Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Fri, 31 Jul 2015 21:55:48 +0000 en-US hourly 1 If he asked me Fri, 31 Jul 2015 21:55:48 +0000 HONK

It’s a day etched in my memory. The prime minister called me into his office on the third floor of Centre Block, with the big wooden door guarded by two beefy guys with wires in their ears.

He said a few things that pissed me off, so I got up to leave. He ordered me to sit. Like a poodle. Then this: You were a journalist, he continued. Journalists make lousy politicians. They think they always have to tell the truth.

And that was the moment I knew this was going nowhere. So I left. A few weeks later my derriere was punted from the Conservative party, even thought I’d been elected a Con MP. The PM sent his caucus chairman out to tell the media it was because I had blogged about matters the public had no right to know. (By the way, that guy was later arrested by the OPP with drugs in his vehicle.)

See how much fun politics is? Mr. Harper knew that by running me out of the party I’d be finished. I knew it, too. And that’s exactly what happened. I became a pathetic blogger, sleeping in ditches and underpasses, stealing food scraps from feral dogs, selling financial advice in bath houses and brothels, until rescued by a kindly nun who turned out to be an Amazon. But that’s another story.

I mention this because we’re at a new intersection of economics and politics. Sometime this weekend, it seems, the Big Guy will drop the writ for the autumn election. The supposed date is October 19th, but if he asked me (lol) I’d suggest Monday the 14th of September. There are a few reasons for this.

First, the Bank of Canada is set to make its next interest rate announcement at 10 am on Wednesday, September 9th. This is a tricky situation for the governing Conservatives. With the economy now in negative growth every single month so far in 2015, the price of oil mired in the mid-$40 range, our trade numbers in serious deficit and job losses looming, there’s a growing chance the BoC could cut again. On one hand, voters love cheap money and free mortgages, believing it will keep their houses going up forever. On the other hand, this will hurt the dollar and underscore our economic woes, creating a sense of crisis.

That is eerily similar to the vote of October 14, 2008. The stock market was crashing, the credit crisis was expanding, companies were slashing payrolls and fear gripped the land. Is this, Stephen Harper asked, the time to let some tree-hugging, tax-increasing untested leftie take the reins of power? And he won, defeating Jack Layton and Stefan Dion.

Of course, if the central bank does not drop its rate in early September, then the government will point to it as evidence the economy is recovering and we should all get over ourselves.

Second reason for an early election: the Fed. If you believe Janet Yellen, the US central bank boss, instead of all the Nobel-winning macroeconomists who read this blog, the first rate increase in ten years will take place on September 17th. That will dramatically highlight the disparities between the two economies – theirs which is healthy enough to end excessive monetary stimulus and stand on its own and ours, which sucks bad. Besides, if the BoC cuts one week and the Fed raises the next, you can kiss the dollar (now at 76 cents) goodbye.

Third, we’re in the ninth inning for housing – a fact which will be a lot more evident to people once they stop drinking Red Bull and return to autumnal sobriety. With the Canadian economy entering a technical recession, amid lousy commodity prices, rising unemployment and off-the-chart household debt it’s only a matter of time before most people sweat. Greed can turn to fear in a few days. When it happens, folks need somebody to blame, since they themselves are utterly blameless. Remember that Canadians do not vote for a new politician. They just punish the old one.

As we head into this election-call weekend, a new report from TD is warning of “cautionary yellow” flashing over the housing markets in YVR and 416. “When we put it all together, key housing indicators on balance continue to highlight the vulnerability of the Toronto and Vancouver housing markets to a significant correction in activity and prices,” says the bank. In a departure from the past, we now have a major Bay Street outfit using words like “a steep and painful price adjustment,” which the economists are giving a “moderate” chance of happening.

So there it is. That’s why I’d call this election early, and not risk waiting until October – also traditionally the most volatile month for financial markets and the value of your TFSA. But if I were Stephen Harper, I’d have retired long ago, paving the way for a charismatic new star to grab the party horns with a fresh alternative to the leftist hordes.

Isn’t ego interesting?

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Lessons Thu, 30 Jul 2015 22:31:26 +0000 DOG SHOT modified

Some things worth knowing as we head into a weekend federal election call, a slagging Canadian economy and the biggest vacation period of the entire year. So slide on those flip-flops, grease up with SPF 30 and throw a tofu burger on the barbie. Here we go:

THURSDAY SEPTEMBER 17th: That’s the day US interest rates will rise for the first time in a decade. This is a big deal, with global implications – not to mention for your mortgage and our dollar. There’s now little doubt the Fed will pull the trigger that day, after this week’s economic report.

The American economy grew at 2.6% in the second quarter – more than forecast – and growth in the first three months of the year (plagued by snow and strikes) was revised higher. Job creation has stayed impressive while corporate profits are running higher than anticipated and we’re heading into a Presidential election year. Even legendary bond guru Bill Gross has thrown his cards on the table, saying cheap rates are bad for the world – creating asset bubbles, distorting capital flows and turning people into porcine debt-snorflers.

So, up she goes. And down goes the loonie. Then, in 2016, the Bank of Canada eats a giant crow and follows suit. Unless, of course, we’re in the throes of a scary recession. In which case we are will have a helluva lot of real estate news to share.

