Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate http://www.greaterfool.ca Book and Weblog - Authored by Garth Turner Thu, 18 Sep 2014 22:27:19 +0000 en-US hourly 1 http://wordpress.org/?v=4.0 The good stuff http://www.greaterfool.ca/2014/09/18/the-good-stuff/ http://www.greaterfool.ca/2014/09/18/the-good-stuff/#comments Thu, 18 Sep 2014 22:27:19 +0000 http://www.greaterfool.ca/?p=9864 ATTENTION modified

It’s a fact we fear loss more than relish gains. No wonder most investment decisions are made because people occasionally have the crap scared out of them. That’s why your co-workers and questionable in-laws own houses and GICs and think investment advisors sport a blood-sucking proboscis. Actually with a good tie, most are attractively hidden.

As I’ve told you before, the greatest risk for most people (especially women) is not losing money, but running out of it. So, we make bad and emotional choices, motivated more to preserve capital than make it grow. As a consequence, Canadians have a dismal amount of liquid assets, fear capital markets and will probably have sucky retirements. Too bad.

Truth is, we haven’t had a good stock market fright since about this time three years ago. That was during the 2011 debt ceiling debate in the US, with the deficit exploding, politicians at each others throats and the prospect of the world’s biggest economy defaulting on its debt. Then markets dropped more than 10%, with daily gyrations of 500 points.

At the time this pathetic blog urged the metalheads to dump their bullion at a silly $1,900 an ounce (it’s now $1,226), and for everyone else to get invested because America was not going down. Since then the Dow has added 34%, the Toronto market is up 28%, the S&P 500 has swelled 78% and gold has plunged 35.5%.

More importantly, in the past three years the US deficit has dropped to the lowest level in eight years, and corporate profits have increased more than 25%. Now 200,000 jobs are being churned out each month, inflation is moribund and housing prices have gained a third of the ground they lost in the GFC. In other words, no US real estate bubble despite 3% mortgages and a resurgence in unemployment.

Meanwhile the US central bank – the Fed – has taken back almost all of its massive stimulus spending, and the economy has held. Wow. A lot of people who came here a year ago – when the idea of tapering was first floated (dropping the price of bonds, REITs and preferreds) – forecast economic disaster and stock market collapse if the $85 billion-per-month was curtailed. Well, now it’s almost gone and guess what? No impact. In fact the US grew at a fat 4% rate in the last quarter.

So what does this macroeconomic stuff mean?

In the past twelve months, while the stimulus was systematically scraped away, the S&P gained 19% and stocks in Toronto romped 23% higher. Bond yields basically behaved because inflation was tepid, and balanced portfolios have delivered double-digit returns – around 11%. Fixed-income stuff, like preferred shares, and rate-sensitive assets like REITs, have recovered from last summer. ETFs mirroring the equity indices have been Beyoncé-hot.

And it continues.

Yesterday markets hit record highs, even as bombs flew over Syria, the Scotch were revolting and Ebola turned into a global threat. Investors looked at the latest data showing a drop in US jobless claims, plus the Fed news that interest rates won’t rise until July, and kept on buying. Also at play was the news American inflation has dropped the most significantly in four years – which means you can get the good stuff (jobs and profits) without having to swallow the bad (higher prices and rates).

Stock markets may have a high and scary number attached to them (both the Dow and S&P are at a record index level), but expressed as a multiple of corporate earnings, things are way more serene. Because corps have been plumping their bottom lines for the past few years, we’re nowhere near the sleazy multiples of the dot-com era or the pre-crash of 2008-9. In fact, sustained high unemployment numbers are a kind of proof companies are way more efficient and lean than they used to be. Thus, it’s a way better time to be an investor than an employee.

This makes the Canadian real estate market far riskier than equities. At least stock prices are supported by the moolah being generated by member companies. House prices in 416 or 604 by comparison, are now completely divorced from the incomes of people buying them or the rents paid by people leasing them. These valuations are supported by a mountainous pile of debt and the tulip-bulb mentality of the masses.

Rich people seem to know this. They have far less net worth in a house than your cousin does. They love liquidity, and have a lot of fun buying stuff when people who read the Huffington Post are changing their shorts.

Maybe you should, too.

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Family planning http://www.greaterfool.ca/2014/09/17/family-planning-3/ http://www.greaterfool.ca/2014/09/17/family-planning-3/#comments Wed, 17 Sep 2014 21:47:26 +0000 http://www.greaterfool.ca/?p=9862 RAINFOREST modified

Janice and Tom sleep together. They live together. They’ve got a mortgage. Even a kid. And a golden doodle. But when it comes to money, they just don’t trust each other.

“This is the way we started out,” she says, talking about their marriage six years ago, “and that’s the way we’re comfortable.” That’s code for, ‘I’m not going to answer to him about my spending.’ Tom’s the same. “We never argue about anything,” he says, “except money. Whatever. Not worth it.”

So they have two savings and chequing accounts each (RBC, CIBC), and a joint account they both contribute to for household expenses, the mortgage and bags of Iams chunks. She makes $105,000 as a health & safety consultant, and he’s a chef, at half the wage. She has a matched RRSP at work, while Tom has no pension. Only in the last year – after a mat leave and digesting the mortgage – have they started to save some money. In separate bank accounts, making 1%.

