The dilemma

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Is it tougher now than in the past to be a young hottie? Marlene thinks so. Especially when you live on the West Coast, where it rains hormones. “I love your blog and have been reading it every day for the last 2 years,” says the 35-year-old who’s single and makes $120,000. (Her email addy will be raffled off at the end of this post). “Anyway, my question to you is what’s a millennial to do these days?”

Marlene feels caught. Events of the last few days sure haven’t helped. Stock markets laid another egg Monday, spooked by slow growth and slumping oil, just as a new wave of greed was sweeping through the hoods of Vancouver in the wake of FlipGate and revelations speckers there have discovered assignment clauses.

“This is my dilemma,” she says. “I can’t afford a house (don’t want a condo), even an hour and a half into the sticks. Unaffordability has spread well beyond Van and is getting worse daily.  Therefore, I have maxed out my TFSAs and contribute a healthy amount to RRSPs, mostly invested in a fairly balanced portfolio.  Many of those investments are on a major decline and predicted to fall over 50% from today’s date.  Nasdaq being a good example.  Should I sell and save the headache?  This invested money is also my savings for a downpayment if that day ever comes.

“So to recap, I can’t afford to buy a home and all my investments are losing big time. That’s negative growth in a booming city.  What are my options??? Is there any hope for all the millennials in my position? On a side note: If I have lost money in a TFSA and have sold all investments within, can I top it back up?”

First, the side note: no, you can’t. Losses within a TFSA are forever gone. You cannot inject new money into the TFSA to replace them, nor can you deduct them from future gains. However if you removed the assets inside the plan, and they later lost money, you could replace the TFSA withdrawal in its entirety the following calendar year.

Now, what’s goin’ on with markets?

There’s a big sale. Because recent events have not turned out as many people expected, large investors (who move markets, as opposed to you) have been sucking money out of equities and putting it into safe havens, like the US dollar or government bonds. Of course, these guys can afford to do what most of us can’t – which is to sacrifice growth and receive nothing, in return for parking their cash. (Institutional investors don’t have retirements to fund or kids to educate.) Once they sense a bottom is in, they rush back.

Markets are unhappy with slowing global growth, the slide in commodity values, the nutjob running North Korea, uncertainty over the Chinese economy, the course of US interest rates and, in Canada, record debt, oilageddon and house lust.

The question here is whether or not this should worry a 35-year-old. The answer is no. Unless she’s dumb enough to want to convert all her liquid wealth into a single real estate asset in the most over-valued market in North America, just prior to its inevitable correction. In that case, don’t invest. Do not risk any short-term declines. When you buy the house you’ll have all the risk you can stomach.

In contrast, a 35-year-old babe with money to invest in a portfolio has picked a fine moment to do so. Logic tells us the current market plop (even if it’s not finished yet) is overdone. The global economy is still expanding, not contracting. That means the commodity collapse is illogical, with demand for stuff like oil actually rising. Cheaper energy is also, logically, a serious boon for both consumers and consuming countries. People can spend more money buying F-150s, and less on gas, creating and sustaining manufacturing jobs. Besides, the commodity crisis is getting old. There’ll be a significant snapback because (a) the US is still swelling, (b) every week there are more humans yet no more planet and (c) the world still runs on oil and copper, aluminium or grain.

So, Marlene, stop being a wuss. If you have a well-balanced, globally-diversified portfolio there’s only one ingredient you’re missing. Patience. Selling an ETF when it’s low is as irrational as buying a house when it’s high. Emotion, not logic, leads people to fear lower lows and expect higher highs. It rarely turns out that way.

As for BC housing, check out this note Mike sent me Monday:

“There’s a story going around that the realtor Fraser Elliott in Ladner hired a helicopter to fly a woman from China around Ladner to look at 7 houses.  Apparently she didn’t look at any of them on the ground, bought all seven and asked to arrange to look at more the next day.”

By the way, this is Ladner, from a copter. Can’t you feel the buzz?

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I called Fraser Elliott at his Re/Max office and told him a GreaterFool Investigative Team would be kicking in his front door at any moment, Hoovering his Audi, then interrogating him mercilessly (waterboarding, if necessary) about the helo lady. Or was this just a rumour he’d started?

“That,” he told me. “is just ridiculous. And I wish I had a chopper.”

