Entries from December 2018 ↓

Ready?

In about a week local real estate boards will bravely issue December stats. There could bear an uncanny resemblance to stock markets of late. 2018, it seems, has turned into the no-place-to-hide year your momma warned you about. At least equities don’t come with realtors, mortgages or illiquidity. Like in Calgary.

Days-on-market there are creeping to 70. Sales are down by a fifth again this month, listings are up 13% and prices have lost another 2.5%. This is a market that peaked ten years ago – proving that bears roar the prairies, as well as Wall Street. A similar experience is unfolding in Victoria, Edmonton and now into the 905.

As for Van, John sent along this flyer his local agent in Kits mailed out the other day. Yup. Sales down 42%, and the price of a detached house has cascaded lower by 45%. Ouch.

You can mitigate unexpected loss when investing with a balanced and diversified portfolio. But when all your precious eggs are in one property, not so much. What the market does, dictates your net worth. In Kits, says the Zwick Chimes Real Estate Group, that just dropped by almost half.

Well, on to 2019. Lookin’ any better?

In terms of mortgages rates, you bet. Given the last few weeks of capricious stock markets, Trump tantrums, political upheaval, real estate wobbles and Fed-bashing it’s a safe bet central banks will be throttling back on the testosterone. Four hikes next year in the States could turn into just two. Maybe one. In Canada our guys might chicken out completely, despite strong economic numbers.

Bond yields have been crashing. The Canada five-year which was pushing 2.5% in November has flopped to 1.9% today. In the bond world that’s stunning. Of course as bond yields plunge, bond prices surge (and a reason why your balanced portfolio has bond ETFs in it). Lower yields means a drop in five-year mortgage rates is coming, just as soon as the banks stop weeping.

How about the stress test?

Yes, the heat’s already been turned up on the T2 gang. They know about 25% of the entire economy’s now related to residential real estate and (more importantly) that dewey and house-horny Mills were responsible for a Liberal majority in 2015. More than any other single factor, the ST has been responsible for dousing deals, restricting credit and the early termination of untold numbers of Audi leases. Every aspect of the housing and property industry has been lobbying Ottawa to cap it or trash it.

Here’s an interesting chart from Rob McLister’s Ratespy depicting the impact of B20 on the income needed to buy a home, city by city. Orange represents the test factor, and blue shows the impact of price increases.

Click to enlarge

So given the fact 2019 is an election year, that Trudeau desperately needs the moisters to win again, and real estate’s become massively more unaffordable under his reign, expect changes. Yes, yes, I know – the stress test is a creation of the bank cop (OSFI) and not the federal government. But it’s funny how stuff happens…

As this blog has shown you over the last few months, the stress test has killed sales, but not lowered the cost of entry-level real estate. Au contraire, by reducing credit and pushing buyers down the price pyramid, it’s created more demand for stuff the kids can afford – like condos. So prices at the bottom have increased while at the middle they’re sticky and tumbling at the top. If you want a $3 million house in Kits, this is your lucky day. If you just need a $500,000 house somewhere, try Lethbridge.

By the way, the stress test is also creating more renters while it’s responsible for fewer buyers. Increased rental demand and more expensive condos have resulted in higher rents. Plus more pissed-off Millennials. Justin gets that, too.

Finally, don’t be shocked if CHMC announces a rule change in the next 100 days allowing the return of 30-year insured mortgages or lifting the $1 million cap. Both would be dumb moves, like gutting the stress test. Houses people can actually afford to buy won’t happen if lending regs are relaxed at the same time central banks take their foot off the gas. But, alas, this is politics.

In other words, if you liked December and enjoy The Walking Dead, you’ll love next year.

The advice

Well, now you know why this blog is so boring. Because this stuff works. Here we go again:

(a) Always have a balanced and diversified portfolio
(b) Never sell into a storm.
(c) Ignore volatility. It’s noise.
(d) Never exit an asset class.
(e) Don’t try to time the market. You can’t.
(f) Ignore those who come here to tell you to (i) go to cash, (ii) buy gold, (iii) buy Bitcoin, (iv) buy GICs or (v) run screaming
(g) Invest in quality ETFs in the correct weightings, rebalance once or twice a year and ignore whatever the hell the Dow is doing.
(h) Never watch BNN. Like, never.

On Wednesday US stock markets (ours was closed – big day tomorrow) had the best rally in a decade. The Dow added over a thousand points as it and the S&P gained 5% in a single session. Oil surged ahead almost 10% in a historic romp. After being pummeled lower by close to 20% over the last two months, and losing 8% in just two sessions, stocks suddenly looked too cheap to pass up. Reality set in. Meanwhile Donald Trump was out of the country, stopped tweeting about financial stuff and – before he left – said he really did have confidence in the Fed.

Nice retreat. Just what markets needed to go with news of galloping retail sales that had companies like Amazon exploding higher. Also dawning on everyone after the Christmas break was the fact there’s no fundamental reason the selling should continue.

After all, look at the numbers.  The US economy is growing by a robust 3.4%. Unemployment is at a 50-year low of just 3.7%. Corporations have been making a ton of money. Central banks have indicated they’ll be throttling back on rate hikes. There are more job openings than applicants to fill them. Inflation is tepid and under control. In short, there is no recession looming. There never was. And so long as these conditions continue, the next one will not come soon.

Never look back: US market adds record 1,000 pts

Problems? Of course. Always got ‘em. Trump’s unpredictability and tactics. Trade wars. Brexit, Macron and Chinese growth. Political polarization and gridlock. Rising rates. And epic debt.

But that’s exactly why a correct portfolio is built as I have suggested. Balance means having 40% of so in safe assets (government, provincial and corporate bonds as well as high-yield debt and preferreds) and the rest in growth (equity-based ETFs with exposure to Canada, the US and international markets, plus REITs). As last week showed, when stocks plop, bonds plump and volatility is lessened.

Diversification means no individual stocks, but exchange-traded funds instead. No mutuals, of course, unless you like being savaged by fees or your BIL sells them (still refuse). Don’t overweight Canada just because you live here. And when you rebalance do the opposite of what your gut tells you – sell off winners that become overweight and buy losers with the profits. Remember – you have no idea what’s coming. Next year Bay Street could roar while Wall Street worries about the 2020 election. Bonds could melt up. Emerging markets surge back. You have no idea, so stick with the plan.

And did I mention never watch BNN?