Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Fri, 24 Oct 2014 20:56:47 +0000 en-US hourly 1 Wheels up Fri, 24 Oct 2014 20:56:47 +0000 BROKE modified

A GreaterFool rule oft mentioned is this: buy what appreciates, rent what depreciates. Hence, it’s okay to buy a house if at the right price, in the right place. But it’s almost always dumb to cash-buy a new car.

You’d think most people would figure this out. Instead of shoveling over thirty grand for a soul-sucking minivan, they’d be far better of stuffing that money into their TFSA and investing it, and letting the dealer or the bank give them the car. After all, in ten years the TFSA money should double to $60,000. The minivan will be worth (maybe) ten thousand.

Well, seems this is academic for most folks, anyway, since they don’t have any money. Car loans have exploded, and it’s no coincidence this has happened concurrently with a housing boom and a crappy job market. Real estate continues to skim off huge hunks of household cash flow, leaving precious little for wheels, investing, or a Plan B.

Moody’s Investor Service has just tallied this. Ugly. Seven years ago car loans totaled $16.2 billion, which is a giant pile of money. Today that pile is $64 billion – an increase of 300%, or 20% a year. But it gets worse.

As you know, these loans now have terms of eight or nine years, which exceeds most marriages and is longer than the lifespan of most Great Danes and almost all Kias. And despite a stuttering economy, the combination of cheap rates and ridiculously-long pay-back periods has created a boom in car sales. The dealers are having a banner year. Plus, says Moody’s, this also has people buying more expensive rides, so they can roll around and look like rockstar realtors.

So, record car sales. Record car debt. Oh, and record car loan delinquencies.

They jumped more than 13% last year, compared to a drop in missed payments on credit cards and lines of credit. “Credit losses have been low, but could rise quickly in an adverse scenario of unemployment increases or rapidly rising interest rates,” says the rating agency. “If the economy takes a turn for the worst, we could see these loans becoming problematic for the banks.”

Well, let’s turn to jobs for a minute. There must be a correlation between the labour market and an unprecedented demand for consumer credit. A constant run-up in debt would suggest most families are not bringing in enough income to sate their spending habits, which would support the Bank of Canada’s warning that household finances suck (a technical monetary term).

This is a thesis Randall Bartlett is proving. He’s a senior economist at TD Bank which has unveiled a new measure of the job market. Finally. The StatsCan monthly employment roller-coaster has turned into a bit of a joke among the biker-economists I hang with. The swings are so wild as to cast doubt on the validity of the data, with abysmal losses being replaced by flowery gains in a matter of weeks.

So the bank’s launched a Labour Market Indicator to try and get a truer picture on who’s working, and (as importantly) the nature of unemployment. If this is a better tool, we’re a little more screwed than we all thought. Says the bank:

  • “The Canadian labour market is currently experiencing more weakness than is implied by … the headline unemployment rate alone, and has been for nearly two years.”
  • About 20% of all the people out of work these days have been that way for at least six months – the long-term unemployed.
  • The bank says the numbers of people in this group jumped during the GFC, which is to be expected – but that levels have not come down since 2009.
  • Meanwhile the number of working-age Canadians (between 25 and 54) in the workforce is on the decline, down 2% in two years. This, says TD, “is a characteristic of a weak labour market.”
  • So while the official jobless rates is 6.8%, the bank says it’s actually about 7.2%. In the US, by the way, unemployment is now 5.9%.

And Bartlett confirms what this pathetic blog has started for a couple of years – incomes have flatlined. Wage growth of about 2% is running a little below the inflation mark, which means most families are spending more and actually making less. That’s supported by the Canadian Payroll Association, which claims over 50% of us could not last a week past one missed paycheque.

This is what you get when a country opts for a condo economy. Massive spending on housing and consumer goods, supported by an historic increase in debt because a weak jobs market and zero income growth mean Joe Frontporch is treading water. Our manufacturing base has shrunk and a quarter of the economy is now centred on real estate. Were it not for low rates that allow so many to meet their gargantuan monthlies, we’d be pooched. And none of this is coincidental.

Tell me how it works out well.

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It works. Thu, 23 Oct 2014 23:42:46 +0000 HOMES modified

The tale of two nations. Part deux. This is certainly getting interesting.

The average moist virginal homebuyer in Canada is 29 years old, just emerged pasty and blinking from his parents’ basement, and plans to spend $510,000 in Vancouver and over $400,000 in Toronto to buy real estate. Almost all of these buyers take high-ratio loans, since they lack a 20% downpayment, and end up paying CMHC insurance – which can add $15,000 to that Van price.

But despite the fact this amounts to an awesome debt loan, the home ownership rate among the twentysomething set (according to BeeMo) is 50%. That’s down from the past level of 55%, mostly because houses are so stupid expensive.

In Canada the average place costs more than $400,000, says CREA. In the States, the average is $176,500.

