Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Fri, 29 May 2015 22:57:35 +0000 en-US hourly 1 The accident Fri, 29 May 2015 22:57:35 +0000 BATH modified

He’s been out of the country on work assignment for the past four years. Now he’s back. Shocked. “I can’t believe the euphoria in the real estate market,” says Jordan. “Keeping in touch with the headlines while away doesn’t do this story justice.”

So, he rents now. Big social mistake. “Most consider me a peasant of sorts for renting because “the monthly carry to buy is no more than rent”. For starters that statement is not true for most, and even if it were you are looking at rate renewal risk, ownership of an asset at highly inflated prices driven by ultra low rates and for most a single asset strategy for building wealth,” he explains.

“The scariest part is the people with these views are not stupid or uneducated, however I would suggest financially illiterate. As a society we need to do a better job of educating our people to make better financial decisions, the system has failed many and there will be much pain ahead. I’ll be happy to watch this car accident from a distance.”

Well, I heard from Jordan on the same day that some lights went out in Alberta. Across the nation, in fact. Logic tells us that a collision with destiny may be closer than it was a few months ago. Here’s why…

The economy’s blowing smoke. GDP (gross domestic product, a measure of economic growth) shrank 0.6% on an annualized basis in the first three months of 2015. That’s a lot. But it gets worse. Business investment dropped almost 10%, thanks largely to misery in the resource sector. The guys who support these industries are also getting creamed – activity down about 18% in both February and March. Then, as you know, we lost 19,700 jobs in April as retailers punted an army of workers amid lousy sales

And while the economy overall was in Preparation H mode with shrivelling job prospects, guess what people were doing? You bet. Buying houses with borrowed money. Residential investment expanded by 4% – a big number – thanks in part of unfettered condo construction. As I’ve also told you, household debt bloated considerably – by about 8% – during the same period GDP was shrinking .6%.

Do these people have any idea what they’re doing? Of course not. Jordan sees that. They’re probably hooped.

Now, what about America? News also arrived that the US economy shrank an equal amount in the first three months of the year. So are things are messed up there, too? Does this mean the Fed will never raise interest rates and a recession is coming?

Nah, it doesn’t. Incomes actually grew in Q1, payrolls rebounded by a strong 223,000 new jobs in April and corporate profits advanced 3.7% from the same time a year earlier. Car sales took off, selling at an annualized rate of about 17 million. Orders for capital goods increased in both March and April showing corporate investment in increasing, while going in the opposite direction here. Did you hear GM is spending half a billion to build a new Corvette factory, just for Boomer guys with hormone problems who like to wear ball caps and gold chains? And the US housing market is doing just fine – prices up 5% nationally – despite a jump in mortgage rates. New home sales are ahead 6.8% and the number of pending deals in the resale market is at the highest point in nine years.

The unemployment rate is down to 5.4%, or about half of the level after the GFC and the best number since the spring of 2008. Applications for jobless benefits – which have spiked in Alberta – are at 15-year lows south of the border.

So the consensus of economists is that the US economy will rebound, and grow at the rate of 2.7% for the current quarter, which means a few things. First, I sure hope you took the advice offered here two years ago to position more of your portfolio in American and international assets than Canadian ones. Second, the interest rate hike signalled by the Fed for later this year is still on. Third, never, ever, ever believe what you read in the comment section of this pathetic blog.

Unless it agrees with me.

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Little piggies Thu, 28 May 2015 22:47:50 +0000 PIGGY modified

So, would you stand outside for six hours, in the dark, on concrete, for the chance to get five bucks? Or maybe a thousand? Damn straight, if you’re a downtrodden #DontHave1Million Vancouver Millennial.

On Wednesday a local bank and mortgage flogger (Coast Capital) anonymously alerted the media that 300 little piggybanks full of coins and bills would be handed out the next morning, starting at 7 am.

“People are facing pretty hefty housing costs in the city and we want to give them a bit of a break – a little extra to help with other important financial goals,” the message said. “Tomorrow morning it might be $5 for their morning coffee, but it could be $100, $200 or even $1,000. We want people to start thinking about the larger picture of their financial well-being. A mortgage is a large part of that but there are other goals that set you up for success in the future and we want to help people reach those too.”

Well, the lineup started at 1 am. Chris went by and quickly saw it was a promotion for the bank’s new 2.25% variable-rate mortgage.

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“Marketing staff assured me everyone would walk away with something such as $1,000 off their mortgage, and likely other swag. I didn’t stick around long enough to find out,” he says. “From what I could see the line-up stretched 3/4 of the way around the block and contained possibly close to a thousand poor souls. Many certainly looked like they could use the money, and most appeared under 30.  It’s all a pretty sad state of affairs if you ask me.”

When the identity of the shameless self-promoters was revealed, the bank spokesguy added this: “We realized that housing costs in this city and around B.C. continue to rise, and we wanted to do something that symbolizes that people need help.”

Little piggies. Can anyone possibly find a better symbol for the delusional, house-horny, real estate-obsessed, price-swelling fanatics of YVR? Impressive. But in a sad way. Remember how we all felt so superior to Americans stampeding through public places to find caches of cash hidden in various cities last year?

