Author: garth turner

Abdullah (“call me Ab, please”) has a problem. His folks. Like a lot of GenXers these days.

It’s complex dealing with wrinklies, especially in a world where up is down, safe is risk and the virus is neverendum. The cost of living is galloping higher. Incomes are not. Health care is under siege. Getting old sucks in the best of times. And these are not those.

This is Ab’s story, and his question for us:

New-ish reader (a year now) with a question on how to advise my parents (aged ~75). In terms of income/assets – as a couple, they have one federal government pension (50k year) as well as the CPP/OAS. About $300k in savings, own their current townhouse valued at $650k and a vacation property overseas where they will spend 4 months per year.

They would like to move to a bungalow, but given that house prices are inflated, I think it may be a better play to sell their townhouse and rent at least for the short-term if not long-term. Please tell me I have learned something from this pathetic blog and am steering them in the right direction?? – The Prodigal Son

Yes, you have learned well. There are powerful reasons why Mom & Dad should punt the townhouse, eschew real estate and rent new digs. But, you may ask, what about our galloping housing market – does it not make sense to hang on to any property for future gains which look assured because buyers are crazed?

Answer: not if you’re 75 years old, have limited assets, an inadequate income and don’t feel like trotting up and down all those stairs in a townhouse. The benefit of a good property market comes when you sell into it, not buy. These oldies are blessed that in 2021 they can put their place up for sale and likely get a dozen desperate Millennial, FOMO-infested couples to make absurd bids on it and mortgage their butts into the decades to come in order to hand over bags of money. A time to sow. A time to reap. So, reap.

Now, the math.

Selling for $650,000 and adding in existing assets will give this couple close to a million to invest. A nice, not-too-scary, middle-of-the-road, well-run portfolio that should kick out about $57,000 a year, or $4,750 a month. They can rent a very nice new place (small house, maybe, or two-bedroom upscale condo for sure) for three grand a month – and no property tax, hefty insurance, maintenance or condo fees. That would leave $21,000 a year ($1,750) to add to income. Still not enough to gouge into OAS payments, if split between them.

Now, the hard part. How do you talk a couple of paleo people (as we affectionately refer to Boomers) who have always owned real estate and never invested in financial assets to become renters and the owners of a significant investment portfolio?

Try this, Ab.

First, explain that by selling high and renting new they’ll likely end up living in a way nicer place. A spacious condo in a suburban setting, for example, would ditch the stairs, eliminate yard work, snow removal and other chores, offer heated indoor parking and maybe amenities like a pool. All good stuff as time takes its toll.

Second, buying a bung in this market is nuts. They’ll end up in a stressful bidding war, likely paying too much, fighting with vicious moisters in bike helmets, draining off their precious liquid assets and facing big closing costs (especially in a place like Toronto). A really, really, really bad idea.

Third, selling, renting and investing will hike their annual income by about 40%. That’s a lifestyle game-changer. Instead of fretting over the cost of veggies in the grocery store, or doing without essential items, like lots of nice booze or a pooch, they can enjoy every day more fully.

Fourth, financial security. It’s vastly more important than housing security. You can always find a roof. You cannot rent income. If you convince them to go this route, Ab, your folks will have almost a million in liquid accounts sitting there to support them in the future if assisted living is required (highly likely), to throw off a life-long and tax-efficient stream of income, and to fund an estate for the family, if that’s a priority. A bungalow cannot do all those things.

Finally, they need to dump the offshore place. If they want to travel back to the old country for a month or two, fine. Stay in an inn, a hotel, with family, or Airbnb. Don’t finance a property for 12 months which you stay in for just a hundred days. And don’t assume at age 75 you’ll be trekking across the ocean much longer. Especially in the endless Days of Covid.

Remember this too, Ab. Your parents once made wise and protective decisions, despite what you may have wanted. Now it’s your turn.

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It doesn’t stop.

One lonely 2×4 at Home Depot this week costs fourteen bucks, with HST. A sheet of plywood, three-quarter inch pine is (gulp) $77. Even lowly spruce is close to sixty bucks. My suspender-snapping fancy portfolio manager buddy Ryan says his basement reno bill went up a little because of material inflation – 53% more.

Today we got new house price stats. Up 2% in February, month/month. That’s 24% annually. It was double that in Vancouver. In 27 markets, prices roared ahead in 22 of them. As we showed here yesterday, resale house prices are now (says a big bank) ‘parabolic’ with prices moving as much every four weeks as we used to average each year.

Now, factor in the GreaterFool Puppy Index (goldens four grand, chows five, frenchies six), plus the sold-out nature of boats, RVs, Pelotons, quads and cottages, and you know Stats Canada’s latest tally of inflation – 1.1% – is, well, psycho. Let’s just hope the feds are incompetent instead of evil. Here in the real world the cost of living is out of control.

The bond market’s been smelling this for some time. So while central banks say everything’s under control, the recovery is unfolding, inflation expectations are reasonable and benchmark rates will stay on hold for a couple of years, look what bond yields have been doing…

In response bond prices fell further and tech stocks took a hit (those companies thrive on cheap debt). In the States, 10-year Treasuries went through 1.75% for the first time in a year after the Fed indicated there’s not enough inflation yet for its liking and the economy will be allowed to run hot, with lending rates staying suppressed.