So, you’d imagine US kids would be swarming to real estate, since mortgage costs are roughly equal (thirty-year loans are 4% in the US, but tax-deductible), as are big-city incomes. But you’d be wrong. Home ownership among this group hit 40.6% as the housing boom was ending in 2007, then fell to 34% last year and is now just 29%. Of new-home purchasers, just 16% are first-timers.

What could possibly account for this huge gap between the Yanks and the Maples?

Well, many US kids saw their parents get their butts roasted in the housing correction that bottomed about four years ago. The US middle class was vacuumed for about $6 trillion, and millions of families found that having a one-asset investment strategy, leveraged over a mountain of debt, was a toxic idea. A whole nation of house-hornies discovered real estate does not always go up.

But that’s background. More salient reasons American millennials are renting are (a) student debt, (b) higher youth unemployment and (c) a lack of affordable properties. Sound familiar? So, we still don’t have an answer. Until we look at lending practices.

To get a mortgage in the States, you typically need a credit score of 750. Yikes. Not only that, but most lenders usually won’t dole out any funds unless a buyer can cough up a downpayment of 20%. Compare that with Canada, of course, where 5% is all you need, and the bank will give you at least half of that for showing up.

Of course we also have teaser-rate and adjustable-rate mortgages, which are now banned in the States. That’s how banks here sucker in people with 1.99% or 2.2% two-year terms. It’s also worth remembering the Canada Interest Act dictates all mortgage terms have to expire after five years, so you cannot lock into a 4% rate for the next three decades, as so many Americans are doing currently. (Refinancings have jumped 23% as bond yields fell.)

The result is obvious.

Half of our kids buy houses and the average price is $408,795. South of us, in a similar country, less than a third can buy – and homes cost $176,500.

This is no coincidence. Real estate doesn’t cost more here because it’s better-built, or since we have a larger population and a better climate, or because people in Seattle make half what Vancouverites earn. Prices are higher because houses are easy to buy, and debt flows.

It’s been deliberate. Pushing real estate’s been a key policy initiative of governments which are financially strapped, strangled by election cycles and bereft of other ideas. By pushing citizens into borrowing and spending massively, politicians don’t need to pare spending, enact stimulus programs or reform taxation, especially when the economy turns south. They just get the fool voters to do it. Simple. It works.

So we got forty-year amortizations and zero down payments, along with first-time homebuyer tax credits. This was layered over the Home Buyer’s Plan allowing RRSPs to be raided, and provincial grants to encourage newbies. Land transfer taxes are slashed or eliminated for the virgins and, of course, CMHC wipes away all lender risk for mortgages up to 95% of a property’s value. We now have an entire banking sector that’s grown fat on giving home loans to people who have been too challenged, lazy, undisciplined or juvenile to actually save any money.

The result?

Unaffordable houses and record debt.

Genius country, eh?

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October 22 Wed, 22 Oct 2014 23:44:26 +0000 DOG SOLDIER modified

Al Jazeera, of all outfits, called me Wednesday afternoon from New York to comment on lax security in the Canadian Parliament. That turned into a theme after the gunfire. “Ottawa Attacks Shatter Canadian Innocence,” read Bloomberg’s headline. I guess we’re playing with the big boys now, in the same week that six of our old jets deploy against ISIS.

Financial markets can handle a lot of stuff, but not surprises. The TSX lost a few points on news a soldier had been shot at Ottawa’s War Memorial. It lost a lot more on reports of bullets in the Centre Block. Then, on claims of multiple shootings (the cops at first said three), plus the Quebec ramming days ago that killed another soldier, things hit the fan. Just a day after adding more than 200 points, the market shed 235.

That was not all that was worth fretting about. Oil crashed more than 2% on Wednesday, and a sad prediction of this pathetic blog last month – that crude would hit $80 a barrel – was realized. This is a big story for Canada. It’s a manifestation of the trends I’ve been yammering about for some time – less demand and more supply is exactly what deflation means. Next comes lower prices, less investment and lost jobs.

Calgary, Edmonton and Fort Mac have intense times ahead. I hope your daughter didn’t just buy a Cowtown condo from poser cowboy Brad Lamb.

The Bank of Canada jumped into all of this, citing the oil plunge as a likely reason interest rates now won’t be rising too fast in this country. No good news there, as the fedsters also said they’re worried about hormonal housing markets in Vancouver, Calgary and Toronto. The real estate bloat, of course, has been caused by absurdly low rates. What a dilemma we’re walking into.

And did I mention the dollar is at eighty-eight?

So, there you have it. Terrorist attack on Parliament. Oil price crisis. Deflating economy. Unaffordable houses. At least Doug Ford is losing.

For the last two years I’ve been suggesting your exposure to Canadian assets – whether that’s ETFs owning the Toronto stock market, or a house in North Van – be contained. Don’t fall victim to home country bias and have a portfolio full of maple assets. Incredibly, 70% of all Canadian investors with equities have only Canadian companies. Not only are they undiversified, but they’ve now hitched their wagon to the wrong star.

