Entries from February 2015 ↓

Loving to hate

CHIMNEY modified

Yesterday I threw a frequent and articulate poster off this blog. In response to a comment from someone proud that their immigrant parents had produced three doctors and two pharmacists who were helping Canadians’ lives, he wrote:

Born and raised Canadian kids could have been trained for those jobs, so don’t get too full of yourself. And doctors and pharmacists mostly are public servants, rather than net taxpayers. With most of their compensation derived from payments from government.

The implication was clear: immigrants steal jobs. The kids of immigrants are not ‘Canadian kids.’ Besides, the government subsidizes them.

Xenophobic, anti-immigrant sentiment is a sad, dark and persistent theme in the comment section of this site. That mirrors social prejudice, but it’s concentrated here because we often talk about real estate. Since houses cost so much – usually more than average people can afford without pickling themselves in debt – the hunt is always on for someone to blame. Rich foreigners are easy game. Especially in Vancouver. Especially now.

Last month the average detached home price in YVR jumped back into record territory, at $1,303,256. In Toronto it has also restored to a peak level, now $1,056,238. The average household income in Van is under $73,000, and in 416 about thirty grand more. It’s easy to see why mortgage borrowing is rising so quickly or the national debt-to-income is a record 164%.

My thesis has been that real estate values have been mostly impacted by the advent of cheap money and the legacy of 2008. When people who had unbalanced, equity-heavy mutual fund RRSPs and investment accounts were whacked in the financial crisis, they sold, took losses and vowed never to repeat. Even those who lost no money still lost their nerve. The aversion to perceived risk was then stoked by the real estate industry at the same time desperate governments were slashing interest rates to encourage borrowing.

So the cheaper money got, the more people borrowed and the higher house prices traveled. Before long 70% of families owned, and most net worth was being concentrated in one asset. As prices rose, more wanted in. Up she went.

But the thesis of many others, including those who cannot afford the house they feel entitled to, is that they’ve been denied a birthright by a foreigner who stole it. Thus, the myth of all of those thousands of Chinese millionaires beating down our doors, snapping up properties and through their sheer influence driving values skyward.

Standing by to fuel the panic are professional realtors and marketers. They’ve hired helicopters to have Chinese agents buzz the Lower Mainland. They’ve hired chicks of Asian heritage to pose as fake Chinese buyers. They’ve fed the ‘buy-now-or-buy-never’ meme a whole generation of virgin buyers now believes. They encouraged flawed surveys showing HAM is everywhere. And now they’re telling us a cheap Canadian dollar (in part because the economy sucks) is going to unleash the next wave for foreign buying.

“With the loonie falling about 10% against the U.S. dollar in the last six months,” said the Financial Post yesterday, “foreigners who have their money parked in greenbacks or in currencies pegged to the American dollar are likely to ramp up their interest in the Canadian marketplace, say industry experts.”

See what I mean? It’s a relentless and consistent message, yet one which is supported by no authoritative data. And any empirical attempt to counter it – as CMHC did recently with a survey showing only 2% of condos in 416 or 604 are foreign-owned – is instantly attacked.

So, what are we to think? If a massive doubling of mortgage debt on the part of Canadian citizens is not enough to make it clear who the buyers are, what is?

Well, here’s a glimpse.

The Victoria Real Estate Board tracks exactly who buys real estate in that market, BC’s second-largest. Yeah, I know. Victoria is not Vancouver, 115 watery km away. Maybe there are twice as many foreign buyers in Van. Maybe it’s five times. But at least this is a good starting point in understanding who is buying houses in one of the priciest cities in the country, and a provincial capital. The numbers below were just released privately to members of the Victoria Real Estate Board:


By the way, of the 1.64% of Victoria buyers who were foreigners, 50% were from the US.

Of course, such stats won’t change the minds of those who hate without thinking, or blame others for their shortcomings. That’s the nature of prejudice. We all have some.