Penn Park in Whittier, California suffered more than $5,000 of damages to trees, shrubs, fences, and sprinklers after more than 800 people got wind of the free money stashed in Pez containers by the creator of the @HiddenCash Twitter account, The Whittier Daily News reports.

Turns out we’re not so different, except we form nice lines when we stampede and swarm for freebies. Of course the bottom line is that yet another mortgage lender has victimized people, taking their intuitive greed and turning it into a marketing tool. In return for consuming their dignity, the company said it’s helping people.

It must suck even more than I thought, to be 30 and live in Vancouver.

Well, speaking of mortgages, CMHC just released its annual in-depth survey of borrowers, and so we have more proof that emotion, not logic, is the key motivator. The federal agency found that majority of people renewing their mortgages (60%, in fact) have actually been doing so before the term expired – which, in many cases, would mean forking over a penalty payment.

Now, why would they do that?

The main reason – “to avoid a perceived increases in rates.”

As we now know, US rates will creep up a little this autumn, then continue that trend for the foreseeable future. Canadian rates will follow, but the first change will probably not occur until some time in 2016. As mentioned yesterday, RBC thinks the Bank of Canada rate could be a point greater by the end of next year. Currently you can get a five-year floater for as little as 2%, then lock the rate up with a phone call if central bankers actually pull the trigger. However, about 80% of borrowers have now locked in to higher rates. Yes, scared.

This is why people buy stock in the banks. Did you see the profits? Those are the big piggies.

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Obedience Wed, 27 May 2015 22:22:28 +0000 DINNER modified

Let’s start this post on a happy note. It comes from Michael, a thirtysomething whom I have not met, but apparently reads this pathetic blog.

“I am for one glad I listened to your advice, stayed off housing and invested heavily into ETFs, stocks with returns over 20% per year,” he says (seriously). “Now I have an amazing offer from the UN and I am moving to Copenhagen leaving all the craziness behind. I wouldn’t have been able to do this with a strangling debt. Looking forward to a richer fuller life.”

See, kids? There’s more to this life than getting a 650-foot condo, a swollen mortgage, property tax bills and elevator thumb. Besides having a landlord subsidize you – since renting is absolutely cheaper than buying – not being shackled with real estate yields freedom and mobility. You can chase a job, a dream, or a hottie and make the most of the one asset you’ll never recover. Time.

Besides, like Mike, you can use that extra cash from renting to invest and help finance those experiences. Or, you could borrow from the Bank of Mom and be obligated forever, embrace epic debt, buy property close by (so she can watch) and little by little, bit by bit, turn into your parents. Obedience. Sounds fun.

It’s a daily revelation to me how many young people want exactly that. We need more Michaels.

Okay, let’s review the latest big news. The Bank of Canada on Wednesday decided to do nothing. No change to its key rate. This is big because a bunch of people, like Capital Economics’ David Madani, have been beating the drum saying the economy’s so bad that money has to get cheaper. He’s predicted (and still is) that the 0.75% bank rate will be 0.25% by the end of the year.

But that’s not likely to happen unless things get really, really worse. For the poodles to hack rates would take a plunge in oil prices to the $40 level, an entire summer of serious job losses, plus an unexpected plop in the all-important US economy. Any of those things might happen, of course, but all three would probably be necessary for such a drastic reaction in Ottawa – especially with a federal election barely four months away.

Here’s what the Bank of Canada now thinks: our economy will slowly grind its way back to capacity by the end of 2016. The American economy will grow nicely after a rotten winter-from-Hell first quarter. The biggest shock to the economy (oil) is in the rear view mirror. Our economy will expand for the rest of the year after stalling badly since last autumn.

So, no need for more stimulus – a position just about every Bay Street economist has lined up behind. For example, here’s how RBC’s assistant chief egghead, Paul Ferley, reacted:

“Our forecast assumes that sufficient evidence of above-potential growth being sustained will be evident by the second quarter of 2016, thus returning the central bank to tightening mode. With core inflation expected to trend closer to the Bank of Canada’s mid-range target of 2% during the forecast horizon, we expect the pace of tightening to be gradual with the overnight rate finishing 2016 at a still stimulative 1.75%.”

What does that mean? Well, ‘tightening’ equals raising interest rates and making money less available in the process – removing stimulus, in other words. So the country’s biggest bank is telling us the core interest rate in Canada will rise by 1% between now and the end of 2016.

One per cent? Big deal?

Actually that would mean the cost of a variable rate mortgage – now available for about 2% – would rise by half. It would also set the scene for a few years of gradual rate normalization meaning anyone taking a 2.5% five-year mortgage should budget to renew that at 4%, or maybe a point higher. And because there is an inverse relationship between interest rates and house prices, we should all expect any increase in the cost of money will mean a decrease in the value of real estate.

Of course, that would also suggest this is the bottom for the cost of a home loan.