Sane folks can see what’s exploding around us. The real estate/building materials/reno explosion is but one aspect of this phenom. Look at Ottawa, where our enlightened leaders just spent $400 billion we don’t have fighting the virus. In fact more than half that money was sent directly to people, who then plunked at least $100 billion into their bank accounts. The historic jump in personal savings is proof extreme stimulus was probably unneeded. But it was spent anyway. It added to the debt. It was newly-created cash. It devalues the money already existing. And that’s why my colleague’s basement is now sheathed in priceless drywall.

CBs and governments have clearly made the decision to risk steadily-rising prices rather than let the economy take a further Covid hit. They’ll keep benchmark rates low so cheap loans continue to flow. They will not stop buying bonds in an effort to suppress yields. Meanwhile politicians in Canada keep huge cities (like Toronto) locked down, allow the hardening of provincial borders, seriously hobble the entire retail sector and eviscerate the tourism and travel businesses.

As a result, we have stimulus billions and no place to spend it all, other than on booze and dogs (not so bad). There are also five million Canadians still doing the WFH thing, cutting daily overhead and adding to savings. The result is a big and growing pile of cash to be unleashed as the economy reopens. When all the stores, gyms, hair salons, arenas, clubs, bars and stadia get back on line, with the planes flying, the borders porous and workplaces repopulated, you can imagine the result.

Some worry central bankers could lose control. If the crazy costs of everything – especially accommodation – surge more it could lead to sizeable compensation demands and a wage-price spiral that would have CBs jumping on the brakes. Then rates would rise fast.

But for now, this is the reality:

• Bond yields are driving mortgages up. Five-year terms that were 1.5% are now over 2%, and climbing. That 2.5% 10-year mortgage has jumped a full 1%. More to come.
• Variable rates have been dropped by major lenders to keep loans volumes flowing. VRMs that were on par with five-year rates are now about 70 points less.
• The March and April housing markets will be obscene. Rising rates guarantee that as the fence-sitters dive in.
• Bonds and ETFs based on them will continue to lose capital value, which is why half the fixed-income in your portfolio should be in preferreds (they gain as rates increase and pay a dividend as well).
• Stocks do okay in inflationary times since, in general, higher rates signal more economic growth and enhanced profits. As the vaccines defeat the virus, that’s exactly what you should expect. But be wary of the tech guys, or other leverage-sucking outfits. The more inflation there is in the world, the more you need growth.
• GIC returns may eventually increase, but these are still brain-dead assets. You are better to buy a van full of OSB and sell it to guys like Ryan.
• And remember that if inflation stays with us for a long time (it will) hat non-taxed, registered accounts become even more crucial to your financial future. Stuff that TFSA. Make max RRSP contribution. Get free money with your kids’ RESPs.
• Buy a house? Sure. If you need one and can afford it without gutting your family’s finances. Just do it in a reasonable market. Like Wabush.

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Source: Warren Photography

It’s end-of-winter update time. Pay attention.

First, whither your portfolio? Were those who said stocks sat at dangerous levels last year, as stimulus billions washed over society, right? How about people who warned that if bond yields/interest rates rose  financials would crack?

Here are the one-year gains for markets – suggesting if you bought in or hung tight during the Covid crash you were a genius (or read this blog). The Dow is ahead 55%, the S&P 56%, the tech-heavy Nasdaq (despite recent declines) up 81%, and even poor Bay Street has added 49%.

Is this just the start as vaccines inevitably defeat the virus, the planes fly, the global economy reopens and corps start making serious money again? Likely, since the US GDP is forecast to surge 8% in the next few quarters (incredible) and average 6% for 2021. Earnings for publicly-traded US companies are expected to grow 16% for the first quarter of this year, then 25% year/year over the following three months. And you know what higher profits do, right?

Right. If you held an ETF tracing the S&P 500, like SPY, you’ve reaped a 56% annual return. Ditto for Bay Street, where an exchange-traded fund like ZCN has jumped 48% in the past twelve months as the TSX advanced. And the benefit of an ETF over individual stocks is evident – diversification. No need to guess at picking six or ten individual companies and hoping one doesn’t blow up. Plus there’s still a yield which beats the trousers off a GIC.

Meanwhile, what of preferreds?

This blog was slagged mightily a year ago for telling you to buy and hold prefs since interest rates wouldn’t stay depressed forever. Rate-reset preferreds not only cough up a nice income stream, they also get more valuable as the cost of money rises. Like now. It was inevitable. So in the fixed-income portion of a 60/40 portfolio, having a fat slice devoted to preferreds gives a big offset to bonds, which fall in value as rates swell.

Thus ETFs holding these preferreds, like CPD or ZPR, are ahead more than 50% in a year. Actively-managed DXP has gained 60%. They also pay you to own them – a dividend in the 5% range, plus the dividend tax credit. They do everything but walk your dog.

Okay, but can this last? Haven’t financial assets been puffed by stimulus trillions, desperate central banks and spend-happy politicians?

