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March 3, 2016 | Just Nuts

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.


In Surrey Paul listened in amazement at the tale his realtor friend was spinning.

“He told me a house for sale here recently got so much attention that over 120 people showed up to view the property. Traffic had to be controlled so people would trickle in slowly for the viewing. The Surrey RCMP was called in to maintain order and control traffic onto the street. In Surrey? Nuts. Just nuts.”

In Toronto a CBC reporter called me wondering why the market there’s on steroids. Read the blog, I offered. “I did,” he said. Then you know listings have plopped, I summarized. Combined with low rates it’s a classic supply-demand thing. Owners are afraid to list because they listen to the CBC, then think they’ll never be able to buy again. Everybody’s into house porn, laced with greed and fear.

“Know what you mean,” he said. Then he told me about the place he bought on a dodgy street a decade ago for under three bills, now worth seven. A bit more convo, and it was evident that he, like The Walking Dead, was as infected as the rest of the colony.

The latest sales and price stats from Toronto and Vancouver (for February, no less) clearly show we have a dangerous bubble on our hands, now making people weird. Millions of folks eat, sleep, dream and lust over houses. They have children to populate them. They find jobs to afford them. A house is now most people’s entire financial strategy, their savings mechanism, the essence of their net worth, their retirement plan and, worse, their identity.

Real estate’s become an investible commodity everyone expects to generate windfall wealth, and at the same time is an obsession. “You rent?” is the meanest, sneary question in the land. It used to be that a professional or cool occupation was the supreme status. Now it’s an addy in the right hood, on the best street, in the hottest area.

Yesterday I gave the real reason houses are hottest in YVR and the GTA. Nope, not Chinese dudes nor 2.5% five-year mortgages. Instead it’s supply and demand (laced with the sauce of desire), a fact which has just been reinforced.

A year ago listings in the GTA – an area of 6,000,000 people – were ridiculously sparse at 12,800. Now there are 15% fewer, under eleven thousand. That’s a 41-day supply of real estate. Comparatively the second-biggest market in Canada (Montreal) has 32,600 listings available – a 440-day supply.

In Vancouver there are 7,300 listings in an area of 2.5 million people, for a paltry 51-day supply.

This constraint results (as I spelled out) from owners not wanting to risk being sellers, then forced to become buyers. Besides, they think every day beings new equity. So, like the CBC dude who says he could never afford to purchase his own house again, they stay put. Renovate, maybe. Move, never.

Dwindling supply and mounting demand (The Walking Dead somehow multiply) mean houses sell in a snap for full price, through bully offers above list, or in bidding wars with high body counts and record valuations. Every time that happens (like the Kits house fetching $735,000 extra the other day), the media is all over it and the fiery story of every-spiraling prices has another log thrown on it. “The fact that the annual rate of sales growth outstripped the annual rate of new listings growth shows a tightening of market conditions compared to last year,” says the Toronto Real Estate Board. And it’s true. The average detached home, say the realtors, costs 16.3% more than a year ago – at a time when inflation is 2% and the economy is growing at 1%, with high-interest savings accounts paying 0.5%.

As this pathetic blog has stated often, things can change surprisingly fast. No commodity in history ever ascended without painful corrections. Canadian real estate will be no exception. So while it’s been a good ride if you happened to own in the right place, it’s incredibly unwise to have the bulk of your net worth sitting in a single asset. Supply and demand can change fast. Look at oil. Or Stephen Harper. Hoverboards. Man buns. Fifty Shades of Gray. Trump.

So it actually doesn’t matter to smart people why some markets are insane while others descend, or what caused this to happen (worrying about the Chinese is so 2015). More relevant is what you do in response to this reality.

For example, if you sell a shack you’ve owned for 15 years and net $2 million, investing the money in a 60/40 balanced portfolio, what can you expect? Who knows for sure? But over the past six years (including 2015 when it made nothing, thanks to commodities and China), this would have averaged 6.8%. That’s an annual cash flow of $135,000. Less taxes (low on dividends and capital gains) and a tax-deductible advisor fee of 1%, that would net about $8,000 per month.

So, you can lease and live in a house like this (in tony Point Grey), be surrounded by luxury and still have two mill tucked away….

PT GREY modified

…or, you can continue to live here, in a $2 million dump on the wrong side of town, with all your nuts in one wacky basket. Tough choice.

CRAP HOUSE modified

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March 3rd, 2016

Posted In: The Greater Fool

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