Meanwhile, today – and the poor, dead soldier on ceremonial duty – should count for something. We’re in harm’s way, which is unavoidable when you face up to evil. This is one more thing you need to factor into your personal strategy, and I will address that in coming days.

By the way, I turned Al Jazeera down. No interest on my part in talking about the guys who failed to keep a dude with a gun from the front door of Parliament. I know many of the guards, and have walked through those brass doors beneath the Peace Tower hundreds of times, smiling at them. That is a public building, through which rivers of tourists flow daily. In recent times security has been beefed up, and vehicles prevented from cruising past ambling MPs. Gone are the days I could park my bike beside the PM’s black SUV tank, and so irritate his Mountie driver.

But there’s certainly more security to come. The two aging guards at the front door will likely be given guns. That will sadden me.

Godspeed Cpl. Cirillo.

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Darwin Tue, 21 Oct 2014 22:18:19 +0000 SELFIE modified

Let’s irritate the millennials more. It’s fun. They’re so cute and defenceless. Like baby skunks.

Almost nine million people born yesterday (between 1981 and 2000) which is roughly equal to the number of wrinkly Boomers. Incredibly, half of the M-people still live with their parents, and about a million of them who could work, don’t. Six years ago, the number living at home was just a third. Go figure.

Millennials account for about 20% of all income earned in Canada, while the Boomers, many of whom are now at the end of their piteous careers, constitute 30% and their kids (Gen X) who are in mid-career, represent 46% of all earnings. Of course, this last group – saddled with houses, kids, dogs and SUVs – also spend hugely.

Well, so what?

Hmm. This is an ugly demographic mix for the little skunks. I hope their moms are teaching them to forage, and hide their nuts.

Our social system – much of the economy, in fact – is based on working people supporting old wheezers. Today there are four-and-a-half workers for every senior. So, the Boomers never have to worry about their CPP or OAS or health care. But when the average 25-year-old millennial is 65, there will be just two people with a job for every retiree. Oops.

This is because our population’s aging quickly. Like Japan’s. Within twenty years a quarter of the nation will be collecting OAS – that’s $4,000,000,000 a year (four billion) in pogey. CPP payments add another six billion, but that program should still be self-funding two decades from now. Forty years out, I’m not so sure.

The implications should be obvious, but aren’t to most millennials, 70% of whom have smart phones but no savings. For starters, real estate is demographically doomed. With an aging population in financially strapped times, demand and prices are destined to fall. Survey after survey of Boomers (most of whom are in denial) already show between a third and half understand they’ll have to downsize their property in order to raise cash for living expenses.

That only makes sense. Over 70% don’t have defined-benefit corporate pensions, and have saved a quarter of what will be needed to survive 25 years without working. They’re house-rich and financial asset-poor, not to mention unbalanced, non-diversified and potentially illiquid. The big need in the years to come will be income, not enough garage for two minivans.

So, the current millennial fixation for real estate, as we ridiculed yesterday, is beyond dumb. These kids are buying into a mindset which will facilitate a giant transfer of wealth from them to their parents. The wrinklies end up with the cash. The kids get the debt – pledged against assets likely to fall in value as rates inevitably rise. Double screwed.

Second, the whole system of social transfers could be threatened by the time the millennials are lining up for metal hips and plastic hearts. Today, when there are twice as many taxpayers and half the dependents that will exist in forty years, we already have a persistent federal operating deficit, and an accumulated government debt (the feds, provinces and cities) of $4.1 trillion. That’s about $245,000 for each of us. And these are the good old days. Every year more than $60 billion in taxes goes to pay interest in this debt – so imagine what happens when rates drift higher over the decades ahead.

So, yes, the millennials would be fools to expect their lives to unfold as carbon copies of their parents’. No profligate hippiedom, no finding-myself-in-Europe, no sha-na-nah for them. This is Darwin, baby. And you’d best know that now.

Some months ago I gave you a Millennial Portfolio. It was met with thunderous neglect. So let’s try again.

First, the investment vehicle of choice for all the kids should be the TFSA. Forget RRSPs for now, because they’ll end up being tax bombs you deeply regret in a few decades, when taxation rates are inevitably higher. You may not get a break for making a TFSA contribution, but you’ll pay nothing on the growth or any withdrawal.

Second, these savings accounts are not for savings. Get out of the bank or the orange marmalade outfit and into a place where you can hold a bunch of low-cost ETFs – exchange-traded funds. Divide your money into five piles and buy a fund holding the TSX 60, another containing the S&P 500, one with a basket or preferreds, one comprised of a bundle of REITs and the last containing a good mix of bonds. Now you have balance, diversity and liquidity.

If you start with five grand and add that much in a year, securing just a 6% annual return (assuming a slow-growth world), in thirty years the balance will be $494,000, of which almost $300,000 would be tax-free growth. That’s half a million in taxless wealth, all for contributing $100 a week.

