Simple

Over the last decade we’ve endured much.

Credit crisis recovery, US debt ceiling panic, oil price collapse, Trump, trade wars, protectionism, Brexit, Bitcoin, Hong Kong, record debt and now the first global pandemic in a century. Stock markets swooned in a serious way four times. Interest rates collapsed. GICs pay 1%. Houses are inflated. Wages got stuck. Lots of people did stupid things. Eight million on the dole and a million unable to pay their house loans when the Covid storm rolled in gave evidence of that.

Through it, this blog has told you the best path was to stay balanced, ignore what you cannot afford, eschew debt, avoid putting everything in one asset, try not to be a cowboy flipping stocks, chasing bullion or crypto, be diversified, reduce tax, stay invested and understand that real risk means running out of money, not losing it. Alas, few listened. Human nature almost always leads us astray. We chase houses. Think short-term. Borrow too much. Get investment advice from moms and brothers-in-law. And we’re complete slaves to emotion. Fear. Greed. Envy. Nesting. FOMO.

But if dogs were in charge of finances, they’d just do what works, and stay at it. Simple. Results are all that matter when you don’t have email and have to pee outside.

Why have I yammered at you for the past ten years about a balanced and diversified portfolio? Because despite all the turmoil and scary stuff we’ve been through, this has proven itself with an average annual return of just a little over 7%. That doesn’t mean seven points a year, every year since there have been times of decline (it lost 3% in 2018, for example). But net worth is built over time and, like dogs know, by doing proven things repeatedly.

Time for a refresher and an update on asset allocation.

First a B&D portfolio generally means 60% in growth stuff and 40% in safer things. The logic is that when stocks sell off in a sweat (like when the virus hit) that other assets will rise in value as money seeks refuge (like bonds). This is exactly what occurred in 2020.

But wait, you cry, interest rates have tanked and bonds pay nothing. Why on earth would you own any?

Because they go up in capital value when stocks fall, thereby slicing volatility. Nobody owns bonds any more to collect interest. That’s so 80s. They’re shock absorbers – with the added bonus that (as stated) when rates shrink the value of bonds plumps. And remember, a good portfolio doesn’t just contain pay-nothing government debt. It also has exposure to provincial and corporate bonds, adding some yield.

But the real payers in the fixed-income part of the portfolio are preferred shares, with a dividend now in the 5-6% range, plus reduced tax. Rate reset prefs are interest-sensitive, too, so when the cost of money falls, their value drops. These days they’re cheap to buy and still churn out that nice return. As central banks inevitably increase rates in future years, these will surely hand over a capital gain.

Growth assets mean equities (plus some real estate investment trusts). But not individual stocks, since most people can’t pick well nor stomach the volatility owning a handful of companies brings. Hubris, vanity and too much testosterone leads many people into thinking they’re smarter than Mr. Market and can pick a few ‘winners’. They can’t. It’s a guess. And guessing is gambling, which is not the same as investing. Don’t.

Better to own whole markets through broad-based equity ETFs – exchange-traded funds. They are cheap and liquid. Far superior to mutual funds. And don’t fall for home-country bias, keeping too much of your growth assets in Canada. Year/year the US market has delivered a 14% return while Bay Street is up just 3%. A good portfolio is a global one – North America, Europe, Asia, emerging markets.

There are other complexities, depending on how much you have to invest. Large and small corporate exposure, for example (small caps will likely lead the economic rebound, as usual). Sector exposure (like health care). US and Canadian-hedged funds (try to stay at least 20% US$-denominated). And don’t have too many positions. Fewer than 20, for sure, even if you have a couple of million in the can.

The current preferred weightings in a 60/40 portfolio are 26% in a variety of bond funds, 13% in preferreds, 20% in Canadian growth assets (including 5% in REITs), 22% in US equities and 18% in international stocks. Of course, try to move things around for tax-efficiency between a non-registered account (dividends and capital gains), an RRSP (sheltering bonds) and your TFSA (the hot stuff).

Finally, ignore the noise. Experts telling you to go gold or more equity exposure, for example. The US election. The virus. Government deficits, central bank policies or prime ministers with ethical blind spots. I mean, does your dog care about what was in the news on Thursday or how last year compared to the average period? Can she even spell MAGA or BLM?

Nope. Results. That’s all that matters. Woof.

The crash

– Ksuksa Raykova photo

“We’re doing a story about the potential for a residential real estate crash,” the email from glitzy mag Toronto Life read. “The premise is basically that prices have held steady for the past few months, despite crippling economic conditions, so does that mean the bottom will inevitably fall out?”

