Chow Down

November 11, 2019 | Chow Down

Garth Turner

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.

What a weird blog. Alberta Liberation Army news. The Greta Report. The Breeders’ Daily (canine division). Fear & Greed on Bay & Wall. The Tax Avoider. T2 and You. Canadian Investment and Conjugal Advice. And, of course, The House Horniness Hotline.

Today some morsels for all blog dogs to chew on. Apparently things are not exactly as they seem…

The Inconvenient truth about Van Real Estate

Dane Eitel is a nerdy statsguy contrarian deeply immersed in Van housing, and an avowed enemy of local realtors. They say the market’s rebounding with a 45% sales jump last month. He says phooey.

“The October data has come in and has been touted as a signal of strength from the Real Estate Board and optimistic analysts. The truth in the matter is prices are down almost 100 Thousand from October 2018. Over 300 Thousand from the peak. In addition the detached market produced an average sales price of $1,533,135, signaling no pricing momentum over the past quarter. Simultaneously falling behind the 10 year uptrend. What this means to us is the market is holding on for dear life.”

What’s it mean? Simple. Don’t buy, unless you like paying too much. Eitel says prices will be $100,000 less by the Spring, taking an average detached down to the bargain-basement level of $1.4 million, therefore affordable to hairdressers and apprentice plumbers across the LM. Some parts of the market have hit bottom (prices down 30%) while others continue to sag. Overall, house values will drop.

So why are sales higher? “The market is experiencing need-based buying,” the analyst says. Prices 16-18% lower have mitigated the impact of the stress test, allowing those buyers who must purchase to move in.

What’s next? A flood of new listings in a few months. Buyers will be rewarded and owners (who held off waiting for a stronger market) punished. “Sellers are advised to take advantage of the fall market before the spring market is yet another disappointment.”

Stocks 157, Houses 127, Reits – insane

The meme among the chattering classes is that nothing beats real estate for making dough. Especially in a big city like Toronto. In fact it’s depressingly common for realtors to publish self-licking little blogs about stocks vs houses. Equities are rife with risk, they say, while buying a house with 20x leverage is a sure thing!

But it’s a lie, kids. At least in terms of pure market performance. According to BNN (which you should never watch) Bay Street delivered a 157% return over the past decade while Toronto real estate clocked in at 127%. But, the house-humpers cry, you can use leverage to buy a condo! And gains are tax-free!

Sort of. You can leverage a portfolio, too. And the interest is tax-deductible, unlike your mortgage. As for taxless gains, this applies only to a principal residence (no rental or flipped condos), and you pay a heavy price for that in the form of high closing costs, strata fees, property tax, insurance and maintenance, as well as huge selling fees. And while you get to live in real estate, it can also turn illiquid exactly when you want or need to bail.

Anyway, the big winner a REIT investment. Bay Street’s real estate investment trust index grew by 354% (dividends included) over the ten years. These things own and manage commercial real estate assets across the country, giving you 100% liquidity, almost no transaction costs, no ownership fees and no landlord headaches. For years we’ve been telling you to have a hunk of your portfolio in exactly this – and rent.

Ask it again: how does this end well?

Blah, blah, blah. Another item on the amount of debt people carry. No matter how many times the warning flares go up, seems nobody’s looking. But at some point the consequences will be memorable. Hopefully you will not be in the blast radius.

Families have achieved a brand new level of stupidity, and now owe $2.24 trillion (a trillion is a thousand times a billion) – which is bigger than the economy. It’s interesting to note there are about 8.5 million families, and in the past 12 months they borrowed another $82 billion, of which $64 billion was mortgages. Total mortgage debt is $1.6 trillion – which is a scary number since 40% of homeowners have no mortgage. Plus, interest rates are near generational lows and won’t be staying at this level, no matter how hard you close your eyes and click your heels.

Finally, we’ve been in a ten-year economic upcycle of rising asset values and expansion – as well as swelling loans. There will be a contraction. Equity values will fall. Debt levels will not. Anyway, nobody cares. So might as end this post…here. Chow.

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