Or, you could buy a condo for $400,000, with a $390,000 mortgage, pay twice the amount per month that a renter does, and end up losing all your equity. In a vaguely deflating world populated with annoying and condescending old people who won’t give you money even though you’re special, why would you?

Ask your phone. There’s an app for that.

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Screwed Mon, 20 Oct 2014 22:10:17 +0000 TUNNEL modified

What a drag it must be being a millennial. When the GFC rattled the world, you were in college. When the dot-com bubble exploded, you were in high school. When the last serious recession hit, you were in Huggies. When financial apocalypse erupted 27 years ago Sunday, you were an urge.

So how can we expect you to have any real context for all of this angst? Suddenly a lousy job market and temporarily inflated house prices have created a crisis that makes WW2 look inconsequential. Worse, it’s all a seething conspiracy.

Well, that’s the way they’re feeling at The Tyee these days, an online journal for the youthful, oppressed underclass that, astonishingly, uses the word ‘screwed’ more often than this pathetic blog. Days ago, readers lapped this up:

“Vancouver has morphed into a machine for screwing millennials.

“Unless we do something drastic, we will have deprived that generation of productive 20- to 35-year-olds the ability to own a house in Vancouver. If you think that’s no big deal, consider this: each person shut out of affordable home ownership in Vancouver is consigned to the screwed side of the increasingly widening global wealth divide.

“That’s right. Vancouver’s perverse real estate market is a textbook example of the suddenly fashionable realization that the rich are getting way richer at the expense of an evaporating middle class.”

Now, there is some logic to lamenting the middle class. The demise of the middle is obviously happening, a phenom best illustrated by American society, where just 1% of the people control 37% of the wealth, and the average family has saved only $25,000 for retirement (or anything else). But there’s one overriding reason for this. Real estate. American families bet big on housing, and they lost spectacularly. It’s estimated that $6 trillion was wiped away when real estate values collapsed an average of 32% – and most of that slipped through the fingers of middle class households.

Ironically, while American millennials have seriously backed away from home ownership, Canadian puppies can’t get enough of it – and feel, yes, screwed when a person in their twenties is denied a house. Simply because they can’t afford it. How awesomely unfair is that?

Despite watching the meltdown south of the border (if any of these whiny kids were paying attention), plus the way real estate has decimated wealth in many European countries, along with deflationary threats and the risk of borrowing a mountain of mortgage money, they’re still horny. Can’t help it. They see houses as wealth. Evidence be damned.

So, society is “depriving” millennials of real estate ownership thereby pushing them into the screwed side of the wealth divide. It sounds like a human rights violation, and the push is on to find solutions – like (as the Tyee author suggests) carving up existing houses into micro-units that the kids can afford. I think we used to call those  “apartments.”

But here’s the deal. Somebody with credibility (and that’s not a Boomer blogger with a titanium leg and penchant for Harleys and Amazons) needs to keep a generation of horny millennials from self-destruction. Just this week another alarm was raised. Giant ratings agency Moody’s affirmed Canada’s good credit standing, but said our housing is “particularly inflated” and the ever-increasing debt load of the middle class is a risk that cannot be ignored.

“This combination presents a potential risk to the banks and to the federal government directly, as it guarantees a considerable portion of mortgages,” said the report – as Moody’s joins fellow rating company Fitch, plus Morningstar, The Economist, the IMF, the World Bank and other international observers who think we’ve flipped. And now that oil prices have fallen, imperiling one of the country’s major export industries, while the dollar has tanked, how can young people think housing is safe? Why would they want the debt, potential illiquidity and likely losses?

Simple. They don’t believe it. The generation these kids hate and blame did an excellent job in brainwashing their offspring. Nick Nanos knows that.

The pollster’s latest Canadian numbers are precious:

  • Those who believe the economy is getting worse: 83.7%
  • Those who do not feel better off financially: 80.2%
  • Those who believe real estate prices will rise: 40.3%.
  • Those who think house prices will decline: 10.6%.

How do you are argue with that? You don’t, of course. Because when most people think something, it just has to be so. Today the majority of us, including our educated-to-the-gills young people, fail to make the connection between the stuttering economy and the one asset that depends on economic expansion more than any other. Without more income and more jobs, housing is doomed. No matter how cheap mortgage rates get.

Seems obvious to me. But I spent my youth growing hair.

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What could go wrong? (2) Sun, 19 Oct 2014 16:25:36 +0000 WRONG

“I have a car-buying company,” says Paul. “Lately I have seen a strange phenomenon. Most of our customers are trying to sell their vehicles to pay their household debt. The problem is that 70-80% of their vehicles have loans. Too much debt!!!! I feel sorry but we cannot help them.”

While a lot of people who come to waste their time reading this pathetic blog have high net worth and the income of potentates (as opposed to potatoes), debt is a massive national problem. It could bring us all down, especially if deflation has legs.

