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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

September 27, 2015 | Go For It

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

The morning after the morning we know who the next prime minister will be, the Bank of Canada takes centre stage. On October 21st the bank will make its next rate announcement, accompanied by a full-blown press conference and release ot its latest ‘Monetary Report.’

So what?

So expect some great political theatre because, as much as I regret to say this, our big bank is leaning towards another cut its key interest rate – an unprecedented third decrease in the space of one calendar year. This would not happen if the economy was recovering, or even breathing on its own. There is but one reason why these guys would move in the opposite direction to the US – condemning our dollar, risking more household debt and underscoring political failure – and that is the malaise around us. The one most people don’t see. Our own little zombie apocalypse.

Makes you wonder what Canadians are thinking. Commodities prices have plunged to 1999 levels. Oil is $45 on a good day, with Canadian crude down around $30 and our producers losing money with every barrel. Now Hilary Clinton says there’ll never be a Keystone pipeline, and even the Chinese are jumping into the cap-and-trade business. The world has run out of places – storage farms, offshore tankers, underground salt caverns – to store the stuff. And ‘dirty’ Canadian oil is falling out of fashion faster than that Korean pony-dance guy.

Economic growth in Canada this year will be, maybe, 1%. That’s half what the federal budget just six months ago forecast. There is no way any government elected next month is going to balance the books. And as the commodity trade dips – putting oil patch workers, miners, shippers and service contractors out of work – a greater percentage of our economy ends up being based on residential real estate. If we could export condos and slanty bug-imbued semis, we’d be cool. But this is all going in the wrong direction.

For example, in Calgary the office vacancy rate has soared to 13% downtown (and 11.5% in Edmonton), and yet there’s more than five million square feet of new space under construction. Like oil, when supply overwhelms demand, prices tank.

Residentially, the pain has just started. House sales so far this month are running 32.7% behind this time last year (which wasn’t great), with listings rising and the average price down 5.2%. Former realtor and housing analyst Ross Kay argues that realtor stats are hiding what has been a far more precipitous drop in average prices, and even local permabull blogger/broker Mike Fotiou admits, “It’s shaping up to be a frosty September for Calgary real estate.”

But, you cry, I don’t live in Cowtown! I don’t care!

You should. This is a proxy for what happens when the locals start understanding the local economy’s on the down escalator. It’s a potential outcome for us all. The Bank of Canada can drop interest rates to zero, and the impact will be negligible if people grasp the reason for the cut, and what lies ahead. There’s no good news to be gleaned from such a policy decision, only an admission the guys in Ottawa are trying to staunch the flow of blood. And this will happen less than 48 hours after all the promises, rhetoric, assurances and political endorphins have turned into a post-electoral hangover.

Ponder that when you vote.

Also, if I were thinking about selling my house, I’d seriously consider the next 22 days. Just sayin’.

By the way, it’s too late for poor Brad. He just sent me this:

“I know it’s a mistake.  I knew it when I signed the contract a year ago to build it.  Bought it anyway.  Every single one of my beliefs has been confirmed, which leaves me to wonder – how are we so delusional as a society?  I’m not delusional – I know it was a mistake.  Which (sigh) makes me an idiot instead.

Every single thing I knew before about Buying vs. Renting still holds 100%:

— Lower cash flow (much lower) every single month.  True.

— More expenses each month.  True.  Unless I decided not to properly budget for annual taxes, insurance, and maintenance.

— “At least I’m Building equity!”  False.  The equity currently in my home would otherwise be equity in a diversified portfolio.  Either way, personal net worth can grow, so the “home equity argument” is completely without merit.  Not to mention that one of those paths isn’t relying on a single asset to build wealth.

— “At least I’m not paying somebody else’s mortgage now!”  False.  Rent and interest expense are both expenses – one is no worse than the other.  The interest on my mortgage is most certainly paying the mortgage off for “somebody.”  People relentlessly scoff at the idea of paying someone else’s mortgage and say nothing about the billions in profits made each quarter by our big banks.

— Less mobility, less flexibility, more stress.

So why buy?

Over 40 now.  Clock is ticking. Tired of not having my own place.  That. Is. It. So I ignored all of it.  Even ignored the current economic situation, and struggling oil prices on top of everything.

I get people falling into the house lust trap.  I really do.  I wasn’t lusty about it, just tired of the alternative.  If someone is 25 and buying a house in Calgary right now, they are making a (financial) mistake.  No doubt in my mind. People need to be honest about one thing… buying now is all about stroking the ego.  It’s all about pride… logic be damned. Trying to say otherwise, trying to make the financial argument, is just being delusional.  Or a liar.

Buying a home in Calgary is not a good investment.  Not today.”

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September 27th, 2015

Posted In: The Greater Fool

One Comment

  • Avatar SirtalksAlot says:

    Dear Garth,

    Define the elusive “diversified portfolio”, does this include your formerly touted “preferred shares” (index -23.6% YTD).

    Can you cite any other province where real estate is in a down trend besides AB or just cherry picking data to fit forcast?

    Is housing in White Rock is bounding upward something like 4% a month or no?

    When interest rates go down next week as you think will the lower interest rates slow the housing boom?

    Doubt it.

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