Entries from March 2016 ↓

Seriously?

KIDDING modified

Over the last two days dozens of people posted the same article in the comments section of this blog, in hopes I’d be proven an idiot. While that’s a low bar to clear, this didn’t do it. Let me tell you why.

For those who think Canada’s being overrun with rich people speaking Mandarin, the headline said it all: “Chinese investors buy one-third of Vancouver homes: National Bank estimate.” It was just what a lot of them wanted to read, as it confirmed their bias, observations, prejudice or the urban myth they’ve adopted. And, wow, it came from a bank. Gotta be true, right?

Actually the National Bank, the sixth largest, based in Quebec, should be ashamed of its analyst, Peter Routledge – who spends most of his career dissing Canadian bank stocks. This report was arguably the worst ever to leave a research shop. It was even more pathetic than one done by a Van-based real estate company who counted the “Chinese ethnic-sounding names” on sales reports to determine the nationality of buyers.

Unbelievable, that was. Fantastic, this is.

The report’s headline conclusion: a third of Van houses are falling into Chinese hands. That compares with the 5% estimate adopted by both the BC government and the provincial realtors’ association, plus a survey of members done by the local real estate board. In other words, what Routledge ‘discovered’ would be a six-fold jump over the best estimate of everybody else.

So, how did he do it? Where did this data come from?

He made it up. Routledge admits it was a “back of the envelope” conclusion that he drew from 100% non-Canadian data that “could have built-in biases that overstate (or understate) the amount of capital inflows.” So, the methodology, whatever it was, probably sucked.

But, wait. We actually do know the methodology. Routledge took total sales figures for purchases by non-US residents from the American National Association of Realtors, which showed a big jump last year in Chinese action. He then found a completely unrelated survey done by the UK-based Financial Times which (in a multiple choice format) queried 77 high net worth Chinese guys who had purchased real estate abroad. Yes, 77 people. “Admittedly not a statistically significant sample size,” Routledge admits. No kidding.

Anyway, he took the results of the Times survey then applied the ratios of buyers in Vancouver (there were nine of them) and multiplied the US numbers by this factor to come up with a total probable dollar investment value for the YVR market – assuming any of this was representative of the larger wholes.

That led him to this: “One could hypothesize that for every four high net worth buyers from China who purchase a U.S. residence, one purchases a residence in Toronto; and, for every three high net worth investors from China who purchase a U.S. residence, one purchases a residence in Vancouver.” Of course, given the fact Routledge had zero Canadian stats to go on, he could only deal in probable dollar values. That means, even if he were correct, there is no way of knowing how many homes in Vancouver went into Chinese nationals’ hands. It certainly was not 33%.

“Due to the lack of Canadian data, the analyst based his estimate on a Financial Times survey and data from the US,” blog dog Roberta writes. “Makes me wonder who was actually paying for this thing.” Me, too. Bogus report.

But is there any other explanation why Canadian real estate costs a stupid amount, especially on the wet coast? The International Monetary Fund thinks so. Here it is…

DEBT LEVEL modified

Cheng Hoon Lim is an assistant director in the IMF’s Western Hemisphere Department and concludes that houses here are too expensive because money is too cheap.

“Low mortgage rates are an important factor feeding the housing market boom,” she writes in a report. “This has helped keep interest payments low even as the size of the average mortgage has risen. As the chart shows, the share of interest payments in households’ disposable income declined from 9% in 2008 to 6% in 2015, while the average size of mortgages increased by some 40% over the same period. This means more households are able to afford more expensive homes, which, in turn, prompts households to borrow more money and get further into debt, while house prices continue to be pushed upward.”

As this blog has pointed out with utterly boring, mind-euthanizing regularity, rates and prices are negatively correlated. Houses are not intrinsically worth a greater amount, but the carrying costs have fallen with the rate plunge – so prices have shot higher to fill the gap. The end result is clear – (a) houses have never cost more, (b) household debt’s never been higher and (c) property risk is extreme, as rates will eventually normalize and debt servicing costs swell.

But, but, but, the deniers and garth’s-a-weenie crowd protest. If it were just cheap rates then why wouldn’t houses in Regina cost the same as in Kitsilano? That’s easy. Normal people live in Regina.