For example, look at what the kids are doing. Since Boomer parents messed so much with their heads, young people continue to think that buying real estate they can’t afford and shouldering massive, low-rate debt, is what adults do. Sad, but pervasive. Here’s an example from this past weekend.

Casey sounds like a smart 23-year-old, working in IT for an outfit he likes. He sent me this:

“My newlywed wife and I live in Victoria BC and are looking to take the next step at building our future. We are currently renting, paying $1200 per month on a decently sized two bedroom, one bathroom apartment. We don’t hate the place, but we have found a condo we like and think we can afford. The builders have yet to break ground on the project and estimate 2.5 years to completion. The place we are interested in is about $450,000 with $340/mo in strata fees. My question to you is, is this a smart decision? Do you predict that our home will be worth the same value or more when it comes time to close? Is it smart to lock into a builder rate of 4.99% now in case interest rates shoot up between now and closing? We are hoping to be approved for 5% at signing and then take the 2.5 years to build up enough of a down payment to avoid CMHC costs at closing.

“I was all gung ho to go out and sign the papers when I woke up this morning, but since talking to a co-worker today and reading your blog thanks to his recommendation, I clearly haven’t thought things through enough. I need you to help explain how we can assess Canada’s economy and the predictions of the big-D.”

So I wrote back, to learn more. When I asked Casey what assets he and his babe have to contemplate buying a $450,000 unbuilt condo, and what their financial position will be afterward, this was his reply:

“Great to hear back from you. The only assets we have now are a car with a payment of $500/mo. Because this is a new development, and we expect to get approved for the initial 5% signing down payment instead of the 15% signing DP over 9 months, we can currently afford to pay the 5%. My wife and I both earn about $65k each. She is trying to get another casual position so she can pull in a bit more than that. And currently we have no plans to start a family.”

There you go. A typical situation these days – young adults who figure they can go from zero to a half-million-dollar home in one step. How should I respond?

Obviously I could remind Casey and his new wife they’re gambling and speculating in buying a housing unit which is unbuilt, unknown and with a contract which typically gives the builder all the cards – the right to delay closing, to change floor plans and materials, or even not to build if pre-sales sputter. They should know that over the course of two or three years everything could change. Rates could rise. The economy sink. Pandemic hit. Markets fall.

The kids need to be reminded we’re in the final throes of boom housing market that cannot last, which means they’re probably buying at the top. Or that Victoria already (like most major cities) has too many condos coming to market, in buildings hastily and cheaply-built whose future problems will be manifest in special assessments and illiquidity.

I could ask them why they’d trade being young, free and mobile with a shiny new life ahead, for debt, obligation and financial servitude – and still not have a back yard, if babies arrive. Or simply, I could remind Casey and wife that by buying they will likely double their living costs (to about $2,500) compared with their current rent. If the new condo doesn’t appreciate every single year they own it, this will be a money pit tainting the rest of their lives. Why would anyone want to start a marriage that way?

This is what easy debt does. For that we must blame gutless policy-makers, omnivorous bankers and misguided helo parents. Household credit – loan and mortgages – are on the rise again, swelling at twice the pace of income growth. And while seeping deflation now suggests interest rate increases will come slowly, we have a greater threat to ponder – economic torpor. Without steady job growth, expanding GDP and higher family incomes, this giant pile of debt is a giant threat. If Casey & his squeeze buy this place, their consumer spending will go to zero, and their savings along with it.

Kids without assets ready to buy a half-million-dollar apartment? I shouldn’t even have to write about this.

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What to worry about Fri, 17 Oct 2014 22:09:28 +0000 LAWYER modified

Well, that was fun. Days ago markets were crashing and fools were selling. By Friday bargain-hunters were plumping stocks and draining bonds. It was enough to make a boy dizzy.

What happened, and what comes next?

In a word, markets (which were a tad frothy and fat) were attacked by fear. It may have been largely irrational, but fear’s like that. You don’t think it, you feel it. This time it came from worry everything was starting to come unraveled – Europe’s a mess, ISIS goons are winning, deflation’s coming, the US is sputtering, and Ebola.

Picture4  In fact, here’s an interesting chart for you (from Myles Zyblock, at Dynamic) which tracks the main American stock market, the S&P 500, and the number of news stories about the spread of the West African virus. Coincidence? Hardly. People are like that. They overreact to risk. Markets hate surprises. And selling begets more selling.

After a few days of this, driving share prices down almost 9% in New York and over 10% in Toronto, the panic petered out. The news got better. US corporate profits rose, consumer confidence shot up as mortgage rates and gas prices fell, central bankers stepped in and jobless claims dropped. Brave investors moved in to Hoover everything in sight. And up she went.

“Needless to say, we do not see the typical hallmarks associated with a deep and prolonged downturn,” says Zyblock in a research note. “In fact, leading data argues that the economy and earnings should continue to march higher over coming months – a development which is usually associated with positive longer-term returns for equity investors.”