DINKY DIVIDENDS: Here are three headlines which splashed across the MSM this week as we settle into what’s looking like a long and serious commodities rout…

Cenovus looking to cut jobs, slashing dividend by 40 per cent
Goldcorp slashes dividend 60 per cent as price of gold tumbles
Shell to axe 6,500 jobs, cut spending to cope with lower oil prices

It’s been ages – almost seven years, in fact – since we’ve seen news like that. Trust me, the last thing CEOs want to do is cut dividend payments to stockholders. This makes the shares inherently less attractive, drops the capitalization of the entire company, torpedoes the market price and signals that the company’s entering survival mode and needs cash that normally would be distributed.

This also throws more cold water on the belief many amateur investors have that they should load up on dividend-paying stocks and eschew diversification. Bad idea. See why?

COWTOWN CARNAGE: Well, not exactly, but it may be coming. What does it tell you when a local real estate board tries to get out in front of public opinion, and issues a warning? Yup, crapstorm coming.

That just happened in poor Calgary. The realtors, who seven months ago predicted prices would rise 1.58% this year are now forecasting a slight decline in values and a big drop in sales – 22%. The effects of cheap oil are just starting to be felt, they say, and the city’s economy “continues to be plagued with a level of uncertainty.” You think? Just take a look at the headlines above – the big job cuts may only be starting. About 12,000 positions have been cut – a whack of them highly-paid engineers or execs – and the Conference Board is predicting twice as many will get the axe in the next five months.

“Employment conditions are expected to worsen and put increased downward pressure on wages. When combined with lower levels of migration, it’s expected that these conditions will cause further impacts on the housing sector.” So far this year detached homes sales have dropped by a quarter, luxury-home sales are a disaster and the rental vacancy rate has doubled. Commercial space for lease? Don’t even ask.

Only a year ago Cowtown was a swaggering mass of bidding wars, cowboy testo and realtors leasing Audis. If you can’t see a lesson in here, I give up.

CANADIAN SUBPRIME: Remember how we loved to make fun of Americans with their insane borrowing, their zero down payments, adjustable mortgages with teaser rates, subprime lending market and liar loans? Well, those days are gone.

Now we borrow far more than they, with banks giving 100% financing. There are 1.99% home loans, while subprime lending is the fastest-growing segment of the mortgage market as people finance down payments for million-dollar homes. And, yes, lender fraud. Apparently almost a billion in diddled loans from one company alone, Home Capital.

The largest ‘alternative mortgage lender’ in the land, as the result of an OSC investigation, was forced this week to reveal that 45 brokers were punted from its network for falsifying the incomes of borrowers. Yup, liar loans. In order to secure larger loans, brokers purposefully inflated the earnings of clients. Collectively, these bad seed brokers wrote about 12% of Home Capital’s 2014 loans, representing 5.3% of its outstanding assets.

This raises serious questions about how often this practice goes on among the nation’s tens of thousands of mortgage brokers. Besides, all of these falsely-obtained mortgages were insured by CMHC, and apparently still are. Worse, Home Capital (in its defence) said it did not verify the incomes of applicants, because it doesn’t have to. Apparently CMHC guidelines don’t require such a bothersome detail. “The practice met the standards of mortgage insurance companies, including the federal government’s Canada Mortgage and Housing Corporation,” it explained.

Still feel smug?

This doesn’t end well.

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The cure Wed, 29 Jul 2015 20:33:44 +0000 COW1

The Doctor is in. Here, read this TIME issue from 1975 and shut up. Nurse practitioner Amy Zon will be with you shortly.

First up, Louise. Spill it, colleague.

Hello, Garth. I discovered your blog a few months ago, and I don’t know what I’d do without my daily dose of The Greater Fool. I would love to be featured on the blog. I’m a 29-year old physician, with an annual income in the mid six-figure range. On the personal side, I have ~30K in a TFSA (index funds) and no RRSP.  I also have personal debt in a line of credit (mostly from medical school), a significant amount in the low six figures.

I purchased a 1-bedroom + den condo in the GTA almost exactly 4 years ago, and I don’t think the value has increased much.  I estimate that I could sell for around 220K.  Mortgage debt hovers around 155K.  I am terrified of the future possibility of a special assessment, and there’s rumours of another condo going up right beside the current building.  The latter would greatly affect my property value (current view from my unit is completely unobstructed).

I’m single, no kids, no pets, but would love more space.  I’m considering selling, using the equity I have in the condo to pay off a significant portion of the LOC, and start renting a townhouse instead.

My current costs for housing are around $1350 per month.  This includes mortgage payments, maintenance fees (most utilities included), property taxes, and hydro.  For the properties I’ve been looking at to rent, the average price is 1650-1850 per month, excluding utilities.  That would make total costs around 1800-2000 per month.

Because I am currently single, but my situation could change in the next 5 years or so, I don’t think it would be a smart idea/time to buy; my needs could easily be different in the near future.

Is it a better idea to continue owning the condo, slowly increasing the equity but running the aforementioned risks of a special assessment/value drop, or bite the bullet, sell, and start renting but at significantly higher monthly cost?

This is easy. Sell and rent. First, you’ve been sitting on seventy grand in equity for four years which has provided a zero return. In fact, with the potential of a special assessment and a new building about to suck the view and lower your equity, there’s too much added risk. Even if you sell now, paying the realtor commission, you’ll likely sustain a loss – non-deductible.

