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June 12, 2016 | Hitting the fan

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.


Bench art at Coal Harbour park, Vancouver. Blog Dog photo. (Click to enlarge)

There were open houses this weekend at 2348 Oliver Crescent, a few blocks in from Granville in the Arbutus hood of Vancouver. It’s a demand area, close to downtown, but it’s also a symbol. At least this house is.

“What a piece of crap,” says Leslie, who lives nearby. “This has to be the end…”

The bungalow was built in 1951, is unrenovated, sits on a 50-foot lot, has two bedrooms and 2,118 square feet, including the basement. “A fully developed basement to help reduce those mortgage payments,” says realtor David Richardson. Which is a good thing. Because at $3,888,000 most people would probably want a big $1,500 coming in from downstairs to help offset the $15,000 monthly payments.

Taxes are $8,500 and David lists these stunning features: “Shared laundry, Frdg, Stve & DW.” So, here it is:


For those who don’t know Vancouver, and think a chunk of this insane price might be justified by the stunning views across the ocean, or up the mountains, think again. No water. No hills. This is a flat, boring neighbourhood of non-descript streets, uninspired vegetable and unbridled house lust. Here’s the view outside:


As this pathetic blog articulated in a three-parter last week, the market has truly reached a point of self-destruction. Prices are detached from fundamentals. Household debt is off the charts with 30% of buyers in Vancouver now taking mortgages worth 450% of their incomes (the number is even worse in Toronto, at 40%). Almost six in 10 mortgages on houses selling for over a million have 30 or 35-year amortizations and, of course, are not insured.

So no wonder bank bosses are worried, as are mortgage brokers, the central bank and now the prime minister and his finance guy. Anyone going long on a house in YVR or most of 416, or spending $3.8 million on a beater on Oliver Crescent, are setting themselves up for a world of hurt.

Which brings us to the topic du jour: what happens if the market crashes? Like in America in 2007, will it start taking down everything else with it? What about your RRSP, or tax-free account, or all those ETFs and preferreds in your no-registered portfolio? Will the Toronto stock market crater along with residential prices? And real estate trusts? Is there no place to hide?

Well, the first thing to realize is that Canadian mortgages have not been turned into collateralized debt obligations (CDOs) and sold in tranches of risk to unsuspecting investors and institutions as happened in the US. True, our banks and CUs have a ton of exposure to billions in dodgy loans, but CMHC is a huge backstopper. Yes, a housing collapse in Van and the GTA will scare investors, impact earnings and likely wound the common share values of the banks, but nothing like 2008 – from which they recovered massively.

In other words, there is less correlation between the Canadian stock market and the housing market than between the TSX and oil. When crude collapsed, taking Alberta with it, Canadian stocks lost about 11% of their value (last year). But people with fully-invested, balanced and diversified portfolios lost nothing. In fact, they were mildly positive.

This is exactly what portfolios like that, with 40% safe stuff and 60% growth assets, are supposed to do – preserve capital in lousy years and deliver growth otherwise. So the key is to ensure you actually have a broad diversification among asset classes (bonds, preferreds, REITs, equity ETFs etc.) and that too many eggs are not in one geographic basket. Like Canada. As stated here often, of the 60% growth component, keep no more than 17% in maple, 20%+ in the US and an equal amount internationally.

What about preferred shares? Actually rate-reset prefs love rising interest rates, which are 100% on the agenda going forward. Plus they churn out a steady 5% dividend and dish up the dividend tax credit to boot.

REITs? Won’t real estate trusts be clobbered if house fade? Nope. Most REITs own office towers, shopping malls and other income-producing assets, and the economy would have to collapse and go depressionary for the bank towers to start emptying. As for apartment-owning REITs, they flourish when house prices tank, since demand for rental accommodation increases.

But don’t higher rates man lower bond prices? Indeed, which is why only 8% of a balanced portfolio should be in government bonds – and ones with short durations which will be affected little. Add in some better-paying corporate and high-yield debt, and you have a nice counterweight to equities. Remember that when stock markets swoon (it happens), fixed-income assets grow more valuable as investors seek safe havens. So own both. That’s what balance means.

There is risk everywhere, as you know. Trying to avoid it, parking your money with the jam people or in a laughable bank HISA, just means you’re augmenting the chances of outliving your capital. Meanwhile keeping windfall gains in a house in the GTA or Vancouver, thinking prices will go up forever, could be a mistake of epic proportion.

So, be like the smart owner of 2348 Oliver. Seek a greater fool.

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June 12th, 2016

Posted In: The Greater Fool

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