In fact, when you think about it, not a lot changed last week to cause all the freaking. The American economy is doing just fine by every measure that matters – job creation, corporate profits and government finances, for example. The unemployment rate is at an eight-year low and the federal deficit has virtually plunged, thanks to less spending and more taxes.

Europe sucks, but we knew that. The central bank there is about to start a stimulus program, and has just slashed interest rates so much that some banks are charging to hold your money. ISIS is evil and scary, but will probably end up being bombed back to the 13th Century. And Ebola is pure terror – until you realize it’ll be heart disease or cancer that kills you.

The week showed how destructive emotions can be. Imagine rushing to your laptop to dump the equity ETFs in your TFSA on Wednesday, only to see them rocket higher on Friday. And being in a registered account, you couldn’t even save any losses to write them off against taxable gains. Bummer.

Human nature often betrays us. It’s amazing how much time some people spend trying to identify and avoid risk – driving, cooking, walking the dog, dressing the kids and, of course, investing. Meanwhile we pick careers haphazardly, and fall into love and marriage randomly. In short, we worry about the wrong stuff, fretting over global markets while we snorfle a maple glazed at Tim’s.

This is why having a balanced and diversified portfolio makes sense. When the TSX was nailed for a 10% loss this past week, that portfolio was down less than 1.5%. By design. ‘Balance’ means you own both growth assets (like exchange-traded funds holding the S&P) plus fixed-income stuff, like bonds – which soared in value as stocks fell. Meanwhile the diversification element gives you a steady income stream from more stable assets, like preferred shares, and ownership of stuff that’s not correlated to stocks, such as real estate investment trusts.

The goal is to grow money without swilling Imodium. The best way to do that in a world where you can’t control disease or stupidity, is to hedge your bets by owning a lot of assets, in a rational mix (40% safe stuff, 60% growth, works well) that ends up being an antidote for fear. In the past seven days there was all the proof ever needed that this approach works.

Now, what next?

Hard to imagine the volatility is over. The Fed still has to end its stimulus spending this month, or not. Either way, that will get people excited. So will more Ebola in the US, which looks predictable. Earnings season continues, and that’s going well. Lower gas and rates should goose consumer spending going into the key holiday retail season. Overall, the American recovery continues and Europe has only one direction in which to travel. No wonder some people were buying. They don’t believe the wheels are coming off. Me neither.

So, you can flop around with emotional wrecks flipping stocks in their Qtrade accounts. Or, you can build that portfolio and concentrate on your love life. Tough choice.

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The end Thu, 16 Oct 2014 22:13:49 +0000 TAILS modified

Remember the Fort Mac dude who told us some weeks ago he was going to unload his house in a squalid city populated with horny engineers? (Like there’s any other kind.)

Well, the guy has horseshoes up his rear, apparently, listing and selling just days before the price of a barrel of oil plunged enough to put oil patch execs into cardiac arrest. “First of all, thanks for reading and posting my story! I feel somewhat famous now,” he says, pathetically. “My house just sold for $10k less than what I bought it for back in June of 2008.

“I’m just glad it’s over, especially the way the world markets have been acting this past week! I’m pretty sure back when I bought it the exact same thing was happening globally, but I was completely oblivious to it, just like these new greater fools probably are. I bought at a bad time, but looks like I probably just sold at a great time.”

Now, remember the Financial Post dude who dissed me recently, arguing there’s no real estate bubble – only a gasbag full of twits like me writing about it. “Booming real estate markets are producing another kind of bubble: An expansion of authors writing about a looming crash,” he wrote. Then Marr quoted such unbiased and credible people as Joe Owe and Brad Lamb to help calm the afeared masses.

Well, times change. Sometimes ya gotta flip. Sometimes, flop. Mr. Marr, praise be, has seen the light. “No matter what statistics show, Canada’s housing boom is about to end, experts say,” is his latest piece. Just in time, too. CREA reports sales fell last month – a significant event. Even Royal LePage is warning consumers not to expect real estate to perform. And Capital Economics’ David Madani earns some ink with this observation:

“What concerns me is some buyers seems to have this view that prices can only go up. People feel it’s a one-way bet. A lot of younger people seem to think that if they don’t get in now on the home ownership ladder, they’ll miss out. Some of these people will come to regret this decision. In the more expensive markets, it’s almost like a capitulation where they say ‘If I don’t buy now, I’ll never own a home’. This is what happens in a housing bubble.”

Meanwhile, even The Motley Fool is lining up to take a whizz on the housing market. “If you buy Toronto real estate now, you’ll hate yourself later,” says this week’s headline. In arguing for an investment in nice REITs that pay you actual cash to own them, the Fool reminds is why GTA housing is a potential sinkhole.