Thus, renting lowers the risk, adds marginally to your overhead, frees up dollars to invest, allows you to move into a larger unit and unencumbers your sorry life. And it must be a sad existence of unzipped cabana boys at Club Med and too much blow. After all, you’re an MD earning “mid six-figures” with over a hundred grand in debt, a cruddy suburban condo and just $30,000 in a TFSA. Where’s the cash going? Louise, please tell us you’re not a psychiatrist.


My name is Carson and I’m a long time reader of the blog and I’ve recently been thinking about doing some leveraged investing, and had some tax interpretation questions I was wondering if you could help me with.

I’m 29, an engineer making $85k, don’t own a home, and have $40k in investment savings (between RRSP & TFSA). I’ve been preapproved for a 2.99% LOC for 1 year (which goes up to Prime + 2.99% after the year) and I figured this was a decent rate to use in leveraged investing. I don’t have a home (and therefore no HELOC), so I don’t think I’ll be able to find a much better rate than this to use in the short term.

I understand that the interest on money borrowed to invest is tax deductible, but I am wondering if this is still the case if I invest within a TFSA. I get the sense this would not be allowed, but have not been able to find a definitive answer.  I have room in my TFSA to hold this entire amount, so I figure this will be the better place for it regardless of my question.

Forget it, Carson. Bad idea. Sure, leveraging (borrowing money) to invest can be a great strategy if the funds come cheap, you have a long-term horizon, enough experience as an investor to understand and swallow the risks and do it in a non-registered account. No, interest on a loan taken to fill your TFSA is not deductible from income.

And this is a bad rate deal. Sure, 2.99% is nice if you can invest for a 7-8% long-term annual return, but when it pops to 6% in a year, even with tax-deductible interest, it’s way too tight a spread. There’s no guarantee any portfolio will advance predictably year after year, and if 2016 turns out to be a 0% period while you are forking over 6%, odds are you’ll despair and fold.

A young, single guy making your money should be able to save consistently. Do it. And direct every dollar into the tax-free account, in the assets and weightings I have outlined. I don’t care how cute TNL@TB is. Stay away.


I’m Amil. We recently had a new addition to our family and I’ve heard of RESP’s, how do they work?

What would be the best way to save for his education and to save for my son in general?  Also I’m not sure whether there are other things that we should be considering such as life insurance, a will and anything else that would be important to set up if anything were to happen to my wife or me.

Ah yes, a new parent. Swimming in hormones and endorphins. Plus a sudden gush of obligation and protectiveness. It’s why the Baby Vultures who circle maternity wards with their RESP brochures do so well. It’s red meat time for all the insurance salesguys who swoop in and sell you policies which 90% of the time are cash-sucking, life-long albatrosses. So, be careful.

In terms of RESP, yes, you should start one. But not one of the BV variety. Ensure yours is a self-directed plan, which you can open through an online brokerage, at the bank or with an advisor. Fill it with good, diversified, growth-focused ETFs, since the time horizon is long. Apply for the government grant, which adds 20% annually to a $2,500 contribution from you. The funds grow tax-free and can be taken out by the kid once he/she starts post-secondary schooling. If they fail you miserably and become a teenage rock god worth $1 billion, a good chunk of the money can be rolled into your RRSP if you have room.

As for insurance, stick with term. It’s cheap, flexible and all you need in the case of an emergency. Compare rates online, and remember the cardinal rule: never buy coverage from your cousin who failed the community college Hot Tub Maintenance Technician course and is now an insurance expert.


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Missing F Tue, 28 Jul 2015 21:38:41 +0000 CROOKED HOUSES modified

Crooked semis listed on Shaw Street in Toronto: $688,000 each


Ever wonder why the federal finance minister is such a wuss?

“We do not see the need for major changes at this time,” Joe Owe told a realtors’ convention recently “We will continue to monitor the market and make adjustments, if needed, although none are being actively considered right now.”

And, hey, how could there possibly be a problem? Average single-home prices in 416 and YVR blew through $1 million some time ago, new mortgage debt is piling up at five times the inflation rate, real estate values have detached from the economy, lenders are sucking in buyers with 1.99% quick-reset loans, the subprime market is bloating at an historic rate and buying a median-priced house in Vancouver (even at the cheapest-ever rates) eats 65% of family income.

What would F think?

Two years ago, before his untimely demise, the elfin deity was issuing warnings like this: “My expectation is that banks will engage in prudent lending — not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” As one political staffer put it (as reported by the Financial Post):

“Flaherty spoke to bank CEOs all the time. I would think he had moral-suasion-type conversations with them on many occasions. And he also intervened in the market dramatically four times. He felt quite strongly that, as finance minister, he did have a fair bit of moral suasion at his disposal that he could use. Much of the time that was done quietly behind closed doors. But it was effective.”

OTTAWA- For national stories- Federal Finance Minister, Jim Flaherty, holds a news briefing for media held in the traditional "lock-up" prior to releasing the 2007 budget.  -Photo by Wayne Cuddington, Ottawa Citizen, CanWest News.  Assign#-82676--Federal Budget 2007

In stark contrast, Oliver says this: “Our long-term objective is to gradually reduce the government’s involvement in the residential mortgages.” And that means, ultimately, privatizing Canada Housing and Mortgage Corporation – if Joe and his party survive the coming federal election.