This week the lowest number for a five-year VRM is 2%. A fiver fixed can be had for 2.5% and the banks are offering 10-year loans for about 3.7%. How you borrow depends on what kind of premium you’re willing to pay to avoid higher rates later. A woman I spoke at length with today just signed up for a 10-year loan, thinking she was so clever to lock in. But maybe not. Since the ascent of rates will be slow and measured, paying a premium of 1.7% over a variable rate, which won’t hit 3% for a couple of years and can be locked in at any time, is probably too much.

Remember, if you have investments and also have a mortgage, making 7% on your cash is going to build wealth faster than paying down a 2.5% loan. The time to sink money into the house is when the borrowing renews, not every month through increased payments. That’s so Jar Lady.

Well, this is all irrelevant to Mike. Screw a mortgage. He’s off to Copenhagen. Now tell me you’re not a little green.

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Choices Tue, 26 May 2015 22:14:12 +0000 BOZO modified

Josh is 28, single, gainfully employed ($125,000 a year) but lacks the one thing he says would make him a chick magnet. “No house. But I want to change that.”

He rents for $1,250 a month, has no debts, and is looking to buy a $300,000 townhouse in a distant GTA suburb. “My assets are $30,000 saved in my TFSA and $25,000 in an RRSP. Plus I have a few thousand in a locked-in account from an old job. So,” he asks, “is it a mistake to buy?”

By most measures, Josh is a rock star Millennial. Owes nothing. Doesn’t live in mom’s basement. Makes serious coin. Has fifty-five large in liquid assets. If he sticks with the current plan, saves big hunks of what he earns, shelters it from tax and embraces growth assets, he can be a god by forty-two.

Or, he can buy that townhouse.

I mean, seriously, how excited can a girl get about a guy who has little in the bank, carries a $250,000 mortgage, and takes her home to a cul-de-sac full of Chrysler minivans, tricycles, basketball hoops and skunks with ennui? But maybe that’s just me.

Besides, the mortgage would equal his rent, plus he’d have to shell out condo fees, property tax, insurance and the usual bag of extra costs – about $800 a month more. Come renewal time, Josh could count on the mortgage payment going up, and the property value going down, since they’re negatively correlated. Worse, he’ll then be in his thirties. Close to death.

The key question is this: is it worth trading liquidity and freedom for face bricks and debt?

The answer: not a chance. Especially now. As I keep trying to emphasize, these are the days to be liquid, not encumbered. Before long everyone will know why. But right now, a good portion of the population is seriously messed up. A survey days ago showed 31% of Canadians don’t agree with Ottawa’s budget move to virtually double the annual TFSA contribution limit, for example. Why would anyone oppose a government plan allowing you to invest money and pay no tax?

That’s simple. Because they think it’s not for people like them, and might help rich folk get richer. Kinda like why Albertans voted NDP. And here’s another survey, this one from CIBC, that’s equally weird. The bank found 90% of people have not, and will not, contribute the maximum annually to their plan (that’s ten grand, as you know). Fully 30% will contribute either less than they did last year, or nothing. And 20% said, TFSA? Is that a new designer drug?

So, figure it out. If you’re 30 today your accumulated contribution room by age 42 will be $130,000. If you had, say, $20,000 in a TFSA now (only half the amount you could have put in) and made the annual $10,000 contribution, plunking it into a nice mix of ETFs earning 7%, by 42 you’d have $223,928.

In other words, if Josh took the $800 extra he’d pay to own rather than rent and TFSA’d it, in a dozen years he could have almost a quarter million dollars liquid. To equal that, his cruddy townhouse would have to show an appreciation of 83% – or possibly far more depending on the pace of interest rate increases over the next two renewals. The chances of that happening are probably zero. And given the quality of suburban row house construction these days, that puppy could be in need of some serious upgrades just to retain its value.

Besides, this gives Josh way more options than spending a decade shoveling money into a yawning mortgage. If the real estate market takes a dive, he can jump in – maybe even buying a place with cash, then taking a HELOC against it and creating both a tax-deductible mortgage and an investment portfolio. Or he can keep at it, putting his $800 a month into the TFSA while spending the rest on babes and cars – and expect to have a tax-free account worth $1.82 million by age 65, of which $1.4 million would have come in taxless growth.

That TFSA, if still churning out 7% (the long-term average for financial markets) would give Josh $127,000 per year in unreportable income, and he’d qualify to collect his CPP and OAS (if it still exists). Plus the $1.8 million nestegg would not diminish.

Do you have any idea just how sexy a 65-year-old dude can be with a six-figure non-taxed income, a life of unfettered, possibly debauched, experiences and almost two million in the can? I mean, compared to a retired guy with a paid-off townhouse in the wilderness?

Pick your path, Josh. Remember what Meatloaf said.

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#hard Mon, 25 May 2015 22:41:31 +0000 CRAP modified

As you might imagine, the big anti-Boomer, anti-foreigner, anti-politician, anti-anti rally in Vancouver yesterday was a bust. About a hundred residents (maybe 150 including pets) care that the average detached house costs $1.4 million. To be fair, maybe the rest were Tweeting. Or at hot yoga.