Of course. This is the everything bubble we’ve been talking about. And while financial securities have reflected that, the truest representation of a world that cannot last is this…

BMO economist Rob Kavcic is at it again, charting a real estate market in Canada he now calls a ‘melt-up’ and ‘The Wild North’. That chart shows annual housing price gains of 17%, but over six months the annualized jump is 20%. Over the last 90 days it bloats to 40%. In short, says the expert, this is ‘parabolic.’ The bubble is now greater than in 2017, when governments moved hard to deflate things, and we’ve only started into the nutso spring rutting season.

Months of supply have crashed into the 45-day range, and Kavcic calls this an ‘extreme condition’:

Twenty-two of 26 major markets have seen the average transactions price rise by double-digits, with 20%-to-40% gains common. Markets that entered the pandemic in a position of strength (e.g., Toronto, Ottawa and Montreal) have strengthened further, while markets that were in the doldrums (e.g., Calgary, Edmonton, to a lesser extent Vancouver) have re-emerged. And, the strongest momentum is in what we can loosely call “cottage country”, with average price gains in some locations running around 50% y/y.

It’s a melt-up. That usually signals the final stage in a bubble market. Routine home-buyers become crazed purchasers as competition for scant inventory increases. Then the speckers and the flippers move in, aggressively shoving values higher. Finally, increasing interest rates cause a panic among those sitting on the fence, who plunge in months or years earlier than planned in order the get a cheap loan. Future demand is wrenched forward.

So what’s the difference between romping financial assets and galloping house prices?

Lots. Corporations make money, pay dividends, increase in intrinsic value as they expand and have shares convertible into cash in two seconds. Houses cost money to own, require big fees to buy or sell, pay no dividend (but you can live there) and can turn illiquid fast when markets cool.

However the biggest difference may be how value is established. Most stock valuations are related to P/E ratios (p=price, e=earnings). But most houses are selling based on FOMO – the fear people have that they’ll cost more later. Logic on one side (equities). Emotion on the other (real estate). Oh yeah, and investors usually buy financial assets with cash. House buyers normally use leverage – and often 20x.

Will governments bring in new regs to cool off the stock market, reducing investment in corporations that provide jobs? Not a chance. Is intervention possible to tame a melting-up property market which threatens to shut the middle class out of home ownership? You bet.

Invest accordingly.

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The vax news is getting more infectious. The AZ brew’s been okayed for all us wrinklies, increasing supply. That floof about it causing blood clots has been discredited. Booster shots for the two-dose vaccines can now be months (not weeks) apart – more supply. And as of next week, boodles of bottles will be arriving in Canada.

All we beavs are finally getting closer to a jab, and meanwhile Biden’s big promise of 100 million inoculations in his first hundred days is coming to pass. Two million Yanks are being stuck daily now. By June, we’re told, there’ll be herd immunity in America. Hopefully we will follow in short order. There may be another wave of this damn virus before that occurs but this much is certain – we’re winning. Peoplekind, 1. Pathogen, 0.

So combine vaccine lift with the boffo jobs numbers last Friday, record household savings, Rogers spending $26 billion to swallow Shaw and stock markets 60% higher than a year ago – not to mention GameStop, Bitcoin, NFTs, baseball cards and bungalows in Tillsonburg – and we’ve got the Everything Bubble.

Sheesh. Look at the equity markets. Fresh highs everywhere. The S&P at 4,000 for the first time. Nasdaq up over 90% in a year.

Say, do you recall this day (March 16) a year ago?

Sure ya do. It was scary. It sucked. The Dow lost almost 13% – the biggest plop since 1987. The S&P shed 12% in one session. The Nasdaq crashed the most ever. Tesla croaked. The virus was ripping through society, and our minds. Nobody wore a mask but everyone was hoarding bumwad (for some reason). The real estate market froze. The lockdowns started. The border shut.

The Vix looked like this. Yikes.

On that day this pathetic blog dismounted, swaggered to the edge of the abyss, spat a cigar stump into the void, adjusted its gun belt and told you what to expect…

The short – the next 120 days
Canada goes into recession, which means a period of negative growth. Contraction. A bunch of people lose their jobs (already happening with Westjet, the oil patch, tourism, lobster guys). A global recession is also possible, which means less demand and lower prices for crude. Alberta is kinda pooched. Financial markets roil and volatility stays extreme.

Where’s the bottom? Dunno yet, but it’s coming. Markets are pricing in not only economic torpor but a 30-40% drop in corporate earnings. That would be historic. And while it’s also temporary, traders are so intensely risk-off that common sense is as unwanted as a share in Suncor or Tesla….

The long – come autumn
First, does anyone really, seriously, truly believe that in a global effort modern science will fail to produce a vaccine? Not me. It’s a done deal. Just need time. As for the economy, consider that US unemployment is the lowest in a half-century with steady income gains over the last few years. Store shelves are empty right now because people have spent a storm. Look at the vids online of hours-long lineups to get into a Calgary Costco, for example. Parts of the economy may be shuttering. Others are red hot.

Once public panic recedes pent-up demand for clothes, cars, iPhones and houses will be intense. It will happen in an environment in which central banks have injected enough stimulus to make Kevin O’Leary grow hair again. Cheapo loans. Oceans of available credit. Direct money transfers to families and businesses. All fuel for the fire.