Now why such a dramatic difference between F and his heir, even as it becomes more evident the housing market is a towering, hulking pillar of risk that could collapse on the Canadian middle class as it did in the States? Simple. Letting people pickle themselves in debt, succumb to their hormones, spend far beyond their means and pull economic activity from the future is a cheap, quick and desperate way to try and rescue an economy in trouble by a government struggling in the polls.

And they’re still at it. This week CMHC made a bombshell announcement which – more than the bank rate cut – is designed to throw Lava Hot Scorpion BBQ Sauce all over the real estate market, especially in YVR. Simply put, CMHC will now count as “income” 100% of the money you received, or might possibly get, from a tenant renting your furnace room or garden shed. Until now only 50% of rental income was added to a mortgage applicant’s total income, which is then used to calculate how much debt can be carried.

What does this mean? Lots, actually.

A couple earning $100,000 between them with $50,000 to put down can qualify for a mortgage of about $420,000. But add in $12,000 a year from a basement suite (based on a rental agreement, not actual cash), and – presto – they qualify for a mortgage of $520,000. That’s seventy thousand more than using only half the potential rental income.

The mortgage guys are eatin’ it up. “The ability to utilize 100% of the rental income to qualify for the mortgage…can certainly make the difference for many homeowners and may move a larger number of homebuyers from condo purchases to a single family home with a mortgage helper,” a broker from Vancouver tells the trade mag Canadian Mortgage Trends – which itself gushes, “CMHC deserves applause for trying to boost the stock of affordable rentals and allowing young homebuyers an alternative to condo living.”

Yes, excellent social policy. Just when prices inflate the most, rates descend the furthest and debt hits new, epic levels, the feds encourage more borrowing and over-spending, making it all worse. Moreover, this throws the door wide open to abuse. The definition of a ‘legal suite’ is hazy, and income from new units (with no rental history) will be accepted at ‘market rates.’

And let’s remember the context in which all of this is happening. Oil’s crashed. The economy has stalled. Jobs are being scrubbed. And the central bank’s rate drop is the ultimate admission of trouble. Is this really the time you want your government loosening up mortgage regs to allow more debt, higher prices and enhanced risk?

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada,” economist David Madani warns. “But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer-term, they won’t defy gravity for much longer.” The guy is now forecasting a 30% price plop for these two Bubble Republics.

That equals the US crash. Ouch. By the way, homeownership in the States has plunged to 1967 levels. Some people learn lessons. Some people just sell out.

JOE modified

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Strong & free Mon, 27 Jul 2015 22:38:00 +0000 FLATBED modified

Sit down. Somewhere in the world it’s sundown. So pour a scotch. This is thick.

While everything will turn out okay in the long run (I have no doubt), it now seems certain we’re entering a period of confusion (unless you read this pathetic blog daily) and volatility. As you know, the Chinese stock market laid another egg, despite the fact they’ve done everything there but shoot people who are selling. That robbed the commodity market for technical reasons (money being pulled out to cover margin loans) and economic ones (a slower China means less demand for copper and oil).

  • So, on Monday crude prices cratered a little more, and at $47 it’s likely on the way to a new cyclical low. The bottom was $45 back in January, and one year ago a barrel was worth $101. Canadian crude is way sicker – at the $30 mark. The normal discount for the oil sands stuff has widened dramatically, which is about the worst news possible for Alberta.
  • The Canadian dollar is sitting at 76 cents US, on its way to 74, analysts say. This is because of oil, natch, but also because while there’s a 50% chance our central bank will cut rates again, there’s a 100% chance the US will raise them. Goodbye, loonie.
  • Even gold can’t catch a break, which matters because mining and refining is a giant industry in Canada. The latest forecast for the yellow stuff is down to just $800 an ounce – a 27% dive from the current level, and 58% lower than four years ago.
  • And then there’s the Dipper factor. Yikes. A Globe/Nanos poll just published found 47% of people think a federal NDP government would be positive for the economy as opposed to 31% for the Cons and 41% for the Libs. But while citizens of the Socialist Republic of Canuckistan might embrace Muclair, just like the collective known as Alberta did with Rachel Notley, currency markets want none of it. Down she goes again
  • All this has the Toronto stock market bleeding. The composite index is barely above 14,000 now, giving investors a 6.75% loss year/year and a decline of 2.7% so far in 2015. (In contrast, the S&P is up 6.6% in the last 12 months.) Hard hit, as you might imagine, are energy and miners, with even financials slagging. Why? Read the four bullet points above. Commodities. Currency. Rates. Regime change.
  • Jobs numbers are due out after the coming long weekend, and are expected to be ugly. Canada lost 6,400 positions in the last period, and since then the economy has continued to weaken. We’ve had five months of negative growth and the mother of all trade deficits. So it’s a fair bet the unemployment rate of 6.8% will be heading higher now that oil is testing its recent lows.