In any case, everyone’s off the hook – the mayor (who caved Friday night and called for a speculation tax), the premier and the feds. It’s one thing for 25,000 people to sign an online petition but actual protesting is, like, real hard.

So is voting. In the last federal election, while 73% of everyone over the age of 55 cast a ballot, the rate dropped to 54% for GenXers and plunged to 38% for the under-25 condo-buying set. So what the kids need to understand is that Twitter, Instagram, Facebook, blogging and social media in general ain’t gonna win diddly for Generation Squeeze.

Politics is a numbers game. If you don’t have them, you lose. So if you call for a big rally in downtown Vancouver and get tons of advance media, then light up the entire Twittersphere with live coverage, you’d better be certain you can deliver. Sadly, organizer Eveline Xia did not. And she’s such an earnest young woman. Pity.

The fact is Vancouver, like most of the GTA – where people sleep in their cars to buy $2 million suburban piles – is obsessed with housing. As I strove to make obvious yesterday, this is not the result of cash-laden Chinese dudes invading the Lower Mainland, it’s all about a bubble mentality that has gripped everyone. Yes, stupid cheap rates have engendered reckless borrowing. Yep, the lenders are ethically challenged for their race to the bottom. And, for sure, by taking away the bankers’ risk, the federal CMHC is core to this speculative frenzy.

But central is the intergenerational movement of money, as boomers suck out their own equity and raid retirement savings to enable their horny kids to buy and become mortgaged. Without the Bank of Mom, according to a BeeMo report, 40% of first-time buyers and 50% of move-uppers would not be able to purchase. And if that were to happen, the market would stop dead in its greedy little tracks.

Of course, that won’t happen. Now that delusional parents have stepped in to thwart market forces (ie – when stuff costs too much people stop buying because they don’t have the money. Duh.) it will take require some misery to do the job. It looked for a while like the oil collapse might kick it off, but the effects of that are proving to be more muted and localized. In Calgary, for example, sales are running about 30% behind last year. It’s a similar story in Saskatoon, where last month listings swelled 34%.

The brains at CMHC came out with their forecast on Monday. “Lower oil prices are contributing to disparities between provincial housing markets. A slowdown in housing starts and resale transactions in oil-producing provinces such as Alberta will be partly offset by increased housing market activity in other provinces, such as Ontario and British Columbia, which benefit from the positive impacts of declining energy prices, a lower Canadian dollar and continued low mortgage rates,” said chief economist Bob Dugan.

The feds are predicting the average house in Canada will trade for $422,129 this year, and $428,325 in 2016. But, “due to the recent decline in oil prices, our assessment is that there is more downside risk than upside risk to our forecast.”

So we’ll see. Ditto with interest rates. It seems clear the Fed will pop in the next few months. Maybe even in June, if the latest pronouncement means anything. “If the data comes in according to my forecasts then the time is near where we’re going to be wanting to raise rates,” Fed insider Loretta Mester said Monday – just days after chair Janet Yellen made a similar point. Obviously the US central bank is signalling hard to the markets that the trigger is about to be pulled.

Once the Fed starts to push the needle, it’ll be a lengthy process. Anyone thinking a couple of quarter-point increases will be the whole story isn’t paying attention to history, and fails to understand the risks of too-cheap money. The more debt that citizens accumulate now, the more miserable will be the consequences as rates slowly normalize. I wish the house-lusty kids would get it, and that those taking out 2.5% five-year mortgages would quit thinking we’re the next Japan.

We’re not. But we could be the new Alberta, if Eveline ever learns how politics works. Way worse.

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Time to be heard! Sun, 24 May 2015 13:02:56 +0000 MICROLOFTS modified

– Vancouver Courier

Old people have money. Young people have time. It’s a broad statement, I know. But in general it is true. The older we get, the more we’d trade wealth for extra years. The younger we are, the more we demand both. We are so arrogant.

And this brings us to the worn stone steps of the Vancouver Art Gallery today, Sunday, where the youth of YVR are revolting. They’re angry, too. Not gonna take it.

“It’s time to be heard! There is no end in sight to the stratospheric home prices in Vancouver and its impact is being felt across our communities.

“Families and professionals are leaving in frustration, homes sit vacant while too many need shelter, rent is sky-high, businesses can’t retain talent in this city, and the next generation of Vancouverites are forever priced out. The affordability crisis is affecting everyone in the income-spectrum and problems are all interconnected. But what’s to be done?”

So, a big rally against real estate prices in a city where the average detached hovers around $1.4 million. The kids, led by Twitter warrior Eveline Xia (I spoke with here a few days ago, as you know), have turned this into a Millennial-vs-Boomer, local-against-Chinese, all-vs-politicians movement. It started with her #DontHave1Million campaign, spread to the conflict-loving MSM, spawned a tax-foreigners petition with 25,000 names and now has gripped the pliant mayor, Gregor Robertson.

