Greater Fool – Authored by Garth Turner – The Troubled Future of Real Estate https://www.greaterfool.ca Book and Weblog - Authored by Garth Turner Thu, 30 Jun 2022 18:46:55 +0000 en-US hourly 1 https://wordpress.org/?v=6.0 Willfully blind https://www.greaterfool.ca/2022/06/30/willfully-blind/ https://www.greaterfool.ca/2022/06/30/willfully-blind/#comments Thu, 30 Jun 2022 18:46:55 +0000 https://www.greaterfool.ca/?p=20229

When GTA real estate broker Michelle Makos did an online vote this week, the questions was about blind bidding. The results were unequivocal.

If you’ve tried to buy a property in the last two years you know all about ‘offer nights’ and the emotional, illogical, fevered auctions that can ensue. Since the depths of the pandemic agents have used this technique to pump, inflate, gorge and balloon house prices to the benefit of sellers and the eviscerated humiliation of defeated buyers.

Often a property is listed at a price tantalizingly below perceived market value by an agent who knows what it should sell for but is trying to draw blood. The sellers sign a form instructing their guy not to present any offers before a certain day/time. The intent is that on offer night there”ll be a stack of them on the kitchen table and in advance bidders have been told to come in with their best price, no conditions, big deposit.

Often the top one or two bids will be sent back for sweetening. The competing buyers are told they have to do better, but given zero context for knowing what they need to add to win the deal. Ten thousand more? A hundred thousand? Two hundred?

It’s a devastating process. Auctions themselves are hard enough. But to bid blind is insane. Meanwhile the real estate cartel – comprised of agents, brokers, the regulator and politicians – have made it illegal for competing offers to be laid on the table and disclosed, so potential bidders might gain have clarity.

In the last federal election T2 & gang said they’d bring in a homebuyer’s bill of rights banning blind auctions. As we told you then, it was a hollow pledge as the sale of houses is an area of provincial responsibility. And in Ontario – scene of the biggest bidding crimes – the premier sided with the realtors.

However, as you might imagine, Mr. Market has come to the rescue. Sellers are now giddy at the prospect of receiving one conditional offer within two weeks of listing. Offer nights are largely gone. Prices are coming down.

In this context buyers are being empowered. And they’re finding a voice. Here it is.

No surprise here. Blind auctions and the agents who have engineered them on behalf of greedy, omnivorous sellers have helped drive some big nails into the coffin of real estate selling as we’ve always known it. As recently as last month giant Re/Max was wavering on whether this ordeal was helpful or evil.

Blind auctions are okay, says the corp, because the process, “can help streamline the entire affair because the owner will review all the offers at one time without additional changes, meaning fewer appointments. Sellers can merely eliminate lowball offers.” Additionally, a blind auction is good because, “a bidder who possesses the capital or borrowing amount to place a bid as high as possible for their dream home.” Yeah, the rich dude wins! Survival of the fattest.

In fairness the company does acknowledge the appalling downsides, like forcing people to buy a home without any conditions or protection, plus possibly spending way too much in an emotionally-charged hormonal competition. “Blind bidding can fuel speculation. When bidders are aware that this is a prevalent phenomenon and understand that offers will be made well above the asking price, prospective homebuyers might make the mistake of automatically making an extremely high bid.” No kidding.

Well, things are changing. As stated, the embrace of blind auctions by an ethically-challenged industry is one reason realtors should fear a digital future in which people are way more comfortable buying online – peer-to-peer, seller-to-purchaser – than being manipulated by an agent with a needy Audi to feed.

Some people think the world, society, the economy and human interactions will change forever coming out of the pandemic. That’s probably too dramatic and shallow. But there will be changes. Among them, the way people buy houses.

An entire generation in this land will never forget how an industry brutalized and demeaned them. Nor should they.

About the picture: “This is our rescue cat, Ernie,” writes Dianne, “recovering from his most recent stay in the emergency ward. He’s endured so many illnesses over his 10 years, including a life-saving operation that made ‘him’ a transgender kitty. Fortunately for us, this cherished cat keeps bouncing back. Like the markets and life, up, down, up, down, up, down, but mostly up. So grateful for that.”

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Five bucks https://www.greaterfool.ca/2022/06/29/five-bucks/ https://www.greaterfool.ca/2022/06/29/five-bucks/#comments Wed, 29 Jun 2022 17:33:33 +0000 https://www.greaterfool.ca/?p=20225

Such intense times. Markets roiling. The banking regulator wimping out on HELOC debt. A muddah of a rate hike ten business days out. Blood in Bunnypatch. And our post-Covid PM romping across the globe.

Yesterday Dorothy sent me for blueberries. (“Vitamin K,” she said.) As I was harvesting some little plastic boxes the elderly woman beside me looked dejected, and muttered, “I wish.” When I asked what she meant she said, “They’re five dollars each. I wish I could afford that. This is just so crazy.”

