Victims

Apparently every eighth property sale in the GTA last year (and there were 113,200 of them) went to a person who already has real estate. This ratio exploded in the last decade according to government stats. More than 120,000 locals now own multiple places.

So what?

So if foreign buyers (according to local realtors) equal 4.9% of all deals, if 50% of all condos (according to Urbanation) are bought by people with no intention of moving in and if 14% of total buyers (according to the province) already own homes, then the changes announced last Thursday are doomed. The centrepiece of Ontario’s big douse-the-fire program was a 15% tax on foreign buyers (who don’t move here), but the numbers show the real culprit for runaway pricing is clearly old stock speckers.

By bringing in an anti-foreigner tax, spanking realtors, extending rent controls and opening the door to an empty-houses levy, the province missed stomping out the hot coals responsible for this conflagration. Forget Chinese dudes, assignment clauses or rich people with a downtown condo for game nights – prices have romped because GTA properties (ditto in Vancouver) are now an asset class, and part of the futures market.

The mania to acquire real estate is unlikely to be abated by anything last week delivered. Nothing Ontario did will immediately reduce sales or prices. A detached house will be just as unaffordable to the average moister couple in July as it was in March. That won’t change until government has the backbone to create a serious speculation tax of the kind last seen in the 1970s.

On April 9th, 1974, out of the clear blue came a bolt of lightning that sautéed the rear end of every speculator and multiple-property owner in Ontario. The province imposed a 50% tax on any and all profits an investor might realize from the sale of any piece of real estate. The only exceptions – your farm or your principal residence. And this was on top of the federal capital gains tax.

It was an astonishing thing for a conservative government to do, but it worked. Sales collapsed overnight. Within days, prices followed. The 30% year/year price gain which triggered this draconian action (currently the bloat is at 33%) was arrested, then interest rates started to rise and the party was truly over. Real estate remained relatively affordable until the next bubble formed in the mid-1980s (burst by mortgage rate hikes in the early 1990s).

The hate mail this pathetic blog has garnered over the past three years of suggesting locals, not dudes from Guangdong, were responsible for peak house, is impressive. I’ve been told what to do with literally every orifice on my bronzed, taut body. Most Canadians have bought into the meme that shadowy foreigners and traitor realtors have conspired to steal houses so they can launder their stolen fortunes. They want to believe it. They hate people who reject it. Life’s so much more understandable when you’re a victim.

Well, victims they are. Of their own frenzied obsession with dirt.

Renters are discriminated against. Household debt levels are reckless. Our media’s obsessed (“Buy now or risk saying bye-bye to affordable Montreal home ownership,” said the Gazette on the weekend). Our kids have turned into condo junkies. Financial balance has been sacrificed on the altar of potlights and polished cement. Worse, this bubble we’ve created for ourselves has turned many of us into xenophobes, racists and generally despicable, envious, venomous people. So we get the government actions we deserve – a tax on foreigners and collars on agents. Tomorrow houses will cost a little more. Risk on.

Frenzied buyers line up outside the sales office of Brad Lamb’s latest condo development on the weekend in downtown Toronto.

Bad timing

DOUG By Guest Blogger Doug Rowat

Brad Barber and Terrance Odean. Know of them? Perhaps not, but you should.

Mr. Barber and Mr. Odean were researchers at the University of California who conducted a landmark study of investor behaviour during the 1990s. They looked at the trading activity of roughly 78,000 households at a large US discount brokerage over a six-year period. What they discovered was revealing.

Households that traded their stock portfolios the most had, by far, the worst performance. The highest turnover portfolios had an average annualized return of 11.4%, but the lowest turnover portfolios had a significantly better return of 18.5%. (If these returns seem impressive, it’s because it was the bull-market years of the 1990s.) The annualized blended-benchmark return (buy and hold) was roughly 18%. A conservative stock portfolio might have annual turnover of 20%—the highest turnover portfolios in the Barber and Odean study were realizing this every MONTH.

So what were these frequent traders doing wrong? The mistakes were numerous. Certainly overestimating their ability to determine market direction, an enormously complex task, was a key factor in their underperformance. Overconfidence led them astray, essentially. But there were other errors. They also traded emotionally. For instance, they held stocks that had recently underperformed the market and sold their winners, which was “consistent with the evidence that individual investors tend to hold their losers and sell their winning investments”. Our experience with our own clients is similar. When a client wants to raise money from their portfolio, often they suggest selling only the positions that have performed well, ignoring the fact that positive fundamentals are likely the reason for the strong performance and that it could easily continue. Repeatedly selling your winners usually only serves to blunt momentum.

Another amazing revelation of the Barber and Odean study was how poorly diversified most of these stock portfolios were. The mean household in their study held only 4.3 stocks! Recall the blog post I wrote a few months ago (http://www.greaterfool.ca/?s=hail+marys) highlighting that the odds of any one stock suffering a catastrophic loss (a 70% drop) is about 40%. If you have only a four-stock portfolio, you’re living dangerously.

Much of what Barber and Odean concluded has been supported by other analysis. For instance, Blackrock notes that you only need to miss a handful of strong market days to absolutely cripple your long-term portfolio performance (see chart). Over thousands of trading days do you believe that you’ll be able to accurately determine the few strongest market days and, by corollary, the few weakest days? Get over yourself.

Investment of $100,000 in S&P 500 (1995-2014): Market Timing is Pointless.

Source: Blackrock

Interestingly, Barber and Odean also determined that men trade 45% more often than women. And, lo and behold, underperformed women in terms of net returns. Sadly gentlemen, overconfidence once again gets the better of us. As Barber and Odean describe it

Overconfident investors believe more strongly in their own valuations, and concern themselves less about the beliefs of others. Overconfident investors…hold unrealistic beliefs about how high their returns will be and how precisely these can be estimated.

Put another way, even though your buddies have advised you that you’re an ugly slob, you still decide to ask Scarlett Johansson out on a date. You can, of course, do this, but just be aware that she’ll tell you to get lost every time (or call the police).

I don’t highlight the Barber and Odean study to suggest that portfolios should never be traded. They should. It makes sense, for instance, to periodically rebalance your portfolio and also to subtly shift asset and geographic weightings in response to broad changes in economic conditions or interest-rate outlook. But having 200% portfolio turnover because you view yourself to be a human algorithm? This is a poor strategy.

Dial it back, flash boys.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.