a desperate economy with leaders unprepared to support the currency, there’s probably more to come.

Of course, if the bank just ends up costing you more without protecting your job, while encouraging bigger borrowing, this was a dumbass move. It won’t restore the price of oil or lure new investment capital here. It doesn’t slash anybody’s lending costs. Houses don’t get cheaper. But it’ll certainly increase debt. You can smell that. The aroma was all over this blog yesterday like a monetary fungus.

The question now seems simple. Will the real estate cartel and omnivorous lenders act responsibly? Will they remind people that snorfling more debt with deflation looming is like inviting your GF over while your wife’s napping? It may be thrilling. It’s also fatal.

No, I did not see this coming. What a rube.

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The shock Tue, 20 Jan 2015 21:53:28 +0000 WASHROOMS1 modified

(Shot by blog dog Winston, of Edinburgh UK, on a recent trip to India)
Bank of Canada cuts its rate 0.25%

Well, the inevitable consequence took just a few minutes today. The Canadian dollar lost almost 1.5 cents US within moments of the central bank’s dramatic and unexpected decision. At 10 am EST the loonie had plunged to 81.43 pennies. (It fell below 81 during Stephen Poloz’s disappointing media scrum.)

Almost no credible Canadian economists saw this coming. Nor did I. The cut not only wounds the currency and risks further inflating our credit and housing bubbles, but it sends a strong message that our economy’s faltering. Clearly the Bank of Canada is privy to information we are not. “The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks.”

We’re also being told growth in Canada will now be 1.5%, compared to 5% in the States. I hope you followed my long-standing advice to be heavier in US growth assets, and reduce your exposure to Canada. Now you know why.

*   *   *

Hong Kong’s 7.2 million people are crammed into 1,000 square kilometers of space. It has the most expensive real estate on earth. No wonder. Metro Vancouver has just 2.3 million, living in 2,800 square kilometers. Houses there are the second most expensive on the planet. No kidding.

In the eleven years the outfit called Demographia has been documenting this stuff, it’s the worst showing ever for a Canadian city. When a beater detached property that would make a barely adequate biker club house goes for $1 million (on average) people who analyze this stuff in a global context just shake their heads. We’re certifiable. Especially those in YVR who like to come here and tell us they’re special.

Got that right.

Now, let’s add some further context. The International Monetary Fund downgraded prospects for global growth this week. Canada’s economy, they said, will crawl along at maybe 2% (the US is growing at a 5% clip). As a result, the Canadian dollar plunged a full cent on Tuesday, down to less than 83 American pennies. Oil fell back into the $46 range (off 5% in one day). The latest stats on factory orders sucked, lower for the third time in four months. As you know, there were 20,000 layoff notices issued nation-wide last week.

Did I mention the daily Cowtown Death Watch? Sales so far in January are lagging last year by 33%. The big story, however, is listings. New ones are running 38% ahead of January, 2013, while total actives keep piling up – now ahead 66.4%. Imagine a swelling herd of uncontrollable wild mustangs, running panicked through the sagebrush. Those are the Calgary sellers. This is what happens when an external factor – in this case a 40% drop in oil since November – meets the kind of it’s-different-here delusion that typifies Canada. Yep. Stampede.

Is Vancouver, or Toronto or Mississauga, immune from this kind of catharsis? Unlikely. As I told you, a detached house in 416 today ($859,672) is worth less than it was a year ago ($894,654). To buy this house would cost $27,000 in tax and to sell it would peel off another $43,000. So, as a one-year-investment, this property would yield a loss of $105,000, or -12%.

And 2014 was a good year for real estate. In fact, this was the realtors’ summary in the GTA: “The strong price growth we experienced in 2014 can be explained with two words: listings shortage. The constrained supply of listings was especially evident for low-rise home types like singles, semis and town houses. The number of households looking to purchase these home types increased, while the number of homes from which they could choose decreased. This situation resulted in more competition between buyers and more aggressive offers.”

Strong price growth? Continually we’re told values rise monthly, but here’s tangible proof that real estate in the bustling centre of the biggest city costs less now than it did a year ago. Or nine months ago. Add in transaction costs and taxes, and homeowners who think they’re sitting on a growing asset are actually traveling in the opposite direction. Now the same is happening in Montreal, Winnipeg, Halifax – in fact in almost 70% of Canadian cities, real estate is already in decline. And we haven’t had a single rate hike. In fact, mortgages are cheaper than a year ago.