Friday night, after years of silence, and as it became apparent the winds were shifting against him, he issued this statement:

“We definitely need taxation tools that discourage speculation on real estate. It’s clear that rampant speculation on real estate is driving up prices in Vancouver. Vancouver needs the BC Government to take action on creating a speculation tax and recognize that we need a fair and level playing field to make housing more affordable for residents in Vancouver, and throughout the province. Their complete absence in supporting low and middle income housing is making it extremely difficult for people, especially young people, to live and work in Vancouver.”

Next in line was the local condo king, Bob Rennie – one of those West Coast, anything-goes marketing guys as responsible as anyone for blowing on the embers of housing lust. We need a speculation tax, he told a big conflab of business people last week. “It’s speculation we should be concerned about. The conversations aren’t about foreign investment, the conversation is about China. That’s the elephant in the room.”

Rennie (and his political horse, Robertson) is calling for a sliding-scale tax linked to the length of time someone owns a property – in addition to capital gains tax, and the CRA’s treatment of quick gains as 100%-taxed income. Where should the money go? “Let’s repatriate some of that money back to first time buyers,” he said graciously, hoping everyone in the room would forget he makes his living selling boxes in the sky to horny kids.

Well, it’s clear those same kids are feeling victimized – persecuted by a system they say is broken and unfair. In 1976, they argue, the Boomers needed to save for only five years to amass a down payment. Now it’s fifteen. Average wages, they add, are pitiful. Besides, everyone has to go and get a degree or two, incurring debt. They feel the world has failed them when they cannot turn into their parents and within a short time of leaving university have a marriage, a kid, a detached urban house, a retriever and a picket fence.

And so they Tweet. They petition. They op-ed. They blog. And they march. Here is how it looked on Sunday:

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Time will tell if others, like the mayor, bend and sway with the wind. With a federal election on the horizon, and the moist generation leaning left, it would not surprise. But I would obviously be a mistake. It’s always sexier and more fun to blame the system than yourself, your peers or your family.

The truth is a spec tax won’t make a SFD in Vancouver more affordable. Nor will beating up on Chinese immigrants or investors. Only by addressing the root causes of this stupid-price situation will any sanity return to the real estate marketplace.

We know what they are. I just devoted eight years to telling you. At the top of the list are the lowest interest rates ever which have encouraged excessive debt, overspending, and inflated house prices. Once rates start to normalize, the thud will be deafening. Then there’s financial illiteracy. You know, the kind that leads BC residents to spend (on average) 108% of their incomes, adopt a high-risk, one-asset strategy and turn their houses into a futures market. Add in irresponsible lenders, like Vancity with their laneway and free-down payment mortgages, plus CMHC, which strips away banker risk and gives cheapo loans to people without money. Low rates, easy credit and market-bending policies have bred greed and entitlement. It’s classic bubble thinking.

But there’s an even greater cause. It’s Mom.

Seriously. If the market were left to its own devices, house prices would have started to wither several years ago. Today 42% of all first-time buyers rely on the Bank of Mom for the down payment – a reliance that is swelling along with house prices. BMO also found that an equal number of move-up buyers are being financed by parents, most of whom are tapping their own windfall equity to keep the party going.

As you might expect this has bred the very kind of irresponsible, anti-social behaviour the moist Millennials are accusing everyone else of exhibiting. Almost half (48%) of Mom-financed first-timers are willing to jump into a bidding war, as are 36% of the upsizers. And here’s the most telling fact (that you will not hear on the steps of the VAG today): without the Bank of Mom 40% of first-timers and a whopping 50% of the move-up crowd would not be buying.

If that were the case, if this torrent of money from the hated Boomers and local families was not gushing into the real estate market to support the entitlement of the virgins, prices would descend rapidly. But, it’s so much easier to blame the Chinese. The premier. The oldsters. The system.

Of all the things wrong in the world to vex about – climate change, over-population, ISIS, Canada at war, public debts and deficits, punishing taxes, animal depopulation, homelessness, a sliding economy – the young protest over real estate.

We are so arrogant.

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Don’t do it Fri, 22 May 2015 22:38:31 +0000 SOUP modified

For the past four years, says Jon, he’s been waiting for houses to cheapen. “Renting, saving and investing,” he tells me, “with bated breath.”

Finally it was all too much. “As we stand on the precipice of historic housing highs,” he says with a flourish, “alas, the idea was hatched that we moved back in with Mom – after putting on an addition and renovating the place.” Late thirties, two screamers – it seemed like a good idea. After all, the old gal lives in a good hood, and it “would show the kids that family sticks together.”

But, adds Jon, there was “a nagging feeling prompting us to assess our sanity. Hence talking to you.”

That is probably a mistake, but let’s push on. Turns out Mom has $300,000 left owing on a place worth five hundred, and Jon would personally foot the $150,000 addition. “But what happens when Mom’s pension runs dry in ten years, or when she croaks and the other three siblings want their cut,” he asks?  “Any equity we put in until then gets split?  What provisions could be made in advance to avoid squabbles down the road regarding the inheritance?  Or do we hold the course, forget the whole thing, and ship a case of depends and Purina anonymously? Can this end well?”

