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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

November 16, 2015 | Deal with 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.

 

Well, so much for the financial implications of scuzzball terrorism. As suggested here yesterday, financial markets shrugged off Paris, refused to tank as the doomers forecast, and roared off on a hot little Monday rally. Triple-digit gains in both Toronto and New York. Even in France a modest drop at the opening was reversed by the end of the day.

Why?

Oil rallied a bit, which helped Canadian assets. In New York a lot of stocks actually looked cheap after a sell-off last week. In Europe the sustained stimulus spending by the central bank has supported double-digit returns for months now. And overall, global growth continues despite the best efforts of the bad guys. America is still on track for the first rate hike in a decade and Hillary Clinton’s going to be the next president, so the world will get a different-hued Obama in heels.

Terrorism sucks, but it’s important to separate the psychological damage it does (like making people who comment here into Quran scholars and Islamophobes) from the financial fallout. With every one of these events, market reaction grows shorter and less intense. The impact becomes more localized. Life moves on more quickly.

What doesn’t end is the fear-mongering of those who actually want things to get worse. More and more, fear’s becoming a tool to sell you stuff, whether it’s gold and silver (‘the financial system will collapse’), investment newsletters (‘how to avoid the coming crash’), a 1% GIC at the bank or a rental condo (‘who can trust the markets these days?’).

It’s called the ‘fear appeal theory’, with tons of practitioners, from Brad Lamb to Marc Faber and the fine assortment of nutjobs who live under the porch on this site. Their call to action is always to avoid the massively negative consequences which are just around the corner, as they happily point to events like Paris as proof the end is near.

Before you fall for this, be aware fear is the one emotion you probably can’t control. It trumps greed by a long shot, edges out sex and is considered even more powerful than the pull between a house-horny GenXer and a six-burner Wolf stove sitting against a rock backsplash. The more the crap is scared out of people, the more they’re motivated to take extreme action. This is not lost on real estate marketers in 416 or YVR who spend their days telling people to “buy now or buy never.” The fear of getting “priced out” of the market is the single biggest driver of sales activity. That’s why they created Chinese buyers.

CREA knows this. The latest stats, released Monday, are designed to keep the flames of fear burning. Sales up month/month national by almost 2% and average house prices ahead more than 8% year/year. If you ask anybody under 40 who doesn’t own real estate what scares them the most, they’ll probably tell you it’s the fear of ending up homeless.

Lost in the noise are some key facts.  When Toronto and Vancouver are stripped out, for example, real estate has appreciated at about 2%, not 8%. Actual sales for October across the country were stagnant from levels the same month in 2014. More cities are showing sales and/or price declines than increases. The Toronto market has been cooling now for 20 consecutive months. Sales in the GTA, says housing analyst Ross Kay, are 6% slower than a year ago – despite mortgages being cheaper. And when it comes to the fear that guys from China are buying all the houses, Kay pegs the number of total foreign purchases at 2.8% in Vancouver and just 0.2% in Toronto.

Moreover, bond yields (and some mortgage rates) are already on the rise as the world gets ready for a relentless normalization in the cost of money. In other words, while fear pushes our buttons, logic should be screaming that this is probably the worst time to be acquiring an asset which has never cost more –  in the midst of an economy going nowhere.

So keep the following in mind. First, just because something scary happened is no guarantee it will continue. Terror attacks do not cause more attacks. Stock market corrections seldom bring bear markets. And the average house price in Vancouver is not on the way to four million. Resist impulsive reactions to abnormal situations.

Second, more people make money from selling stuff to scared people than they do following their own advice. If the investment newsletter guy is a genius, with all the moves figured out, why’s he hocking it to you instead of making millions trading? If there’s no risk in real estate, why don’t agents spend all their time leveraging and flipping? Be careful where you get your information.

Third, beware public sentiment. Most people almost always get it wrong. In 2009 the herd panicked after seeing financial markets dive, and stampeded the exits – selling when they should have been buying. Overwhelmingly, investor sentiment was negative because everyone believed what just happened would happen again. Fear trumped logic, since rational people would see assets they’d previously wanted selling for a 50% discount. Today thousands of investors are being herded into house deals they’ll likely regret.

Human nature is not your friend during times like these. That’s why you need a badass blog to set you straight. N’est-ce pas?

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November 16th, 2015

Posted In: The Greater Fool

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