YVRers are the most property-obsessed hornies in the nation. It’s a cult, evidenced by BC having the only negative savings rate. Layered over that is the heavy Asian presence that has always characterized the city, but now exacerbates and visually magnifies the impact of foreign buyers. Do they exist? Of course, and are concentrated in certain neighbourhoods. But this is hardly unique to Vancouver. Toronto’s the same – as is ever major city on the continent. And yet, no moans from 416.

I know this won’t change a single mind. Foreigners are great scapegoats, and give guaranteed media exposure to slagging careers. Ask Peter Routledge.

The hole

SPEED modified

A little over 9,000 people in Canada retire every week. Yes, these are boomers, and they join approximately 10,000 aging American hippies who are going through the same life change each day. This is a massive event, since the wrinklies represent about a third of our population.

Lots of them are screwed, of course (more on that in a moment), but logic tells us they might be way better off than their Millennial spawn who now outnumber them. Their retirement event, in about four decades, should be a mother.

The reason’s simple. Boomers lived through years of inflation and economic expansion, while today we’re borderline deflationary and in a financial funk. For people like me, buying a house that cost three times annual income was a good strategy, even when rates were off the chart. Today kids who overreach to buy property at six or ten times income, with monstrous debt, are taking extreme risk, no matter how cheap money is. Given that real estate will not hold present values, Millennials trying to turn into their parents will probably blow up.

How they don’t see that is weird. Real estate’s a wealth trap. Why any 25-year-old would want to fund the retirement of a Boomer by taking over their $1 million house, or walk into 25 years of payments to live in a condo they could rent for less is inconsistent with Millennials being so smart. What, exactly, did they teach you in all those years at uni?

Anyway, now we have a selfie prime minister who also made himself minister of youth and should understand this stuff. So what did the budget do yesterday to try and guide us towards a better future?

Well, the dole handed out to poorer retired people, called the GIS, was increased by 10%. This amounts to about $8,000 a year (in total) for those below the poverty line. Second, the freebie money every retired person receives, called the OAS (Old Age Security), which was scheduled to start being available at age 67 in a few years, has been restored to age 65. That’s $570 a month, which is reduced the more you earn. And third, as you know, the Liberals chopped the amount you can put into a TFSA every year by almost half. Thus everyone will have a harder time amassing savings that will supplement their retirements, without shrinking their OAS or GIS payments.

Meanwhile plans to revamp and enhance the CPP (which pays an average of $600 a month in retirement) have fallen apart, and it’s quite unlikely reform is coming. Even if it did, this would mean substantially higher premiums paid by every Millennial for the next few decades to gain more after they finish work.

None of this would impress me if I were thirty. There’s no plan here other than to toss a little more money at people who are in a spot you’d never want to trade for. This government’s thinking just like every one which went before. It encourages young people to dive into housing debt – with cheap rates, the homebuyers plan, CMHC insurance, low dowpayments and tax incentives – and yet fails to recognize in a low-growth, low-rate, low-jobs, low-yield world that’s a recipe for enslavement and likely ruin. Too bad. And, to boot, the kids get $100 billion in new federal debt over the next four years – none of which Boomers will be repaying.

Most of us don’t understand what’s coming. Of the nine thousand people a week now retiring, over 84% (according to a BeeMo survey) will ”rely heavily” on CPP cheques to get by. How sad is that, when the annual total averages under $7,500? At least the boomers have real estate to sell – which about half of them plan to over the next few years.

In the US, not much better, although social security payments are higher. About half (48%) of people haven’t even figured out what they’ll need to live on in retirement. Those who have think they’ll need about half a million dollars. But 94% don’t have it, and probably never will.

So what? Well, this massive Boomer retirement thing is scheduled to go on for another decade, at which time there’ll be more thirsty-underwear-wearing, scooter-driving, sex-pill-popping, irritating old farts than at any other time in human history. Not a real boon for the economy, as they suck off health care, dump their houses and drive too slowly in front of you. If I were a Millennial, I’d understand that no other generation has ever faced this kind of obstacle before. I’d see that houses could become a major source of financial deflation, growth could be flat for decades, and the last thing I’d ever want is more debt.

I’d also be looking for leaders who get it. Hard to see how the middle class can be saved by spending money building bridges, taxing at 50% those who achieve good incomes, neutering the best wealth-building vehicles families have, plunging the country into another decade of borrowing, guaranteeing higher taxes or being incessantly encouraged to sink into real estate debt.

But, of course, I’m no hipster. Just a guy who thinks you need to be careful. Voting is easy. Investing is hard. Only one of those really works.