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The retreat

Is our house lust now an economic threat? Should you lighten up on the maple in your portfolio because of rampant house-horniness? How is this possibly going to end well?

Fidelity portfolio manager David Wolf made waves saying he’s dumping some Canadian exposure in his funds because idiots are paying extreme, unsustainable amounts for houses. But who cares about some mutual fund dude?

Maybe you should.

Wolf joined the global fund manager seven years ago after service as senior policy advisor to the governor of the Bank of Canada. Lately he’s been helping to run the Fidelity Canadian Asset Allocation Fund, Fidelity Monthly Income Fund, Fidelity Monthly Income Class, Fidelity Dividend Fund and Fidelity Income Allocation Fund.

Here are his creds:

“From 2009 to 2013, Wolf served as Adviser to the Governor of the Bank of Canada, and served as Secretary to the Governing Council for Monetary Policy at the Bank of Canada. As Secretary to the Governing Council for Monetary Policy, he oversaw the analysis supporting the monetary policy decision process and acted as Editor in Chief for the Monetary Policy Report. In addition, he served as a representative of the Bank of Canada on a number of international bodies, including the G-20, the International Monetary Fund (IMF) and the Organisation for Economic Co-Operation and Development (OECD).

Prior to his work for the Bank of Canada, Wolf served as the Head of Canadian Economics & Chief Strategist for Merrill Lynch Canada from 2005 to 2009, where he was responsible for fundamental analysis and asset allocation strategy. Previously, he served as the Chief Interest Rate Strategist & Senior Economist for RBC Capital Markets, where he worked from 1997 to 2005.

Hmm. Smart guy. So what does Wolf say now?

“Housing is becoming a dominant player in GDP in a way that is dangerous, like in Spain, Ireland and Greece,” he states. “These turned out to be epic housing bubbles that led to severe recessions.”

These days real estate accounts for a direct 10% of the economy. But that’s misleadingly small. Residential mortgage debt is almost $1.7 trillion, and growing by $200 billion a year. The entire Canadian economy is $1.8 trillion – so figure it out. Real estate’s reach is massive. Over 250,000 people are employed in flogging properties across Canada, 130,000 of which are agents. Then add in all the mortgage brokers, insurance dudes, home inspectors and closing lawyers, and the number swells. This does not include builders, contractors, renovators, drywallers, roofers, electricians, plumbers and virtuoso Italian tile guys.

Is this why the recent federal budget wimped out in dealing with the housing bubble? You bet. Real estate is being left to run hot because politicians would rather have buyers and borrowers shoulder the risk than the government. Besides, at this point in the neverendum pandemic, all growth is good growth. Even when homes are made unaffordable and society is set up for an inevitable, painful correction.

By the way, here’s an example.

No. 380 West 62nd Ave in Vancouver sold for $4.28 million in February of 2018. Uh-huh, you read that right. That’s a ‘4’. At the time the province’s assessed value for the 50-foot lot was $3.2 million. Eighteen months later the owner tried to move it for $4.3 million. No takers. Over time the asking price was reduced to $3.9 million. Still not deal. Now it’s for sale at $2.9 million. Oops.

In what universe, you might ask, is an old, ugly beater house in Canada’s third city worth even three million? How could anyone have been so myopic and possessed as to pony up well over four mill? Meanwhile, as reported here, a rural home outside Ottawa recently went for $1 million more than the listed price, and the average sale price in Toronto is now 111% of asking. Nationally residential real estate gained 31% in the last 12 months, and more homes sold in March (during a global pandemic) than any previous month.

By the way, it’s worth recalling the last time a real estate bubble turned negative. What followed was a long period of stagnation. In the GTA it took seventeen years for the average house price to restore.

What could go wrong?

Lots. A ton of new listings could hit the market, overwhelming demand, knocking prices back. That could put recent buyers under water – and remember almost a quarter of GTA purchasers have debt-to-income ratios of at least 450%, considered to be in the red zone.

Interest rates could rise (the CB last week said as much). Mutated mutant virus variants could up the misery and spike the economy. Or the vaccines might work great, defeating Covid, repopulating downtown workplaces and making WFHers in faraway hick cities panic and sell. Maybe we just hit the price wall. Disgusted potential bidders quit. The market loses momentum and sinks.

