Author: Stan S.

The US Fed blinked. Actually it did’t blink, it closed it’s eyes and assumed the fetal position. After talking tough about backing off on buying the US Government debt (the definition of ponzi btw), it stood pat and said..”we will..we will…keep buying! forget what we said earlier this year”. Actually it worked out ok for me, as my poor preferred shares which had been beaten into mush caught a bid. However it did bring interest rates down a notch now that everyone sees the Fed for the blow-hard-but-do-nothing that it is. The Canadian bond market which is tied by it’s apron strings to the US one also got a bounce and rates dropped. Now how about September? What are we looking at. Well so far it looks to em like we are going to get some weakness in the HPI and averages for the month. I see mid range homes (would be super upper end anywhere else) $1.2-$1.6 M selling for a 4-8 % below asking. Of course the asking prices are pretty crazy, made up numbers , but that didn’t deter the delusional buyers before. I have said before that if September didn’t show some weakness that I would probably suspend or close this blog but it looks like you may have to put up with me a bit longer. 

Assuming you are waiting to buy or have decided not to, then you have a nice pile of cash building up. What are you doing with it in this forced low rate era? None of the Central banks (UK, Canada, Euro), despite talking tough about soaring consumer debt have had the balls to increase rates. We are STILL sitting with rates at emergency levels and below inflation. So what options do we have for our money? Well a few and none are that enticing. There is the GIC. Rates are pretty low at the moment. The banks still haven’t budged much from the 1.0-1.4% for a one year fixed. You can get a little more by bargaining with your advisor. This has always irked me BTW. Why not just post better rates for everyone. Our banks, like our telecom carriers either need competition or serious regulating. I just picked up 1.8% for a one year at ING direct which is owned by Scotia now. I got this from a brokerage account and was better than their posted rate. Other institutions with lower credit ratings offer up to 2%for a one year and 3% for a five year fixed. The CDIC will insure up to $100,000 if the GIC is under 5 years. Either way you slice it, it isn’t a big chunk of money. After taxes, it is below inflation. It used to be that a one year GIC matched inflation after tax and a two year beat it. Not now that the Central banks are trying to force us to speculate (and then complain when we do) So what else is there? Bonds. You can buy bonds via any brokerage account. The rates are not much better than GIC rates at present for high credit companies and Government of Canada bonds are even lower. You can tweek things by buying stripped bonds which have a lower tax rate (capital gains instead of interest taxation). You can google this if interested. Preferred shares. These are shares that behave like bonds. They come in several flavours, some pay a steady % until maturity, others reset the rate depending on the Bank of Canada rate or rates for a ten year bond, others maybe convertible into the shares of the issuer. They pay higher rates as they are considered ‘long bonds’. However as they are shares too, they are taxed better than bonds and so a 5% yield in preferreds would be the same as getting almost 7% in a bond if you pay tax at the highest rate. Here is a good site which explains and tracks them. Though he also writes of other stuff in his commentary which I usually skip over. Garth Turner used to be a big proponent of them on his site Greater Fool. They have done very well for the last few years and then got slaughtered recently as rates have been rising. He has not mentioned them recently 🙂 Then there is the stock market. You can buy stocks directly, or mutual funds or index funds etc. Bank shares have done very well as they have been in the sweat spot. They have borrowed short (from all the people having one year GICs or getting near zero interest in their savings account) and lending out several % higher to mortgage borrowers. Even though rates are low, the spread between the short end and then long end of the rates curve has been widening and therefore the banks have been making even more money than before. The best thing is that they have been doing this risk-free. Anyone with high leverage or poor credit risk they passed off to that garbage can of risk – the tax-payer back CHMC. A scandal IMVHO. However this circus is slowly coming to an end, as outsiders from the World Bank to Investment houses to independent economists have told our Government how poorly risk is managed at the CMHC, they seem to be finally getting the message. The stock market was a good place to be for the last four years, especially the US market. But I am too leery to put new money unless there is a good correction. Rising rates are usually bad for the earnings of companies That’s about it. Can’t think of many more options. What are you doing out there?

Larry as usual provides the numbers. Detached MOI = 6.9 Attached =  5.6 Condo = 6.1 These MOI are in the ‘balanced’ range. However they are a LOT lower than last August. Is this demand pulled in because of the interest rate and CMHC changes or is the Bull back? Some higher sales have skewed the numbers. Lots of local and HAM big buys in August in the Multimillion range have pulled the numbers up. Is HAM buying drying up? Not yet. There are some signs that emerging markets are under some financial stress with the Fed TALK (only talk so far) of pulling back on ponzi monetary policy. However the Chinese PMI number has come in above expectations and that may bring more hot money to our shores. As I have said recently, we SHOULD have seen the top with everything stacked against RE. However there could be some new dynamic that I have not taken into account which will ignite further buying and if so, then it is time to move on. We will know very soon if this is the case.

