Suck & blow

One problem with running a free blog is that anyone can come in, use the washroom, make a mess, rifle through the fridge, write on the wall and leave, smirking. So far there have been 686,200 comments published here. A whack more were deleted – too combative, disgusting, shanky, horny or dodgy to post.

Free speech is important. Abuse is too frequent. But these days, more than ever, we need debate. The world’s highly abnormal. More disruption and change on the way. There’s no black-and-white solution to anything.

Here’s a recent controversial topic: if massive government and CB stimulus are causing danger by inflating real estate, why isn’t a puffed-up stock market just as bad?

Answer: people buy houses with 10x and 20x leverage, usually for emotional reasons, often when they can’t really afford it, and despite the fact renting is almost universally cheaper. Today we owe over a trillion in mortgage debt which is guaranteed to cost more to carry in the years ahead. People willfully ignore the inverse relationship between rates and real estate prices. So when the cost of money starts to restore, mortgage debt grows more expensive, houses lose some value and personal finances wither.

That’s the risk. The naysayers counter by stating rates will never rise again in their lifetimes. But they will. No question of that, unless the economy remains in recession for decades – in which case, real estate will be a death trap. This is the mistake Mr. Socks made on TV Wednesday night, saying Canada can add excessively to its deficit/debt because of low rates. But when they double – from 2% to 4% (it’s coming with economic recovery) – it will add $20 billion a year to the cost of carrying $1,000,000,000,000 in existing debt. That’s twenty billion less for health care transfers, child care, seniors or renovating 24 Sussex.

Finally, lots of residential real estate transactions are non-productive. Aside from realtors, lender dudes, lawyers and movers, nobody gains. No new jobs are created. No products produced for export or domestic sale. No factories built, stores opened or offices launched. It’s hard to understand how a nation of people continuously selling each other houses and condos at ever-rising prices with larger whacks of debt expect a higher standard of living.

All that debt, by the way, is expensive to maintain – even at these rates. It sucks off disposable income that might otherwise buy cars, iPhones, clothes, vacations and stuff which actually creates products and jobs. Plus, look what Covid did. Almost a million families stopped making mortgage payments – a quarter of all the indebted households in the nation – because they couldn’t carry that $180 billion in borrowings. Now they are madly adding to them.

Is this not a warning we have taken the real estate, the one-asset strategy, too far?

What about financial assets?

Yup, also benefitting from government fiscal stimulus and central bank monetary diddling. Low rates have shoved down bond yields (along with bank savings and GICs) so more money flows into growth assets like equities. Cheap rates help corporations by lowering their borrowing costs. Govy handouts such as CERB keep people buying food, kibble and Internet connectivity, which helps Loblaws, Shaw, Purina, Sobeys, Rogers and Bell. There have been small business loans (partially forgivable) and payroll subsidies, as well as sectoral bailouts (more coming for the airlines).

As a result, people with financial portfolios have flown through the dogawful 2020 largely intact. Those 15% gains in 2019 have been retained. Now investors look forward to a recovery and post-election euphoria in 2021.

Meanwhile real estate buyers in 2020 have paid more for a house than ever before in history, taking on greater debt when the jobless rate is above 10% – the highest in the OECD – and the country is in recession with four million people worried about CERB cheques ending next Thursday (they won’t, of course).

In short, pretty much all of the assets in a financial portfolio end up in the economy, productively feeding corporations, employers and jobs or financing government debt. Most critically, people with RRSPs, TFSAs, RESPs, non-registered accounts and RRIFs do not have government insurance backing their portfolios and did not use leverage to buy them. They have assets which are not layered on debt. So when Covid hit, there were no deferrals. Besides, people always require income, especially in retirement. They don’t need houses. You can rent nice accommodation when you’re seventy. You cannot rent cash flow.

Apples, oranges. Bananas and Buicks. Simple comparisons are meaningless. Stop trying to make them. There’s no competition between real estate and financials. You should probably have both.

Despite the above, nothing will change.

A survey out today from BMO found 40% of first-time homebuyers think this is a swell time to make a house purchase – with record-high prices, greedy sellers, low inventory, steep unemployment, a deep recession and a global pandemic. Thanks to the sick economy, the bank says, many of the kids have had to dig into their savings and will require larger mortgages. “Even with a global pandemic as our backdrop, we’re encouraged to see Canadians maintaining their optimism on our housing market,” says the head of personal lending. Smiling.

But it’s not just optimism. It’s delusion.

Now get out of my bathroom.

 

 

 

They did what?