Janice and Tom are the kind of clients bankers love. They’re Joe Owe’s idea of perfect taxpayers. Because they won’t share money (the way they share fluids) these thirtysomethings pay way more in bank fees and taxes than they need to. It’s amazing how many couples are in similar circumstances. We sure seem to have an unhealthy relationship with money. More precious than love.

Well, this post is not about matrimonial intimacy, on which I am a renown expert, but income-splitting. By treating a marriage or common law relationship as an economic union, there are a mess of advantages – especially if you’re like these guys, with a big disparity between incomes.

Here are a few ways you can make romance work harder.

Open a joint investment account. Don’t accumulate secret piles of money in dead-end bank accounts, but pool it with your spouse and invest it jointly. This way you can get more momentum in a larger portfolio, plus be reassured that if something happened to your spouse the funds would pass to you without a legal barrier (not necessarily so with a bank account). Plus, the money this account makes can be split between you – a savings when one person is in a lower tax bracket. In fact many couples attribute all of the gains to the less-taxed person.

Open a spousal. This kind of RRSP is custom-made for Janice and Tom. She can contribute to a plan in his name, to her own limit. She gets to deduct all of the money from her substantial taxable income, while he gets ownership of it after a three-year seasoning period. Tom can then remove it at his lower rate, or run away with the doodle and open his own food truck.

Don’t share the expenses. That’s just dumb. The person making the most money in a relationship should pay the entire costs of running the household, including the mortgage. That way all of the income of the less-paid spouse can be used for investment purposes – because the proceeds will be taxed at a lower rate, building family wealth faster.

Invest the kid’s loot. The Child Tax Benefit cheques are not intended for silly things like day care or Huggies. Instead, open an in-trust investment account and stick that money into things your child will really enjoy, like ETFs and REITs. That way the proceeds are taxed in your child’s hands, not yours, since attribution rules do not apply.

Then hire him. If you have a business – incorporated or sole proprietorship – you can give your kid a job, pay him or her a wage, and deduct that from the taxable income of your enterprise. Just ensure that the work being done is ‘reasonable’ in the eyes of the CRA for someone of that age and skill level, which probably means Junior will not be your marketing consultant.

Then fund his TFSA. Once your child is 18, then you can stick cash into his tax-free savings account, and invest the money in capitals gains-producing assets. In fact, Janice should also do this for Tom, as should every spouse who is in a higher-income situation. There is no attribution of investment gains back to the donor, and all of the growth is completely free of tax.

Well, this is just a taste of things you can do to split income within a family and pay w-a-y less tax. Of course, you can also loan money for investment purposes to family members at the ridiculously low rate of 1% and have no profits attributed back to you. If you’re an old fart you can split pension income with your squeeze. Or your CPP. You can loan money to relatives to start a business, without interest, and maybe turn it into an allowable loss.

It’s a long list. But it all starts with trust. Share that first.

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Aliens http://www.greaterfool.ca/2014/09/16/aliens-2/ http://www.greaterfool.ca/2014/09/16/aliens-2/#comments Tue, 16 Sep 2014 23:02:12 +0000 http://www.greaterfool.ca/?p=9860 NORMAL modified

“You sure won’t find any bidding war here,” says a guy who’s sold real estate on the silk side of Victoria for the past three decades. “Forget that stuff CREA’s telling you. In a normal month this time of year we should have a thousand sales. We’re running at half that.”

Actually 609 properties changed hands in the suffocatingly smug little burg by the sea last month. Up 12% from last year says the local board, but still 40% behind levels last seen eight years ago. In fact, as this blog has shown enough times to be serially catatonic, outside of 416, Van and Testo City, real estate’s sliding into a swamp of failed expectations and jilted buyers.

Detached homes and condo sales slumped in Montreal. Nova Scotia is a mess. So’s Regina. In Winnipeg sales are down 12% while listings have bloated 59%. The number of deals is down in Durham, Cambridge, Fredericton, Kingston, and Milton. In Edmonton sales of detached homes are off 15%, and for condos the decline’s 20%. Of course some markets have improved (Fraser Valley, Barrie, London), but overall there are reasons to be scared if you’re 66 with way too little in your portfolio and a backsplit on the market for five months.

Now even the bankers are on it – a ‘false sense of optimism’ based on year/year price increases which completely mask current trends and market momentum. Here’s BMO’s chief egghead, Doug Porter:

“Canada’s housing market remains healthy and well balanced overall, albeit with sizeable disparities across regions. The major potential flashpoint is that prices in the three hottest cities—Calgary, Toronto and Vancouver—are rising faster than family income, further straining affordability… Meantime, the seemingly calm exterior on sales and prices masks a deepening divide between large cities and small, and West and East. On the sales side, almost half the major markets (12) reported declines last month, with double-digit drops in Halifax, Sudbury and Winnipeg. Similarly, so far this year, precisely half of Canada’s cities saw sales drop, with 8 of the 9 cities east of Ontario down, while only 1 of 8 in the west fell.”

Bummer. In half the places the bank probed, sales are sliding. And in the three spots where enough delusionally horny fools remain, it’s not a boom but instead a “flashpoint.” Meanwhile the Bank of Canada has stopped yapping about a soft landing for the national housing market because it looks increasingly unlikely there can be one. With most of the country already soggy, with US interest rates set to rise in a few months, with bond yields backing up, with incomes stagnant and household debt levels rising, and 52% of people saying one missed paycheque would down them, how does this end gently?

Well, it doesn’t. And not even the aliens can save it.