A follow-up phone call materialized from the editor (I explained no crash was near). Then another note arrived. Housing is a hot thing these days. Apparently, even bigger than the virus and glory holes. ‘Okay,” I relented. ‘Send me the questions.’

“Has anything surprised you about how the market reacted during the pandemic? Pls explain.”

The current market sucks. Bidding wars. Blind auctions. Bully bids. Multiple offers. Prices rising double-digits. Many are incredulous how this could take place in the midst of a global pandemic with the downtown core a ghost city and a withering 13% unemployment rate in the GTA. Eight million Canadians have been on government pogey for four months, and the GDP has crashed the most on record. Yet when it comes to real estate, we’re partying like it’s 2017 again.

The reasons are profound, and temporary. There was no spring market in 2020, since we were all going to die of Covid, and stayed home in our underwear. Hence a big pent-up demand once it appeared life was going to carry on. What normally happens in April this year took place in June.

Second, lots of demand was unleashed on scant inventory. Available listings shrank faster than a dude in the Humber when the virus arrived. Live showings halted. Owners were totally unwilling to have anyone view their homes. The choices for buyers once public fears started to dissipate were thin. Good properties were immediate objects of desire and competition. Prices popped.

Third, money’s cheap. Ridiculously cheap. The major lenders are quietly giving mortgages for less than 2% on a five-year term. Even decade-long loans are 2.5%. As central banks rushed to rescue the economy from the pandemic, rates were slashed and billions thrown at buying up mortgage securities. Liquidity is sloshing over the gunnels. As mortgage costs decline, of course, people can borrow more money on the same income. So they are. The fact we no longer have any fear of excessive debt is driving real estate higher, unwisely.

But these things are temporary. The demand surge will temper. More properties will hit the MLS. Unemployment will stay elevated. Any economic or public health reversal now could make those who overpaid in June regret things in November.

“You mentioned the likelihood of a potential residential real estate crash is “basically zero.” Can you flesh out how you came to that conclusion?”

Sure. If this were Calgary or Kelowna or Windsor, a protracted period of decline would be no surprise. Lots of places in Canada will have many problems for the next couple of years. But the GTA will fare better, because of a highly diversified local economy, the financial core, migration and the synergy of a six-million-strong market.

No, no crash – which we’d define as a 20% price correction. But this does not mean a rosy market, either. There are several worrisome trends.

“You mentioned there might be a flatlining in the 416. What factors do you think would contribute to that? How long would you expect that to last before prices recover?”

After this little boomlet, it reasonable to expect a far different market to emerge. As mentioned, swollen unemployment is not going to shrink anytime soon. It will be well in 2021 before we get back to the levels of February. Second, a serious number of people deferred mortgage payments,  ending in the next few months. An unknown number will still be without work and forced to sell, so more listings. Also many coming up for renewal may be unpleasantly surprised at the reception they get from lenders who were just denied six months of payments.

And big troubles with condos. Airbnb has collapsed. Pre-virus, the GTA had over 21,000 short-term rental properties. Hundreds of those have been hitting the market lately, with thousands more to come. Add to this the 15,000 units coming available as new construction is completed over the next two years. Supply will overwhelm demand. This is why condo prices and rents will decline, pulling the entire market back.

Finally, the virus. It freaked out millions. No surprise that detached sales in 416 have actually declined while those in the boring, soulless expanse of 905 have jumped. People want backyards. Front doors to the street. No elevators or garbage rooms, corridors or parking garages. Besides, Covid showed that a lot of companies can function perfectly well with employees working remotely. So no need to spend three hours a day on the QEW and Gardiner Expressway. The burbs are suddenly sexy. The clogged Kingdom of 416 is tarnished.

“How do you think it would impact the market if there was a much-dreaded second wave of coronavirus?”

Like an asteroid. Combine that with joblessness, more shutdowns, the condo plop, mortgage deferral cliff, CMHC rule tightening (no more HELOCs to finance rental props) and more risk-averse lenders and the market would be a smoky hole in the ground for at least a year. Until the vaccine.

But why would this happen? We’re all wearing masks now. Leaping off the sidewalks from each other. Lining up like ducks at the grocery store. Washing hands all day and bathing in sanitizer. This is not March. The authorities are not going to lock down society or turn off the economy again. If infections rise and hotspots develop, so be it. The virus risk ain’t going to zero. It never will. And it will be a long, long time before the herd is dosed and social distancing ends.

The best time is to buy a house is when you need it and can truly afford it. And the worst time to do that would probably be now.