Entries from November 2014 ↓

The shock

SHOCK modified

Well, let’s recap.

The sheiks have decided to keep flooding the world with oil in order to maintain their market share, so a barrel of crude is on its way to sixty-five bucks, as of yesterday. This is a disaster in the making for Fort Mac, Edmonton, Calgary and poor Jim Prentice. Just a day after RBC claimed Calgary real estate is affordable (say, pardner, would you like a mortgage?), everything changed. As we near the break-even price for the gooey stuff the oil sands produces, we grow closer to the next leg in that region’s boom-and-bust cycle.

Don’t claim nobody warned you, cowboys.

On top of this, there’s the certainty of rising US interest rates in 2015, as this pathetic blog tried to drill home in the last two days. It’s coming. Like, seriously. In fact, the cheaper oil gets the more Americans will spend, and the faster their recovery powers ahead. Long-term bond yields will eventually reflect that, which means don’t count on renewing your mortgage at under 3%. Get ready now. Use this time for trashing debt or effectively investing the money you’re saving. Or, better, selling your house in the inflated burbs of Cowtown.

Third, the world continues to think we’re crazy. CMHC says Toronto and Vancouver properties are not overvalued. The OECD says pfhht. Prices are 132% of what they should be, compared to long-term averages, based on incomes. The IMF says our valuations are unsustainable. So does The Economist. Morningstar. Fitch. Standard and Poor’s. Robert Shiller.

Two days ago we laughed at the poor schmucks who paid over $1 million (plus $50,000 in land transfer tax) to buy an ugly dwarf house on Euclid in Toronto. Sadly, it was a price consistent with a hood when semis get snapped by aging hipsters for almost seven figures. Now there’s more evidence the people of Vancouver, who on average make 70% of those in Toronto, are equally insane.

Recently only six detached houses in Van were listed for less than $700,000. Yes, six. One of them, at Victoria and Hastings (yuck) was marketed at $699,000 and sold for $757,000. The unrenovated beater has but 500 square foot of space on the main floor, no closets, no finished basement and is perfectly suited for a mold farm. There were four offers, and a bidding war among people who will need to spend another $250,000.

Here it is:


The average Van property now costs $820,000. The median Van family income is $71,200. Figure that out. Foreign money plays a role of course, but it takes an entire city drinking the Kool-Aid to make an absurdity like this happen. Meanwhile prices and/or sales are heading down in six of ten other markets. Increasingly we have an unhealthy, unbalanced and unhinged situation incredibly susceptible to economic shock. This is exactly what the Bank of Canada’s been warning us all about for a dog’s age.

Well, here’s a shock for you. Oil was $106 in July. This week it’s in the sixty-dollar range. Down more than 6% on Thursday alone. Canada ships out about 2.7 million barrels of the stuff every day, accounting for 9% of the economy and almost half our total exports. With retail sales squishy, incomes stalled and our condo economy built on the ethereal horniness of moist virgins, this is relevant. Just like the certainty that we will be impacted as the Americans decide it’s time to normalize their interest rates.

By the way, the OPEC guys, whose decision on Thursday led to the crude collapse, would be happy to have Calgary hollowed out. They have enough cash reserves to see oil drop to levels which idle the tar sands, crash American fracking and completely diddle the Russians and Venezuelans. Fort Mac? Roadkill. So much for those half-million-dollar trailers.

Whether you live on Euclid, Hastings, in Tuxedo Park or on the Athabasca, you’re not immune. In the last three hot markets in Canada, real estate is overvalued and vulnerable. It probably won’t collapse, but then, it doesn’t have to. Even a modest correction will ripple through everything, and tear into the finances of those who decided a one-asset strategy, steeped in leverage, was the easy way to wealth.

‘I am weakening’

LIQUOR modified

Welcome to the whine-and-sheesh edition of GreaterFool. We’ll get to some of the moaning in a moment.

First a brief update to yesterday’s heretical post about US interest rates rising in 2015. When they do, the bond market will follow. After that happens, mortgage rates here will swell. If you doubt this, look at history. Over 90% of the time, Canadian and American bond yields have tracked each other – and both will be higher. So get ready. Lock in. Above all, use these absurdly low rates to trash debt. And don’t get a trophy house. Or spouse.

Here’s the latest evidence that America’s a phoenix. Stock markets hit more heights this week. Consumer confidence (as measured by the Bloomberg Consumer Comfort Index) is at the highest level since 2007. Buying sentiment is the best since November of that year, while Americans feel the most confident about their finances since April of 2008.