A major meme on this pathetic blog among the house-humpers has been that unbridled immigration will keep house prices aloft in places like Vancouver and the GTA. Of course, there’s no hard evidence anyone other than lusty Canadians are responsible for million-dollar hovels, but the country’s apparently full of xenophobes who want to blame outsiders. Now the Vancouver mayoral race is being shaken by a long-shot dipstick candidate who wants to tax people who buy houses but don’t live in them.

Even the sitting mayor, Gregor Roberston, is joining the stampede, saying, “We have real concerns around empty homes, and affordability.” So does he question CMHC policies, voracious bankers, kids buying with 100% leverage, condo speckers, sleazy marketers who lie to the media or crazy mortgage rates which have indebted BCers like no other citizens in the country?

Nah. Too hard. Diss the Chinese, instead.

Michael Ward isn’t so sure. The North American CEO of a major forex company, which wealthy immigrants often use to convert cash into Canadian dollars, told this to the Financial Post:

“We’re not real estate experts, we don’t advise [on real estate]. But there a lot more people asking ‘is this going to burst? What are you hearing?’. I think people are nervous, they didn’t see the Canada crash in 2008 like a lot of other markets. It’s stable but you can’t continue to have an upswing. I do think some people who are doing the research or reading the news and seeing the insights are starting to go ‘is the Toronto market’ overbought’?”

Hmm. More wily immigrant-investors wanting to flee Canada than put money here? Maybe they’re not as dumb as the people running for Vancouver council. Hey, perhaps that’s how they got rich in the first place – buying when it made sense, then selling when the local fools rushed in to pay top dollar.

Meanwhile trying to keep foreign buyers out never works. Canadians still snap up Florida digs despite being slapped with a property tax penalty. Central London is peppered with non-Brit owners despite residency restrictions. Australia’s just seen a 45% jump in alien investment (mostly Chinese) despite banning foreigners from owning resales and forcing them to sell when they moved offshore.

In country after country lazy, rabble-rousing, morally bankrupt politicians have won office and changed laws by catering to the lowest common denominator of public opinion – immigrant-bashing. Few have the guts to lay blame where it belongs. Their entitled voters.

No wonder they hated me in Ottawa.

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Party time http://www.greaterfool.ca/2014/09/15/party-time/ http://www.greaterfool.ca/2014/09/15/party-time/#comments Mon, 15 Sep 2014 21:51:34 +0000 http://www.greaterfool.ca/?p=9857 LUBE modified

Nik Nanos regularly asks people about stuff he thinks is important. Like housing. “It’s a key forward indicator to be monitored,” the pollster says, “because the perceptions of real estate have been a key driver of confidence.” Of course on this pathetic blog we call that house lust, infused with hormones and sprayed with REALTOR® pixie dust.

Canadians have become so invested in this one asset class there’s now a permanent bias towards it. Even so, Nanos has just found, perceptions are changing. His polling shows the share of Canadians who think prices will rise over the next six months has fallen to 38%, which is the lowest number since April – and compares with 47% in July. It’s a huge move downward.

So 48.1% think prices will stay the same, while 11.5% believe they will fall. Frankly, that’s a surprising number – 59.6% who say real estate is going nowhere, or going down. Maybe what’s coming won’t be the massive shock that appeared certain.

This should be a big week for those interested in a long view of where it’s all headed. The Fed (the US central bank, headed by the most powerful woman on the planet) is holding a key meeting over the next two days, widely expected to be a prelude to the ascent of interest rates.

As you know, all the misguided wonks and metalheads who poured on here a year ago to say America would never stop its stimulus spending, or ‘QE’, were SOL. The Fed’s chopped its monthly bond-buying program six times so far, and all of this stimulus will be gone by Halloween. Imagine. Eighty-five billion a month, to zero. The stock market did not collapse. The economy did not stutter. Job creation was not impacted. In fact, GDP pushed ahead, corporate profits rocked, and the federal deficit is on the way to an 8-year low.

So now that QE’s over, ended in an orderly, well-signaled and resolute fashion, rates will be next. Most economists think Janet Yellen will flick that switch early in 2015 – about six months from now – and will tell us well in advance. Like on Wednesday.

It’s a big deal, of course. The cost of money’s been in the ditch for five years, purposefully driven lower to stimulate borrowing, drop financing costs and help pull back from the abyss of 2009. In the US, it’s worked. Corporations have recovered, made lots of money, hired 1.2 million people so far this year, paid more taxes and used cheap cash to buy back stock and each other. The economy swelled by 4% in the second quarter – sloughing off the Winter from Hell – while the US got closer to energy self-sufficiency and Europe got depressed.

In Canada, of course, it’s been party time! We used all this cheap money to (a) close useless factories with their smelly jobs and replace them with productive condos, (b) jump the cost of housing to unheard-of levels and, as a result, (c) hopelessly indebt the middle class with mortgages and LOCs that will (d) now reset at substantially higher levels – thanks to Mrs. Yellen.

The decision she reaches will have global implications. For Americans, higher rates will simply continue where tapering left off – slowly removing more of that massive stimulus applied so a 1930s rerun did not occur. For Canadians, now pickled in loans, it’s a different outcome altogether. Already the bond markets are signalling what lies ahead. Last week I gave you a glimpse into what’s going on with yields for five-and 10-year government debt. They’re popping, likely with more to come.

