Entries from July 2016 ↓


REALLY modified

It’s February 22, 2005. Rates are low, the economy’s okay, real estate’s hot, pricing are boiling and everybody’s buying. A new book hits Amazon, “Are You Missing the Real Estate Boom,” authored by David Lereah, the seasoned economist for the National Association of Realtors.

“Are you missing the real estate boom? Can you increase your wealth from it? For most people—including current homeowners—the answer is a resounding yes.

“But it’s not too late to increase your stake in the greatest real estate boom of our generation. Author David Lereah shows why the real estate market is poised to climb higher over the next decade—and explains what you can do to profit from it.

“Lereah calls today’s market a “once-in-every-other generation opportunity.” Today’s boom is not just driven by low interest rates—there are a host of demographic and economic reasons why real estate will continue to outpace other investments, from the growing needs of the baby-boomer generation and the rise of the “echo” boomer generation to the new ways real estate is marketed and sold.”

Six months later, Lereah was still at it. “The continuing shortages of housing inventory are driving the price gains,” he told the Wall Street Journal. “There is no evidence of bubbles popping.”

Well, we know how this story ended. By early 2006 sales were slowing, listings rising and home ownership levels had reached almost 70% amid a record run-up in household mortgage debt. Two years later real estate values had crashed by 32% across the US, and over 70% in areas of Arizona, Florida and California where buying had been orgiastic. The real estate collapse brought down venerable Wall Street investment banks, crashed equity markets, plunged the country into a recession and resulted in a global credit crisis that threatened a rerun of the Great Depression.

David Lereah lost his job. He remains a hated man. Eleven years after the housing bubble burst, average prices have just recovered. Family finances have not.

It’s July 30th, 2016. Rates are low, the economy’s slow, real estate’s hot, pricing are boiling and everybody’s buying. In Canada’s largest newspaper, real estate guru and housing info entrepreneur George Carras tells readers “incredible wealth is being created” for “those who own houses.” Best of all, it will continue for ten years.

“If a homeowner were to compare value gains earned via an RRSP investment versus the value gained by their home over the past decade, the house would be the top performer. The TSX was down 3 per cent year over year as of June 30, while the average price of a detached house in the GTA increased 19.9 per cent to $979,445 and $1,259,486 in the city of Toronto, according to the Toronto Real Estate Board.

“New and resale housing prices have been rising at double-digit rates over the last two years and are likely to continue to do so over the next decade, driven by three main factors: intensification, low interest rates and strong demand.”

Do we have a new David Lereah in our midst? You bet. In fact, Canada’s full of them. Builders like Brad Lamb. Marketers like Bob Rennie. Economists-for-hire like Helmut Pastrick. Pumper CEOs like Phil Soper. So long as the real estate business remains a Wild West for regulators, with 130,000 realtors roaming the nation and bold, unqualified statements being published by media “experts”, we edge closer to the cliff that Americans were lured over a decade ago.

As for George Carras, he made this stuff up.

Toronto stocks weren’t down 3% over the past year, but up 4%. So far in 2016 (seven months), the TSX has gained 12.09%, more than Toronto real estate. Over the past decade an exchange-traded fund mirroring the Toronto market (XIU) has gained 46.7%, plus a dividend yield of 2.8%.

So, did George fib, knowing nobody will censure him, or does the professionally-trained engineer not understand how to do research and craft a spreadsheet? Hmm. I’m going with the former.

Anyway, let’s compare “an RRSP investment” (actually an RRSP is not an investment vehicle, but merely a channel for investing in other assets) with the average Toronto house over the past decade. In 2006 that house was $351,941. Today it’s $756,546. Big capital gain which, less selling commission, equals 97% over ten years.

Meanwhile a balanced, conservative portfolio (40% fixed income and 60% growth assets) inside an RRSP over the same period of time, averaging 7.1% annually (including the credit crisis years) would today have increased by 96.7% . So is housing “the top performer”? You win, George. By 0.3%.

But wait. The RRSP didn’t suffer ten years of property taxes, ongoing maintenance costs, lawn care and snow removal, legal fees for closing, mortgage interest, new Caesarstone counters or insurance premiums. Of course, you can’t live inside an RRSP, but the financial assets can provide cash flow and are also 100% liquid – unlike listing a house then watching people tromp through on showings.

Also important are these questions: if something has jumped almost 20% in price during one year, isn’t that a sane time to be selling it, not trying to buy? Why would a smart guy like George Carras have to fudge the numbers so badly to make a point, if housing is unparalleled? Why set up a competition between real estate and financial assets, when balanced people should have the right mix of both? And if you’re going to be handing out financial advice in a newspaper column to a mass audience, isn’t it irresponsible to say one asset is “likely to rise at double-digit rates over the next decade”?