Needless to say, financial assets will also ignite. Come the autumn the world will look like a different place. Airplanes will be flying. Stores will be open. The amount of surplus toilet paper will be epic. You will be happy you didn’t bail out of perfectly good assets when they’d lost a third or more of their value, and that you were fully invested when values restored.

Darkness. Dawn. You know the drill.

What we didn’t know then: that this would last more than a year. That WFH would embrace five million Canadians. That Trump would allow Covid to decimate America, kill 500,000 citizens, then help defeat him. That nesting, FOMO and cheap money would ignite housing, everywhere. That governments would spend $20 trillion globally to combat a bug – almost all of it freshly-printed funds.

So here we are. The goal line is in sight. But just as the advent of this pandemic brought profound change, so will its exit.

In the short term, the melt-up in housing and financial assets is likely to continue. As mortgage rates increase, so will real estate activity as buyers rush in to lock up rates and secure deals. The average house in Toronto or Vancouver increased by about $140,000 in the last six months, says RBC. Could that repeat? As for stocks, new stimulus money, global economic reopening and a surge in corporate profits have traders looking at a string of new highs right into 2022.

Meanwhile interest rates and mortgage costs will jump. Home loans that were 1.5% a few months ago will be 3% next year. Inflation will bubble up, leading to wage demands as workplaces open again. Central banks will taper back on their stimulus programs  – and how can governments not increase taxes in their budgets next year? Global growth will hike demand for commodities, with Canada benefitting from a price boost. Trudeau will call an election in the next few months. Soon you won’t remember that Erin guy’s name. Or the Green lady. Downtown condos will be gold again. Kamala will be the next president.

Oh, and Covid won’t be quite gone. We just won’t care anymore. Enough drama.

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Sometimes it makes sense to step away. Would that be now?

In the last two weeks this blog has detailed some of the excesses of our pandemic world. In fact, most of the irrational behaviour flows directly from the virus. Governments and politicians have gone extreme. Shut-in, restricted, locked-down and quarantined citizens have made wild choices. Fear of sickness, isolation from work colleagues, job loss, media hysteria and a sense the world has changed irrevocably in 12 months are having an impact on everyone.

The results? They’re everywhere.

Pandemic loneliness created a puppy boom. Lockdown boredom helped fuel Reddit stock boards, Hoodies, GameStop, covered calls and rank speculation. Tesla shares are at 900 times earnings. Bitcoin exploded, even when it’s backed by nothing and will inevitably blow up. A Beeple digital artwork just sold for $70 million. NFTs and sports cards are soaring in value. Building materials and lumber are up incomprehensively. And recently almost every house that sold in mid-town Toronto went for $2 million or more.

None of this is normal. It all traces back to the pandemic.

We’ve focused a lot recently on real estate. No wonder. It’s the aphrodisiac of the masses. The most popular Canadian asset. Life’s very raison d’être for the entire moister generation. And lately it’s been gamified just like stocks. What started a few months ago as a shelter from the viral storm has turned into a financial play. Using big leverage and shouldering large risk, buyers tell each other prices will never fall and rates never rise.

The results are terrifying, in these two ways.

First, of all the properties sold in the GTA (the nation’s largest market) last month, almost 80% changed hands above asking – for more money than the sellers had demanded. This is historic. An unprecedented jump from the 25%-over-ask level of a few months ago. It drove the average price for all properties over $1 million in the last few weeks, and fueled a 46% sales jump. Condo deals, by the way, erupted 52%.

Here’s what the surge looked like, thanks to realtor John Pasalis (who hates me):

And what happens when eight in ten houses sell for more than vendors requested? Usually with multiple bids in blind auctions? Yup – asking prices rise. The odds are that March, and then April, will see the largest ever year/year inflation with household debt levels increasing apace.

But – terrifying fact # 2 – this is not contained to the idiots who live in the metropolis. It’s everywhere.

Rising prices, accumulating debt and crashing affordability are the daily realities in London, Kamloops, Halifax, Kingston, Victoria and all of the little Hopes, Owen Sounds, Guelphs and Airdries in between. Convinced WFH will last forever, that ‘the government’ will not allow mortgage rates to rise and it’s a smart thing to chunk all of your net worth into a single asset on one street in one town, legions of Canadians are stocking this bonfire of the viral vanities.

As behaviour finance teaches us, the more that abnormal things look normal, the more everyone believes they’ll stay so. And they pile on. New mortgage debt is running at $10 billion. A month.

As it is with houses, so with tech stocks, baseball cards, crypto or some dude’s blockchain JPEG file.

What next?

More of the same. It’s not over. It won’t be until herd immunity is achieved this autumn and the economy achieves near-normality. Then a lot will change.

Growth, inflation, wages and interest rates will all increase. Government and CB stimulus programs will be scaled back. In fact the Bank of Canada is likely to start next month. Mortgages won’t be 1.5%. Or even two per cent. Large numbers of people who thought they’d never return to the workplace will be called back. Cautiously and sporadically at first. Then largely as before. This experiment is over. For many companies, it failed.

The virus caused our current delusion. When it goes, expect revolution.