In contrast, last year a balanced and diversified portfolio (60% growth, 40% boring) grew by more than 8%. There was no property tax on it. No insurance required. If you needed some money, you could just sell some stuff (try marketing a bedroom when you’re tight for cash). It didn’t need mowing or watering. You didn’t have to shovel it. To sell it took a few clicks and ten seconds. No lawyer. No fluffer. No title insurance. No stress. No debt.

Anyway, you get my point. People in Toronto, Calgary, Vancouver and other places where houses cost too much have sacrificed a giant amount to acquire and finance them. As demonstrated yesterday, this has often kept them from saving or investing anything for the future. So when real estate turns from just shelter into a non-performing financial asset, as is happening now most places and will inevitably repeat in 604, it’ll be a shock.

The past three weeks in Calgary should give you a taste of what that means, on the ground, in real terms.

Remember: the goal of life is the freedom and means to relish the one thing that truly matters. Incredibly, it does not involve granite.


Ask Kelly what it takes to sell a $1.1 million house in Calgary these days:

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Harbingers Mon, 19 Jan 2015 23:35:59 +0000 BIKER modified

Harbingers. Things that hint of what’s to come. Like the first robin. Or, in this case, the first Re/Max agent turning in the keys to his Audi A7.

Mull the following, and tell me where we’re headed:

  • One in five people owning houses in Toronto will be up the creek if mortgage rates rise by just 2%. In other words, TD economists say people are poorer than they think. They might live in houses that have doubled in value thanks to societal house lust and dirt-cheap loans, but they’ve also taken on so much debt that even a modest rate hike would whack them. The average GTA family has about $410,000 in debt. The bank also figures all those downtown one-bedder concrete boxes won’t be easy sells when the current population of hipsters outgrows them. Half of them say they plan to move in five years. But who will buy?
  • By the way, Scotiabank economists have recently poured into the Je Suis Greater Fool compound to lend their support to a controversial call this pathetic blog recently made, riling house-horny terrorists. The US central bank, they confirm, will in fact start raising interest rates by the middle of 2015. In other words, if you think bond yields are going to stay put, well, good luck.
  • Also of interest: the average first-time homebuyer in the GTA is now 37 years old, mostly because real estate has drifted beyond the means of the normal person. This tromps on the romantic notion that most of these newbies are dewey young kids. I’m starting to think some may not even be virgins.
  • Cowtown Death Watch: Well, the numbers so far this month has been relentlessly consistent. So much for the local realtors who came here to rip me a new one for telling you in early January that things looked dire. So far this month overall sales are down a rattling 37%, while listings have now swollen 64% from the same month last year. The average price is down just under 2%, but it’s a fair assumption there’s worse to come.
  • So, is our house fetish likely to bite Boomer bottom in the years ahead? A new survey by HSBC suggests exactly that. The global banker polled 16,000 people in various countries and found only 24% of Canadians saved – anything – for their retirements last year. In the rest of the world, 40% of people managed to salt something away. Why? Pfft. You know. The majority of Canadians surveyed (52%) said they were too pickled in mortgage debt.
  • That TD report I mentioned also highlights the fact Toronto tenants, on average, are paying monthly rents equivalent to 50% of their paycheques – vastly more than is considered reasonable or sustainable, which shows you being downtown-hip ain’t cheap. Realtors love feasting on their folks, telling them they might as well use 95% or 100% leverage to buy the same soul-sucking 700-foot box they currently lease.
  • Why on earth would they do so, then face condo fees, property taxes and immobility? Here’s why, from an angst-drenched Millennial blog: “The heart of the matter is that if you’re only paying half your income on housing, the landlord hasn’t left you without heat for weeks at a time, and you don’t have bed bugs, congratulations, you’re doing okay in Toronto. For now. Do you dedicate 50% of your working life to funneling money into the pockets of someone who will one day callously serve you an eviction notice claiming their grand niece is taking over the lease in two months?” To solve that, they swallow $400,000 in debt.
  • And consider Canada’s top two real estate markets’ recent performance. In the GTA’s heartland of 416 the average detached house price dipped 4.2% from this time last year (over the whole region that average loss was 3.4%). And in Montreal the appreciation of the average single-family home was a big zero. Meanwhile in Calgary, well, the death watch continues. Do we now have a one-city housing bubble? What kind of harbinger is that?
  • Most poignant of all: the Globe ran a personal finance sob story two days ago about a Van couple (one a doctor) making $450,000, who bought a $1.1 million building lot (with a mortgage of $800,000) and now can’t afford the million needed to build (maybe because they have five screamers and a nanny). Praise be to Allah that her parents will borrow $1 million against the Vancouver house to give the kids the dough to proceed. And so will rise a $2 million house, with a foundation of $1.8 million in debt. We are so screwed.
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The awakening Sun, 18 Jan 2015 17:50:21 +0000 DRIVEWAY modified