But it’s a fair assumption all real estate board have similar numbers. Guess why they’re not published?


SUPERDOG modified

Does Stephen Poloz know what he’s doing? The Bank of Canada head dude shocked markets last month when he dropped the bank’s key rate a quarter point. “Insurance,” he called it. “Poison” is more like it.

The signal he sent was unmistakeable. The guy had the patina of desperation about him. Immediately the dollar plunged, and has been barely above 80 cents US since. When it happened, I told you there’d be consequences.

The nation imports $45 billion worth of stuff every month, mostly machinery and equipment, motor vehicles and parts, electronics, chemicals, electricity and durable consumer goods. Yes, plus food. And Harleys. The bulk of this comes from the US, and we’re paying 20% more than we used to.

So thank Allah for cheap oil. Without a big drop in gas and energy costs, consumers would be shanked. As it is, families are still squeezed. Thanks to Poloz, it’s just started. I mean, have you bought lettuce lately?

Despite a massive 12% drop in energy prices in January, inflation was up 1%. Core inflation (after volatile energy is stripped out) is double that, at 2.2%. That number hasn’t changed in a long time, and sits within the central bank’s own target range. It would be lower, and living would be cheaper, if our central bankers had not sacrificed the dollar. As a consequence, seven of the eight categories of stuff StatsCan tracks cost more last month. Food alone was up 4.6%. Clothing shot ahead as well, along with all the crap from China that Wal-Mart sells.

Meanwhile, if you live in the GTA or YVR, you know what that quarter point cut did to housing. As predicted, it stirred the loins of moist Millennials, sending them into the streets to start bidding wars and force prices higher – even though mortgage rates were basically unchanged. Just as Poloz had telegraphed fear to the currency markets, he fed expectations that cheaper money would mean pricier houses. And so, it came to be.

In the first two weeks of February, say the realtors, sales in Toronto jumped 14% year/year, while prices were up 10.3%. The average detached house sprinted ahead to $1,056,238, the highest in almost a year, after trending lower through the second half of 2014. A similar story happened in Vancouver. Recall the photo I showed you the other day of a near-riot to buy 300-foot micro-boxes in unbuilt suburban towers.

POLOZ modified  So that’s Polozonomics. A rate cut. Collapse of the dollar. More expensive imports. Sustained inflation. Higher living costs. Real estate speculation. More consumer debt. All at the same time our export base is falling and jobs erasing, thanks to oil. What a combination.

How would it have been worse to leave interest rates alone, let the dollar down gradually, curtail inflation and suck some air out of the housing gasbag, giving hope to those priced out?

Clearly the bank was spooked about oil and deflation, plus what’s been happening in the prime minister’s home province. As you know, Alberta real estate is cratering. January sales crashed 45% in Llyodminster, 41% in Fort Mac, 35% in Calgary and 23% in Edmonton. This month to date, Calgary deals are down 34% and average prices have dipped 4%, with the expectation the decline will deepen significantly in the coming months. Once again we see human nature at play – when listings bloat, sellers sweat and values decline, the buyers disappear. When real estate is topping out and irrational, as in YVR, there are lineups to make offers. Nothing ever changes.

What happens now?

The betting is Poloz panics and reverses course. He already signaled that in a speech this week, saying the January cut was enough. Now he can see the immediate impact of his loonie-crushing move. With inflation rekindled even as a sagging economy punishes citizens, it’s highly unlikely another cut is in the cards – at least not next Wednesday, when the next rate announcement is scheduled.

Meanwhile we all know the US Fed will be raising its rate – likely June 17th, or July 29th. If that happens on the heels of another Bank of Canada rate reduction, just imagine where our currency is headed.

Well, now, aren’t you happy you took my advice years ago to put together a balanced portfolio with lots of diversification? More US, less Canada. A whack of fixed income and REITs. Bank preferreds. Inflation-indexed bonds. No stocks, no mutuals. Lots of love and a secret sauce.

Given what’s coming, you’ll be happier still.