Fixed-term mortgage rates (unlike those for variables) are determined by bond yields, not by the Bank of Canada. Our bonds track US debt, and days ago ten-year treasuries broke through a key resistance level, suggesting there’s more to come. Partly this is in anticipation of the Fed’s next move, but also simply a reflection of an economy that is growing, inflating and in which investors are demanding a premium for holding fixed income assets.

Thus, long-term mortgage rates will likely rise soon. Regardless of what Ottawa does, that will continue throughout 2015 as the Fed finally moves. So all those people who told us America would never, ever stop stimulus spending can join all those who believed interest rates would never, ever rise.

The impact on real estate?

Simple. Once the masses see this happening, expect a surge in buying as fools rush to lock into low rates and high prices. Six months later, rates will be up and house values will be down. Many will learn it’s not what you pay that matters, but what you owe. They’ll have been caught in a trap of Biblical proportions. Verily.

Well, at least 11.5% of people get it. I think they’re all here.

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That’s it http://www.greaterfool.ca/2014/09/14/thats-it/ http://www.greaterfool.ca/2014/09/14/thats-it/#comments Sun, 14 Sep 2014 22:05:18 +0000 http://www.greaterfool.ca/?p=9853 COPS modified modified

How to tell when housing boom’s running on fumes?

  • When the Globe and Mail appoints a full-time real estate reporter, who gets more stories published than the Ottawa guy. And is cute.
  • When 108,000 new condos are under construction in the GTA.
  • When more than 50% of all markets saw sales declines last month.
  • When politicians start talking about limiting foreigners from buying houses in Vancouver, after they buy less.
  • When a Toronto realtor I trust stands in my foyer and says, unprompted, ‘Things are going to really slow down.”
  • When new houses on ravine lots go on sale in suburban Ottawa and there’s a line-up – of seven people.When the Ottawa Citizens writes about it. And sends a photog.
  • When fixed-term mortgage rates slide under 3% and nobody cares anymore.
  • When it’s been five months since house prices peaked in 416, with the average a hundred grand cheaper.
  • When a Van developer thinks he can get $1 million for 700-foot vertical boxes on a clogged street beside a truck laneway in a former food store plaza with a rusty iron grate stuck on the front.
  • Then when he has to drop the price a hundred thousand. And change the name.
  • When big mortgage lenders like Northwood will give a cheaper rate to a kid with no money than a guy with 80% cash and a credit score of 800 because CMHC insurance wipes away all risk. “It strikes me as rather counter-intuitive to all that I have been taught from childhood about being diligent with money and staying on the straight and narrow,” writes James (not paying more). “The system is supposed to reward you, not penalize you!”
  • When a Canadian chain with 917 stores selling stuff for less than $3 sees its stock soar, sales jump 12% and opens 70 new outlets. Oh yeah, and Dollarama’s stock just split.
  • When nobody talks about the 1.99% mortgage offer. Because it’s gone.
  • When someone named Dominic emails me: “Could you please share your opinions in regards to buying cemetery plots in Vancouver (upright vs flat) as an alternative to buying a condominium. Side note is that the plot would be 0% financing for 5 years in which it would be paid off.”
  • When 39,400 people in Toronto are selling real estate.
  • When Moody’s, the OECD, Fitch, Morningstar, The Economist and Robert Shiller say we’re delusionally house-horny, and the finance minister shrugs.
  • When people in Vancouver need over 100% of after-tax income to carry a house they put 25% down on, and RBC cites, “widespread improvement in housing affordability across the country.”
  • When a house that has 72 offers in April and sold for $650,000 more than list hits the rental market, leasing for a loss.
  • When new condos in 416 and 604 routinely cost $700 a foot, while whole houses in the US average less than $100 for the same foot.
  • When 70% of us own houses, 51% would be in crisis if a paycheque was one week late and the savings rate’s just 3%.
  • When, by the 14th day of the 9th month, my too-gross-to-publish list of deleted Garth’s-a-douche blog comments swells to a record 209 pages, single-spaced. The end is truly nigh.
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The robust bust http://www.greaterfool.ca/2014/09/12/the-robust-bust/ http://www.greaterfool.ca/2014/09/12/the-robust-bust/#comments Fri, 12 Sep 2014 22:03:18 +0000 http://www.greaterfool.ca/?p=9849 STICK modified

“Why,” asks Dave, in a pointed email to me, “don’t you issue your own press releases? Seriously – then the Financial Post could recycle them.”

He was flamed by a late-Friday story about a triumphant Canadian real estate market. The immediate catalyst was the latest Teranet Composite House Price Index, a wobbly thing which tries to ape the authoritative S&P Case-Shiller index in the US. Said the news:

“Canadian home prices rose in August and the pace of 12-month home price appreciation accelerated, suggesting robust demand for housing is carrying through to the second half of the year. National home prices rose 0.8% last month, exceeding the historical average for August. Prices were up 5.0% from a year earlier, a pickup from July’s 4.9% price gain. August was the ninth month in a row in which the composite index did not fall. The price increases, on top of robust housing starts data in the spring and summer, have surprised economists who have been calling for a slowdown in Canada’s long housing boom.”

Wow. And that’s just the start. Dig this from the Globe:

“Toronto’s sizzling summer real estate market appears set to remain hot right through the fall. Low mortgage rates fuelled property sales in cities across Canada, with Toronto, Vancouver and Calgary seeing the most action, he says. Prof. John Andrew, who is the director of the executive seminars on corporate and investment real estate at Queen’s, predicts September and October will bring more of the same. “I don’t think we’re going to see a significant downturn in sales until we see an uptick in mortgage rates.”

