The finale

All you need to know about how Toronto real estate happened last Saturday. Fifteen thousand people packed a tacky seminar on how to get rich buying property. Yes, in Toronto – now one of the most inflated, bubbly, frothy, horny housing markets on the planet, where prices rose 27% in a year and, according to Tony Robbins, they can never go down.

Robbins, of course, is a motivational speaker who knows diddly about Toronto real estate. The same with some dude named Pitbull. He spoke, too. And the kid realtor who hosts “Love it or List It” in Vancouver. But Brad Lamb was there, the condo flogger who finds math so challenging. And did I mention there were 15,000 others? They all paid between $50 and $150 for a seat, so the organizers made millions – which went to Robbins, the doggy guy et al.

The event was a ‘real estate wealth expo’, not aimed at helping people buy a home to live in, but full of encouragement to borrow massively and – as soon as possible – grab real estate as an investment. No money down. Rent it out. Watch it soar. How hard can that be?

There comes a time in the life of every bubble, usually near death, when the fools pile in at the moment of peak euphoria. History is rife with examples. The pattern is as ancient and reliable as human nature. Now, in Toronto, this is that instant. When speakers make big bucks telling you to do something, rather than doing it themselves, it’s time to go home. That’s now. When everyone is clamouring to buy the same asset, as they did with Nortel stock seventeen years ago, sell.

But let’s not just trust history. Instead, hard evidence. Facts, numbers, stats. For some, we turn to John Pasalis, a fixture on the Canadian real estate scene, and head of an outfit called Realosophy Realty. The thing that differentiates JP from the normal realtor is perspective and (dare I say it?) integrity. Very truthy dude.

Anyway, he has just released a large, indepth and highly interesting paper called “Freeholds on Fire: how Investor Demand for House is driving up Prices in the GTA.” The conclusion is simple. It’s not Chinese industrialists. It’s not moist Millennials. It’s not even the Bank of Mom or rapacious lenders at the heart of the current delusion – but Tony Robbins-inspired losers gobbling up every listing that materializes.

And why are they losers? Because, as Pasalis found, 95% of them are cash-flow negative. In other words, almost all of these ‘investors’ are bleeding money monthly. If the price appreciation stops (and it will), they will truly qualify as the GTA’s greater fools.

Here is the report’s summery page:

Lack of government data and competing explanations for Toronto’s skyrocketing real estate prices have resulted in uncertainty about whether the market is becoming unstable. Using an innovative method of measuring investor demand which looks at the number of houses being bought and immediately rented out, Realosophy’s John Pasalis finds evidence of speculative activity across the Greater Toronto Area, specifically:

  • These investors are responsible for 17-21% of all sales in Aurora, Newmarket and Richmond Hill and 36-39% of all sales in some of the GTA’s hottest neighbourhoods.
  • Whitby, Ajax and Oshawa all saw the steepest increase in sales to investors of over 400% in just 4 years.
  • An estimated 95% of all investment properties purchased in 2016 are losing money every month.
  • This subset of investors in the GTA real estate market alone accounted for 10% of all sales; all investors could be responsible for as much as 25%-30% of all sales. This behaviour, emblematic of bubble markets according to leading economists, not only prices out regular buyers, but eventually risks a market correction affecting all property owners. Regular buyers and sellers are advised to be aware of what Greater Toronto Area neighbourhoods are showing the greatest signs of speculation when making real estate decisions. Governments are called to implement the right measures to address the problems suggested by the data. Most notably, lenders currently underwrite mortgages for residential investment properties as if they are owner occupied homes, resulting in a loophole that allows buyers to finance money losing investment properties largely with debt; these loopholes should be closed by tightening lending practices.

In the past, this blog has pointed out that 52% of all condo purchases are currently being made by speculators, not owners. Virtually every one of those units will end up hitting the rental market unable to provide a positive rate of return for the investor. Even with 2.5% mortgages available, after financing charges, property tax, condo fees, insurance and the lost investing power of the downpayment, it is impossible to make money as a condo landlord. The situation is even more dire with detached houses or rental semis – now costing seven figures. Negative cash flow, with everyone gambling that prices will continue to inflate. As the Realosophy boss concludes, this is the reason a boom became a bubble, and will end in a bust.

What can be done?

The Ontario government asked the feds to impose a higher capital gains tax on spec real estate. They didn’t. So now it’s up to the provincial guys to levy a speculation tax on non-principal residence holdings – if they have the courage. Meanwhile the CRA is routinely forcing speckers to include real estate gains in their taxable income, not allowing the 50% capital gains tax exemption, because they consider speculation to be a business. Finally, as JP suggests, bankers should stop lecturing people about how risky real estate now is, and do something about it.

In any case, it’s only a matter of time. Fifteen thousand sweaty investors sealed it.