Jon needs to remember one of the GreaterFool cardinal rules: never invest in real estate with anyone you’re not sleeping with. That includes mothers. Your own, I mean.

The potential problems are legion. If Jon’s going to spend serious money renovating the house, he needs to be on title in order to protect that investment. But with Mom on a pension and a substantial mortgage outstanding, it looks like the house equity constitutes the bulk of her net worth. So, will the other three children come looking for their slice when she passes?

You bet they will, presuming Mom’s will divides her estate equally between the kids. So, Jon would not only inherit a $300,000 mortgage if he assumes title with her (and she lacks insurance), but he’d have to remortgage the place to suck out two-thirds of the remaining equity (including the addition he financed) in order to pay them off. Disaster.

How to avoid this? Don’t do it. In fact, Mom-with-the-$300,000-mortgage should sell and rent, since it would lower her overall living costs and give some cash to invest for an income stream she obviously needs. Hopefully she’ll live long enough to consume it all. However, if Jon truly loses his mind and goes into this unwise situation, he needs to ensure Mom’s will is rewritten to deal with the new reality. He should also pay the premiums on an insurance policy (on her life) large enough to handle the inheritances.

But the best strategy is to keep the baited breath, save, invest and rent. Because with every day that passes, we move closer to the event he has been waiting for. Most people don’t believe this, (which is why I have no friends) and a big report on debt in the last few days reinforced the popular meme.

Maybe you saw it. The Fraser Institute said there is no borrowing crisis. “Little evidence that Canadian households are being irresponsible in taking on new debt,” it said.

Really? With $1.3 trillion in mortgages and households owing more than at any point in history, with the IMF and the World Bank, all major ratings agencies and virtually every major economist – even the prime minister- warning about piggy borrowing habits, how can this be?

The think tankers make this argument: assets (mostly real estate) have risen 31% in the last five years, while debt (mostly mortgages) has increased “by just” 21%. So, whazza problem? Besides, the Fraser Institute says compared to other countries, like Norway, Switzerland and South Korea (seriously, I’m not making this up) our debt-to-income ratio don’t look so bad. (But compared to the country most like us, the US, it blows.)

Conclusion: “Canada doesn’t have that problem. Our banks have tighter lending standards and Canadians are clearly managing their debt levels responsibly with no evident strain to their incomes or balance sheets.”

Well, remember those people sitting in lawnchairs yesterday outside a sales centre in a GTA suburban field waiting to spend $2 million on a monster particle board house that increased in price $150,000 overnight? Those are the faces of debt. It is the intersection of greed and stupid. This is what risk is made of.

As Capital Economics points out, the think tankers took only mortgage interest into consideration (not debt repayment) when doing their report. They didn’t acknowledge the potential of a real estate correction, as is now gripping Alberta. And they reinforced the delusional belief interest rates can never rise.

The scariest part of this is believing that houses are more valuable because they cost more. In fact, real estate costs more because money costs less.

There is no intrinsic increase in shelter itself, just that cheap rates have allowed people to pile on epic debt and carry it for the same monthly fee. Say the economists: “While total net worth has risen by 141%, real estate has grown by 211%, contributing 55% to the overall gain in net worth. But with house prices now at record high levels relative to incomes, there’s obviously a greater than normal risk of a correction which, in turn, would hit net worth hard and, indirectly, negatively impact household spending. Since household spending represents more than half of the entire economy, these household balance sheet risks should be taken seriously.”

Jon should rent. His mom, too. Let the greater fools borrow. Just watch.

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Through the roof Thu, 21 May 2015 22:41:27 +0000 MOVINGUP modified

On Tuesday the second phase of “Aspen Ridge” McMansions in the distant GTA burb of Vaughan went on sale. People started lining up on Friday for the chance to buy a particle-board monster home with endless toys. A detached house on a 50-foot lot started at $1,641,990. With closing costs the premium model came in at over $2 million.

This was special pricing for the ‘VIP’ waiting list – people who still felt they had to sleep three nights in a lawn chair. There was another ‘VIP’ event for potential buyers on Wednesday, too. But this time there was an added surprise – a $150,000 increase. Now the basic fifty-footer was going for $1,791,990. By the way, that represented a half-million-dollar increase over the same house sold by the same developer in the same project one year earlier.

Guy lives not far away. “The houses are gorgeous,” he says, “but to go up $500,000 in a year is ridiculous.” By the way, these places are available to the general public this Saturday. If there are any left.


While obsessed people willing to swallow unbridled risk camp out and pee in jars for the chance to shell out two million on an unbuilt suburban pile, it’s a far different reality in others parts of the country. Like Alberta.

Matt check in from Fort Mac. “Don’t judge me Garth,” he says, “but hookers and blow have gone through the roof here!” Good thing, because real estate is peeling in the other direction.

