Entries from September 2015 ↓

To the limit

GROWTH modified

Another day, another Brad. This one in Saskatoon where two years ago there were bidding wars, flippers and a meme that it’s different here, thanks to booming commodity prices. The oil biz was great and big ag land-owing guys drove their new Silverados to town and strutted like gods.

Brad sat in his rented condo. “Couldn’t bring myself to sign on the dotted line,” he says. “Been a tough go listening to my 8 year old wishing daily for a back yard to play in, but I think things are finally starting to happen. So much for bidding wars…. “

You bet.

Calgary – once the hottest real estate market in the land – is not alone in its residential misery. Sales in Saskabush have tumbled 15% this month from the same time a year ago. Listings are rising – up about 13%. In a city of 220,000 people there are almost 700 condos sitting for sale – a year/year increase of 50%. And as a local realtor points out, of the 96 houses that sold last week eighty – or about 85% – went for less than the list price.

This is what happens when commodity values tank, even when interest rates sit at record-low levels. As I’ve said before, mortgages can migrate to zero but as people start to understand what the real economy’s doing, real estate risk grows. Most won’t agree, but I think regional markets like this (and Calgary) are harbingers of what’s to come.

Too bad your brother-in-law pays no attention, and the debt snorfling continues, largely in southern Ontario and the Lower Mainland. The last report, published Monday, gives us this:

“…Residential mortgage debt jumped 7.5 per cent annualized in the month, raising the three-month pace to 7 per cent, its fastest since April, 2012. On a year-over-year basis, mortgage growth was 5.9 per cent, a 32-month high….”

Interesting juxtaposition, isn’t it? Oil collapses to $44 a barrel, our dollar tumbles below 75 cents US, financial markets shed blood over collapsing commodity values, our economy’s been in recession yet mortgage debt grows at three times the rate of inflation and five times the pace of income growth. Just. Wow.

If you think things are normal, contemplate Shell. The giant energy company has flushed $7 billion into a hole in the Arctic. Now it’s walking away. The announcement yesterday was a shocker, and helped to underscore what’s been happening on the markets, and here.

By abandoning this well – maybe the most expensive useless hole ever punched into the earth – Shell said simply that it probably can’t make any money pumping liquid crude out of this thing for the next 15 years, given where oil prices are headed. So just imagine the futility of producing oil by scooping tons of frozen dirt out of the tundra, cooking it in billion-dollar ovens then sending it thousands of miles to market, the way we do it.

This is why we’re a little screwed at the moment. I hope you heeded this pathetic blog’s advice to seriously lighten up on maple in your portfolio. This is the latest installment in a global commodity rout which has been gathering steam all years. Given what’s coming it makes you wonder why anybody would want to be prime minister next month, own a Canadian equity mutual fund with a nosebleed MER, or sign up for an $800,000 mortgage in Mississauga.

A smart guy I work with, Ross the trader, says markets will probably retest the lows they hit in August (we’re not far off), then rebound for the remainder of the year if corporate earnings come in strongly, or the US Fed pulls the trigger on rates. Makes sense, at least to Charles Goodhart, a top dude at the London School of Economics and former big whiz at the Bank of England. He says rates are going from zero to their historic norm around 3%, and that this will help change the world.

Goodhart sees inflation returning, cheap money ending (for at least a generation) and asset bubbles popping. After all, the price of things like houses is negatively correlated with the cost of funds. And one of the most significant bubbles in the world these days is Canadian residential real estate – at least in the two markets which are left in delusional territory.

How do the country’s political leaders help to prepare citizens for the inevitable? You bet. Harper increases the RRSP-for-downpayment plan and brings in a permanent hot tub tax credit. Mulcair backs CREA to eliminate capital gains taxes for guys buying rental suites. Trudeau will let people drain retirement savings, tax-free, to purchase a house every time you have a life event.

Such old thinking, pitted against such global change.

No wonder we’re not ready.

Go for it

BUM modified

The morning after the morning we know who the next prime minister will be, the Bank of Canada takes centre stage. On October 21st the bank will make its next rate announcement, accompanied by a full-blown press conference and release ot its latest ‘Monetary Report.’

So what?

