Entries from May 2019 ↓

Take cover

Well, it’s happened again. The one-man presidential wrecking gang has roiled the world. It will be interesting about eight inches from now to see how the red-hat brigade in the steerage section rescues their guy after this Trumpian mess.

In case you missed it, the xenophobic American president, unable to get his own country to seal off the southern border (no wall) says Mexico will be penalized with tariffs until they seal theirs. Five per cent now. Rising to 25% within a few months. Of course this just about abrogates the new NAFTA and, worse, it will cost US companies and consumers around $87 billion in higher input costs and prices. So, the economy will hurt. Profits fall. The stock market was whacked.

The Mexican tariff came in a Tweet. Nobody in Congress voted for it. No research document from the trade department was done, no impact study on the North American auto industry (the biggest loser), no consults – just a Tweet, and it’s done. Incredible.

At the same time China has retaliated against the latest Trump tariffs affecting that country, imposing $60 billion in duties on US imports. Beijing is also mounting a campaign in response to Trump’s vendetta against Chinese tech giant Huawei, saying US companies will be shut out of the world’s biggest market. More economic fallout. More pain for corps and their shares.

In Canada, consequences.

This makes a joke of the new NAFTA that took a couple of years to negotiate. Obviously a trade deal with Mr. Trump means diddly. He is capricious and unreliable. Investors took one look at the latest moronic move and flocked to the safety of bonds. Prices there shot higher and yields crumbled. The curve inverted the most in 12 years (short rates are now substantially higher than long ones) simply because the writing’s on the wall. NAFTA’s probably dead.

So a 10-year bond now yields just 1.5%, the least in a couple of years, as investors bet what the White House is doing could torpedo our economy.

Not that it needs much help, apparently. Despite the boffo jobs numbers in April, the GDP is lying in a ditch, covered in brambles, barely breathing. Poor thing. We’ve just learned that growth in the first quarter of the year was a sickly 0.1% – the same as the final quarter of 2018 in which stock markets fell 20% and the Bank of Canada had a small cow. Now with a quixotic egomaniac in charge of our biggest trading partner, none of this is good. Without robust trade, Canada gets hammered.

By the way, speaking of Mr. Trump’s political prowess, this week in Japan he agreed with his friend, Kim Jung Un, the dictator of North Korea, that Joe Biden – four decades in Congress and eight years the US vice-president – was a low-IQ person. It was the first time anyone could remember an American leader openly dissing a fellow legislator on foreign soil, before a foreign leader. The fact he was agreeing with a dictator made it all the more notable. A day later it was revealed Kim has executed by firing squad his envoy to the US for the Hanoi summit, because of a bad outcome. He’d been co-opted by the US, the dictator said, and he threw three other officials into the lineup for kicks. They took bullets, too.

Of course, it was Trump’s personal attention and fawning which turned Kim from a third rung, regional bruiser into a global player. And it continues. Meanwhile the American leader shreds relations with a key economic and geographic partner. Because most poor migrants are, he’s says, murderers. But Korean ones are okay.

Over to you, deplorables.

$      $      $

An update on the very sensible and expanding decision being taken by many people to get the hell out of Dodge. Life in the GTA, Vancouver or the Lower Mainland is expensive, congested and populated with too many conflicted, financially stressed souls. They knee you on the subway. They give you the finger from their cars. They grab the best avocados from your hand.

Who needs this? Why not go somewhere affordable, where jobs are waiting? A poster calling himself ‘Running from Ontario’ asked me to share this with you.

Dear Garth: My partner and I are leaving Ontario and moving to the south shore of Nova Scotia in July. We’ve also done something we’d never thought we’d be able to do in Ontario – we’re in contract to buy a house!

Why? Doug Ford’s coming cuts to the healthcare profession have luckily coincided with Nova Scotia Health’s recruitment incentives; they offered a very nice signing bonus along with a full relocation package so we jumped.

What? We have an accepted offer of $135K on a nicely renovated three bedroom bungalow that’s walking distance to the hospital (complete with fully updated services, walk-out basement, fancy new kitchen and of course, a bunch of those shiny new appliances!) in a lovely little ocean-side town an hour or so south of Halifax. With a good combined annual income (along with defined pensions) we’re going with a 10year mortgage amortization with plans to pay it off asap.

The problem? Local real estate market stagnation – historically local prices have see-sawed and flat-lined. As such we are NOT anticipating any sort of price appreciation. In fact we are bracing for a possible 25% – 40% decrease (if the economy seriously tanks). Although it’s a lovely home, we clearly see it as a liability, not an asset. But with an effective vacancy rate of zero locally our carrying costs are still far less than our equally nice rental house in Ontario, and should we decide to eventually move on this property will become a rental unit or vacation home for us.

Is our thinking sound?

If you’re happy, financially solid, gainfully employed and content living in a spec of a place by the sea, an hour away from the city, what do you care what I think? Or anyone else? Life’s about choices, and you’re making a bold one. A few thousand people will read this tonight and wish they were you. Without the courage to say so.

Give it up

So yesterday a moister in Van told us why he and his squeeze bought a condo. On cue the crustaceans and paleos in the steerage section trashed them. (And we wonder why they hate us…)

Because life moves on, there’ll always be people buying. To spawn. To nest. To scratch the societal itch for property. The job here is to ensure fewer of them blow up, that they understand the consequences of their actions.