Imagine that. A university professor in charge of real estate seminars. Now we know where all those horny college kids are getting turned on to granite slabs and bamboo floors, desperate to leap from the dorm into a mortgage.

But how could these stories about “robust demand,” “surprised economists” and “sizzling summer real estate” be so at odds with The Gospel as it appears on this pathetic blog? Who, exactly, is zooming you?

It’s a valid question since Canadians continue to get into real estate debt at one helluva clip. Mortgages swelled in the second quarter at the fastest pace in almost a year, while overall indebtedness is now growing again after several months of decline. Economists say they’re concerned but not freaked, since overall net worth is also on the rise. But wait. All that wealth increase has come from a single source – real estate values – as incomes and savings are in the swamp.

In other words, we owe more because we’ve gambled big on one asset. But it’s okay. The paper said so. And it’s, like, full of experts. Who give seminars.

The key is to know where a market’s going, not where it’s been. The average prices real estate boards report are notoriously unreliable leading indicators. In the United States, sales and demand started to fall apart in 2005, but prices kept rising into 2008 – when the wheels came off. In Canada, vast swaths of the country are currently real estate wastelands, with stagnant or declining sales and badly segmenting markets. Two days ago I gave you an indication of that growing weakness, from the second-largest urban area (Montreal) to one of the richest (Oakville).

More significantly, this dark, morose and devoid-of-all-hope blog has also been shoveling stats that should scare everybody. Tumbling job growth in Canada. One of three citizens screwed if their pay’s a week late. Subterranean Millennials. Mortgaged retirees. Half of us spending every nickel we make, saving ziltch. How can real estate “sizzle” and be “robust” when average personal finances are such a mess?

Debt, of course. People borrow what they don’t have, then count on house appreciation to wipe away the blot. It’s exactly the path that led to a real estate crash which ate the American middle class. This is why media reports (and professors) which use only one data point- average prices – are bunk. But it’s consistent with the carelessness of the modern press. No wonder it’s almost over.

Meanwhile, have you absorbed the latest interest rate news? Look at the 5-year Government of Canada bond yield:

BOND YIELD modified

Sentiment is certainly growing that American interest rates will start to rise in early 2015, as the economy there continues to expand – the latest positive news being a surge in retail sales. The Fed’s expected to pull the trigger during the winter, setting in motion a gradual rate rise that could be years long. Whether the Bank of Canada follows soon or not is irrelevant, because the bond market will. In fact, already is. The anticipation of higher rates (as you cans see above) begets higher rates. Remember it’s the bond guys that set fixed mortgage costs.

I’d tell you this is a great time to sell your house. If, in most places, it weren’t too late.

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Party mode http://www.greaterfool.ca/2014/09/11/party-mode/ http://www.greaterfool.ca/2014/09/11/party-mode/#comments Thu, 11 Sep 2014 21:21:27 +0000 http://www.greaterfool.ca/?p=9844 funny dog pictures : http://www.funnydogsite.com/

The moaning and dribbling experienced here yesterday when I suggested a 24-year-old male was no kid and should be ejected from his parent’s root cellar was, ah, interesting. It’s hard to know now when adulthood starts. At thirty? When you get your first condo? Three decades before retirement? When your mom stops washing your shorts?

Those who want twentysomethings treated as dependent children invariably have economic reasons. No jobs, they say. The kid’ll be homeless. So adult children end up like giant eight-year-olds, assuming they have no mobility, freedom or personal responsibility. Hard to see how helicopter parenting does much for experience, which is the foundation of maturity.

Of greater concern, though, is what this often does to parental finances. The numbers shared here yesterday are a shocker – almost half of all Canadians spend 100% of their incomes on houses and kids, putting nothing aside for the future. And half over 50 have just a fraction (one quarter) saved of what they’ll need to retire a decade later. In other words, they ain’t going to make it. It’s a fair bet a lot of them have Millennial things in the basement, contributing nothing to the home despite expensive educations.

This underscores the fragility of household finance. With $1.75 trillion in mortgage and personal debt and the certainty of rate increases next year, plus a 3% savings rate, things aren’t going too well. No wonder wealth is drifting up to the investor class while debt drifts down to what’s left of the middle class. The TSX gained 27% in the past year and the S&P is up 21%, while inflation is 2% and houses grew an average of 5%. Real estate also has massive buying and selling costs, ongoing property tax, insurance and maintenance payments and often strata fees.

Unless there are sustained capital gains each and every year in the property market, things aren’t going to end well for a lot of people who have rolled the dice on a one-asset strategy. Almost 60% of Canadian households have mortgages. That’s 5.6 million families, while another 2.2 million have home equity lines of credit. The average mortgage rate is 3.2%, and even at that historically-low level most folks are saving nothing. Just imagine when mortgages again average 5% – which is still a relative bargain.

The Bank of Canada has crunched the numbers. They’re ugly. If five-year mortgage rates average just 4% then mortgage payments would become the most unaffordable in 16 years. If interest rates rise 2% in general (and they will, without a doubt) then 10% of households with mortgages can no longer afford them. That’s more than enough to push over the entire market.

At the heart of this threat to the middle class is the notion that houses are investments (not places to live) so if you have one you don’t need to invest in anything else. That’s how we got a 70% home ownership rate and a 3% savings rate.

This is also what screwing up the kids’ heads.

