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September 28, 2015 | To The Limit

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.

Another day, another Brad. This one in Saskatoon where two years ago there were bidding wars, flippers and a meme that it’s different here, thanks to booming commodity prices. The oil biz was great and big ag land-owing guys drove their new Silverados to town and strutted like gods.

Brad sat in his rented condo. “Couldn’t bring myself to sign on the dotted line,” he says. “Been a tough go listening to my 8 year old wishing daily for a back yard to play in, but I think things are finally starting to happen. So much for bidding wars…. “

You bet.

Calgary – once the hottest real estate market in the land – is not alone in its residential misery. Sales in Saskabush have tumbled 15% this month from the same time a year ago. Listings are rising – up about 13%. In a city of 220,000 people there are almost 700 condos sitting for sale – a year/year increase of 50%. And as a local realtor points out, of the 96 houses that sold last week eighty – or about 85% – went for less than the list price.

This is what happens when commodity values tank, even when interest rates sit at record-low levels. As I’ve said before, mortgages can migrate to zero but as people start to understand what the real economy’s doing, real estate risk grows. Most won’t agree, but I think regional markets like this (and Calgary) are harbingers of what’s to come.

Too bad your brother-in-law pays no attention, and the debt snorfling continues, largely in southern Ontario and the Lower Mainland. The last report, published Monday, gives us this:

“…Residential mortgage debt jumped 7.5 per cent annualized in the month, raising the three-month pace to 7 per cent, its fastest since April, 2012. On a year-over-year basis, mortgage growth was 5.9 per cent, a 32-month high….”

Interesting juxtaposition, isn’t it? Oil collapses to $44 a barrel, our dollar tumbles below 75 cents US, financial markets shed blood over collapsing commodity values, our economy’s been in recession yet mortgage debt grows at three times the rate of inflation and five times the pace of income growth. Just. Wow.

If you think things are normal, contemplate Shell. The giant energy company has flushed $7 billion into a hole in the Arctic. Now it’s walking away. The announcement yesterday was a shocker, and helped to underscore what’s been happening on the markets, and here.

By abandoning this well – maybe the most expensive useless hole ever punched into the earth – Shell said simply that it probably can’t make any money pumping liquid crude out of this thing for the next 15 years, given where oil prices are headed. So just imagine the futility of producing oil by scooping tons of frozen dirt out of the tundra, cooking it in billion-dollar ovens then sending it thousands of miles to market, the way we do it.

This is why we’re a little screwed at the moment. I hope you heeded this pathetic blog’s advice to seriously lighten up on maple in your portfolio. This is the latest installment in a global commodity rout which has been gathering steam all years. Given what’s coming it makes you wonder why anybody would want to be prime minister next month, own a Canadian equity mutual fund with a nosebleed MER, or sign up for an $800,000 mortgage in Mississauga.

A smart guy I work with, Ross the trader, says markets will probably retest the lows they hit in August (we’re not far off), then rebound for the remainder of the year if corporate earnings come in strongly, or the US Fed pulls the trigger on rates. Makes sense, at least to Charles Goodhart, a top dude at the London School of Economics and former big whiz at the Bank of England. He says rates are going from zero to their historic norm around 3%, and that this will help change the world.

Goodhart sees inflation returning, cheap money ending (for at least a generation) and asset bubbles popping. After all, the price of things like houses is negatively correlated with the cost of funds. And one of the most significant bubbles in the world these days is Canadian residential real estate – at least in the two markets which are left in delusional territory.

How do the country’s political leaders help to prepare citizens for the inevitable? You bet. Harper increases the RRSP-for-downpayment plan and brings in a permanent hot tub tax credit. Mulcair backs CREA to eliminate capital gains taxes for guys buying rental suites. Trudeau will let people drain retirement savings, tax-free, to purchase a house every time you have a life event.

Such old thinking, pitted against such global change.

No wonder we’re not ready.

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September 28th, 2015

Posted In: The Greater Fool

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