Now every time I chronicle what’s happening to our economy, some redneck dork from Airdrie calls me a traitor. But this is the world in which Canadians find themselves, so it’s wise to adapt. As I’ve told you, a profound home country bias has persuaded 70% of all investors to keep 100% of their assets in maple – which is also the overwhelming bias of most bank-owned brokerages (someday I’ll tell you why). What a stinker that’s turned out to be.

Of course, investors with a nicely-diversified (40% safe stuff, 60% growth stuff) and globally-diversified portfolio (15-20% Canadian, the rest US and international) need not fret a lot. Sure, monthly valuations will bounce around, but you have exposure to lot of markets that are inflating, protection from rising rates and even a special anti-NDP secret sauce.

But that’s a minority of us. Most people have most of their net worth in a single asset, sadly. With a soggy labour market, a pop in inflation thanks to a tanking dollar, and the certainty of rising long-term fixed mortgage rates, the next year or three will not be the sunshine and ponies they expected.

There you go. Personally I think we should have stayed with puppies.

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Scary Sun, 26 Jul 2015 18:47:52 +0000 SCARY modified

Sarah is 36, lives on the coast, and is confused. Scared, even.

“As a woman in a terrifying investment world, living in a ridiculous city I am finding that I need to educate myself in how to deal with the money that I have. I’m starting to look at my choices and am overwhelmed with confusion on where I am going with finances,” she writes me. “I know that now is the time to get things sorted. I’ve approached my bank twice and have not felt properly guided or any more knowledgeable. Unfortunately my parents are entirely financially illiterate, actually I would say 99% of those in my life have that problem.”

Sarah may not be totally cognizant of the reasons, but she sure gets the vibes. It’s a time of change. As usual, that brings danger and opportunity. Old beliefs break down. Conventional wisdom’s proven wrong. What looked safe, isn’t. A hallmark of changing times is when everyone looks back and says together, ‘how did I not see that coming?’

One of the biggest changes in 2015 will be the beginning of the end of cheap money. For almost a decade now it has fueled asset bubbles that have come to look normal. Beater houses in the shadow of a Toronto sewage treatment planning selling for a million. Stock markets recording record highs month after month. Household debt bloating even as the economy and jobs shrink. Detached properties in urban YVR averaging over $2 million.

Just as Sarah becomes aware she needs to manage her savings, the landscape is shifting. As the cost of money rises over the next few years, amid economic torpor, logic tells us the bubbles cannot last. Those who peddle cheap debt or a one-asset strategy (like the people at the bank) will end as merchants of failure.

So, how will this unfold?

Here’s what we know. The US central bank’s chair, Janet Yellen, has said as clearly as she’s allowed that rates will rise this year. A big deal. It’s been ten years since this happened. No wonder she has telegraphed it so often and so clearly, because so many just don’t want to believe it.

When will this ascent begin? The Fed has its next rate-review meeting this week, on Tuesday and Wednesday, and while there’s an outside change the trigger could be pulled then, it’s doubtful. Here’s why:


This is the schedule of Fed meetings remaining in 2015. You will note only two end in media conferences (September 17 and December 16) and the release of an economic statement. Given the global significance of this rate increase, and the impact it’ll have on at least the next five years, it’s hard to imagine it will be made without a full explanation and briefing. That makes the third week in September the likely go-date.

(Remember what a higher Fed rate will do to our already-pummelled currency, after the Bank of Canada moved in the opposite direction earlier this month. This event will happen just five weeks prior to the scheduled Canadian federal election. Would you, as prime minister, want to spend a month explaining the currency collapse? Or would you call the election for the week after Labour Day? Be ready.)

We also know this: a few days ago there was a Fed leak, which made public the projections for the US economy and rate increases that had been prepared for Yellen by her bureaucrats. There is no guarantee this will come to pass, but it paints a likely scenario of what to expect:


Hmm. What does this tell us? First, US central bankers expect slow-growth and low-inflation with to dominate for the next half-decade. Not great news for Canada, since we flog 80% of our stuff to Americans. Second, these guys are expecting one rate increase this year (a quarter point), then a jump of almost 1% next year, another 1% (almost) in 2017, and for rates to be 3% higher by 2020 – five years hence. Meanwhile you can expect that the bond market will follow a similar path, on both sides of the border. Plus the Bank of Canada has aped Fed rate decisions 97% of the time over the past 25 years, so we assume similar.

Bottom line: a five-year mortgage on a crap Vancouver Special secured at 2.4% in 2015 could easily face renewal  north of 5%. So if house prices are perfectly (negatively) correlated to interest rates – as we have seen proven since 2009 – it means Canadian real estate has only one direction in which to travel. Meanwhile the oil price collapse, fallout from tumbling commodity prices in general, poor job prospects and the debt orgy among your colleagues and relatives are engendering economic fear. This is what sea change is made of.

So Sarah can (a) ignore it and buy a condo, (b) go to the bank and be sold a dangerous Canadian equity fund and a market-linked GIC, (c) huddle in cash and make nothing or (d) embrace a balanced and diversified approach. Not too many eggs in any basket. Not too much exposure to Canada. Defensive and offensive. Global. Rational.

She’s right. It is scary. If the little hairs on the back of your neck aren’t stiff, you’re not paying attention. But you soon will.

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Puppies Fri, 24 Jul 2015 20:45:48 +0000 PUPPIES modified

“Hey business guy,” she said, sticking her head through the doorway and loud-talking over the Dow Jones machine, “wanna dog?”