The average detached house in Vancouver touched $1,002,000 in December. At the same time inflation in Europe turned negative – that’s called deflation. Bond yields dropped to historic lows. House prices fell in 65 of China’s 70 biggest cities. Oil plunged. And that was just the start.

This month Russia is close to collapse. Currency markets are in a twist. Oil’s now lost half its value and a wave of layoffs have hit Canada – almost 20,000 last week. In Calgary (as of Friday), real estate sales have collapsed 28.6% and listings are up an unbelievable 61.68%. There are now exactly 1,000 more properties on the market than a year ago (3,229 versus 2,235), and For Sale signs are sprouting everywhere.

In Toronto, prices have turned negative – something most people in the business considered impossible. The average detached 416 house is down 4.2% from a year ago. At $859,672, it is $100,000, or 11%, cheaper than it was in April, nine months ago. Over the entire GTA, listings this month have swollen by 17.8%.

The realtors are in denial. Says the local board: “The average selling was down slightly in comparison to the same period last year. A change in the mix of home types sold this year compared to last year during the same period accounted for the dip in the average selling price. “A constrained supply of listings for singles, semis and town houses coupled with balanced market conditions for condominium apartments points to further growth in the average selling price in 2015. A sustained period of strong listings growth will be required to account for the pent-up demand for ownership housing in the GTA,” said Jason Mercer, TREB’s Director of Market Analysis.”

In Montreal, the country’s second-biggest housing market, there are now 30,170 listings – a 14-month supply – and that number just increased by 8%. While sales improved in December, the average detached house in the last year appreciated by zero.

Jacob lives in Fort McMurray, epicentre of the oil patch and Canada’s most famous boom town.

“I have lived and worked here for just over a year now and there is a noticeable difference in the whole town. When I got here, it was always full throttle all the time, if employees didn’t like the boss they had or could earn a few cents more an hour at another job they moved immediately, there was that much work.”

The layoffs have started, of course. Suncor, Shell, the indie drillers and contractors, Civeo. Everyone expects more to come, because you can’t do business with $50 oil like you could when it was $100.

Listings have gone nuclear. There are 73,000 souls in Fort Mac, and currently 820 MLS listings. (Calgary has 1.2 million people, with just over 3,000 listings.) More importantly, where will eight hundred new families come from? Why would you move to a city where the jobs are leaving? Where the average detached house costs $750,000 – at least for now?

As the Globe reporter I spoke to there a few weeks ago points out, urban Ft Mac has one listing for every 76 residents. Urban Toronto has one per 501 people. So much for liquidity.

Jeff is a lifelong Albertan, oilman, living in Calgary. He tells me this:

“I am an engineering executive in the energy sector.  Because of position and proximity, I see a lot of information before it becomes public.  Project cancellations, budget curtailments, and layoffs are currently significantly under-reported in the media.  I’m holding more proprietary information now than ever before.

“Many of the recent layoffs have been to contractors.  Any contractor with a holding company is considered “EI Exempt”.  They don’t pay into EI, so they can’t collect it when they lose their job.  As an owner, you can’t lay yourself off.  The employment statistics will not accurately reflect the number of positions recently eliminated.  The reality is worse.

“The reported break-even figures for oil sands projects are also a misnomer.  They will apply to large, established facilities.  One can also not make blanket statements about the operational costs for mining facilities versus steam injection facilities.  The junior SAGD sector is essentially destroyed.  Billions in capital investment is at risk of massive write-downs (or outright write-off) in 2015.”

Hmm. Jeff, being an engineer, also did an analysis of current listings in some of the city’s tonier burbs. He found that occupied listings, as opposed to new-builds and reno-flips done on spec, account for just 26% of the houses for sale. “We are going to see over the next few months who buckles first,” he says. “ Three-quarters of the listings are held by builders who will have margin compression from lower selling prices on one side and their one-year bullet loans (full principal + interest) coming due on the other.”