The fact people believe such tales, and trade them, tells us all we need to know about this market, Marlene. It’s a Millennial death trap.

It’s obscene

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There are three ways to buy a condo these days in Toronto, Mississauga, K-W, Kingston or other urban areas in the most populated swath of the country. (a) You line up, camp out or weasel your way into sales office and get a pre-sale – securing a unit to be finished in two or three years; or (b) you buy an existing resale from the person who owns it; or (c) you purchase an assignment.

What was once difficult is now commonplace. Developers are smart guys. When they understood real estate had become a speculative commodity like oil, bitcoins or Beyoncé tickets, the builders and marketers started adding assignment clauses into agreements as a matter of course. At first they charged a price – up to five thousand – to include this paragraph. Now, it’s just there. It’s the license to trade, flip, speculate, potentially profit and play the game – suddenly de rigeur in our house-horny world.

In case you didn’t realize, there are realtors who do nothing but trade assignments. Whole brokerages are heavily engaged in them. There are assignment web sites. And just check out Kijiji if you doubt that this thriving marketplace in paper-based real estate exists (click below to enlarge).

ASSIGN

On Saturday morning this pathetic blog lit up when scores of people rushed to link a Globe story on the use of assignment clauses in Vancouver. It was kinda cute. YVR takes another step towards maturity, it seems, as the mainstream media catches up to a practice which has been in pace, and functioning, for years.

“Assignment clauses are an obscure but increasingly ubiquitous feature of domestic real estate transactions in B.C.’s Lower Mainland,” the Globe said, darkly, “where feverish real estate prices have triggered a frenzy of buying and selling, and a national debate about the risks of an overheated market and the role of foreign investment.”

Assigning houses works similarly to assigning condos or any other property. A vendor accepts an offer containing a clause allowing the buyer to sell the property again prior to closing it himself. In a hot market rife with speculation, flipping and greed, where listings are scarce and citizens obsessed with real estate, the buyer (who has no intention of closing) is willing to accept the risk involved.

If successful, the buyer (often a realtor with deep market knowledge) is able to sell the offer to a new purchaser for a profit before closing. That second buyer may even be a player, too, who resells the paper to a third party – made easier if the closing period is long (three to six months). So, on the day of closing the original vendor gets his or her cash per the agreement, and yet the ultimate purchaser assumes title, having willingly paid a greater price. Like a futures contract.

Nothing new here. Thirty years ago, in the last Canadian real estate orgy, it was common for a single home to close multiple times on the same day, with the offer to purchase flipped four or six times after the original deal had been inked. (By the way, this kind of activity in the late 1980s also preceded, by just a few months, a market dive which ultimately shaved more than 30% off the value of GTA real estate. It would take 14 years for the average price to recover.)

Assignments increase prices within a market, but are not responsible for the speculative fever which makes their success possible. Realtors who are also assignors may reap more commission on the pass-through, but profits trading clauses do not go untaxed. In fact, CRA will levy capital gains taxes on the profits and possibly HST on the sale price, or worse. Gains made through trading clauses are routinely classified as income, so the flippers are taxed at their marginal rates, without the 50% break they’d get with cap gains.

What the Globe piece did, by not providing any context, was suggest Chinese buyers had found a shady, likely unethical, way to suck up houses from unsuspecting Van sellers through multiple grey market deals. “It’s obscene,” one seller was reported to have said. “I had no idea our house was going to be resold. We were shocked when it was flipped.”

The obscene part, of course, was that the house closed for more money than the first seller received, after the buyer took a risk and resold the deal. Greed has a funny way of pulling the needle on your moral compass.

While assignment-clause sales in Van are a small fraction of those in the GTA, they constitute one more log on the pyre of a stable market. The other day some dingdong paid six figures more than the asking price on the $2.4 million piece of crap featured here in Point Grey. Bidding wars have erupted in the wastelands of Langley, Surrey and PoCo, far from the lights of downtown. In the burbs, realtors are claiming ‘average’ houses are appreciating $30,000 a month. Real estate has gone parabolic, as is always the case when euphoria wins. But it never stays.

EMOTIONS

Source: Blackrock

The chart look vaguely familiar? Check out the Van real estate board price graph published here in the previous post. Or the Case-Shiller graph of real estate values in major US markets city  reproduced below. They thought it was different there, too.

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Some things never change, as they result from human nature. But apparently we have to learn them all over again, every few years.