Was the bond market surprised when Mr. Socks let it be known federal spending was just getting going? That the estimated $380-billion annual deficit was, well, merely a starting point?

Nah. Rock-bottom yields hardly budged on Canada bonds after the Throne Speech. Mr. Market says the central bank will continue to gobble up debt, creating demand and depressing yields for a while yet. Given the one-two punch of fiscal and monetary stimulus (Chrystia’s spending and the CB’s buying) we’re on our way to a $500 billion annual shortfall, and all the long-term consequences that will bring.

Don’t ask. They’re ugly. Your kids will hate you. Especially if they grow up to be anaesthesiologists.

Meanwhile, lenders are in a deathly battle for mortgage market share. Today we have a new all-time winner for the lowest fixed-rate, five-year home loan. It’s from those pirates at HSBC and clocks in at a mere 1.64% (for insured mortgages). It’s the cheapest advertised rate in Canadian history.

Yikes. That means it costs but $2,031 to carry a mortgage of $500,000 which, after five years becomes $415,600. Thus, $84,400 in principal is retired through making $122,000 in payments over sixty months. A record.

Combine that with 20x leverage, thanks to CMHC’s ridiculous insuring of 95% mortgages, and you arrive at these conclusions:

  1. When housing agency boss Evan Siddall warns young people not to buy real estate because of the inherent risk, and chastises society for its mindless ‘glorification’ of housing, is he hoping we won’t notice what his own outfit is doing? By insuring loans with extreme leverage, protecting lenders who can then do crazy things – like offer a 1.64% loan – this governmental body is literally begging moisters to jump in, increasing demand and jacking prices further.
  2. Ottawa is out of control. Stimulus spending is off the charts. Now the PM says, in a trumped-up, pre-election address to the nation, we’re in a second virus wave. Not maybe. It’s here. (By the way, the province I’m in today has one lonely dude with symptoms. No new cases. Nobody in hospital.) As a result of scary Covid, we’ll get national child care, universal pharmacare, payroll subsidies until next summer, a brand new CERB,  and, oh yeah, an enhanced shared-equity mortgage program for first-time buyers. Plus, of course, whatever the NDP wants in order to prop up the government. Did I mention there’s an election in the cards here? Will Canadians vote against cheap child care, 1% mortgages and free scripts?
  3. We are so drugged on debt. Households owe over $2 trillion, and mortgage demand is (of course) popping higher. The feds will spend $500 billion more than they have, pushing the federal debt way past a trillion. Provinces are pooched. Cities are crying for cash (look at poor Toronto and Vancouver). Conclusions: taxes and user fees will rise. When rates start sneaking back up, well, I hope you did the right thing in the final months of 2020.

First, if you’ve been even thinking a teensy bit about downsizing your real estate, and live in a bubble city or region (everywhere except Alberta, and the other flat bits), why not do it now? Buyers are currently hopped-up, wild-eyed, debt-infused zealots, seriously believing if they don’t purchase immediately they’ll be shut out forever. So cute. Anyway, this is the time to bail for top bucks.

Then rent for a while. Wait to get back in if you need property. The world will sure look different in two or three years when all of this stimulus starts turning to regret.

Looking to buy? Don’t. Utter foolishness. You’ll pay too much and are better off leasing a place since landlords are hurting and rental rates are dropping. Down 15% in the last few months in Toronto, for example.

If you must buy (spousal abuse) pre-qualify for financing. Get a five-year fixed commitment since the variable discount has largely vanished. If you end up in a bidding war, and win, (a) plan on staying put for at least a decade to justify being Hoovered, and (b) get a weekly-pay mortgage which – combined with today’s ridiculous rates – will help you trash the extra debt in record time.

Have a financial portfolio? Stay invested. The amount of government and central bank stimulus in Canada, the US and globally is unprecedented. Twelve trillion so far – which is about the size of the entre Chinese economy. It will continue to inflate many asset values, keep rates depressed, flow cash into capital markets, paper over anything Covid does and shift the burden of pain from corporations to governments, taxpayers and savers.

There’s a reason equity markets caught fire after their March lows. That’s when Trudeau and others turned the taps on. Despite all that the virus has done to our world, investors with balanced and diversified portfolios have skated through the mess. Now the taps are being opened even wider. No reason to think we’ll get a different result. And when a vaccine arrives, stand back.

By the way, did you see Ontario is now allowing employers  (effective next week) to skip making contributions to their defined-benefit pension plans? More virus fallout. More reason you need a Plan B.