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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

February 5, 2016 | Risk-on

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.

 

It was clear in December the feds’ new down payment rules would goose the housing market, at least in those cities where metrosexual moisters Vespa their way through lefty, over-educated lives. So, now we have proof. Starting in ten days the minimum doubles for houses over $500,000. Combined with dirt-cheap rates, this has hockey-sticked Van and the GTA, further disconnecting those two markets from the economy beneath.

You probably know the numbers. In Toronto January was extreme, especially in the soulless burbs where average prices jumped more than 20% year/year. In YVR the average detached house ended up 27% above last year’s mark, with the urban area now averaging $1.8 million. Sales volumes were ahead by a third, underscoring the little stampede that the T2 government’s announcement caused.

After all, there was no other explanation.

The Bank of Canada didn’t drop its key rate. The big chartered banks actually increased most of their mortgage costs, both fixed and variable. The dollar, oil and financial assets all took a drubbing. And the economy blew.

Proof of that lies in the unemployment numbers delivered Friday. Canada lost 5,700 net positions and Alberta was whacked. The overall jobless rate went up – it’s increased steadily over the past year while that in the US has continuously fallen. Today we have the greatest discrepancy between the labour picture in our two counties in 14 years. Meanwhile, for the first time in 28 years (back when I was a mere boy), the unemployment rate is higher in Alberta than the rest of the nation.

The country needs 1% net job growth a year just to keep up with the population increase, and we’re not there. Meanwhile joblessness in the States has dropped from more than 10% during the GFC, when we all felt superior, our dollar was at par (or above) and Yanks were losing their houses, to a mere 4.9%. The latest stats showed that growth continues unabated.

So on Friday the US dollar spiked more, driving down ours along with oil. American equities stumbled, as the likelihood of a rate increase in March bumped higher. That the cost of money will be greater in the States as 2016 progresses should be a question in nobody’s mind. It’s gonna happen. And it probably means Canadian rates won’t fall again. Maybe ever. This will be cemented by the March 22nd federal budget, set to unleash the rapacious hounds of liberal deficit spending.

The point is risk. Financial markets have just shed a ton of it, with assets like preferreds, equity ETFs and REITs cheap compared to year-ago levels. With the Fed on its resolute course higher, there’s a ton of logic in trading bonds for equities, although people already with a balanced portfolio need do nothing. The recovery’s coming to you.

So while financial assets are risk-off, real estate – at least where the prices are steaming – is pure risk-on. The foundation upon which this gossamer structure is constructed is unstable. As CIBC economist Avery Shenfeld points out, there are more job losses to come as our rocks-‘n-trees country copes with the lowest commodity prices since the Nineties. The economy’s stopped growing. And taxes are going up.

Meanwhile the signs of a market top keep piling up. Panic buying in the suburbs surrounding Toronto and Vancouver. Price surges seven and even eight times the rate of inflation. The public’s unshakeable (and false) belief foreign buyers are stealing our houses (leading to ‘buy-now-or-buy-never’.) Real estate and construction’s swelling proportion of the economy. Political pandering to house lust (check out the coming BC budget). A sharp resurgence in household debt levels. And this…

VAN CHART

Dig out an old chart of Nortel. Or the TSX during the dot-com days. Or the NASDAQ before it lost 80% of its value. Or house values in Phoenix, prior to the collapse. They all look like the squiggles above, because they chart the same thing – human nature. We buy on euphoria. We sell in panic. The higher prices go, the more invested everyone becomes, the greater the risk.

In your heart you know this. Unless you vape.

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February 5th, 2016

Posted In: The Greater Fool

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