I found this on Vancouver Condo info, hat tip China bust, it is a legal action brought by investors who purchased units at the Olympic Village and who now want their contracts  rescinded . They are suing the City of Vancouver. Here is the list of investors named in the law suit: ok J. Choi, Il Ho Ahn and Ra Young Choi,Yen Hai Doan, Tian Gao, Thomas Gisby,Jung Gu Han and Hyun Joo Han,Jung Kyoo Han and Sung Sub Han,In Cheol Jang and Sunkyu Choi,Heebo Kang and Soon Bin Kang,Mi Hyang Jin and Yung Jun Kwon,Mohamad Lafta, Hak Hyung Lee, Flora Kwangah Lee,Sang Wook Kwang and Hyun Jung Lee,Kyoung Won Lee and Nam Won Park,Gordon Mah, Wendy Milligan,Sook Ja Oh and Mu Hong Oh,Young Ock Park and Yi Yong Pan,Young Mi Seo, Shermar Holdings Ltd.,Susana Yim and Hardy Yim,Sook Ja Yoon and Eul Byong Yoon Here is the case, and from what I can understand, the first question is whether the City of Vancouver can be deemed to be the developer of the project. I definitely do not know or even understand the legal intricacies.  But I am an over-taxed Vancouver resident worrying about cuts to other City-funded services or a Provincial bail-out. I am also a student of the speculative frenzy in this city, where Billions of Dollars of real estate are bought and flipped or bought and left empty. A few things come to mind: 1) The names are apparently mostly Korean. I don’t know whether they are resident in Canada or not. They could be German or Mongolian, but the fact that one ethnic group has so many unhappy buyers, makes one wonder if the project was aggressively marketed to this group by a realtor. 2) Are they end users who have some concern about construction or are they speculators who are upset about the drop in value. ie were they speculating. The GetLegal blog linked thinks they are investors who bought at the top and are now regretting their decision and trying to get out of their obligations. Certainly there have been a lot of condo projects built in this city which have been late or have had issues. When the market is flying no one seems too bothered, but once it falters the law suits start flying, like Sangrila and now OV. 3) How much more is this going to cost us? What we do know is that when lawyers have the Government as a client, ie the taxpayer, the fees are exorbitant. Let us not forget the defence that we paid for in the Dave Basi and Bobby Virk case which cost us $6 Million, before they pled guilty.  To add insult to injury Judge Robert Bauman who IMVHO is a very misguided Judge, refused to allow the tax-payer’s watchdog, the Auditor General, to audit the Legal bills to see how come they were sooo high. Apparently the rights of two individuals who have already pled guilty trumps the ability of the Auditor General to do his job and point out waste and corruption. What message does that give the legal profession? If you can get a clerk in Victoria to sign off on your billing, you are audit free!!! I cannot believe what a carte blanche Bauman has given his fellow lawyers! Once again I say PPP do not work. If the project is profitable, the Private keeps it, and if it doesn’t the Public owns it. The financial sharks make sure they write the deals so that is how it works out. The other side of the table are well-meaning but naive councillors and city officials who are no match for the sharks. We are witnessing the result now. Of course the councillors are mostly gone and the officials still get their bonuses and pensions and us suckers get to pick up the tab.

Off topic. Have you heard the ads by the telecom giants, Bell, Rogers and Telus. They have some average employee who tells you that if the Government lets Verizon in to Canada then this unfortunate soul will lose their job and they and their family will be cast out to the wolves. Funny how they pick lower ranking employees, not someone from the executive suite. How about the CEO of Telus doing the ad and saying…” I made $11 Million last year and $10 Million the year before and if Verizon comes in, I may lose my bonus”. Or the Rogers CEO saying..”Next year I get a $18.5 Million retirement package and um…well good luck with that Verizon things”. In fact the three CEO’s earned $23 Big ones between the three of them. Enough to run a medium sized hospital or two High schools. That is our society folks. These companies who have shamelessly outsourced call and technical centres outside of Canada, are now waving the flag and asking for protection from that big hairy American company. We could be more sympathetic if you weren’t such greedy ba$tard$!!  My cousin who has ATT comes up here from the US and uses his phone without a second thought to call the US or anywhere worldwide for one fixed rate.  Whereas we make sure we have every button turned off to airplane mode or free wifi only to make sure we never inadvertently down-load a text or e-mail in Calgary, never mind the US. Last year I went to Europe and somehow my phone set itself free and downloaded two banal text messages and one e-mail. I heard the ping and my heart sank. Sure enough, when we went back home the bill from Fido (Roger’s pooch to make us feel like we have choice) was over $50! Welcome Verizon, who BTW can only have up to 10% of the market anyway! AND CEOs of Rogers, Telus and Bell, if you are so worried about your employees distribute some of your huge payments to them and let us have SOME choice as consumers.

