The fix


The latest goof to call for a Chinese Dudes tax in Toronto is the country’s previous finance minister. If you completely forgot about Joe Oliver, that’s okay. He wouldn’t stand out even if you put him between two shrubs. That kinda guy.

But as Harper’s former No.2, he does have some influence. And he says there should be a 15% Van-style tax on any non-Maple buying a property in the Big Smoke. He joins prominent CIBC economist Benny Tal, who made the same argument a few days ago. And sources tell me that T2 is also pushing Ontario to man up like BC did and off the foreigners.

The goal of all this? Ostensibly it’s to crater prices so people can afford houses. But really it’s about political optics, to be seen ‘doing something’ about a problem which government cannot solve. They can only crash, as it happening now in YVR.

August sales overall were down 24% and the average SFH shed $294,000 in what could be the opening ripples of a property bloodbath. As housing consultant and excommunicated realtor Ross Kay pointed out to me Friday, no housing market in North America has ever seen a 36% year/year sales increase turn into a 50% decline in just six months. “Not 1990 not the Great Recession, not in Canada and not in the USA,” he says. “This is a North American record.”

Well done, premier Christy Clark! You’ve just piloted the local housing market from a Biblical height into a deep, smoky hole devoid of survivors. So much for a soft landing. “I think it is fair to say we have had an impact,” she said yesterday. “That was the impact we wanted to have.”

So what was the impact? Basically, foreign buyers have said phooey to paying a 15% surtax on market value, and departed. In the two months before the tax there were (claims the government, which is suddenly swimming in data) 2,034 deals involving non-Canadians. But in the month after the tax, just 60. The yellow-peril gang of xenophobes who cruise through this pathetic blog argue that these stats – lower sales and prices plus the Chinese exodus – prove Van was a market made by foreigners, or the impact of the tax would have been slight.

But here’s the thing. The market was already rolling over. Sales in Vancouver peaked in March (5,173) then steadily wilted through the spring before hitting bottom (so far) in July (3,226). This 38% toppling in market activity happened at the same time benchmark prices for detached homes were rising by $235,000, or 17.5%.

That’s the essence of a dangerous asset – bloating price on collapsing volume. It shows fewer and fewer buyers were entering the market, that prices were being skewed higher on a reduced number of trades, and a correction was already beginning. That’s exactly the argument made here before the Chinese Dudes tax was cooked up and hastily announced by a government in distress. All it would take to topple the tower of speculation, greed and delusion was one little nudge. And we got it.

So whether foreign buyers were doing 9% of all deals, 3% or 16% is moot. After the realtors and Global TV had told the locals that Chinese Dudes were stealing all the houses, it was pure FOMO that fueled the bidding wars and the obscene mortgages. When the tax hit, the meme changed. Suddenly it made way more sense to wait than to buy. Sales dropped. Prices came next. Now expect more listings.

“I’m on the ground in Vancouver,” says blog dog Jeremy, “and the sentiment has definitely changed. Even at 16.5%, with much of that activity constrained to the top end of the market, your long-standing argument still holds true.”

Of course it’s true. Real estate is the most emotional of assets. People buy it for the damnedest reasons. And the higher it goes, the more they want it. If the tide turns, they flee. This is what booms and busts are made of. When human nature changes, so will this. Don’t hold your breath.

On Friday afternoon in mid-town Toronto several clutches of people populated a slick sidewalk on a boring street in mid-town, waiting to enter a house. The listing was 24 hours old, and hot. Smallish house, newly reno’d, mainly constructed of stucco-over-plywood, postage-stamp lot. Inside it had one of everything (nanny kitchen, media room, wall oven with vid screen) but all of dubious quality. Offers are being held back in anticipation of a bidding war. The price: $2.4 million. At the curb was a fleet of realtor A7s.

“The Ontario government should quickly impose a 15% tax on purchases by non-residents and foreigners of residential property in certain Greater Toronto Area (GTA) communities,” Joe Oliver says. “We have no choice.”

And so the real story begins.