BTW, here’s Derrick in Toronto, with a so-typical question:

What if buying a box in the sky in TO gets you lower monthly payments than renting one? The rental market is crazy too. Take your pick of getting gouged for a rental or a purchase. Scenario: rent:$2000/month. Condo, say $450,000. Downpayment: 300K, mortgage 150K. Monthly payments condo fee $450 + $750 amortized over 25 years +utils/insurance/hydro /taxes say $300?. Total $1500. Rent or buy?

The answer ain’t simple. What are D’s assets? His income? Corporate pension? Age and marital status? Job security? Can’t answer without knowing more – but sadly most people never do the calcs, figuring out where true financial security might lie for them. Real estate’s not a strategy, just part of one. Never forget that.

In this case, the kid neglects the value of a $300,000 downpayment. Invested for a 6% annualized return over five years, it would grow to about $400,000. In other words, the opportunity cost of the down is $1,500 a month – so the condo costs at least $3,000 to possess. Plus property taxes are understated, and destined to rise. In other words, there have to be reasons to buy, and saving money isn’t one of them. The only valid excuse for taking the plunge is enough capital appreciation over time to outweigh closing and sale costs plus the added burden of owning over renting. In this case, over five years, that would be about in excess of $100,000. And that’s a gamble.

Maybe it’s time more people accepted the fact owning in the 416 or downtown YVR is a really bad idea. If the economy slows, trade wars intensify, commodity prices fall or money costs rise (all distinctly possible in the next three years) then you poured money into an asset that could have been leased for far less, or drop further in value. Yesterday Pablo said he could live with that thought. Good thing.

This week a mortgage-rate site crunched numbers to determine who can actually afford homes. The results support the drivel published here: in Toronto and Vancouver, buyers are gamblers unless in the top income brackets. Smarter people are heading to other cities where they can have a nice urban existence, less traffic, cheaper real estate, more cash flow and enhanced financial security. How does that not make sense?

Here’s what RateSupermarket found: to buy in Toronto you should earn $160,00, putting you in the top 10% in terms of income. In poor Vancouver, it takes wages of $240,000 annually. That makes you a 1%er.

Income required to buy, city-by-city

Here’s the comparison:

  • Vancouver: House price: $1,441,000. Household income needed: $240,000
  • Toronto: House price: $873,100. Household income needed: $160,000
  • Victoria: House price: $741,000. Household income needed: $140,000
  • Hamilton: House price: $630,000. Household income needed: $120,000
  • Kitchener-Waterloo: House price: $523,720. Household income needed: $110,000
  • Calgary: House price: $467,600. Household income needed: $100,000.
  • Ottawa-Gatineau: House price: $444,500. Household income needed: $90,000
  • London: House price: $426,236. Household income needed: $90,000
  • Montreal: House price: $375,000. Household income needed: $80,000
  • Edmonton: House price: $372,100. Household income needed: $80,000
  • Saskatoon: House price: $301,900. Household income needed: $70,000
  • Regina: House price: $275,900. Household income needed: $70,000

But remember, as with Derrick, the buy-or-rent decision is not just based on income, nor the price of the real estate.  Will buying a house soak up all your cash flow and prevent you from having a liquid portfolio for the future? What are you going to live on when you’re 73 and as employable as an NDP finance critic? In life it’s the long game that matters. Play it that way.

Now, kudos to some Vancouver media. It’s a rare thing, but maybe this is a reflection of shifting public sentiment. Let’s hope.

An editorial in the Courier makes the GreaterFool argument: it wasn’t dudes from China, or bad people from Alberta, or shady money launderers who were primarily responsible for the price of houses inflating beyond control. The locals did that. Just the way locals in every market set the prices for that city. Therefore politicians who try to ‘fix’ it always fail, and in the course of doing so distort the market, making outcomes worse. Plus, people who strive to buy using extreme debt and duct tape are putting themselves at risk. Ironically, if you stop, the market will correct. It always does. Really.

First we were told it was foreign buyers who had driven up the cost of housing in British Columbia. Then it was real estate speculators who were responsible. Now the B.C. government and much of the public and media have turned the guns on near-phantom money launderers as the mystery bogeyman to blame for the unprecedented surge in Metro Vancouver housing prices from 2015 to 2017.

Despite all the hyperbole and headlines, it turned out that foreign home buying in Metro Vancouver peaked at less than 5 per cent of sales and has since fallen below 1 per cent.  The few remaining foreign homebuyers are still exposed to a 20 per cent tax on their purchase. The provincial government then further weaponized taxes and thundered after residential speculators who it said were forcing tenants into the streets and driving up residential prices across the province.

“The speculation tax focuses on people who are treating our housing market like a stock market,” said Finance MinisterCarole James. The government then required the majority of B.C. homeowners to fill out a lengthy form on any homes they owned. Failure to do so results in taxes of thousands of dollars, guilty or not. The forms revealed that just 1 per cent of owners could be defined as speculators and most of these are B.C. families who happen to own  a vacation home, often for generations.

The money launderers are an even more elusive target, primarily because it is not against the law in B.C., at least not yet, to pay cash for something. The recent government-ordered report on money laundering in B.C. real estate was vague to the point of nonsense. It could be worth $800 million. It could be $5 billion. Whatever, who knows? The report also stated that Manitoba and Saskatchewan have more money laundering in real estate  than B.C., which gives an idea of how much faith we should put in its findings. Now the provincial government has ordered an expensive Commission of Inquiry into Money Laundering in B.C., which won’t report back until May 2021.

What politicians miss is that there is no mystery bogeyman to blame for high home prices. B.C. residents buy and sell  more than 96 per cent of residential real estate; all the biggest property developers are B.C. born and built; and government delays and taxes have helped drive housing supply down and prices up. But it is easier, and more vote-friendly, to blame someone, anyone else.