Apparently a lot of people think Canadian real estate will collapse. When she blows, they believe, it’ll be an event similar to the US housing bust. Swept away, or grievously wounded, will be banks, credit unions and half of Bay Street.
This is based on real, and scary, facts. Households owe more than $2 trillion, about 70% of which is mortgages. That’s a record. Over $100 billion in HELOCs are not being repaid. Wages are less than inflation, making cash flow difficult. Four in ten say they’re struggling to pay monthly bills. Almost half are two hundred bucks from insolvency at any one time. Blah, blah, blah. You’ve read this stuff here routinely. It’s rooted in surveys, polls, reports and government stats. Most of it is doubtlessly true.
The conclusion then is that huge numbers of delusional Canadians have overreached to buy inflated real estate. They have unrepayable debt. They also have little in the way of savings, cash or investments. In other words, in an economic downturn or a time of job loss and spiking rates, they’d be seriously pooched. Many would default on mortgages they cannot service. Lenders would be stiffed. Because Canada’s major banks have massive mortgage portfolios, the system would be rocked. Some might fail.
After all, isn’t that why the last few federal budgets have contained bank bail-in legislation, which is now being enacted? Why would Ottawa go to the trouble of creating such a safeguard if the potential of a bank collapse were zero?
As stated, lots of people are betting it happens, and putting real money on the table as a result. A reminder of that came while reading a recent Motley Fool report on shorting the banks. Investors have just shorted TD shares to the tune of $3.5 billion, and Scotiabank for almost $3 billion. Going short is the opposite of going long (when you buy a stock because you think its price will increase). Investors who believe the opposite borrow and sell shares, figuring they can buy them later for a cheaper price, return them to the lender and pocket the difference. Yes, that sounds dangerous. It is. If prices increase, the shorts are screwed. If prices fall, they gamble and win.
Remember ‘The Big Short’? Lots of people do. Those who saw the American housing crash coming cleaned up using a similar theory and made fortunes. Now that real estate sentiment has turned negative in the land of house-horny and debt-infused beavers, an army of people are betting the banks will be in trouble – or at least suffer a run on their equity.
But I’m not one of them.
First, real estate is not collapsing. It’s correcting. I’m sticking with my long-held (and so far accurate) prediction that a 10-15% plop in prices in major markets would be followed by a years-long slow price melt. Second, house prices outside of the GTA and moronic patches in BC have never been in a bubble, and are not subject to a bust. It’s still cheap to live in Halifax, Winnipeg, Montreal or Windsor. Third, this is exactly why the banks are protected by CMHC insurance for large swaths of their home loan portfolios. It’s also why the stress test was enacted – to ensure lenders can withstand rising rates. Fourth, the bankers have had more than a decade to get ready for a Canadian crash. Capital reserves have been increased, borrowing requirements tightened and our banks have pushed hard into other areas – several are now major US players.
Besides, they’re massively profitable. RBC alone made more than $1 billion per month last year. That’s over $50 million each business day. Almost as much as a blog! No wonder financial outfits account for more than a third of the entire Canadian stock market. And each of the banks have steadily increased their dividends, so investors have seen capital growth as well as tax-efficient income. TD’s dividend growth, for example, has jumped 11% annually over twenty years.
As for stock prices, look at the 10-year track record for the Royal (click to enlarge):
But how did the banks do in 2008-9? Not so hot. Sometimes in a crisis all asset classes are dumped. RBC stock which was about $60 in 2007 tumbled to $30 in 2009. But even in the darkest hour, no Canadian bank missed or cut a dividend payment. Investors who saw intrinsic value and went long have scored. In fact, every time bank shares have dipped, it’s turned into a buying opportunity. And 2019 is not 2008.
So what if I’m wrong and Vancouver house prices crash by 70% (as happened in Phoenix), leading to mass defaults, foreclosures and losses to lenders? Well, you might regret owning a hunk of Vancity or Coast Capital, but not BeeMo or CIBC. Share prices of the Big Five might well decline in a real estate-induced recession, but the shorters’ euphoria would be brief. If history’s any guide, it would be time to take money out of the bank, and buy the bank.
Having said that, no crash. Go long or go home.
Investing isn’t gambling. The sooner you learn that, the happier you’ll be. Especially if you’re a young cowboy Alpha male with a discount trading account. Or a hipster crypto fanatic with a loaded credit card. There’s a big world full of sharks out there ready to eat you up.
This week’s example is Bitcoin, which on Monday was (officially) 80% lower than its peak a little more than a year ago. As such it’s equaled, and will soon surpass, the epic meltdown in tech stocks at the beginning of this Century. At that time dot-com millionaires on skateboards said ‘it’s different this time.’ It wasn’t.
