Delusions

LIFE

A good thing I stopped caring what people think. That happened years ago when (during a period of temporary insanity) I held public office. The doors of the House of Commons elevator I was riding in opened onto the main corridor where the media cabal was hanging out. Hey boys, I said. The doors closed and we continued on our way upstairs.

The next day there was a large photo on the wire with the caption, “MP Garth Turner never goes anywhere without two blonde, female aides.” Not having any Amazons at that time, I looked hard at the picture and saw I was indeed flanked by two women – both of them House of Commons internal couriers.

Not long after, a story appeared in the Globe about how “millionaire Parliamentarian Garth Turner” had purchased a unit in an exclusive downtown Ottawa condo where rock stars (Alanis Morsette), dilettantes (Belinda Stronach) and hockey heroes (some big, scary dudes) lived. I was insulated by wealth, obviously, from the concerns of working stiffs while sucking off a government wage.

But, I rented. It was cheap. Unlike other MPs living it up in hotels and putting it on their expenses, I never claimed a dime. So I concluded (a) people will believe whatever they wish to be true about others and (b) the hell with them.

Lately you may have noticed on this blog how some folks like to dispute whatever is said. Why they don’t just leave is an interesting question. But a fav topic is the extent to which Canadian housing affordability has been destroyed by foreign buyers. My position is simple: of course offshorers influence some prices in Van or Toronto, but not enough to move the entire market. Instead, it’s locals who do that, hopped up on cheap money, fueled by FOMO and whipped into a speculative frenzy by Global, the Globe and an army of hungry realtors.

When data supports this long-stated belief, it’s trashed. When some junior UBC prof writes a paper quoting ill-researched media reports decrying Chinese, it’s a party. Once again, people believe what they want, and nothing will change that except a market decline.

Now it looks like they may get one. As the tide goes out, we’ll see who’s left holding the bag. I doubt it will be thousands of guys from Guangzhou. As I wrote here and in the HuffPost the other day (more flaming), rising prices on thinning sales volumes is not a good sign. As you also know, sales of homes in June tumbled from May (not an uncommon event) but have fallen seriously from year-ago levels – up to 40% in some hoods. Third, the sales-to-listing ratio now clearly peaked a year ago and has been declining since. One realtor last week declared the tony Westside to be “a buyer’s market.”

Now we have new analysis from indy housing analyst Ross Kay suggesting the tide’s already receding, with the flow of capital into the Vancouver market massively diminished. Says he: “When we warned of the perfect storm, this is what we were talking about.  The $4 billion in capital that entered Vancouver between February and March to support house price gains had dropped to just under 1/2 billion in June.  That was the most volatile reduction recorded in the history of Canadian real estate.”

What that means in practical terms is this: insane increases in selling prices are coming to an end. Kay says the market is now entering “its first phase of correction” which will continue unless the Bank of Canada loses its mind and chops the trendsetting rate once again. Price gains are forecast to drop by more than half, and “the average selling price in the second half of 2016 is forecast to be 11.35% lower than in the first half of the year.” More significantly, the analyst says, “a 20% correction could very well be recorded by June 2017.”

As you know, that would shave about $350,000 off the value of the average detached in YVR (where 91% of all houses are assessed at over a million). Finally, this: “June of 2016 recorded the highest number of closings reported across Canada and the mortgage debt assumed to make those deals happen is about to be reported by the Banks and StatsCan.  It appears Canada’s housing bubble may very well be cracking the moment household debt tied to mortgages sets a new record.”

Kay, by the way, disagrees with me about foreign cash and its impact on the market. He argues it is now the withdrawal of that capital which will cause an unstable, wobbly, entirely speculative pyramid to topple – because it’s not supported by economic fundamentals. In other words, locals (who still make up 95% of all trades) have been over-reaching, over-borrowing and buying beyond their practical means to grab a piece of the pie they perceive is slipping away.

This will probably end in the tears of those who borrowed excessively to buy too much, and the regret of many more who watched the biggest windfall of a lifetime pass them by. As I said at the outset, people will believe what they want to believe and these days the V in YVR stands for “victim.” The howls as this all deflates will be deafening.

CRACK

Above is a crack house. “I’m totally pro-RE,” says blog dog Alex, “but even this is getting a little ridiculous. Lol.

“This is a 3 bedroom rancher that was a grow op and meth lab and flop house for all sorts of delinquents in the worst part of Maple Ridge, a suburb of Vancouver that takes an hour to drive to (two hours in rush hour). This house was declared derelict, boarded up and had all utilities physically removed due to the above mentioned enterprises that were run from it. It is located across an empty lot that was one of the worst “tent cities” for the homeless in the city.