Of course I bought two boxes and gave them to her. That made her cry a little. And I felt terrible, privileged. Our income inequality is growing worse. This inflation of everyday prices and overhead is exacerbating a disparity that isn’t sustainable. No wonder so many people have descended into debt.

For my part, besides blueberries, I hand over 54% of my annual income to the government, and pray it’s spent responsibly. Plus, I write a pathetic blog. It’s like singing in the subway. You can listen. You can walk by. Your choice.

Well, Irina has stopped and has a question.

“Reading your blog helped me build dividend income equivalent for now to future CPP, thank you,” she says. “I’m contemplating taking early CPP next year, at 60, while still working. Because of Post Retirement benefit, it seems like there are no penalties for early retirement. Only issue would be taxation, since CPP would be added to income.

“If I, however, put all that into RRSP while working from 60 to maybe 65, there are no tax implications. I am missing something or this would be wise to do?”

Yes. For the past decade or so people can collect CPP at 60, keep working, keep contributing (their employers, too) and thereby increase the amount received in retirement. Until 65, CPP contributions are mandatory (if working), then elective until 70 when they end for good. The post-retirement benefit is automatically tacked on to CPP payments and equals an earth-shattering max of about $350 – per year (or 70 berry boxes).

So the main question is CPP at 60, or wait? This blog has always argued for taking it early. Yes, it’s taxable and, yes, you can stick it in an RRSP while working to gain a credit. The key things to remember: (a) if the government gives you money, take it; (b) you have no idea how long you may live, so why wait; (c) it’s always better to have extra money when you’re young & healthy enough to spend it on a new skateboard; and (d) delaying CPP for five years could mean $50,000 or more that you forego. That money could be vibrating nicely inside a registered account, like a TFSA.

Now… here are a few folks who didn’t understand some of my recent comments.

Brent and Suzy sold their spread in the Okanagan, rent in Comox Valley and are waiting for prices to fade before buying again. “You heavily influence(d) our decisions as regards real estate,” they say, “and our B&D portfolio manager encourages us to read your analysis.”

But…

We (my spouse and I) don’t understand the following paragraph.  We know what rutting season is, but are unsure how to interpret “Govern yourself accordingly.” and not sure what you are suggesting for the 2023 Spring market [more inventory, lower prices, etc.?]  We can usually figure comments, such as these, out by discussing it ourselves, but we are a bit confused here; sorry, I know you must be constantly busy, and it’s the weekend.  If you get the time in the next while, we’d like to hear.

“In other words, rutting season 2023 will not look at all like this year, when the spring market went flaccid. Govern yourself accordingly.”

The real estate market is in semi-shock at the moment. This will deepen as the BoC turns up the heat on mortgage rates over the next few months. Showings have taken a dive along with sales. Listings are up hugely. Pre-approved mortgage buyers are becoming scarce. It’s not hard to see more decline ahead.

But this will not last. Like canines, humans are surprisingly adaptable to changed conditions. The innate desire a home will not abate despite 6% mortgages. Yes, prices will adjust to compensate for higher carrying costs but this environment today of increasing supply and decreasing competition will prove unique. The Spring, 2023 market will be more like the one you saw in 2021. But less froth.

Brian asked the same

“How do you predict these rate hikes will affect real estate over the 1-3 years? Price declines would be great, but I’m hoping for a return to normal where listings are priced correctly (not lowball), offer nights are a thing of the past, and you pay close to or maybe or even under asking. Like it used to be in Bunnypatch.

The reason I ask… If at all possible, our goal is to buy a small, reasonably-priced house in a small town. After 26 years of owning a house, we miss it. But we figure we have to (a) wait another year and (b) wait until the market gains back some lost ground.

See the comments above. Yes, a more normal world will be upon us a few seasons from now. And, yes, we’re expecting a robust year for financial markets in 2023. No, we’re not going into a dystopian mess, the economy’s not swirling the drain but, for sure, houses will cost less than they do today. Especially in Bunnypatch, where pandemic-era appreciation was emotional, not logical. The greatest greed will yield the largest risk for recent buyers there. Plus opportunity for people like you, with sharply reduced demand for properties in the far-flung burbs and hick cities.

As always, purchase when you need a place and can afford one. Or rent and buy all the berries you want.

About the picture: “I suggested to my neighbour Joan to get in touch with you for some advice a few weeks ago and she mentioned you were interested in seeing a photo of our dogs,” writes Joel. “Unfortunately our sweet boy Peanut (left) passed away recently. He was a boisterous and energetic beagle even at age 13. A lover of fine foods, and asparagus stems, he is greatly missed. He and Pistache were very close and loved to cuddle when it was cold. With Chantal and I working from home the dogs were always close by and it is going to take a lot of getting used to without Peanut around. He had a beautiful, deep howl that we will never forget. Pistache gets twice as much attention now and thankfully he is coping well.” 

