- the source for market opinions


August 24, 2016 | The divide

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.


Shot yesterday at the CIBC Branch in Waterloo University at  the Student Life Centre, by Blog Dog Deippak.


A few days after saying housing affordability on the West Coast was being “crushed,” the country’s largest bank reported elephantine profits. On Wednesday RBC revealed it’s been making about $1 billion a month, up 17% from last year, and enough to once again increase the dividend it hands over to stockholders every three months.

It was the second bank in as many days to shrug off energy, housing and slow-growth issues and announce boffo earnings – and happened at the same time oil prices were being creamed on world markets. The profit romp also comes as the country’s showcase real estate market slides precipitously, shot through its horny little heart by an ill-advised, politically-motivated, dumbass tax.

The point of this contrast?

Simple. The world’s dividing neatly into two camps. Those who have exchanged all their money and taken on epic debt to invest in stuff. And those who have chosen to stay liquid. For the past eight years the Stuff People have chortled about their windfall gains and how their giant leverage play paid off. For the next few years, the Liquids may turn smug, watching those pickled in debt slide under the waves as equity tanks.

The Stuffers think financial markets are risky, volatile, dangerous and, if not rigged, certainly stacked against the little guy. The Liquids believe stuffing all your net worth into one asset on one street in one city for which there is no capital market is insanely speculative. Plus you have to clean eavestroughs. Of course, as this pathetic blog keeps pointing out, balanced people try to bridge the extremes. They love owning real estate. And they adore having liquidity. Always a Plan B.

What’s happening in Vancouver these days is pale fire to what we might expect in Victoria, the GTA, Hamilton and other markets in the coming months. Residential real estate was already cracking under its own bloated weight even before the BC crazies decided to slap a stamp tax on the Chinese. Now the market’s frozen. “As American politics are currently at that forefront I offer a tag line borrowed from the Democrats who claim that Together we are Stronger,” says Van realtor and blogger Larry Yatkowsky. “The 15% Property Purchase tax like the Mexican wall proposed by Trump is untenable at its most base level.”

As with Trump (or Brexit, or the rise of the nutbar right in Europe) there are always economic consequences when people vote in a tribal fashion, or cause their local government to think that way to retain power. The evidence is now before us in spades in BC. It’s not so much that foreigners have stopped buying (they have) but that locals who do over 90% of all deals have retreated out of sheer uncertainty. Since real estate runs on emotion and debt, not corporate profits or growth, when greed turns to fear, everything changes.

So here we are. In the first two weeks in August sales dropped 66%, which came after plops of 18% and 31% in June and July respectively. The evidence of decline has been well documented here, and there’s no bottom in sight yet. First sales plunge, then values ricochet lower, always stickier on the way down than the trip up. But the move lower is inevitable.

The cost of houses in Vancouver, Toronto and a few other wannabe cities has detached from the local economy. Borrowers have heroically over-extended, gorging on cheap money handed over by smiling RBC mortgage specialists (and others). As a result of increased demand and reduced supply (listings drop in torrid markets and swell in cooling ones), prices have bloated. Everybody knows it. This is all people talk about. The media is obsessed. Have you seen a single day go by without the Globe and Mail running a housing headline? Me neither.

In an environment like this – where we all know houses are hot and people are horny – it doesn’t take a whole lot to burst the bubble. A rate hike. A few plant closures. Lending restrictions. Or a tax.

So now the real risk contained in residential real estate is exposed. With a wall keeping the Chinese dudes out and the locals on the sidelines, the housing market is suddenly far more exposed to traditional forces – like the ability of people to afford mortgages, based on household income. Oops. The Canadian economy has shed 110,000 full-time jobs in a mere two months. Our trade deficit is massive – at a record level. The whole economy has just contracted. And a candidate for US president wants to tear up our free trade agreement.

I’ll admit it. Those who eschewed my advice to seek balance and instead snorfled the biggest mortgage they could get, snapping up inflated real estate have lucked out. It was a once-in-a-generation and localized opportunity. I sure hope you took the profit. In the year ahead you can count on higher US interest rates, higher Canadian taxes and a struggling economy. The potential for correction in many places is profound.

As for RBC and the rest of the banking cabal, they’ll sail through it. The citizens of Maple have no history of big mortgage defaults, and are unlikely to start now. They’ll keep paying even as equity leaves town. Besides, such an overwhelming amount of mortgage debt is taxpayer-insured that bank exposure here is a fraction of what it was when the US housing gasbag exploded.

Investors don’t have a lot to worry about. Others have much.

“It’s not just that there’s less buyers in the real estate market: you’ve got all these people whose jobs are dependent on the over-exaggerated real estate market. They’re taking a hit, too,” Van academic Tsur Somerville said this week. “Whether they be realtors or people in construction or stores that sell granite countertops or Maserati dealerships, they’re going to see an effect from it.”

Meanwhile the bankers handing out mortgages like candy, no proof of income, continue to goose their dividends. What days these are.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

August 24th, 2016

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.