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   By Guest Blogger Ryan Lewenza

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One of my favourite TV shows in recent years has been Arrested Development. This hilarious program centered on an odd and dysfunctional family, the Bluths. From this motley crew, Gob Bluth, the eldest son and magician of the family, is my favourite character in part due to his signature line, “I’ve made a huge mistake”. He would say this line repeatedly as he made a lot of mistakes and I feel it’s very appropriate right now for some home buyers.

  I believe many of the people moving out of the city core and into the suburbs in search of a bigger home, a backyard for the new dog and a room for the Peloton bike are going to be repeating this line (‘I’ve made a huge mistake’) in the coming months and years as we get vaccinated and reach herd immunity.

Many people are making these life-changing decisions based on a pandemic that is temporary in nature. I believe six months after we reach herd immunity, employers will be asking their employees to come back into the office. Many fleeing out to the suburbs are under the impression they will be working from home for years to come but may be pretty bummed out when they have to return to the office and their commute goes from the bathroom to their spare bedroom/office to an hour ride on the train or in the car.

I believe these Covid-induced moves are definitely contributing to the recent insanity in the markets.

Both prices and sales activity nationally have been off the charts in recent months. According to the January market update from the CREA, sales were up 35% Y/Y in January and the average national sale price of homes in Canada is up 23% Y/Y. That’s crazy given the cloud of the global pandemic and all the economic carnage that it has brought.

Home Sales Have Surged in Recent Months

Source: CREA

It’s clearly not fundamentals that are driving this housing market surge as: 1) the job market blows with the unemployment rate still at a high 9.4%; 2) immigration slowed to a crawl last year (184k new immigrants in 2020 down from 341k in 2019); and 3) home prices are up over 20% Y/Y so clearly there’s no bargains right now.

Well, what is driving this insane housing market?

Easy, record low interest rates!

My father would often say, “Son, when I bought my first home my mortgage rate was 18%!” Well dad you were born in the wrong decade as today you can get mortgage rates for 1.8% and lower. It’s not much more complicated than that.

Below I chart the MLS Composite Home Price Index for the Canadian housing market with the Government of Canada (GoC) 5-year bond yield. This is always the most important interest rate to follow as 5-year fixed mortgage rates are based off this level.

Notice two important trends. First, the long-term trendline of interest rates (dotted green line) and the long-term rise in the Home Price Index (blue line). People always ask me why home prices keep going up and I just continue to point to the trend of declining interest rates. Second, on a shorter term basis, note the big drop in the GoC 5-year yield since early 2020 when the pandemic hit. It dropped like a stone from 1.5% to a low of 0.3%. Not surprisingly, this has completely corresponded with this swift and strong increase in home sales and prices.

Declining Interest Rates Has Helped Drive the Canadian Housing Market Higher

Source: MLS, Bloomberg, Turner Investments

With home prices up over 20% Y/Y and prices hitting new all-time highs, the obvious question is, can this continue or will prices deflate faster than Piers Morgan’s career?

I’m in the latter camp and here’s why:

• First, interest rates have bottomed and will slowly move higher as the economy and inflation pick up. We’ve already seen the GoC 5-year yield nearly double in recent weeks and this is just the start. I could see the GoC 5-year yield easily hit 1.5-2.5% over the next few years. If declining interest rates have been the main driver of our housing bubble, then rising rates should take some of the bloom off this rose.
• Second, with the big move up in home prices, affordability has deteriorated and is now back at early 1990 levels, when the last major housing downturn occurred.
• Third, the Canadian home ownership rate sits near a multi-decade high of 67%. Meaning, most people who can afford or want a home are already in the housing market.
• Lastly, rent prices have dropped the most in decades, making the rent/own debate a tougher call. According to the rental property website, Rentals.ca, the average rental price nationally is down 8.7% Y/Y and here in Toronto is down a staggering 22% Y/Y. Our head trader just rented a 1 bedroom plus den in a hip downtown condo for $2,150 including parking and storage, which would have gone for $2,700 pre-Covid. Renting is looking a lot more attractive these days.

Now to conclude, I’m not calling for some massive crash in the Canadian housing market as that would require significantly higher interest rates, which I don’ t believe is in the cards, in the medium term at least. But I do see interest rates moving higher as the economy and inflation pick up, which should help to take some froth out this unprecedented bull market in Canadian home prices.

RBC Housing Affordability for Canada

Source: RBC Economics

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

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Here we go, kids. Hang on

The beaver economy churned out an incredible 259,200 jobs last month, about three times what the experts had predicted. Unemployment tumbled from 9.2% down into the 8% range – and all this reflected (a) the end of 100 days of lockdowns, vax and the reopening of the economy plus (b) a tidal wave of hoary house lust. In the US, also gains – 379,000 more. But we aced that.

And, whoa, look at how Mr. Debt Market reacted, pushing the yield on Canada fives back up to the 1% mark. Yup, more mortgage bloat coming.

What do the vaccines, business reopenings, tons more jobs, mass inoculations and swelling bond yields tell us? Well, the same as $1 million average ticky-tacky suburban houses, G1S plywood sheets nobody can afford and outrageous puppy price tags. Yup. Inflation. Evidence is mounting this is turning into a big deal.