Portfolio management


Let’s imagine the impossible for a minute. You read this blog. It speaks to your inner soul takes you to a better place. You know you need to invest. You agree in a balanced, diversified, liquefied state of Zen. But now you face a dilemma.

Yes, bonds are safe and you need steady stuff to preserve capital. But they pay almost nothing, and become less valuable when interest rates start to rise. What to do?

Well, as Yogi Berra said, when you come to a fork in the road, take it.

Just to be clear, a 60/40 portfolio (the kind that arouses me) has 60% in growth assets and 40% in fixed-income. Most people think this means “stocks” and “bonds”. But it doesn’t. Just as the growth portion is highly diversified (equity-based ETFs investing in Canadian, US and international markets – large, medium and small-cap companies – plus real estate investment trusts), the safe portion of a healthy portfolio is also a mix of stuff.

Yes, bonds pay nothing – at least government bonds. Central banks have hammered interest rates into the dust, seriously penalizing savers and (as detailed yesterday) forcing people to shift their retirement strategies. So why own any?

Simple. Stability. Anti-volatilty. Anchoring your portfolio. For example after UK electors surprised everyone and voted themselves off the continent, global stock markets careened lower for a few days, robbing the S&P 500 of about 6% of its value. Ouch. But Brexit also caused bond prices to spike, since billions of worried dollars flowed into these safe havens. So while the yield on the bonds was unchanged, the value of the bonds jumped – which helped to offset the drop in equities. When stocks were off six per cent, a 60/40 portfolio was down only about 1%, and quickly recovered.

Thank you, bonds. If the nutcase wins the White House, expect a similar story.

But yield is still a goal of any investor, so the 40% fixed-income portion needs to cough up more than government bonds deliver. Thus, if your portfolio is big enough (a few hundred grand) you should also have some corporate bond exposure – investment grade debt (like that issued by the banks or insurers) – which pays a higher yield and is quite safe. Ditto for provincial bonds, with zero default risk and delivering another 40-or-so basis points in yield.

Finally, don’t forget about inflation. It’s a fact of life, especially with a sea of debt swirling around us and an anemic dollar boosting import prices. So having some real-return bonds is a good idea, because the effective yield actually increases along with the rate of inflation, plus they’re guaranteed by the feds.

All of the above should end up equaling about half of the 40% making up the safe portion of your overall portfolio. (And remember to move stuff around so that interest-bearing assets like bonds are safely ensconced inside your RRSP tax shelter.) But does this mean you have to go and find actual bonds to purchase? Nope, there are lots of exchange-traded bond funds around that will do the job.

So what of the other half of the forty? That’s where the preferred shares come in. These are a hybrid of stocks and bonds. Like stocks they pay dividends and give you an ownership stake in the company. Like bonds they’re far less volatile than common stocks, with quarterly cash distributions. The income stream is also safer, which is why they’re ‘preferred.’ A company in difficulty might trim the dividend for its common stockholders, but cannot reduce it on the preferred shares.

Most preferreds today are rate-reset, so they lose capital value when rates drop (that happened last year) and gain value when rates rise (that comes next year). But in the meantime they pay a great dividend – currently a tad over 5%. Try to find that anywhere else with an asset that’s 100% liquid – and which comes with a tax credit. So while interest is 100% taxed at your marginal rate, preferreds pay dividends that have a preferential tax treatment. Yes, because they’re special. Like you.

So the preferreds (at 20% of the overall portfolio) give you a great yield boost, making the overall return on the safe, fixed-income portion equal 4% or a little better. If stock markets do nothing, in other words, you’re still beating the pants off a GIC, and doing it with less tax. Again, there are a few great ETFs around providing exposure to a basket of quality Canadian preferreds. And ignore the know-it-alls who come here to tell you prefs are bad because the capital value fell as rates were reduced.

So what? You buy them for yield and security of income, plus lower taxes, not for a capital gain. Having said that, with rates at the bottom of the curve, it’s hard to see how investors taking a position in preferreds today will not be happy dudes in the years to come.

Well, there you go. And you thought fixed income assets were boring. Shut up.