Adulthood’s now equated with real estate ownership. Parents coddle the adultettes until they land a job, tell them renting is throwing their money away, and encourage them to leap from the basement to the 23rd floor – even when that means shouldering big debt and living paycheque to paycheque. So much for moving three provinces away to land the best job and launch a career.

The condo mavens know this. Like Vancouver’s Bosa Properties. It just hatched a scheme to ensnare the young called an ‘equity plan,’ to “offer hope to Vancouverites who feel like they’ll never be able to afford their own homes.” A small (15%) amount of monthly rent goes to loyalty points which can be used later as partial downpayment for a Bosa condo. After two years, it earns a $5,700 credit towards a unit – so the buyer can start owning the same unit they’ve been living in, and pay twice the monthly load!

Well, this pathetic blog has been warning people about the one-horse portfolio for years now. Millions have ignored me. They won’t stop.

This week Reuters ran a significant story on the real estate party raging in Canada that the rest of the world is watching like a head-on collision YouTube vid. Morningstar equity analyst Dan Werner summed things up pretty well:

“If you start looking at your house as an investment class, as something else you should be investing in rather than the stock market, you run into the danger of being exposed to some of the excesses going on in the system. There is this euphoria when you are within an up-housing market. We fell into it that here. I don’t want to say Canadians are in a party mode, but they are thinking, ‘What can possibly go wrong if prices keep going up?’ It’s going to end badly.”

Of course it will end badly. Meanwhile misguided parents churn out Millennials who feel entitled to leap from their childhood homes into granite-laden, debt-drenched digs, thinking this is what adults do.

What could possibly go wrong?

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The wrong idol http://www.greaterfool.ca/2014/09/10/the-wrong-idol/ http://www.greaterfool.ca/2014/09/10/the-wrong-idol/#comments Wed, 10 Sep 2014 21:31:23 +0000 http://www.greaterfool.ca/?p=9842 WRONG modified

Pete’s down, but counts himself among the lucky. “At least I’ve got this government pension,” the former CRA guy says, “as miserable as it might be – at least it’s something.” Three grand a month is okay in some places, but not in Victoria, not with a dependent spouse and a 24-year-old son in the basement.

It’s a classic tale. Work, have kids, buy a house, then a better house, then a really better house, then retire. So Pete and Marg now have a place appraised at $1.2 million (with financing) which they figure they might get $800,000 for. “Don’t listen to the realtors,” he says, “this market’s toast.” The 66-year-old also owns a condo – bought for his daughter, “and as an investment.” They paid $375,000, were hit with a fat special assessment, and now have $415,000 into the place. “Apparently,” says Pete, his voice bitter and sad, “it’s worth maybe $340,000, but the mortgage is $380,000.”

So, $1.5 million in real estate, maybe a hundred grand liquid, some CPP grocery money, and that pension. Obviously, P&M are candidates for a serious financial makeover – dumping the mortgaged properties, licking their wounded egos, kicking out of the kid, getting invested for income, renting and hoping to stay solvent for the next two decades.

Get used to stories like this. Many more are coming. Many of them worse – since seven in ten of us are pensionless.

The latest numbers paint a picture of what happens when a society worships the wrong idol and mistakes real estate for wealth. This week stats from the Canadian Payroll Association and a BeeMo survey are truly disturbing. More than half (51%) say they’d be screwed if their paycheque was more than a week late. Over a quarter (27%) couldn’t scrap together two thousand bucks if they had to. Almost 45% of people say they spend 100% of their incomes on kids and houses.

As a result, the savings rate’s plunged to 3.9% (it was 21% three decades ago, when families could afford houses). Almost eighty per cent of people now expect to delay the age at which they can retire, and (shockingly) half of Canadians over 50 say they’ve saved only a quarter of what they’ll need when the paycheques stop.

Now, at the same time, 70% of people own real estate – which means they’ve made great sacrifices to buy a house, and most of their net worth much be sitting there. Like Pete and Marg. So just imagine the consequences if property values were ever to go down.

Well, we may be getting closer.

Here’s what we learned this week – markets under stress even as five-year mortgage rates dipped below 3%. Below are quotes from realtors’ own official monthly reports.

National Capital Region: “Members of the Ottawa Real Estate Board sold 1,203 residential properties in August through the Board’s Multiple Listing Service® system, compared with 1,216 in August 2013, a decrease of 1.1%.” On the other side of the river: “Le marché immobilier tourne au ralenti dans la région. Selon la Fédération des chambres immobilières du Québec, les marchés des copropriétés et des maisons unifamiliales ont enregistré des recul de 25 % et 17 % au second trimestre de 2014.” (Condo sales fall 25% and SFH sales off 17% in Gatineau.)

Winnipeg: “The Winnipeg Realtors Association said today that sales through the local Multiple Listing Service (MLS) were down 12% from August 2013 — 1,137 units versus 1,292 — and five percent below the 10-year average for the month. The dollar volume of sales also declined by 8% to $301.3 million from $326.9 million. It noted the number of active listings was 59% above than the 10-year average for August, while the number of new listings was 22% higher.”

Montreal: “The Greater Montréal Real Estate Board today released its residential sales statistics for the Montréal Census Metropolitan Area. According to the real estate brokers’ Centris® provincial database, 2,234 residential sales transactions were concluded in August, a 6% decrease compared to August of last year. This drop in sales follows increases of 3% and 2 per cent registered in June and July, respectively. The most notable difference was in the number of condominium transactions, which fell by 1% in August after jumping by 13% in July. The two other property categories also registered a decrease in sales in August, as sales of single-family homes fell by 3% and plex sales tumbled by 9%.”