At the pointy end of the problem is real estate, as you know. BMO economist Robert Kavcic now says we are “playing with fire.” He points out the last house crisis in 2017 was not nearly as evil as this one, since it was contained to a few major markets. This sucker’s everywhere. Low mortgage rates have exacerbated the threat, becoming a bottomless debt trap. Cheap money means people borrow more, spend more, push up prices further and crush affordability. But if rates rise, indebted household finances wobble under the load.

Kavcic likens this to thirty years ago. Yikes. “If mortgage rates stay where they are, but prices keep doing what they’re doing, we’re back into the late-1980s territory by this time next year.”

And what happened then? I was there. In the thick of it. Real estate hit a wall. The market corrected brutally – falling just over 30%, and taking 17 years to recover. So if rates stay the same, pooched. If they follow inflation and bonds, more pooched.

By the way, real estate – thanks to our unsated residential desires – comprises more of the economy than at any time in history. It is double the share of housing in the US economy, and about 50% higher than when the American property market blew up in 2005/6 – dropping prices nationally by 32%. It took ten years to get over that.

So, is this what we’re doing to our nation?

Monthly GTA sales – this is not normal…

Click to enlarge. Source: Stephen Glaysher, MLS Sold Data

You might find insightful this note I received from a veteran Toronto realtor yesterday:

As of this morning there were 59,700 agents (Brokers & Salespeople) in Toornto. This represents 42% of the Realtors in Canada. (There are 142,160 according to CREA).  In a market that is best described as robust, the local industry has seldom been sicker. In the GTA more than 20,000 agents do not record a single sale in a given year, and another 20,000 only record one or two sales. Imagine going for heart bypass surgery with a surgeon who has done one procedure in the last few years, Gulp.

On the surface, it would appear that all of this competition would drive down commission rates, but because most agents are going for that single home-run a year, there is no incentive to lower fees. At 5%+ HST the owner of the average $1 million dollar Toronto home will pay $56,500 to have the SOLD sign erected on the lawn. To put that in perspective the owner could get ALL of the following non-insured medical procedures for the same cost:

1) Face Lift
2) Neck Lift
3) Eye tuck
4) Nose Job
5) And a Brazillian Butt Lift, (whatever that is)

All procedures performed by highly skilled and extensively trained Medical Doctors.  Garth if you choose to use any of this, best let me remain anonymous, don’t want my car “keyed” in the parking lot.

Meanwhile, all governments have been silent on this matter, preoccupied as they are with the virus. A couple of brave bank CEOs and fund managers have worried aloud. Now a growing number of economists are hoisting red and yellow flags – like my long-time doomer buddy David Rosenberg. Normally I feel Rosie enjoys eating broken glass and shooting himself with a nail gun, but this time he’s stating the obvious: “This might be one of the biggest bubbles of all time.”

It is. And since Canadians keep the bulk of their net worth in one asset class, have borrowed $1.6 trillion in order to afford it and live in an economy dependent on it, real estate has the potential to kick ass. All that behavioural finance stuff we talked about yesterday – recency bias and confirmation bias especially – ensure most are blissfully unaware of the potential for reversal. Many weren’t yet out of Huggies in 1989.

However, Friday’s data speaks for itself. Be careful what you buy. Be unafraid to take gains. Be balanced. And good luck with the butt lift.

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“Love your blog,” says Phil from Hamilton, worming his way into my graces with a slurpy MSU. “My life has changed dramatically since the day a good friend pointed me towards it.  I am a devout follower and I thank you.”

Okay, but Phil’s Garthonian devotion is being shaken by current events. The world, he notes, is nuts. Up is down. Risk is safe. Caution is loss.

In the recent & ongoing real estate climate, where despite EVERYTHING people still ignore any logic and dig themselves further into a debt-slathered grave, why should those that so devoutly follow your tidings not employ a “if you can’t beat them join them” mentality?

If human behaviour/idiocy (in this context “FOMO”) can apparently be so depended on, with a government that shows little inclination of stemming this behaviour, why should we responsible people not get in on the action?  Or is it already too late?

I read all your posts and agree with all of your points, but what if human behaviour/idiocy finds a way to surpass even all these?  Am I missing something that could actually curb the current house-buying craziness? I fully expect an eviscerating but would love to know what points and/or assumptions of mine are wrong.

Actually he’s not wrong. Logic is but another victim of the virus. All around us souls are making decisions based on emotion and groupthink. Reason would dictate that swallowing big debt when rates are low and destined to rise is a really bad idea. Rational people would not be competing for houses at any price when they’ve never cost as much before. After all, we don’t buy anything else that way. In the midst of a pandemic, a recession, economic crisis and job uncertainty putting all your money into one asset and hiking living costs seems rash. Believing an indebted nation won’t goose taxes, that your boss will never want you back at work or that rural properties, lacking stores, hospitals or transit, are suddenly mainstream seems rash. Emotional. Reactive.