“Well, one of my workmates bought a lovely little shack in the Mac for $765,000 in the spring of 2014 and then lost his job at Suncor a month before Christmas,” Matt tells us. “He and the wife and baby put said anchor up for sale in late January 2015 for $785,000, it is now listed for $760,000 along with all the other ones mushrooming up on his street. They also had an offer in on a detached home in Edmonton for $450,000 pending the sale of their Northern Albatross. That ship of limes has now sailed, leaving them with scurvy and bleeding gums.”

Actually, across Alberta, sales to the end of April were off 24% with listings up and the average sale price down 2%. That’s consistent with Calgary. As of yesterday sales for May are off 25% and the length of time it took the lucky people to sell is up 52%.

Ratings agency Fitch said this week it forecasts Cowtown prices are still too expensive by a whopping 17%. “With oil prices off more than 40 per cent from a year ago, there are broader worries of a contraction in the region … with employment prospects shakier in a region highly dependent on commodities pricing, uncertainly has begun to chip away at demand for housing.”

You bet. For the first time in half a decade, the number of Canadians collecting jobless payments has increased – and we are supposed to be in year six of a recovery fostered by government stimulus and the lowest interest rates since ever. Unemployment insurance claims have swollen by 9% in Alberta, leading the nation in claims for the third month running. EI ranks are also growing in Saskatchewan and the Martitimes.

Anyway, back to Matt: “Now let’s talk huge oil paycheques: they’ve shrunk. Contractors making $125hr last year are working for $85hr, and many staff hires are working for $65hr instead of $80hr…the pain continues. I (like all great authors) have resorted to selling my self-published novel out of the back of my pick-up truck to make ends meet…300 sales and counting. Jeez, I wish truck-nutz weren’t so damn expensive.”

David Madani is the chief egghead with Capital Economics. In his mind the Alberta misery is vastly overweighing the hormones in Vaughan. This week he upped the ante with a forecast saying things are bad enough the Bank of Canada will cut rates again. And again. “We expect the economy to struggle over the rest of the year, disappointing policymakers. In our central scenario, we have pencilled in another 25 basis point rate cut in July, and another again in October. Reflecting this, we expect the Canadian dollar to resume its downward trend, ending the year at US$0.75.”

So it’s almost like there are two Canadas. On one hand, moany Millennials with six-figure incomes say the system’s unfair and broken because they cannot afford detached houses the way their parents did four decades ago. In this Canada people sit in lawn chairs waiting to spend millions on an unbuilt house in a former field that even the cows thought was boring. On the other hand, economic growth for the nation disappoints, job creation is dry, exports are thinning, houses go unsold and we’re told money needs to get even cheaper to rescue things.

In between the extremes is the most indebted middle class in history, and Albertans voting in socialists.

Can you imagine a better time to be unencumbered and liquid?

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‘Mom, that’s not the point’ Wed, 20 May 2015 22:02:33 +0000 SHORTCUT modified

“I looked up ‘conflict of interest’ in the dictionary,” says Joe, “and there was a picture of Bob Rennie.”

For those in the gritty East who think only Brad Lamb epitomizes the omnivorous side of real estate marketing, Bob Rennie might not be a household name. But in dreamy Vancouver, he’s Da Man. The 59-year-old is condo king of the Left Coast, owner of Rennie Marketing Systems, the biggest flogger of multi-unit projects, and the genius behind the troubled Olympic Village plus the Woodward’s project. That condo conversion on the lower eastside took useless, affordable housing for society’s displaced and turned it into high-end condos for yuppie princes.

This week Sir Rennie crossed a line.

“I hate when a realtor starts telling people they should give up on something that might actually be attainable if conditions change and they make better decisions,” Joe complains. “It’s just depressing that someone who adds so little value to society has this kind of influence on decent people who might actually add something.”

What did Bob do? He gave a speech saying young people who live in Vancouver should throw in the towel and simply give up on the dream of ever owning a home there. No more land is being  created, he said in a spurt of clarity, so “there’s depleting inventory and increasing demand. I know nobody wants to hear that, but unless we’re going to take a big broad brush stroke and add a lot of density, we’re in trouble.”

And what does that mean? Bingo. More condos for Rennie Marketing Systems to flog.

This kind of message ain’t new. Van property marketer Cam Good famously told the locals they’d just have to accept being priced out forever by foreigners. The numbnuts at Vancity, masters of self-promotion and purveyors of fine mortgages, have warned the average house will go for $2.1 million within a few decades. And now Rennie says if you’re young, get used to living with an elevator and a storage locker.


Maybe you remember Eveline Xia. She’s the 30-year-old who created the #DontHave1Million Twitter campaign that I scorched a few weeks ago, and which made national headlines.

“We may have more in common than you think,” she said after calling me yesterday. Eveline is now famous, of course. Poster child for the disenfranchised. Spokesgirl for a generation that will never know what it is to clean eavestroughs or have a raccoon in the garage.

“This is about an entire swath of society, and it’s getting worse. This is not about asking for handouts or pity. It’s just that if professionals can’t afford to buy a house in this city then something’s not right. Housing is closer to food than anything else. It’s a necessity. You need it to function properly in order to have a healthy society.”