Vancouver isn’t Calgary, Toronto, Northern Alberta, the Maritimes (where prices are falling) or Montreal. All real estate markets are local. Meanwhile deflationary influences are everywhere. If this is not reversed in the months ahead, and I do not see how, then real assets (including properties) will continue to decline in value, money will become more valuable, and debts more impossible. Those who fail to see that coming, which includes almost everybody, are in for an awakening.


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The other half Fri, 16 Jan 2015 23:27:11 +0000 couple 1 modified

Katy’s sister-in-law is smart, but late. “She sent me to this blog recently,” says K, “and I need your input.”

She’s 30. He’s 31. Baby’s 15 months. They moved out of their one-bedroom in North Van and live in her parents’ house (while they’re in Mexico). Life for three in 700 feet understandably sucks. So, they plan to rent something bigger for a while, “and have anther baby”, then buy when they can afford. On a combined $100,000 income in YVR, that could take a long time.

But here’s the question: “We paid $343,000 with 20% down 7 years ago and now owe $157,000 (making good headway in our opinion ). We met with a realtor last night and signed / listing at $347,000.

This morning my other half is now thinking that we should keep it and rent it out and gain equity on it over time?  I’m unsure…. Should we sell and invest the proceed in a balanced portfolio? Keep it, deal with tenants and gain equity, risk vacancy? Pls help.”

Sure, K. Help is almost as important on this pathetic blog as sinewy, rippling abs and thirsty underwear (we cater to all demographics). Since your other half is a confused puppy, let’s lay down some facts for him.

First, as an investment, this condo has sucked. After seven years there’s virtually no appreciation – and those have been the “best” years in history for real estate in 604. It shows how a bunch of lunatics buying ridiculous properties on the Westside, combined with an unethical real estate board, can skew the stats. In fact, after paying your agent for the sale, the place will change hands for less than you paid in 2008.

Now consider this: after retiring the mortgage and subtracting your down payment ($68,600), you’ll net just over $104,000. But to achieve that you spent $117,400 in financing plus almost $20,000 in strata fees and property taxes, plus your down payment earned nothing when it could have grown by 7% a year. In total, you spent $161,000 to end up with $104,000.

By the way, if you’d rented, the cost over seven years would be just over $100,000 and you’d have $84,000 in liquid assets (the down payment plus growth). See what I mean? Renting rocks.

Now what? Stick with an asset that has cost you more than it made, or bail? Well, a one-bedder in North Van is not going to generate enough income to pay the financing, strata fees, property tax plus give you a reasonable return on the $190,000 in equity sitting in the unit. Not even close.

That means you’ll be cash flow negative, and the only justification for losing money is that a tenant is helping to pay down the mortgage. In effect, this means you’re subsidizing the renter to get a portion of your losses back, which will be realized in a future sale – but after some capital gains tax is paid (since it’s now a rental).

Maybe your weaker half believes the condo will rise in value? But since it didn’t during the boom years for Van real estate, why would it now? The big news, K, is that we should all expect less from the immediate future, not more. The oil thing is already having a substantial impact on the Canadian economy, and it seems certain there’s more to come. Everyone around us has pigged out on debt, and now we have mounting job losses plus slower times ahead. All of this is bad news for your condo.

But, wouldn’t it also be bad for financial assets?

If you buy the wrong ones, for sure. But a balanced portfolio contains both exposure to stock markets and income-producing, safer assets. When stocks wobble (as they have been lately), bonds go up (as they are now). Meanwhile you get interest and dividend income which is locked in. Just as important is being diversified. That means an ETF with oodles of companies in it instead of individual stocks. It also means being twice as heavily invested in US and international companies as Canadian ones.

Cheap crude may be kicking the crap out of Alberta (Calgary house sales now down 30% and listings up 59%), but it’s a net benefit to the US, Europe, China, Japan – in fact the 85% of the world that uses more oil than it makes. Thus, 2015 should end up being a good year for investors, despite the rocky start. In America, for example, consumer confidence is at an 11-year high and Scotiabank just confirmed its belief US rates will rise by summer – to cool off an economy that could actually overheat.

Finally, tell the boy a balanced portfolio is completely liquid, while a condo in a down market can end up being a wealth trap. Plus your tenant might grow pot on the balcony. Or raise cuddly pit bulls. Or call you every time the toilet plugs. Or split.

Nope. List it. Duct tape your spouse to the bed and read him this post. The result will amaze you.

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