And we haven’t even mentioned GameStop yet. Or Tesla. The kiddies on Reddit. Bitcoin, or the dog crypto. The Hoodies. Meme stocks. And the ludicrous NFTs. After an entire year of Covid (the sad anniversary is today) never have we seen such FOMO swelling assets or speculation making people crazy. Combine that with pandemic-induced YOLO, governments throwing money around irresponsibly and the viral destruction of our societal work ethic, and we’ve ended up here. The everything bubble.

Time, Phil, for a small refresher on the science of behavioural finance. The premise (and it’s true) is that people do things primarily for emotional reasons and are unable to overcome personal biases. That leads to herd investing. Asset inflation (or destruction). And distorted markets. Like now.

In the last few days, Oxford prof Greg Davis warned that Covid has really messed with our heads, so that emotional investing has hit a new peak with people piling into inflated assets – just because everyone else is.

 “We currently have the perfect ‘storm’ for emotional investing.  Following the Coronavirus crash in the first quarter of last year when stock markets saw big falls, we are now in a bull market, with markets around the world rising.  Optimism is higher because of hopes around the vaccine roll-out and stimulus programmes.  However, there are huge economic problems ahead around unemployment and huge public spending deficits for example, so we should expect the unexpected in the markets over the coming months.

“The rise in the value of Bitcoin has also led to a crypto-assets ‘gold rush’, with retail investors piling into an incredibly volatile asset class that most don’t understand. The pandemic means many investors are currently highly emotionally sensitive and have a shortened emotional time horizon which increases the appeal of get-rich-quick gambles.”

There are always reasons to invest your money, buy a house or take a calculated chance. Lately a lot of those gambles have paid off. But with each tick higher in price, risk augments. Phil (and everybody else) should be aware certain biases make us do weird things that in the absence of a crowd, we would never.

For example, ‘disposition bias’ compels people to hang on to losing investments until they (maybe) recover because they fear admitting to a mistake (GameStop). So they gamble that the pooch won’t go lower. Equally, ‘confirmation bias’ makes us put weight on information we agree with (‘interest rates will never rise’) and discount what this pathetic blog (and economics) says. ‘Recency bias’ leads us to believe what happened recently (like WFH or romping suburban house values) will last forever. And ‘familiarity bias’ seduces us into investing in stuff we know about (like houses) even realizing this may lead to dangerous debt and a seriously unbalanced life.

So, Phil, you can follow your brain. Or your pants. But never both. Amen.

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Tomorrow the Bank of Canada will do its thing. Expect no rate hike. Not yet. The economy’s still fragile. The vax is just starting to flow. There’ll be an election in a few months. So for a while yet banks will offer 2% fivers

But, says the boss of the nation’s biggest, the CB will inevitably raise its benchmark rate, up to a year or two sooner than expected. Meanwhile rising bond yields have already shoved home loan costs higher by about a fifth of a point and another 10 basis point jump is expected this week. That has CIBC economist Benny Tal warning a “spike” in rates could shock real estate and tip the country back into recession. The trip higher, he hopes, needs to be a smooth one so the housing market can chill in an orderly fashion.

So let’s discuss reality, not hopium.

The OECD says the world economy will charge ahead by about 5.5% starting in the second half of this year (like 90 days from now). The provinces are insisting herd immunity could be here by late summer. Biden promises all Americans who want a shot will have one by the end of May. The American economy is expected to swell by 6.5% in 2021. Bond yields in Canada have tripled since being squished by the bug, because investors know what’s coming. In fact it’s here – inflation. That comes on the heels of historic government spending. As the pandemic ends and people get back to work, a lot will change.

So here’s the dilemma.  The CB faces pressure to jump rates and halt its bond-buying binge, but can’t. Not yet. But if it delays a long time, allowing the economy to run hot for a year, the increases then will be substantial. Like Benny says, a shock.

However, we have a runaway housing market. This time (unlike in 2017) it’s everywhere. Small towns, rural municipalities, hick cities, cottage country, far-flung city-suburbs – prices have inflated because of WFH, aggressive nesting, urban flight and cheap money. The average property price in Mississauga is closing in on $1 million. All 32 major markets in the country are on fire. That makes it way more serious than the GTA-YVR bloat we went through four years ago, when governments reacted with alacrity and alarm.

Conclusion?

The pressure is growing for macroprudential solutions. In other words, government intervention. Like in New Zealand where investors have to put 40% down if they buy an investment property. Even the Re/Max talking-head guy, Chris Alexander, now calls the Toronto situation “an affordability crisis.” Realtors are starting to cringe at current events. “I had an agent with a multiple bid situation the other night who called me saying one was for $200,000 above the ask,” a broker told me. “That’s a real concern since it’s unlikely the appraisal will come in that high. The seller’s all excited, but this is nuts.”

And that was in Halifax, where $200,000 used to buy a nice little pad – not be just the extra sauce on an offer. Like I said, this is everywhere. It’s national. It’s bad social policy. It’s enriching flippers and crushing the newbies. Household debt is inflating right along with property valuations. The transfer of wealth from buyers (mostly young) to sellers (mostly old) is epic. The wealth divide grows daily.

Can it last?