I didn’t. As a crusading daily newspaper columnist in his thirties, I was too busy saving the planet. When that proved tiring, I bought commercial real estate, published two investment newsletters and owned a couple of stores. Inflation. Expansion. Opportunity. Excess. God, I loved the Eighties.

Then I looked up and saw the pup. It looked like a miniature wolf, all silver and trouble. We locked.

“Okay,” I said. And I had a dog.

She came fully equipped with a collar, a name (Sheba) and a piece of string, which was handy to keep her from getting trampled in the big-city daily’s newsroom. The entertainment-section babe who gave him to me said Sheba had been found wandering down an alley off Queen Street. Lots of panting. The only cup I could find was columnist Mark Bonokoski’s favourite coffee mug with the death warning on it, and she drained it of water.

Sheba and I drove over to pick up Dorothy from her office job downtown, and waited in the lobby by the elevators. The dog, which I figured out was a purebred German shepherd, made astonishing puppy yaps, peed a little and embraced every single person she could ambush. Later Dorothy told me she heard this weird dog noise, ten stories up.

In those days we had a hobby farm about sixty clicks away, where this puppy turned into a 100-pound comedienne. She routinely attacked and killed the lawn sprinkler. On walks down to the pond she would flail around the edges making the maximum amount of splash and noise possible while other dogs paddled serenely by. In the barn she jumped the partition into the sheep pen for a visit and was almost turned into a wall hanging by Blackie, the bone-headed, moronic ram. She ran joyously with our goats, BillyJean and Thriller. She crowded the wheel and dripped all over me whenever we went to town in the F150.

And she routinely became sauced.

At first we failed to connect the dots. The dog would try to get up and couldn’t. Then she walked, weaved, fell over and smiled. Often she would spend an hour or so lying on her back, paws in the air, under the pear tree. In fact it wasn’t until we watched her eating at least a dozen windfall pears a day that we realized what was happening. She was getting high on fermenting fruit.

Samson came along. Another puppy. Another German shepherd. Magnificent, jet black and tan, noble and serious. They played incessantly until, a year later, Sam started having epileptic seizures. Infrequent at first, later almost daily despite every remedy we could find (it was a brain tumour). Sheba did not run away when he flailed, fell on his side, convulsed and paddled. Instead she stood over him, protective until the violence stopped, then licked him clean of the foam as he lay in a stupor. It took our breath away.

One early morning Sheba slipped down the driveway. Unexpected and out of character. I heard the thump from upstairs. My heart froze, as I knew instinctively what had happened.

We drove the ten miles to the vet at warp speed, Dorothy’s nightgown wet with blood as she held her. Sheba lived two more hours. It was thirty years ago, but feels like yesterday.


A picture of Sheba hangs in our house. Samson, too. All the dogs we’ve lived with are there. Selfless, giving, loyal, friendly animals who – led by the puppy with a drinking problem – showed me how the world could indeed be saved.

That’s my puppy story. Yours?

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Pooched Thu, 23 Jul 2015 22:26:00 +0000 CAT PIZZA modified copy

History will show it wasn’t foreign buyers who pushed real estate values into the nutty zone in places like YVR, but the fact most people believed it to be. So they panic bought, forcing prices up. When almost every house was ‘worth’ more than a million bucks, they had all the proof they needed. Damn Chinese.

But relax. This post is not about HAM. It’s about perception. This is what moves real estate. As I posted here two days ago, a housing orgy even more intense than the one we have today raged in the late 1980s – when there was no 5% down, and mortgages cost 12%. But people perceived that high inflation would drive home prices ever-higher. So they panic bought. Big mistake.

Yesterday we looked at what actually causes a housing correction (which is often a slow-motion crash). It need not be a spike in interest rates, a terrorist attack, an earthquake or Kim Kardashian finding morality. Events that apocalyptic are rare. But worry is ever-present, and when it quietly augments, real estate can be seriously sideswiped.

We’re entering that space, it seems. On Thursday there was more to fret over. Loblaws shuttering dozens of stores just months after announcing a big expansion. More losses for the Canadian stock market. Oil now down to just $48 or 25% less than it was three months ago. The dollar at 76 and a half cents, promising a boatload of higher consumer prices. And who can forget the last holy-shit moment from the Canadian Payroll Association?

These guys have polled people for six years, and things are nasty. A hefty 51% of all working stiffs said in the last survey “I would find it difficult to meet my financial obligations if my paycheque was delayed by a single week.” Half of everybody. Only one week. Ouch. What does this tell us when 70% have houses and epic mortgages?

Of course. They own stuff. But no money.

This is borne out by the fact the payrollers also discovered 26% of people could not come up with just $2,000 over the course of an entire month if an emergency cropped up. And everybody seems equally hooped. Almost 80% of mature people say they’ll probably have to delay retirement while 63% of Millennials say they’re living paycheque-to-paycheque.

This last point – financially pooched young people – is an especially big deal for the real estate market. Already the cohort is stressed by educational debt, a crappy job market, over-qualification, falling compensation, competition and houses they want but can’t afford. They’re the ones who started the Occupy movement, moan on Twitter (#dontHave1Million) and float through Tom Mulcair’s sweetest dreams. They don’t hate the Chinese. They hate the Boomers. Conservatives. Banks. Anyone with a Harley or a Hummer. (Gulp.)