Why? Jobs, mostly. It looks like 2014 will be the strongest year for job creation since 1999 – that’s fifteen years ago. The federal deficit is back to 2008 levels, and now disposable incomes are rising, partly because gas prices are crashing. Oil’s at $73 a pop which means gasoline costs what it did in 2010. As mentioned yesterday, we’ve just seen the strongest six-month period of economic growth in ten years, and corporate earnings have made robust gains this year. In the last quarter 80% of companies exceeded profit expectations. Meanwhile rising equity markets have breathed much-needed life into millions of Americans’ 401(k) plans, the equivalent of our RRSPs.

Pay attention to what this means. It would be a good idea to assume that in about six months, big changes begin. I sure hope your daughter can get out of that pre-construction condo deal you financed.

Okay, I promised you moaning. Here’s some from a depressed soul calling himself, “Feeling Aged Out of the Market.”

“What is an early 50-something renter/wannabe-owner to do in this housing environment? I was once an owner, having sold my Vancouver condo in 2005 after it increased in value by 70% in just 2.5 years. I figured that was the top of the market. Little did I realize…. I sold it to start a new career in Toronto. I never bought in TO, awaiting the stability of a permanent position and anticipating the correction that never seemed to come. A few years ago, I balked at the notion of paying $400K for a 600-sq.ft. shoe box on the 7th floor of a condo near Yonge and Eg. Affordability deteriorated even further from there. I accepted a permanent position in Kelowna, but I’m still waiting for the normalization that never comes (despite a partial correction during the GFC before I arrived).

“I’ve been expecting a correction for as long as you have. I never dreamed that valuations could reach such extremes and become so dislodged from reality, and for so long, to boot. Dare I say it? I never appreciated the extent nor the depths of financial ignorance of the population. I’d also expected a normalization of interest rates long before now. Meanwhile, I’ve grown older and increasingly concerned that I may not be a viable borrower. Will banks offer mortgages to 50-somethings knowing they’d be in their mid-70s when they finally pay it off? My gf is 10 years younger and doesn’t understand my concerns. In the UK, they already seem to be rejecting borrowers over 40?  Where does this leave people like me? Am I destined to be a renter for life?”

Dude. Seriously. Listen to yourself. In the past nine years you’ve lived in Vancouver, then Toronto and now Kelowna. You had job insecurity in 416, then went back to BC to get a full-time gig. So why are you bitching about not buying real estate? Yours have been exactly the kind of circumstances in which mobility, freedom and flexibility were your friends. Even with the recent housing pop, you’d have had a hard time making any money buying and selling twice in that time, absorbing commissions plus Toronto’s punishing land transfer tax, along with property tax and other ownership overhead.

A house is not the Holy Grail. What is? A 10-year-younger girlfriend who thinks you worry too much and should cuddle more.

Now Ahmed has the opposite problem.

“I am not sure what to do as I am very confused and under tremendous pressure from everybody around me and I am being termed as fool of the century. I am 44 years old only person to work in the family and have three kids. I have been renting for some time now. I moved here in 2009 and in these 5 years we have saved around 237K CDN and have invested most of the. Since the day one people around me (wife’s family and mine too) have been pushing me to buy home as my wife’s sister bought a home in 2008 (right before we moved to Canada) for 350K in Burlington and it has appreciated almost 200K since then and I have been termed as fool as I have been renting. Those people recently bought another home in Oakville for 900K and they have their home listed for sale (550K) now. They will have to move in coming February and have been praised very much by other family members for their decision.

“We do not have any debt and the home I am renting is close to 750K in Mississauga and I pay only $2050 in rent for this, I know owner is subsidizing. I try to explain these facts to people around me and they just laugh at me and mock me around. I am getting frustrated and demoralized and seriously thinking about buying a same type of home (I know it will be a financial mistake and I will not be able to save money after that purchase). I need help desperately as my wife is also turning against my thinking and she says she does not want to keep on moving. I have explained her the numbers but she seems to be in doubt now, of course people are feeding her wrong information, PLEASE HELP and write me something which can be a motivation for me again as I am weakening.”

Well, Ahmed, if you bought the house you live in, the monthly (mortgage, property tax, lost returns on $250,000 down, insurance etc.) would be almost $4,500, or more than double what you currently shell out. What doesn’t she understand about paying twice as much for the same thing? Or going from having $275,000 in savings, to zitch? How is that possibly being responsible for your young family? Is getting into a spitting match with her sister that important?

The good news is there’s absolutely no financial argument for buying a house someone else is subsidizing you to live in, not with a rate storm on the horizon and real estate wobbling. It’s a slam-dunk.

The bad news? Her family.

When you married her, you married it. So you’re screwed.