More of the same

Well, that was a yawner. The second T2 budget failed to live up to the scary hype, with relatively minor tax changes (see the summary below), but lots of debt and a big pink bow on the top – because we’re all feminists now.

And have you noticed how much time Justin has been spending with Ivanka lately? A joint venture announced in Washington for female entrepreneurs, then a rendevous on Broadway for a new play about Newfies. In fact, the budget we just received was more influenced by her dad, Donald Trump, than the little beavs sitting in Parliament.

There wasn’t a big hit on Canadian capital gains taxation because Justin and Bill have no idea if the Trump tax-slashing plan will happen. If it does, and Canada moves in the opposite direction, there could be trouble, with a river of corporate capital flowing south. Meanwhile there’s speculation in Ottawa (and Washington) that the economy could move south along with some financial markets as the American president loses prestige, influence and credibility less than three months into his tenure.

The FBI says it has an active investigation of the Trump election campaign’s ties to Russia, and that country’s influence on the outcome of the Presidential election. There is zero evidence to support Trump’s bombshell claim that Barack Obama wire-tapped the Trump Tower during the electoral process. That would make Obama a criminal. The Muslim travel ban has been eviscerated. And the feeling grows that not enough Republicans will support Trump on a key vote tomorrow to repeal and replace Obamacare. In fact the Donald has threatened anyone not voting his way with “losing you seat” in the next election. Bully tactics. Weird.

All of this is worrying investors. First, it was a mistake to try and tackle the complex issue of health care so early and so brashly. Second, the “America First” budget unveiled just days ago – gutting environmental, cultural and social spending to divert money into guns and a bejesus-tall Mexican wall – is dead upon arrival. Third, all of the above is causing serious doubts that the real stuff investors want – slashed corporate taxes, relaxed regulations and mega-spending on infrastructure – may be delayed, or not happen at all. So, no growth spurt, no profit romp, no inflation pop.

But already the markets and policy have moved. The Dow and the S&P bloated a full 10% since the November election. The dollar raced ahead, bond yields advanced and the Fed pushed ahead with an interest rate hike less than ten days ago, promising two or three more in 2017. Now doubts this agenda will actually take place – and Trump has shot himself in both feet – has created a risk-off moment. The Dow fell by 1% on Tuesday – the first time this has happened since October. The US dollar’s at a four-month low. Gold is on the rise, and so are bond prices, as investors look for safe places to hunker.

Stocks are expensive now – not hideously, but enough. The S&P is trading at 18 times forward earnings, compared to the long-term average of 15. That makes them about 20% higher than normal, and certainly opens the door for a correction should the Trumpster continues to lose altitude and political support.

So what does this mean for us?

Uncertainty. Buckets of it. This is why the second Trudeau budget was the non-event it turned out to be. While the Libs want to spend endless amounts of money and Hoover the wealthy to pay for it, the environment is just too fragile now for Canada to trundle down the path of socialism while the Americans are a nation divided, run by a rabid-right president who received a minority of votes and is beyond strange with a web of personal conflicts of interest.

For investors, it’s time to play safe. Stay with a balanced approach – because bonds, we well as preferreds and REITs will counterweight any give-back on stock markets. Stay diversified, since you definitely do not want too many eggs in the Trump basket. And remain globally-invested, with exposure to Europe, China and inevitably-emerging markets.

The American president is a flawed man. He may end up a flawed leader. This day you can be thankful for that. Trudeau blinked.

Here's what Bill just did (or didn't)
Big scare: No hike in capital gains tax, no changes to corporate tax, no doc’s tax, no diddling with dividends or stock options. Nada. Ziltch. But it is all ‘under review’. Phew.
The deficit: $28.5 billion, up from $25.4 billion projected in the fall. Deficits as far as you can see, with debt-to-GDP ratio hovering around 31%.
Housing: $11.2 billion over 11 years for a National Housing Strategy. No move to dump cold water on Toronto. Burn, baby, burn.
For families: $7 billion over 10 years for new spaces, starting 2018-19. Parental leave zooms from 12 months to 18 months
Defence: $8.5 billion in capital spending for equipment pushed off to 2035.
Care givers: New care-giving benefit up to 15 weeks, starting next year.
Skills: New agency to research and measure skills development, starting 2018-19.
Innovation: $950 million over 5 years to support business-led “superclusters.”
Startups: $400 million over 3 years for a new Venture Capital Catalyst Initiative.
$50 million over two years for teaching initiatives to help children learn to code.
Uber tax: GST to be collected on ride-sharing services.
Sin taxes: 1 cent more on a bottle of wine, 5 cents on 24-case of beer.
Bye-bye: No more Canada Savings Bonds.
Transit credit killed: 15% public transit tax credit phased out this year. (partial CBC summary)