Oakville-Milton: “According to figures released today by The Oakville, Milton and District Real Estate Board (OMDREB), the number of all property sales decreased by 7.7% in August compared to the same period in 2013. Monthly property sales totaled 637 compared to 690 in August 2013. The dollar volume of all property sales decreased in August to $299,325,753 from $320,801,577 in August 2013 – a decrease of 6.7 per cent. Oakville’s median sale price for the month of August was $682,500, an increase of 8.5% compared to August 2013. The median sale price in Milton was $454,250, a decrease of 3.5% compared to the same time last year.”

Edmonton: “In the last half of the summer, residential sales were down compared to July from 1,999 to 1,552 units. Single family sales were down 15.4%, condo sales were down 20.8% and duplex/row house sales were down 11.8% in the month. Total sales were down 6.0 per cent when compared to August 2013.”

Regina: “The number of sales and selling prices as compiled through the Regina and area MLS® System in August were both down from 2013 levels while the number of listings for sale remained at long-term highs, said the Association of Regina REALTORS® Inc. During the month there were 348 residential sales reported in all geographic areas, down 8% from 379 reported in 2013. The number of sales inside the city was down 14% with 263 being recorded compared to 307 last year. This was the lowest number of sales in the city since 2008 when 217 occurred. An increasing number of listings continue to have a significant impact on the market inside the city. At the end of the month, there were 1,433 properties for sale compared to 1,039 in August of 2013 and 644 in 2012 – representing increases of 38 per cent and 223 per cent respectively. Inventory levels have been in the 1400+ range for the past three months – the highest in over 20 years.”

Does this sound like a housing boom? Or a disappointment in the making?

If you’ve not already started to diversify out of Canadian real estate, this might be the moment. We got it wrong.

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Really boring post http://www.greaterfool.ca/2014/09/09/fairly-boring-post/ http://www.greaterfool.ca/2014/09/09/fairly-boring-post/#comments Tue, 09 Sep 2014 22:20:03 +0000 http://www.greaterfool.ca/?p=9840 BORING modified

What were you doing on March 9th, five years ago?

If it involved lots of Tums, followed by an Imodium chaser, you were normal. It was a day from hell. That morning the headline in the Wall Street Journal was ‘How low can stocks go?’ If you listened to the geniuses, it was a lot. A hedge fund manager interviewed in New York said he was telling his rich clients to get a gun because society might be breaking down.

Well, that day saw one of the greatest torrents of selling in our lifetimes. Retail investors stormed the exits in a giant pile of bodies trying to get out. In fact March 9th, 2009, turned out to be notable for two events – massive selling, and the bottom of the market.

But that’s what people do. They sell when prices collapse and all hope’s lost. They also buy when values soar and everyone else is doing it. And not just mutual funds, ETFs, stocks or other financial assets. It’s the same story with almost anything – including real estate.

But logic dictates we should buy when things are cheap and sell when they’re dear – harvesting the gain and building net worth. It’s shocking how few people can pull that off. If they have an asset – like a stock – that’s going up, they almost never exploit the gain. If it starts to fall precipitously, they can’t bear a loss and so hang on, ‘just until it gets back to even.’ It’s a guy thing. If it collapses more, they usually panic in secret and dump it.

Buying when things are in the dumpster is smart. Selling when everyone says you’re an idiot is even smarter. But because most people are humans (I’m not sure about some who post here), Allah invented rebalancing.

The idea is simple. First you start by building a balanced and diversified portfolio of the kind I described last weekend. Forty percent safe stuff and sixty growth assets is a good mix for most people, and most times. I gave you some suggested weightings for various bonds, preferreds, trusts and a variety of equity-based ETFs. I trust you wrote this on your thigh, or possibly considered a tat.

Once you’ve built this portfolio, it cannot be ignored. The sucker will wiggle and squirm, swell and contract and ultimately mess up your weightings, becoming too laden with risk, or too conservative. That makes sense, since the point of a B&D portfolio is that (a) safe assets are not correlated with growth things (bonds usually go up as stocks fall, for example) and (b) diversity means big divergences among assets – small companies may be on a tear, while large caps languish.

So if you planned on having 16% Canadian equity exposure, and it jumps to 20%, you’re suddenly overweight. The natural tendency would be to hang on, or buy more – but the correct action is to trim. Sell, capture the gain, and spread it among those assets which are not doing so hot. That’s right. Think like your brother-in-law, then do the opposite.

Rebalancing, therefore, is simple. The goal is to bring the asset values back in line with the allocation plan you first crafted. That means during a stock market boom you’re forced to take profits. During times when interest rates decline and bond prices jump, you do the same. It means you buy stuff when it’s unloved and cheap. You bail from those very things the media’s in love with. And this way you stay on track, controlling risk.

Of course, outside an RRSP or TFSA, selling the winners could trigger capital gains. So what? This should never be a reason not to sell something, especially because cap gains taxes are cheap – just 15% or so for most people, allowing you to keep 85% of the profit. There could also be transaction costs involved, unless you have a fee-based advisor who does this stuff without additional expense. And rebalancing takes time and effort – you have to carefully track the asset allocation of your portfolio, then make the appropriate trades to get thing back into shape.

How often should this happen?

