Entries from September 2010 ↓

The vice

In New Brunswick the premier blew up, trounced by the opposition, the first single-term leader in NB history. In Toronto, seasoned career politicians are being used as Swiffer pads by a lumpy rebel mayoral candidate with a checkered past. In BC, a zombie premier goes through the motions before disappearing into the Strait of Georgia. In Ontario a new poll shows the ruling party enjoys the support of about 20% of the voters and half the golden retrievers. And in America, the superman president is a month away from losing control of Congress, and may soon make history as a one-term wonder.

Why are incumbents and insiders being sliced and diced? Does it matter?

The answer, of course, is the economy, and you bet it matters. Voters and taxpayers are making a lie of establishment claims the recession is over. They know better. And they’re pissed.

In Canada the unemployment rate is mired above 8% and will probably stay there for a couple more years. In the country’s industrial heartland – southern Ontario – not a single new factory has opened in two years. In BC, mill towns have been left for the pine beetles to munch.

As I mentioned yesterday, most households are in abysmal shape. Debt’s out of control, savings are largely non-existent, cash flow barely meets expenses and now we have the HST inflicted on 16 million more people.

Worse, there’s no candle in the window. No tax cuts even possible for a generation or more, now that all provinces operate in the red and the federal debt approaches $600 billion. People have figured it out that more “stimulus spending” means more taxes, emergency interest rates won’t hold and so long as the US is on its knees, we can’t stand. So, where are the new ideas?

In the States, it’s worse. The middle class was shredded by real estate, eight million jobs vanished and the government spent more money than God and fixed nothing. As a consequence, it’s open season on the political class.

Now, the consequences.

My thesis is that we never did emerge from recession, and are bouncing along the bottom – a condition that will last at least a couple more years. This means the fools who believed 2009 marked a recovery and they could borrow their brains out sans repercussions are toast. I’ve told you to expect deflation for a while, including falling real estate values, at the same time as the cost of living rises. It’s a vice ready to squish the unwary.

Eventually we’ll achieve recovery once America touches bottom, leading to a big upside for financial markets. But this will come with rising interest rates, and no real recovery for house prices. Those who see this now, making the move from real to financial assets, will the Great Gatsbys of 2015.

So back to politics.

Hard times always breed simple solutions. ‘Just cut government spending. Simply hack away at the public service. Stop catering to refugees, special interest groups and prisoners. Sell government agencies, boards and commissions. Slash entitlements for politicians. Eliminate waste, duplication and overlap. Live within our means. Us first.’

Without a doubt, some of the above is needed. But all of the above brings disruption and turmoil. Every public dollar unspent is a dollar unearned by someone else. A substantive squeeze – whether that means closing libraries and schools in Toronto or cutting back on EMS personnel on the Lower Eastside of Vancouver – has consequences.

I’m out of politics now. Thrown out, actually. I embody the person the system abhors. My writing and speaking and questioning led to my disgrace and destruction, dooced by a prime minister, shunned by wary colleagues. I will never run again. I have no party.

So trust me when I say, be careful. Be liquid. Be brave.

Hear Garth here:

Wolfville NS
Tuesday October 5, 7 pm, Ken-Wo Golf Club. Register here.

Wednesday October 6, 7 pm, Fisheries Museum. Register here.

Thursday October 7, 7 pm, Ashburn Golf Club. Register here.

Victoria BC
Wednesday October 13, 7 pm, Victoria Convention Centre. Register here.

Thursday October 14, 7 pm. Register here.

EVENT FULL: Friday October 15, 7 pm. SECOND EVENT: Friday October 15, 2 pm. Register here.

EVENT FULL: Tuesday November 9, 7 pm, Double Tree Hilton, 655 Dixon Road (airport strip).

House lust

There are really, really, really a lot of lonely, sad people in Toronto who have yet to hear of eHarmony.ca. How else can you explain well over a thousand of them signing up to come and hear me on November 9th? Or are they all realtors? With weapons?

In any case, we’re now SRO, even after the hotel threw in another ballroom and 500 more chairs. So, registration is closed. I`ve sent notes to Springsteen and the Peas to see if they’d like to hot up the audience for me. Please bring disposable lighters, glow sticks and your own supply of Depends.

On a less serious note, let’s say you have the average Canadian family making the average income – about $70,000. You dwell in the average house, have average kids (1.2 of them), and pay average taxes. That means you have $54,000 left to live on for a year. Sadly, your house eats 48.9% of your pre-tax income, which equals $34,320 – which also means you have about $19,600 left. That’s $1,600 a month for food, clothes, car, vacations, school fees, insurance and your online connection to this pathetic site. Notice I did not include ‘savings and investments’ because, of course, there’s no money left.

And you think this is bad? Try living in a high-cost city like Toronto or Vancouver, where a house eats more than 50% and 65% of pre-tax family income respectively.

This is what happens when real estate speculation meets dumbass public policy, driving the cost of shelter absurdly higher. It’s a massive hidden tax on the middle class, sucking off billions which should be finding its way into a better life or a nest egg for the future. Instead, real estate now means sacrifice and debt. And danger.

So this week the latest Royal Bank affordability report was published, giving us that 48.9% average house cost number. But even that isn’t an honest figure. It’s based on buying a house at current prices with 25% down and a 25-year amortized mortgage. Trouble is, it’s a rare buyer now who has a quarter of the purchase price in cash, the average down payment being 7%.

Even so, this is a document which should have F and Mark Carney doing a dry heave. Families in record mortgage debt. Household liabilities now equaling 145% of earned income. Six in ten living paycheque to paycheque. Forty per not even trying to save. And almost half of earned income now feeding a house pretty much certain to depreciate.

This is what emergency interest rates, feckless lenders and irresponsible leaders have wrought – house lust. Whether it was the CEO of LePage, the economist at CREA or the minister of finance – all of them share in leading buyers into bidding wars and debt quagmires. They turned shelter into a wealth killer, while telling us the American real estate slaughter could never happen here.

Well, guess what?

Even RBC now says there are “red flags” over the Vancouver market. “While the Vancouver market is clearly vulnerable to a price correction, this does not imply that a collapse is imminent because supply (both in the existing and new home sides of the market) is well contained at this point.” What does that mean? If listings rise, of course, it means there will be “a collapse.”

In the GTA: “The deteriorating trend in Toronto’s housing affordability continued.” And the bank cautions that a “wild downswing” in prices was kept at bay only because vendors retreated. Which begs the question of how long that will last. As I’ve told you before, I expect this correction to be followed by a multi-year melt, as interest rates normalize and then those oxygen-sucking, walker-wheeling Boomers start trading houses for income.

Let’s face it. RBC is a bank. Banks in Canada have huge mortgage portfolios. RBC is also a major pillar of the economy and well understands its corporate responsibility. So when it cautions that the average family is being sucked dry by the average house, this is a big deal. Owning a home traditionally took a third a family’s income, not half. The savings rate in 1967 was 7% and in 1982 it was 20%. Today it’s negative.

It’s also worth remembering the US housing market collapsed when it took 4.6 times the average income to buy the average home. Today in Canada the number’s 5.1. In Toronto, 5.5. In Vancouver, 9.3.

Most people have no idea what they’ve done.

Do you?