So we do agree on a few points. Eveline sees massive risk in the level of debt the locals are taking to buy homes, desperately. “People here can barely afford groceries because they’re spending all they possibly can on a house for fear of being left behind. Realtors are feeding this mentality and this fear, and that’s where you come in.”

So, does she feel entitled to own a house? Does she expect a ‘fair’ society to hand her a set of keys?

“No. I’m not young and I am not entitled. I’ve lived on my own for years, don’t have a car. I’m frugal. My mother offered me money to buy a home, and I said, ‘Mom, that’s not the point.’ And it isn’t. Governments are borderline criminal for allowing all of this debt and fear to happen. But they do nothing because they don’t want to be in power when the adjustment takes place, now that they have allowed to massive debt to occur.”

All true. Politicians at every level have been enablers of a bad situation. They’ve pandered to home ownership, using the tax system, monetary policy and social programs to encourage a one-asset strategy that’s now yielded the twin beasts of high debt and high prices. They’ve created the conditions in which predators like Mr. Rennie can prey on the financial illiteracy of the masses, and squish the young in the process.

Nobody’s entitled to a house. And while the current situation sucks for those who feel shut out, let’s hope Eveline and her Twittersphere full of followers have enough smarts to know what they don’t have, may be a blessing.

When condo marketers are newsworthy, we’ve lost our way. This is not over.

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Stay calm Tue, 19 May 2015 23:07:56 +0000 SLEEP modified

The doomer media is now full of warnings we’re on the verge of change, for the worse. That’s half right. Change is coming. Whether it’s good or not depends on you.

Here’s what we know. The first interest rate shock in years is now a few months away. That the Fed would hike by this autumn has been evident for some time. The latest jobs numbers (223,000 more of them last month) and housing data (a 20% surge in US starts) seals it.

We also know this is the bottom for Canadian rates, unless the Bank of Canada boss is lying to us. His speech yesterday was chock full of ponies and moonbeams, saying the economy is on the path to greatness, and we arrive in 2016. “We project it will take 18 months or so to get there.”

That means mortgage rates will be rising. Only the timing and pace are yet to be determined. But the status quo is kaput.

So what does it mean for investors in things other than houses?

A volatile summer seems like a reasonable thing to expect. Stock markets don’t like higher rates, even though they indicate the economy’s creeping ahead. When the cost of money goes up so do loans, and that impacts corporate profits. High rates boost bond yields. So fixed-income assets give a sweeter risk-free return and compete with equities. With stock markets trading near record highs for months, and no correction in the US since way back in 2011, nobody should be surprised to see one happen. In fact, it’s way overdue.

There are three things you need to remember this summer, other than where you put your skin-tight Speedo briefs, and the instructions for safely removing them from wet privates.

First, timing the market is a really bad idea. Most DIY investors, and all doomers don’t get this. In truth, nobody knows what’s coming, so the odds of making a correct call are woeful. Worse, in the age of Googlenomics and authoritative-sounding analysis from complete dorks, it’s easy to be led astray. After all, fear sells. And investors who succumb to their emotions usually regret it.

There’s statistical evidence to prove this, by the way. The chart below plots a sell-when-scared-buy-when-calm strategy compared to a simple buy-and-hold for the exchange-traded fund called SPY (it mimics the S&P 500). If you bailed every time markets fell 5% and then waited for them to stabilize, you made a gain of just over 200% in the last two decades. But if you forgot about volatility and rode the wave, your gain is more than 600% – despite the dot-com bust and the 2008 GFC.

SPY modified

Second, a correction is not a crash, collapse or capitulation. Usually it’s an opportunity. So lighten up, already. A bull market can go on for years (we’re in one now, and it’s far from over) and experience corrections that pull it back 5% or 10%, without changing the long-term direction. That’s exactly what happened in 2011 when US stocks were nailed for a 20% dive thanks to the debt ceiling crisis. The comment section of this blog ran red from every orifice and the doomers were exhorting you to invest in bullion, tuna and toilet paper.

But, it passed. And so will the next one. Here’s more statistical proof: since 1945 only one in 10 corrections has ended up in a bear market – where it predicted larger losses to come. That means the doomers have it wrong 90% of the time. Your Pilates instructor is a better source.

BEARS modified

Third, balance is the best defence. This is why smart people have portfolios with boring, safe, comatose assets in them as well as the sexy, growth stuff. For example, when equity markets fall during a correction, the price of bonds will rise – as money flows to safer havens. If you hold both in a portfolio in the correct weightings, there’s a built-in hedge against chaos.

Fixed income assets also pay you to own them. Like preferreds, currently pumping out a 5% tax-efficient dividend, regardless of what markets do. That stabilizes a portfolio, as opposed to being all juiced up on stocks or equity funds. In fact, about half the overall return on a balanced portfolio should come from the safe stuff – which all the market timers clamour for when they run screaming from Bay Street.

There is no apocalypse coming. No 2008 remix. No bank failures, bail-ins, currency crash, deflation, depression or locusts. But there will be dips and dives – moments when you need reassurance and unconditional love.

That’s easy. Come here. And get a dog.

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