“The city’s real estate boom has produced some jaw dropping figures. For instance…

  • $951,000: Toronto is about to become the second Canadian city where a single-family home costs more than $1 million. Last month, the average detached house sold for $951,000, up 8% year-over-year.
  • 130 skyscrapers: Toronto has more skyscrapers under construction than any other city in North America. Today, there are 130 high-rise projects underway.
  • 39,000 realtors: The number of realtors in Toronto has doubled over the past 10 years. Today, there’s one realtor for every 140 people in the city.
  • 37x rental income: Toronto housing prices are valued at 37x annual rental income. Typically, the market has traded between 15x and 20x rental income.
  • 3.7% cap rate: Toronto capitalization rates — the rate of return based on what a property is expected to earn in rental income — have hit new lows. This was highlighted last year when the Bayview Village shopping mall sold for a record low cap rate around 3.7%.

The conclusion: “You should buy assets that make sense based on cautious assumptions. Nobody should be speculating that people will pay growing premiums for a house.”

That sure is good advice these days in a bunch of cities, like poor Regina. The latest realtor survey shows the average two-story house is 7% cheaper than it was a year ago, even as sales hold steady, while bungs have dipped 8%. Inventory has been flooding on to the market as more sellers sense this is a now-or-never moment. There are more houses for sale than at any time in the past twenty years. Says local broker Mike Duggleby: “The inventory levels available on the market right now are approximately 40 per cent higher than usual, which has created a supply-demand imbalance and pushed home prices down. Strong unit sales this quarter have not been enough to support previous price levels.”

In all of Nova Scotia, including Halifax, prices are dropping. They were off about 3.5% last month compared to the same time a year ago, with more than full year’s worth of houses sitting on the market. In Montreal, prices are running less than the rate of inflation, after an absolute decline through the summer.

Of course, this is at a time when the cost of money has never been lower and a five-year mortgage can be stapled down for a lowly 2.8%. As mentioned earlier this week, already 60% of Canadian markets are seeing falling sales, with most experiencing rising inventories. So the hot housing conditions most realtors and reporters keep telling us exist is really a three-city phenom. And, as I wrote here a few days ago as oil collapsed, you really have to wonder about Calgary.

Well, a crappy, raw semi with a Wild Kingdom basement on a hipster street in Toronto sold this week with twelve offers – all from virgins. The asking was under $830,000, and the sale was over $950,000. When I spoke to the agent for one of the losing bidders (who reads this blog), all he would say is, “I am so done with this town.”

Smart people know where this is going. Tails up.

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Weird Wed, 15 Oct 2014 23:04:08 +0000 CAT BATH modified

It never fails. The price of stuff that people want goes down, and they don’t want it any more.

We have two reports on this most emotional of human behaviour – the trait that just about guarantees the majority will end up as financial dweebs.

First (our fav), houses. This week CREA did its latest stats-pumping thing, saying real estate sales across the country last month were up a whopping 10.6% over last year, with prices ahead more than 5%. But there are two stories, not one. People are still horny for houses in delusional little hormonal pools, including Calgary (of course – at least for now), Vancouver and Toronto.

And because prices have been increasing in these places as mortgage rates fade (Calgary up over 10%, Toronto plus 8%), sales have been robust. When folks see rising prices they equate it to a good investment. It’s illogical, I know, but that’s why we have hormones in the first place. Think foot fetishes or handcuffs.

Hence, buyers in those cities are paying the highest prices on record for houses, which is never a good idea unless you’re convinced they will go higher still. And they are. Sadly.

Meanwhile in 60% of all local markets across Canada, sales are down. You know where – this blog has laid that out for you in recent weeks, talking about the funk that has settled over places like Halifax and Regina. And in at least half of those cities, prices are lower now than they were a year ago.

See what I mean? Buyers fading away where houses are getting cheaper, while bidding wars continue where real estate is less affordable every month. It’s not so much about the markets, as it is about human behaviour. Most people have no confidence in their own judgment, and are massively influenced by what their co-workers, friends or off-colour relatives have to say. If enough people tell them something’s a good (or bad) deal, they end up thinking that way, too.

This is what bubbles, manias and deflation are made of. Love, too. More on that later.

Now, here’s another great example of people doing the opposite of what they should.

Read the comment section from yesterday and there’s one thread woven through most of it. Yes, fear. Stock markets in Canada and the US have shed between 8% and 10% over the past few trading sessions, as oil tanked, global growth stalled, the Ebola scare spread and investors collected their profits. This is exactly the correction that we should have had a year and a half ago, since they happen on average every 18 months. (The last 10% blow-off was back in 2011 during the US debt ceiling crisis.)

To the middle of last month, the TSX had showered investors with a 28% return over twelve months, with US markets gifting about the same. Volatility was comatose and silly things happened, like a nutso IPO for a Chinese ecommerce outfit 90% of investors had never heard of. And still the market advanced, getting more and more expensive. A correction, mused this irritatingly sanctimonious site, is coming. Get your chequebooks ready.

Well, here she is.