So expect some great political theatre because, as much as I regret to say this, our big bank is leaning towards another cut its key interest rate – an unprecedented third decrease in the space of one calendar year. This would not happen if the economy was recovering, or even breathing on its own. There is but one reason why these guys would move in the opposite direction to the US – condemning our dollar, risking more household debt and underscoring political failure – and that is the malaise around us. The one most people don’t see. Our own little zombie apocalypse.

Makes you wonder what Canadians are thinking. Commodities prices have plunged to 1999 levels. Oil is $45 on a good day, with Canadian crude down around $30 and our producers losing money with every barrel. Now Hilary Clinton says there’ll never be a Keystone pipeline, and even the Chinese are jumping into the cap-and-trade business. The world has run out of places – storage farms, offshore tankers, underground salt caverns – to store the stuff. And ‘dirty’ Canadian oil is falling out of fashion faster than that Korean pony-dance guy.

Economic growth in Canada this year will be, maybe, 1%. That’s half what the federal budget just six months ago forecast. There is no way any government elected next month is going to balance the books. And as the commodity trade dips – putting oil patch workers, miners, shippers and service contractors out of work – a greater percentage of our economy ends up being based on residential real estate. If we could export condos and slanty bug-imbued semis, we’d be cool. But this is all going in the wrong direction.

For example, in Calgary the office vacancy rate has soared to 13% downtown (and 11.5% in Edmonton), and yet there’s more than five million square feet of new space under construction. Like oil, when supply overwhelms demand, prices tank.

Residentially, the pain has just started. House sales so far this month are running 32.7% behind this time last year (which wasn’t great), with listings rising and the average price down 5.2%. Former realtor and housing analyst Ross Kay argues that realtor stats are hiding what has been a far more precipitous drop in average prices, and even local permabull blogger/broker Mike Fotiou admits, “It’s shaping up to be a frosty September for Calgary real estate.”

But, you cry, I don’t live in Cowtown! I don’t care!

You should. This is a proxy for what happens when the locals start understanding the local economy’s on the down escalator. It’s a potential outcome for us all. The Bank of Canada can drop interest rates to zero, and the impact will be negligible if people grasp the reason for the cut, and what lies ahead. There’s no good news to be gleaned from such a policy decision, only an admission the guys in Ottawa are trying to staunch the flow of blood. And this will happen less than 48 hours after all the promises, rhetoric, assurances and political endorphins have turned into a post-electoral hangover.

Ponder that when you vote.

Also, if I were thinking about selling my house, I’d seriously consider the next 22 days. Just sayin’.

By the way, it’s too late for poor Brad. He just sent me this:

“I know it’s a mistake.  I knew it when I signed the contract a year ago to build it.  Bought it anyway.  Every single one of my beliefs has been confirmed, which leaves me to wonder – how are we so delusional as a society?  I’m not delusional – I know it was a mistake.  Which (sigh) makes me an idiot instead.

Every single thing I knew before about Buying vs. Renting still holds 100%:

— Lower cash flow (much lower) every single month.  True.

— More expenses each month.  True.  Unless I decided not to properly budget for annual taxes, insurance, and maintenance.

— “At least I’m Building equity!”  False.  The equity currently in my home would otherwise be equity in a diversified portfolio.  Either way, personal net worth can grow, so the “home equity argument” is completely without merit.  Not to mention that one of those paths isn’t relying on a single asset to build wealth.

— “At least I’m not paying somebody else’s mortgage now!”  False.  Rent and interest expense are both expenses – one is no worse than the other.  The interest on my mortgage is most certainly paying the mortgage off for “somebody.”  People relentlessly scoff at the idea of paying someone else’s mortgage and say nothing about the billions in profits made each quarter by our big banks.

— Less mobility, less flexibility, more stress.

So why buy?

Over 40 now.  Clock is ticking. Tired of not having my own place.  That. Is. It. So I ignored all of it.  Even ignored the current economic situation, and struggling oil prices on top of everything.

I get people falling into the house lust trap.  I really do.  I wasn’t lusty about it, just tired of the alternative.  If someone is 25 and buying a house in Calgary right now, they are making a (financial) mistake.  No doubt in my mind. People need to be honest about one thing… buying now is all about stroking the ego.  It’s all about pride… logic be damned. Trying to say otherwise, trying to make the financial argument, is just being delusional.  Or a liar.

Buying a home in Calgary is not a good investment.  Not today.”