If George Carras were a regulated financial guy, he’d soon be selling shoes at The Bay.

David Lereah, by the way, is now self-employed. Guess why.

New highs! What’s the problem?

BEAR FISH modified

RYAN This is Ryan Lewenza. He used to be Chief Canadian Equity Strategist with Raymond James Canada, was a big honcho at TD Bank for over a decade, is a regular on BNN and a few months back joined Turner Investments as a Portfolio Manager, looking after hundreds of millions in client assets. Therefore Ryan thinks he matters. Poor boy. He has accepted my invitation to be a guest blogger, alternating weekends with Doug Rowat, whom we will poke in subsequent days. I trust you will show him all of the incredible respect, hero worship and absolute subservience you demonstrate here daily.  — Garth

By Guest Blogger Ryan Lewenza:

GreaterFool is now seven days a week! For the last nine years Garth has been educating and entertaining us with his six blog postings per week. The slacker took one day off, presumably to recharge the batteries and take his trusty dog Bandit for a long walk. Well we’re happy to announce that the GreaterFool blog will now be seven days a week with his two Portfolio Managers (Doug Rowat and myself) filling in the gap and writing the Saturday edition. While we are unlikely to live up to the witty and humorous prose you have become accustomed to with Garth’s blogposts, we hope we can still provide some insightful comments on the economy and markets.

Before we get into today’s commentary I thought a short bio would be helpful. I have nearly 20 years of experience in the financial industry with the first 16 years working at a major Canadian bank (the big green one). Two years ago I moved over to Raymond James Ltd. as Chief Canadian Equity Strategist. As the Strategist I was responsible for analyzing, forecasting and publishing research on the global economy and financial markets. Over this period I’ve managed a number of different equity and balanced investment portfolios. Finally I hold both the CFA and CMT designations which have allowed me to develop a unique investment approach combining both fundamental and technical analysis.

I can say that over my near 20 years of market experience I have never seen a more hated and feared bull market. Since the 2009 market bottom the S&P 500 has returned an incredible 225% and there have been no shortage of “permabears” calling for a top and inevitable crash along the way. Well, just like those bears have been wrong for years, here we are again with the S&P 500 breaking out and making new all-time highs with the bears out once again in full force predicting yet another imminent bear market decline. We disagree.

First, in our view the stock market (S&P 500) is breaking out to new highs in part because the economic data is getting better. Whether it’s US housing data, consumer spending, manufacturing activity, etc., it has all strengthened in recent months. This can be captured in the Citigroup US Economic Surprise Index which measures whether economic data is beating or missing economists’ expectations. As illustrated below the index has surged higher as economic data has come in above expectations, which has in turn helped drive the S&P 500 to new all-time highs. Stocks typically lead changes in the economy by 6 to 9 months so in our view stocks are breaking out on expectations that stronger growth should result in higher corporate profits down the road.


Now the bears keep trumpeting that equity valuations are too high and will inevitably correct, bringing stocks down with them. But are they? Currently the Price to Earnings (P/E) ratio for the S&P 500 is 20x, which granted, is at the high end of its historical range. However, this does not take into consideration the very low interest rate and inflation levels which are supportive of higher valuation levels, in our view. One way to adjust for this is a measure called the “Rule of 20”. This financial measure adds the S&P 500 P/E ratio to CPI inflation levels, and when they sum up to 20, equity markets are deemed to be “fairly” valued. Currently this measure sits at 20.5x, slightly above “fair” valuation of 20x and is well below typical peak levels of 24x to 28x (see chart below). Yes, valuations are at the high end as a result of the strong bull market, but less so when considering the low inflation levels.


Finally, we believe another hole in the bear case is that they seem to focus exclusively on absolute equity valuations and not how stocks compare to other investments. At the end of day money will go to where investors perceive better value and opportunities. Put another way, equities look attractive when compared to other asset classes such as bonds or Canadian housing. There are a number of ways to compare stocks to bonds but one easy way is to simply compare dividend yields on stocks versus the yield on government or corporate bonds. Historically government bond yields have been significantly higher than the dividend yield on the S&P 500. But currently with the S&P 500 dividend yield at 2.2%, it’s above the US 10-year Treasury yield at 1.4%, a phenomenon not seen in decades. Put simply, from a cash flow perspective equities are yielding above government bond yields which we believe helps to support the stock market. Of course, when this changes and bond yields head higher as the Fed hikes interest rates, this could be the catalyst for that often prognosticated bear market correction.

But until that happens, why not ride this bull market higher and rejoice the new all-time highs? We believe this bull market has more room to run before the next bear market correction occurs. Until then, enjoy the new highs and rising portfolio values, and stop being such a Debbie Downer!