Professional advisors (the good ones, anyway) rebalance quarterly. For most people, that’s probably way too often. Twice a year would be fine, or even annually. Of course, it there were a major event, like a mini-2008 meltdown, you might want to spring into action sooner, selling off some of the soaring fixed income assets to load up on the bloodied and pummelled equities.

Just remember that, like your spouse, if you ignore your portfolio for too long it’ll get ugly. If your growth assets are allowed to bloat, for example, then a market correction could bring them down hard, making you prone to selling at the bottom. Fail. If your fixed-income component gets too large, you might feel secure but the long-term returns will suffer and you’ll hate yourself when toothless and bald (as if that’s not bad enough).

Or, as an alternative to rebalancing by the calendar, you can do it when the current allocation of an asset strays too far from the target – like 5% or 7%. Another technique is to add or subtract money from your portfolio to bring it into line. That means buying underweighted assets and selling overweighted ones – which also cuts trading costs.

If this is all too much trouble, you can be like the 27% of Canadians who don’t rebalance because they have squat. A new BMO survey found a third of our citizens lack enough money to cover one month’s expenses. The average saved is $2,051.

What was that advice about a gun?

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Chutzpah http://www.greaterfool.ca/2014/09/08/chutzpah/ http://www.greaterfool.ca/2014/09/08/chutzpah/#comments Mon, 08 Sep 2014 21:38:35 +0000 http://www.greaterfool.ca/?p=9836 TRUCK modified

Note: If you were coming here today to learn about rebalancing, too bad. Regular programming resumes tomorrow.

My first impression was that somebody wanting you to give them four grand a month to live in their house should cut the grass. But I overlooked it. After that, the next view past the cheery red door opening onto the Lilliputian foyer was of a tiny, galley kitchen straight out of Starsky & Hutch. Put shag in the dining room next door and a Dodge Dart in the drive out front, and it’d be perfect.

I tried to open the ancient dishwasher. Seized. Refinished floors but tired walls on the main floor. No bathroom save the miniature one with the Home Depot vanity-in-a-box upstairs, looking like it had gone through an exhaustive three-hour reno.

‘No guest bathroom?’ I asked. The agent said there was a two piece in the basement. I trundled down and found it:

BATHROOM modified

Outside no deck, no gardens, no landscaping on the 30-foot lot. Just some dank grass surrounding a geriatric garage down the mutual laneway. We stood and looked up at antique wooden storm windows painted shut with fifty coats, and I wondered what this world is coming to.

This is a famous house. Back in April it made national headlines because it typified a real estate feeding frenzy that briefly drove the price of the average detached home in 416 – urban Toronto – soaring past the $1 million mark. This building, now sitting unkempt and frumpy, was then an intense object of unbridled desire. During the open house Glencairn Avenue in the north Toronto hood was all but impassable. More than 1,000 people jammed into its unrenovated rooms and jostled on the narrow wooden stairs.

When it came time to review the offers on a Sunday night there were 72 of them. Hours later the property sold for almost double the asking price – 195% above list. The vendor wanted $699,000, and ended up with $1,366,000. In fact, 80% of the offers were for more than $1 million.

GLENCAIRN  Of course, there was more to the story, as I told you many months ago. The agent had purposefully mispriced the home to engineer a massive bidding war among as many rabid buyers as possible. No house on Glencairn had sold for that kind of money in over a decade, after all – even an original 1930s structure full of knob-and-tube with a one-holer in the unfinished basement.

And frenzy is what he got. Plus a boatload of criticism when it came out that one of his own clients ended up ‘winning’ the war. Not only did the agent double-end the deal, but a lot of people asked if it was ethical for the agent overseeing the blind auction to also be the one guiding the buying decision.

Said Bradley Hutton, in his own defence: “We expected in the $1.1 million range, but the market pushed it. There are a lot of buyers out there desperate to find a house. It’s definitely a sellers’ market.” Hutton also said he did what he did “to create buzz”, that the house needed about $300,000 in immediate renos and the buyer was a neighbourhood guy who intends to fix it up and then live there.

But that didn’t happen. When the house surfaced days ago as a rental, I checked it out. The agent (a new one) says the owner’s “an investor” who spent some cash on refinishing floors and paint, and now wants to find a tenant who will pay $3,900 a month (plus utilities). Frankly, it’s hard to imagine who would hand over almost $50,000 a year to dwell in such a place, even on an upscale street. But the buyer’s apparently no financial genius, either.

With Toronto’s double land transfer tax, legals and a quicky ($50K) reno, the invested amount is at least $1,470,000. The lease (less commission and property tax) will net about $35,000 – money added to the investor’s income and fully taxed at his marginal rate. Even so, it’s just a 2% return on the investment.

Of course, if he financed a million or so, then the ‘investor’ is cash-flow negative by about $1,000 a month. And if he paid cash, bad choice. His $1.4 million invested in a nice middle-of-the-road balanced portfolio could earn about $105,000 a year – taxed at half the rate payable on rent – instead of sitting in a geriatric pile paying (at best) the same as a GIC at the Croatian Curlers’ Benevolent Credit Union.

Anyway, this house played a significant role in making several million people believe real estate was going ballistic five months ago. With the news of 72 offers and someone paying $670,000 more than the asking price, it gave every agent and broker something to point to as evidence of insatiable demand and never-ending gains. The property helped increase average prices in the country’s largest market, making real estate less affordable for everyone.

There should be a statue on the lawn. To Brad. Inscribed, simply, “What were we thinking?”

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