The tech bubble wasn’t about the future of the Internet (that was obvious) but the speculative over-valuation of profitless tech companies by naïve investors. Similarly the Bitcoin bust doesn’t negate blockchain technology or the digitization of money. But it’s wiped the floor with fools who thought crypto currencies created out of nothing, backed by nothing and regulated by nobody were worth billions.
Bitcoin went from $5,000 to over $17,000 in a few weeks because of insatiable plastic-fueled demand from uncooked investors who bought into an implausible story. They actually believed money could be manufactured privately, be free of central bank control, independent from government, untaxed, devoid of interest and yet be a medium of exchange. It was a scam. As usual, a small number of people got filthy rich. Millions of others, most of whom bought Bitcoin on Visa or MasterCard, have been wiped out – and are paying 19% interest on the losses.
It was all so obvious. On the last day of November in 2017, when BTC had just surged to almost $10,000, here’s what this pathetic blog had to say:
Do not buy Bitcoin. No matter how easy it is. How powerful the pull of greed. How seductive the effortless, unearned gains. This will not end well.
All it takes to buy is an email address, a smart phone for two-factor identification, a bunch of clicks and a credit card. There’s no personal information required, no identifiable data (except your card number or bank account info), no suitability requirement, nobody wondering if you’re a 13-year-old using mom’s plastic, or an 80-year-old with dementia. Click. Buy. And you own the world’s most volatile, dangerous asset.
Bitcoin, of course, isn’t money or currency. As a medium of exchange it fails every test. Few vendors will take it and transaction times are glacial. Even though bitcoin volumes are a tiny fraction of those handled by Visa, for example, the network is clunky, pedantic, massively inefficient. Nobody is going to be buying groceries, cars or ETFs with bitcoin. Fentanyl and automatic weapons, maybe.
Buying bitcoin is not investing, it’s gambling. By proffering your credit card to get some, you’re not sticking it in the eye of central banks, governments or The Man. You’re probably blowing off your own foot. Bitcoin doesn’t pass the investment smell test. There’s a reason its volatility has been 100%, with zero reliability. No government underwrites or stabilizes it through a central bank, which controls the supply and price of money. Digital currency offers no income stream, no guarantee of liquidity, no underlying security, no assets backing it and no failsafe way to safely store it, as with equities, bonds or funds.
And while the blockchain technology that allows digital currencies to exist appears brilliant, recent investors in bitcoin will probably lose most of their money. The threats at the moment are legion, and anyone ignoring them, hoping to double their wad by Monday, is the greatest of fools.
The BTC story isn’t over yet, and may not be until the losses equal 100%. Nor should it be viewed in isolation. The destructive urge for gains-without-brains also manifests itself in the junior resource stocks your BIL suggested. In buying individual securities mentioned by some impoverished journalist in the Globe or a discredited stock-flogging, bow-tied analyst on BNN. Or shoveling your retirement money into silver bullion, or handing over your net worth to a mortgage investment corp promising 8%.
Investing involves understanding risk, and seeking to mitigate it while putting capital to work. That’s why the best portfolios are balanced – holding growth assets plus safe, income-producing ones – and diversified, with several distinct asset classes. Risk is less when you own ETFs containing hundreds of stocks, instead of picking a few separate companies. It falls when you diversify out of Canada, which represents but a sliver of the world’s markets. It’s also safer when you own things like REITs, since rental income within them is not dependent on stock markets.
And, kids, it’s still not different. It never will be.
Property sales are down 20% so far this month in Calgary. In Victoria the drop is just over 30%. Alberta is in an oil-induced, NDP-augmented, pre-electoral funk. BC is just pooched, – unaffordable, stressed and terminally over-taxed.
Vancouver numbers due out early next week should be ugly as the climate there turns even more toxic for owners and investors. As if Comrade Premier Horgan and his eat-the-rich finance minister were not enough, the new YVR mayor is turning out to be just as anti-house. He’s now taking the steps necessary to triple the ‘vacant house’ tax which last year ripped $38 million from the hides of homeowners while doing nothing to lower rents or increase the vacancy rate (which was the only rationale for it).
Not that anyone thought it would. After all, this is just another tax on wealth. Added to the anti-foreigner tax, the anti-Albertan ‘speculation’ tax, and the special extra property tax in selected neighbourhoods, the EHT is an additional reason no sane person would buy a property in YVR, the LM, OK or the Island.
“The tax is proving effective and tripling it will just amplify that effectiveness,” says Mayor Kennedy Stewart. At the same time government stats show the vacancy rate is lower in areas where there is no tax.
As reported here yesterday, be careful what you vote for. You might just get it.