They’re also the fuel that keeps the real estate fires burning.

Housing consultant Ross Kay calls it the “equity pyramid” – first timers willing to swallow debt in order to unlock the equity of the people they buy from, who then go on to buy something fancier, unlocking the equity of others who do the same. “The fact is that housing bubbles only pop when first time buyers stop buying,” he says.

Here’s an example from Toronto, where the average house price (detached, condos, townhomes etc) is now $624,000:

  • The top 11% of sales in the GTA averaged $1,500,000
  • The next ladder saw 22% of sales take place at an average $820,000
  • The next lower step saw 44% of sales take place at an average $470,000
  • On the bottom rung were 22% of the buyers who paid an average of $276,000

Says Kay: “The entire pyramid collapses if those paying $276,000 on the bottom rung stop buying resale homes – whether it’s rising interest rates or employment for those most at risk of being impacted by any changes in the economy. When they stop buying the market corrects.”

Well, let’s go back to perceptions. What people believe to be true is more powerful than the truth. This is why investors, not markets, are the ones who create risk. They stampede into rising assets driving prices to unrealistic levels. Then they stampede out when they smell fear, accelerating price declines.

This is why 51% of us couldn’t last seven days without a paycheque. We’re fully engaged in a single-asset strategy that has sapped our financial resources, soaked up our cash, saddled us with long-term debt and left us unbelievably vulnerable. Now, as the economy turns, this looks like a really bad idea.

Sigh. I think we need to talk about puppies tomorrow. Who’s in?

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What could go wrong? Wed, 22 Jul 2015 22:10:12 +0000 BIKERS modified

“I’m wondering,” says David, “what your thoughts are on possible catalysts to spark a housing correction in Toronto/Vancouver–especially ones other than rising interest rates.”

This is a good question. Especially because most Canadians have deluded themselves into believing rates will never go up again, that the government ‘would not allow’ mortgages to become more costly, and that (consequently) real estate is safe as your momma’s embrace. (Especially if she holds the down payment.)

“The US experienced imploding subprime mortgages (due to rate reset, poor underwriting and wrong default risk assumptions), leading to massive foreclosures, dumping real estate on the market and a complete freeze on mortgage lending (affecting refinancings)–creating a vicious downward spiral,” David adds. “I can’t see the same thing happening here.

“If/when the BoC raises rates, won’t they do it in a slow enough fashion and use anything in their power (with the housing bubble in mind) to avoid a crash? I really can’t think of anything else that will set off a correction.”

Well, the American real estate crash was not caused by imploding subprimes, because that was actually a consequence. So was the blow-up of Lehman, Bear Stearns etc. The real cause was an economic slowdown brought on in part by rising rates, but really affecting people through an employment slowdown. When families fear job loss, they stop speculating on real estate, buying beyond their means, taking on huge debt, or using their houses like private ATMs.

So, house values fell from an inflated level that had resulted from greed and speculation. Because so many people were highly leveraged (like here), the number of families under water soon exploded, leading to non-performing loans and massive consequences on Wall Street, where mortgages had been packaged as gold-plated securities and sold to greater fools. The dominoes then cascaded, leading to a credit crisis, severe job loss and a 32% decline (national average) in house values.

But that can’t happen here, right?

Well yesterday I showed you it did. In Toronto. A 27% drop in house prices from a speculative high (1989) like the one we’re in now. But the decline was long and relentless, which meant it was called a correction, and continued to attract buyers year after year who thought they were being so clever.

Lesson one: a correction is not a crash. But it hurts just as much. Maybe more, since there’s buying all the way to the bottom.

Another common myth is that Americans were financial subprimates – an entire nation filled to the gills with NINJA loans (no income-no job-no assets), zero-down financing, adjustable-rate debt, jumbo mortgages and with unemployed janitors routinely buying McMansions in Florida and Phoenix. So, they brought all that misery upon themselves.

Untrue. As an interesting Morningstar report outlined, in 2005 America looked disturbingly similar to Canada today. Oops.

Just before the US real estate crash about 70% of Americans owned houses. Ditto for us now. In Canada today homeowners, on average, have 55% equity and 45% debt. That was exactly the same ratio in the States in 2005. Currently 23% of Canadian mortgages are for 80% or more of the value of the homes financed. That is weirdly similar to the number of American loans of similar risk (22%) at the height of their pre-crash bubble.

Lesson two: we’re not immune. Or better. Or wiser. In fact, Canadians have allowed the national economy to become just as dependant on real estate as Americans did before they learned a valuable lesson.

Higher interest rates (inevitable as they are) won’t be the catalyst, David, but they sure won’t help. Instead the thing we need to watch out for is simple economic fear. Perhaps that has already started to mount, and with good reason.

The financial news is dreadful. On Wednesday the dollar sat near 75 and a half cents US, the lowest in over a decade. Oil soundly crashed through the $50-a-barrel mark, putting an end to all that brave talk in Alberta about a quick rebound. Remember, oil is our biggest export. And the world is now swimming in the stuff. All this has dragged down the Canadian market, with the TSX giving up 4% over the past year while US, euro and Asian markers rock. And remember that balanced federal budget we received just two and a half months ago? Well, kiss that sucker goodbye. It’s now a $1 billion deficit, says the Parliamentary Budget Officer.