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No place to hide? https://www.greaterfool.ca/2022/06/28/no-place-to-hide/ https://www.greaterfool.ca/2022/06/28/no-place-to-hide/#comments Tue, 28 Jun 2022 18:10:15 +0000 https://www.greaterfool.ca/?p=20218

Since the biggest cohort in the population wasn’t alive (or barely so) the last time we had inflation like this, no wonder they don’t get it.

The Mills and Zs are also confused because life looked simple six months ago. Buy a house with huge debts. Make a brazillion in tax-free profit. Borrow against that to buy another house. Retire rich. At 35.

Then came inflation. It changed everything.

Rates went up, houses went down, borrowers were squished, the housing market froze. Meanwhile stocks looked iffy. Bonds fell. Crypto was crushed. The Bored Ape junk tanked. And the Boomer overlords started talking about having to go back to the workplace. The middle ages had returned.

So where is money safe now from the erosion of inflation?

Lately, as rates edge up, the GIC-lovers have appeared, all giddy and moonstruck they can make up to 4% on a one-year term and 5% over five years. Yes, better than 1% a year ago, but in order to get this fortune a soul has to lock up the funds, receive no income and (in the case of a multi-year asset) pay tax annually on money not received in a non-registered account.

But the real issue is a 5% return when inflation is 7%, on its way to 8% for a while. Does this make any sense over the course of the next half-decade? If you fear the future, or have millions already, then maybe. But for people trying to grow wealth, it’s a dubious move.

Gold?

Lots of bullion-lickers come to this site for reasons that escape me. The myth is that the yellow rocks are an excellent inflation hedge when fiat money is being burned at the stake by dingbat politicians and profligate bankers. Of course, bullion pays no interest. No dividends. It costs money to store. Any gains are fully taxable.

And what of its powers to defy rising prices?

Meh. No evidence to support that lately. The metal has a desperately low correlation to inflation and rises (or falls) more on sentiment than anything else. Over the last 50 years the gold/inflation correlation is a puny 0.16. In other words, none.

Yes, bullion gained ground during Covid, largely on announcements of outsized government spending and the belief that would tank the US$. But it didn’t happen, and a $2,000 price soon deflated by a couple of hundred bucks. Now as inflation tops the charts, the metal has gone to sleep. Once again, no correlation.

While inflation soars, gold has fiddled

Source: Seeking Alpha

How about Bitcoin, Dogecoin, Luna, Ethereum and all the crypto assets that have seized the fancy of a new gen of ‘investors’ (who are actually gamblers)?

Disaster. Losses are 50% to 70% or, in some cases, 100% over the course of a year. Seems the kids got it wrong, and crypto is closely correlated with monetary policy flowing from the CBs that they seem to hate. As that policy tightened, as interest rates jumped, as bond yields advanced, as the American currency strengthened, this stuff collapsed. Like gold, crypto moves on sentiment, not macroeconomics or the money supply. In fact, the correlation to inflation looks negative.

What about equities?

The S&P 500 (the one to watch) has delivered a long, long, long-term average of just over 10.6%. Adjusted for inflation along the way, the real return is 7%. Turns out that when inflation is high, corps tend to pass those added costs along to consumers in the form of greater prices. So profitability is not as crunched as much as family cash flow.

But as for correlation, another pass. Stocks have done very well historically, but as you can see below, no defined pattern. However, in our modern world the economy grows 80% of the time and markets feed off that.

Conclusion: stay invested in stuff with the best track record over time. We all need equity exposure, unless you plan on dying in the next year or two (then you should spend everything quickly. Maybe a Porsche.) The best way to get that exposure is not by picking a few stocks (look at Shopify or Peloton), but by buying a quality ETF holding an entire index. Combine that with diversification – some fixed-income assets (insurance) plus geographic and sector diversity – and stick with the plan.

Rebalance every year or so (soon we will review portfolio weightings), and remember why you invested. It probably wasn’t with the prospect of having more money next month, but financing a longer-term goal. Buying a house. Retiring. Sending the kids to uni. Your estate.

The more you divert from that plan, try to time things, let emotions run rampant or run and hide in some asset a grifter on FB promoted, the further behind you will fall.

Remember the new motto here. Be brave. Be boring.

About the picture: “I’ve been reading your blog for years now,” writes Brandon. “Your advice got me out of cowboy thinking in cannabis stocks into a B&D portfolio. I’ve changed careers a few times over the past several years from farming to now working as a mortgage agent. Using the blog as a tool didn’t make some of what I told clients happy at first, but they are now thanking me. I’ve included a picture of Kelso. She’s a GSP that we got at non-covid puppy prices because she didn’t have spots.”

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