The lot is less than a quarter acre, and it is by all accounts a tear down. I should know, I’ve had the chance to look at this house extensively in person, inside and out. It was bought at a foreclosure auction at the end of 2015 for $300K. It is now for sale for $1.3 million. Wow. Now THAT’s crazy ….and it’s now been removed from the MLS. Could be sold?

I rest my case. Get out.

Courage

HIPSTERS modified

The banks pay you one half of one percent to keep money there. What if they paid you nothing? What if you had to pay the bank to keep savings for you? Would you do it?

Over 75% of depositors, in a global survey done by ING, said no way, dude. They’d pull the cash. But put it where?

In Japan twenty years ago people used to save 23% of their incomes. About a year and a half ago, savings turned negative. Incredible. And why? Japan has a rapidly-aging population, in part because it eschews immigration. The country’s greying at an alarming rate, and old people spend their savings, instead of saving their income. But mostly, why put money in the bank when you get 0.002% on deposits? That’s two bucks a year on $100,000. (The only consolation might be this: the inflation rate in Japan is negative .5%.)

This is probably why sales of home safes in Japan have ballooned lately.

As mentioned here, half the bond debt in the world now pays 1% or less. A quarter of the global population lives in countries with negative interest rates. It’s an indication growth is slow, with a huge oversupply of commodities, labour and industrial capacity. One direct consequence is a big squeeze on the middle class. So we get Brexit, Trump and social unrest as a result. In nation after nation, the divide between the rich and the rest is growing. And no amount of rioting in the streets, punitive taxation, shot cops or political change will alter that.

Sucks. But it should also encourage you to try and be on the winning side of that equation. That’s what this blog’s all about. It won’t do much for global GDP, but it might help save your tosh. Advice follows, below. Here are five things.

Don’t even bother saving your money. Invest it instead.

There’s a depressingly significant chance the Bank of Canada will again nip rates, even as the US Fed raises them there in 2016. This country is now on the wrong side of the curve, which means savers will be doomed to collecting less in interest than they are robbed by inflation and tax. Nobody will be able to retire adequately on savings accounts, GICs or a bond-heavy portfolio (plus the piteous Canadian pension pogey). Investing in growth assets may be more volatile, and it may be scary. But running out of money’s the far greater risk.

Avoid tax. Disappoint politicians.

The more the rabble feels disenfranchised, the more tax will be piled on. Look at the laughable move in Vancouver to punish people for not living in their properties full-time. Or the new T2 tax creating a bracket taking more than half the income of most doctors. Or the 50% slash in the most democratic and effective tax-saving vehicle in the nation. These are not rational moves. They’re political.

So the first action for everyone should be to fully fund the TFSA, then invest in broadly-diversified growth assets, not savings accounts. After that, stuff your RRSP, not necessarily for retirement but immediate tax relief and to shift income from high years to low ones. For your kids, open RESPs, where money can grow tax-free for a couple of decades, and the government will hand over grants. It’s the easiest 20% you’ll ever make. And avoid interest, 100% of which is taxed. You’re better off to collect income in the form of dividends and capital gains, where taxes are reduced by up to half.

Invest in growth, not debt.

As interest rates sink, the return on fixed-income dwindles while central bankers flood the world in liquidity. So a river of money flows into equities. It’s happening now. Brexit may have hurt the voters who made it reality, but the event has helped stock markets climb to historic highs. Bonds paying nothing make dividend-yielding assets look a lot more attractive. Ditto for REITs with great distributions and preferreds’ 5%+ yield. The days when retirees could sit back and clip coupons are gone, gone, gone.

Shun the doomsters, the scared and the skittish.

I once knew a money manager who for two solid years said markets were overpriced and would correct. They actually did, about four times – normal dips – yet he invested nothing, fearing more declines. His clients ended those years with single-digit gains while the TSX and the S&P shot ahead more than 12%. Such lack of experience and judgment is common. It takes courage and confidence to invest when others are timorous and tepid. There are always reasons to be afraid, and in a world of over-information, paralysis by analysis is commonplace. Just look at this blog’s comments section full of losers and nihilists.

Stay liquid, diversified and balanced – and that includes real estate.

Having said to invest, not recoil, do so intelligently. Don’t lock your capital into long-term assets, like five-year GICs for example. Ensure you have a broad diversification among various asset classes and also geographically. No individual stocks. No mutual funds. Not too much maple. No deferred-sale-charge products. No leverage, unless you really understand the risks. And always maintain balance. Safe things in your portfolio as well as growth assets. Yep, some bonds included because they help reduce overall volatility. As for your house, balance matters there, too. Remember the Rule of 90.

Finally, the Royal Bank just called the Vancouver market a ‘bubble’. You know what that means, right?

RBC CHART