Who knows? But experience tells us this much: bubbles do not deflate. They burst. And Wolfy wasn’t born yesterday.

About the picture: “The celebration of canines in your blog helps keep us all focussed on what really matters and so I hereby submit a photo that might be of interest,” writes blog dog Jack. ” This is Meggie (left) and Pepper, our 2 unrelated miniature schnauzers who each lived a nice long 17 years.  Here they are trying to figure out how to access a squirrel, their constant nemesis.”

FOMO 3.0

The virus news sucked this week. Now what?

Ontario cases are looking worse than Doug Ford’s polling numbers. The ICUs are a mess and while the dosing has picked up, the slimy little variants are winning. Will Toronto’s five-month-long lockdown end soon? Nah, probably not. It’s a death knell for Main Street.

In BC the province is actually musing about RCMP roadblocks to keep people penned in their own health authority regions (the mounties are pushing back). Ferry travel to the Island is restricted. Albertans are lassoed and dragged back across the mountains.

Even clean little NS has been sullied. Word is that a single BBQ event hosted by some jerks just back from T.O. ignited a fire of infections. Now Halifax is sealed off and shuttered for a month. Cases per day in the last week grew 84%.

Flights from India and Pakistan are grounded. That part of the world is a global threat. Not only do we have mutant strains of Covid, but now there are mutated mutant versions. So 13 months into this collective nightmare it, well, sucks.

How will all of this affect social behavior?

Not well. Everybody’s fed up. That riot against curfews in Montreal the other clearly showcased public anger. Look at the reaction in Ontario last week after the government said police had the right to stop people at random and demand IDs and addresses. Even the cops were disgusted. Clearly things are starting to fray at the edges.

WFH? The big push to vax everyone a month ago looked like it held promise for workplaces to reopen and employees to shower and find their pants. But not so fast. It’s seriously in doubt whether major corps will be repopulating downtown towers at all in 2021.

Now combine these things – a neverendum pandemic, repressive governments, shuttered offices, small business destruction plus anti-social urgings – with a federal budget that did nothing to stop aggressive-nesting real estate mania and a central bank frozen in the Covid headlights and we get… what?

Confusion. As this pathetic blog pointed out earlier in the week, all the logic suggests a housing market about to cool even as financial markets continue to rise. Way more listings will increase supply while insane prices and the higher stress test dampen demand at the same time wide scale inoculation promises a return to normalcy. Rational people would conclude the bubble then starts to leak. Seriously.

But with the Covid comeback comes emotion. Social distancing is more than a health measure – it’s a metaphor for what this mutating little bug has done to civilization. The retreat from cities to the burbs and far beyond is a manifestation. A new bank poll reinforces that. BMO just found almost 90% of newbie buyers in BC and Ontario are searching in the suburbs or hick hinterland cities. Only a relative handful are shopping for city properties (so a recent 80% surge in Toronto condo sales tells you who the buyers are – investors).

The bank also found house lust is as strong as ever. Almost two-thirds say purchasing the house they want is more important, “than having money left over each month.” The poor kids. They know not what they seek.

Even the dude running the Bank of Canada has a warning. “We are seeing some signs of extrapolative expectations and speculative behaviour,” Tiff Macklem said Wednesday. “Our concern … is that against a background of rapid price increases, people will extrapolate. They will expect that those price increases will continue indefinitely and they will overstretch to buy houses. That would be a mistake.”

In fact the Tiffer joins most financial observers in knowing how this all may end. This week, for example, the CEO of National Bank warned that regulators must (a) stop allowing blind auctions and (b) encourage buyers not to waive conditions for a home inspection or financing. If the market isn’t slowed, he added, it will implode. “The bursting of a speculative bubble in this segment of the economy would have very negative social and economic consequences.”

Will Covid 3.0 ignite housing further, inflame prices in the far reaches of suburbia, make it harder for employers to regain offices, destroy the client base of city businesses, discredit governments, ratchet up the debt of an entire gen and set the stage for an inevitable correction?

That’s scary.

Or is this the new normal?

That’s terrifying.

Have a great weekend.

About the picture: “This is Mouse, my beloved Maltese,” writes Grace, in Burnaby. “He loves romping in the snow even if it’s taller than him. He looks grumpy due to heavy snowballs on his hair.  Love your blog, read it every day. Learned a ton. Thank you! Keep up the good work Mr. Turner.”