Not a chance. Tal is worried. Scotiabank’s Derek Holt is lobbying for intervention. Re/Max is hitting the alarm. National Bank has evidence stupid house prices are pushing debt limits against the wall – a record number of riskier, high-ratio buyers now have loans equal to 450% or more of their incomes. Outgoing CMHC boss Evan Siddall has warned repeatedly that Canadians are borrowing their way into a crisis. Real estate has been allowed to swell to 17% of the entire economy, making it an engine of growth, but one that now threatens to fly off the tracks and wipe out an entire herd of indebted bovines. Guts everywhere.

Yesterday this blog was savaged for saying, historically, four-fifths of price inflation sticks when a bubble market fizzles. It’s true. Unless there’s intervention. If mortgage insurance rules change, down payments are increased, loan rates allowed to rise, debt ratios tightened, flippers targeted or speculators taxed then sentiment can change fast. So far, crickets.

Will the central bank boss send up a flare when he reports on Wednesday? Will our non-financial finance minister Chrystia address the affordability crisis and debt romp in her first budget (whenever that lands)? And what happened to politicians in Ontario or BC who rushed in to cool smouldering house lust the last time real estate went ape?

We’re witnessing the gamification of homes. Oh, and a void of leadership. At least one of those should be a surprise.

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For two decades Rob has lived in the small town in the hinterland and reported for the local paper, the Sun-Times. “We’re seeing weird things,” he told me on Monday. “We were a sleepy town of twenty thousand forever, and suddenly everyone wants to live here.”

Well, 223 more people actually. In February alone. Enough to set a new all-time sales record for houses in Owen Sound. But it’s not just all the moving vans having an impact on this place about 200 km north of the Big Smoke. It’s the pile of urban cash causing the weirdness. And not in a good way.

According to the Realtors Association of Grey Bruce Owen Sound the average home price last month was 54.3% higher than a year ago. For the first 60 days of 2021, the jump equaled 45.5%. It means a place that could have been yours for about $400,000 last winter now trades for $613,000. And things are getting worse. Active listings are down 55% from this time last year, pushing the months of inventory to 1.3 – compared with the historic average of 7.2.

“Any time we do a story on real estate or publish the monthly numbers,” says Rob, “it’s all anyone can talk about. How can a young family buy a house here anymore, or anybody who’s local?”

Indeed. CMHC reports the average income is just a tad under $75,000, which puts the average house – at 8 times earnings – out of reach. Down in Toronto – a 2.5 hour commute (with light traffic) the average income is $109,000 and the average property $1 million – so real estate misery now knows no boundary.

But here’s the key point: in Toronto there are vast numbers of rentals and not everybody expects to live in, and own, a detached place. In Owen Sound (like most small towns) being a tenant is, well, strange. And owned homes are the norm. Properties working people can afford. At least until now.

Rob wondered why I thought this had happened and what comes next.

No surprise, since this is a pandemic phemon that’s hit every market in Canada, and across the continent. Nesting. Urban flight. Cheap mortgages. WFH. And a misplaced human conclusion that what the last 12 months wrought will forge the future. But that won’t happen. In Owen Sound, as everywhere else, herd immunity this autumn will bring workplaces back to life. Then we’ll see cities rising, higher mortgage rates, resocialization, less FOMO and the patina of desire stripped from the hick life. Way fewer people will think about heading north, bringing less competition for real estate and an end to 50%-per-year price gains.

The last people to offload their couches into $600,000 houses that cost way less a few years back may wonder what the hell they just did. The locals who sold will have reaped an historic windfall. And, sadly, the housing market in another community will have been forever screwed.

It’s a story playing out from Squamish to Airdrie to Windsor to the South Shore of NS. Covid cash, pandemic restrictions, human nature, emergency central bank rates, voracious realtors and omnivorous lenders have conspired to put the cost of shelter beyond reach for many. And while we’ve come to expect that in the big cities, it’s a culture shock in the hills and fields beyond.

Will prices plunge as the pathogen fades?

Nope. Not without government intervention. There’ll be no retracing back to 2019 levels. History shows that after a bubble occurs prices can retreat 15% or so, but four-fifths of the inflation remains. Canadians just end up shoveling more of their net worth into a single asset, while taking on ever-larger dollops of debt. Pandemic newcomers who bought into a storm of interest may be completely shocked at how hard it is to get out again, or how quickly a market can grow cold and illiquid.

But it’s not all bad for the urban refugees. There’s always Wing Night at the Legion.

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On the weekend this pathetic and prescient blog predicted we’d know this week about the date of the next federal budget. And now we do. It won’t be in March. So that means late April, according to a Deep Throat media source.

As a result it’ll be more than two years since the last budget, making Canada unique. Not only has our government spent more than any other in the world during the pandemic, but we’re the only major industrialized nation not to be given an accounting of public finances during the crisis. We can now only guess at the deficit. $400 billion? More? How much more? Whassit mean? What new levies?

The last update (not a budget) came in November, as the second wave was hitting. Since then (100 days) Toronto has been in lockdown, schools largely closed, airlines have chopped domestic flights, small businesses failed and government spending has ratcheted higher as tax revenues fall, taking the pubic debt above a trillion. Back then the feds said they planned to shovel out another $100 billion in recovery money which would be detailed in the 2021 budget. So it’s March of 2021, and no budget yet.

By the way, your taxes are still expected by April 30th. Sheesh.

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