So the focus will quickly become jobs. They’re being shed in droves in the oil patch. Manufacturing continues to decline. Even the railways and truckers are punting people – a sure sign of economic malaise. Bombardier’s in trouble again and some think GM will be pulling out of Oshawa, taking 30,000 jobs and $5 billion in GDP with it. As you know, the Bank of Canada is so worried it’s cut interest rates twice in the past seven months, even as the US prepares to raise them.

Says Capital Economics, which was spot-on with its rate cut forecast: “The slump in oil prices has already pushed the Canadian economy into a mild recession and things could yet go from bad to worse. Falling energy investment will hit both production and jobs, which will further depress incomes and spending. Meanwhile, housing corrections in oil regions could be followed by busts elsewhere when bond yields rise.”

So, David, I wouldn’t obsess about mortgage rates, nor feel we dodged the Yankee bullet. People are simple. They fear, they freeze. The music stops.

When you read about it, well, too late.

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The uncrash Tue, 21 Jul 2015 22:14:13 +0000 SOLD modified

About the time Michael was a little wriggler dodging serious traffic in the birth canal, things were not cool outside in the cruel world. Just months later the Canadian real estate market would nosedive from a record high level to a pit it would take 15 years to emerge from.

Now Mike’s 27 and a banker. Sadly, he reads this blog.

“I was wondering if one day you can shed some light on the symptoms and causes of the early 90’s housing crash and what it was like for Canadians,” he writes. “I’ve been trying to google it, but google is full of talk about our potential housing crash or 08 in the U.S… I was too young to remember or know better in the early 90’s.

“I have clients that lived through the housing crash in the 90’s and are under the impression that housing crashes are a thing of the past. I believe corrections are a regular part of history, especially since my girlfriend and I wouldn’t be able to afford anything until my income increases by about 300%. So, why is it that all of these boomers are so ignorant to history? BTW – they’re passing this ignorance down their kids, (my friends) the echo-boomers.”

Don’t you wish your banker was this smart, instead of cramming a bigger mortgage loan down your piehole? Now with house prices once again at nosebleed levels, and economic uncertainty building, the kid asks a serious question. Why did housing crater the last time, and are there many similarities? Could it happen again?

Well, in 1988 the average Toronto home sold for $229,635. That seems like nothing, but the market was on fire – prices had doubled in less than three years, and jumped an astonishing 21.4% from 1987. The fire continued, adding 19.1% to the average price in 1989. And then the lights went out.

The decline started slowly, before taking hold in earnest. By 1996 the average Toronto house had eroded in value by 27.6% – not that far off the epic 32% collapse in US real estate eight years ago. Prices retreated to levels of nine years before, and it was not until 2002 that the 1989 high-water mark was surpassed. In other words, someone buying when our little banker was a gooey swaddler had to wait 13 years to break even – not including inflation.

And note the above: we did not have a crash. It took more than six years for the housing market to find its bottom, before requiring another six years to recover. But despite the gentle slope on both sides, this was enough to destroy the finances of an army of middle-class families who bought into a property boom only to end up as greater fools.

So what happened to the market?

The incorrect belief is that high mortgage rates killed housing. After all, the five-year rate in 1988 was 12%, on its way at 15% the next year. But mortgage rates actually peaked at around 21% in 1981, and had fallen back into the 9.5% range by 1987. Despite the huge cost of money, the market advanced relentlessly – because everybody was horny, because “houses always go up” and if you didn’t bite the bullet and get into the game, you’d be shut out forever.

Sound familiar? It was speculation, house lust and greed which pushed prices ahead, encouraged people to take on massive debt and divorced real estate from the real economy. Like now, actually. Because when all is said and done, it’s people who create risk – driving markets to unsustainable highs because they’re emotional. They fear losing out on gains, then they fear experiencing loss. Booms always end badly. When you’ve mortgaged your derriere off, there’s no such thing as a soft landing.

Well, here we are, Mikey. Your wrinkley clients have forgotten those lessons. Their kids never learned them. They all think this time it’s different.

But it never is. Lots of warning signs exist, for those who look.

The commodity plop this gilded blog detailed yesterday is not just about crashing gold miner stocks, out-of-work engineers or the misery of trying to find a buyer for your house in Calgary. As mentioned, the Bank of Canada rate cut seven days ago was an admission of troubles. It would be really smart to pay attention.

Fitch, the ratings agency, has joined the throng saying real estate valuations in Canada, as they presently stand, are doomed. Our houses are 20% over-valued, it adds, and headed for a correction. “The price growth that has characterized the country’s housing markets for more than a decade will abate, with modest declines to follow,” adding there will be “no collapse”.

Nothing to sweat about, right?

Hmm. But there was no collapse when Mike was backstroking his way to conception, either. Just the start of a grinding year-over-year decline that would end up being one of the greatest robbers of wealth in Canadian history. And there weren’t even 5% downpayments, cash-back mortgages, zero-financing, 70% home ownership, nine million geriatric Boomers or interest rates so cheap they had only one path ahead. Oh yeah, and only millionaires had million-dollar houses.

What a relief it is that history is bunk.

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