And what do we hear? “Uh oh…2008 over again in the market,” and “Obviously, the US economy is belly up just like Europe. If there is deflation, stocks won’t go up, they will collapse lower. No two ways about it. The only safe place to be will be government bonds. All else will not make it through.”

The volume of selling on the markets was thunderous, especially at the opening bell on Wednesday. Retail investors – many of whom probably came to the party late, paying top dollar – were stampeding to get out. Being humans, they expected gains, no matter what they’d paid to get in. They bought high because things were going up. When the music stopped, panic.

This happened in March of 2009, and again in the summer of 2011. When equity markets got cheap, the buyers were scarce – because they lacked confidence and perspective. Emotion told them to flee, so they did. It’s as researchers have found – we fear loss more than we savour gains. That’s why Canadians have billions in GICs and bank accounts paying them nothing, yet barely have enough income to survive. They’d rather suffer, live small and squander their most valuable asset – time – than face any risk of loss.

No wonder so many of us hate the rich. The Chinese guy buying the mansion on the Westside. People in Porsches. Kevin O’Leary.

Emotion and investing don’t mix.

Emotion and underwear?  An entirely different thing. But that’s my other blog.

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The cowboy gene Tue, 14 Oct 2014 23:01:27 +0000 COWBOY modified

Aren’t you happy you didn’t just buy a honking big particleboard McMansion in suburban Calgary? Yeah, it was tempting. The locals swear there’s nothing more secure than fifty feet of Alberta dirt, and lately the numbers have supported that.

The average house in Cowtown had gained 10.2% year/year by last month, to $512,800. Hell, even condos have been sizzling – going for an average of $298,800, a jump of 9.5% from last autumn with a 21% goose in sales.

This has made Calgary the most speculative little line-dancin’ bubblette in the nation. And the burbs have been just as hormonal. In Airdrie, for example, prices popped 8% in a single month – last month.

But all that could be in jeopardy, now that Mr, Market has moved back into town. Oil prices have been pushed into a full-fledged correction – almost a free-fall – by tumbling demand and increasing supplies, which will nail Alberta’s provincial budget as much as it will inflated house values in Fort Mac and Calgary.

On Tuesday alone the price of oil dropped about 4.5% – an unusual event – taking crude to below the $82 mark (you may recall a few weeks ago this pathetic blog said eighty bucks was possible). (Wednesday a.m. update - oil now at $81. Oops.) This means oil has lost close to a third from its recent high, and is now caught in a vice from which there is no easy escape.

As the US dollar rises in value (the world’s safe haven currency) commodity prices are squished. (The loonie this morning dropped a full cent, to just 88 American pennies.) Meanwhile all that fracking south of the border has created more supply and propelled the US onto the path of energy self-sufficiency. Worse, that deflation stuff I’ve been talking about here for the past year has come to pass. Europe’s now an official mess. Germany just cut its growth forecast. The US has missed inflation targets for 28 months. Ebola threatens to freeze local economies and disrupt trade and travel. And demand for oil is dropping along with factory orders.

In short, this doesn’t look like a blip. The TSX sure thinks so. Down another 200 points on Tuesday, and now in official correction mode – thanks mostly to oil.

And even though average incomes in Calgary and Fort Mac beat the national average, so does debt – due to real estate. Alberta households carry $35,000 more debt on average than a year ago, and their debt load is now a staggering 64% higher than the national average, according to BeeMo.

How strong has the cowboy gene been?

  • About 500 homes prices over $1 million have sold in Cowtown this year. That’s ten times the number of a decade ago, and a record. Realtors have been so aroused that one firm (Sotheby’s) hired a helicopter to fly horny buyers over the little faux hills that conveniently connect the freeways.
  • Homes listed over $500,000 are higher by fifty per cent than just a year ago.
  • City Hall claims there are more millionaires in Calgary than anywhere else in Canada. At least, that was last week.

But, it’s all related to oil. Unlike the GTA (six times larger), the Albertan economy swings with crude. When asked why house prices have increased faster than anywhere else in Canada this past year, here’s how BMO economist Bob Kavcic sees it: “It’s a boom-bust economy that lives and dies by oil prices, and the housing market is the same. If you were to say what’s going to drive luxury real estate in Calgary, I’d say just oil prices.”

And that makes Alberta, especially Calgary and Fort Mac, ground zero for deflation’s dump on Canada. Housing values rising at five times the inflation rate are not sustainable. Worse, the buy-now-or-buy-never mentality so prevalent these past two years has blinded people to the dangers of spending big on inflated assets in a one-horse economy.

Oil’s descent may stop. It may not. Already some oil patch development has been curtailed and jobs lost. The newly-minted but well-worn premier is worried about plunging royalties, just days into his new job.

This is a not the first rodeo. Alberta is boom. Alberta is bust. What’s new is a city now packed with seven-figure houses, peppered with debt. At least gas will be cheaper for that drive to the coast.

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