President Obama, arguably to the left of PM Harper, has decided to phase out Fannie Mae and Freddie Mac, their own two versions of our CMHC which insure mortgages. Our own dithering fools in Ottawa were anti-CMHC except when it suited them. And it did in 2008/9. Even as they watched the US equivalents pull hundreds of Billions out of tax-payers pockets, they cynically doubled our own CMHC, loaded it up with a weak board (IN MY OPINION) and allowed it to have poor risk management and operate opaquely (in the opinion of Nomura and IMF and other non-Major-bank economists).  Now hopefully they will do the right thing before this monster endangers our financial future further…and wind it down! BTW- there was a great BNN interview with Ian Lee, an Academic who has been sounding the alarm on CMHC liability which he calls gargantuan! Says the banks are using CMHC! Try this link. Click on the second video ‘CMHC to take stream out of housing market’. All bulls and bears should listen to this interview

“In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some still greater fool could be depended on to take the property off their hands and leave them with a profit.”   – Chicago Tribune, April 1890 Look at the date it was written! This comes from the weekly post of one of my favourite commentators, John Hussman. You can read it here. He is talking about the stock market but outlines how one bubble bursting leads to the next one inflating and the foolish actions of Central bankers who think they know better.

Time to survey the land. Where have we been and where are we headed. We have been a raging bull market for Vancouver RE, of that there is no doubt. It started gradually with minor increases in 2000 and then went up parabolically until the crash of 2009. Then after a brief and sharp correction it went vertical and started to correct in 2012. This correction has hit buying in June and July and looks to be in jeopardy. In 2007/8 I posted about the divergence between income and rental returns and home prices in this city, and in the US. The financial crisis of 2008 was precipitated by the US housing bubble bursting. It brought a sharp correction to our RE. MOI went sky-high and prices dropped about 10% from late 2008 into 2009. Us bears where vindicated. The correction we had so long waited for, was happening. However what we didn’t see was the lunacy of the Government both Provincial and Federal and the idiocy of the Bank of Canada. The right-wing Federal Government who hates semi-socialist outfits like the Wheat Marketing Board , the CBC and the CMHC…very cynically took up the CMHC as their method of stimulating housing demand. Even though we were witnessing the catastrophic effect on the tax-payer of the US equivalents, Freddie and Fannie going BK and needing huge infusions of money, they doubled the CMHC. Then Carney in his wisdom brought rates down zero. As I posted at the time, in 2009, the result of the above measures and the 10% drop in prices was to drop the monthly cost of housing 30%, which was the amount I thought housing was over-priced, and some may want to buy. Well buy they did and up went RE and it kept going up. As it went up our equally foolish Provincial Government, hearing the cry of first time buyers, gave them financial incentives to get into the market…thereby adding fuel to the fire. Where are we now? One of the countries with the highest personal debt levels in the world, one of the most over-valued RE in the world and a Government which calls itself fiscally prudent but which has put another $600 Billion of obligations on our shoulders through the CMHC. This is the Canadian miracle that the world has lauded! The CMHC btw has been called opaque and having poor risk management by several organizations as we have detailed in previous posts. IMVHO this is explained by looking at the composition of the Board which lacks any RE outsiders, serious academics, well-known economists or representatives of tax-payer groups. So bears were blind-sided by the actions of the Government. What else did we get wrong? Income. The numbers we worked off for income in this Province, to gauge RE value, are seriously under-represented I believe. We have drug money, a huge black economy (mainly contractors and drug related), and a river of off-shore money coming here. So looking at the stated income levels was wrong. We were wrong not to account for that in our calculations. We were also wrong in thinking that Carney would do more than just jaw-bone as consumer debt exploded to the level that the US had pre-crisis. He refused to walk the talk. We also did not realise how much the Federal Government would allow easy money to come here. The ‘Investor’s Program’ in many cases has been an absolute farce and has allowed Mainland money to come here and invest in little more than commercial and residential RE, with-out the big job impact that was promised. Worse still, the entrants from almost every Province except Ontario ended up here. So Provinces like Quebec got the fiscal benefits and we got the added costs and RE pressure. More Federal Government meddling which bears did not account for. It is hard to include the effects of Politician’s constant desire ‘to do something’. OK, so where are we now? We are in no-man’s land. MOI of 6 = balanced. Some recent buying pressure after a terrible 2012 and early 2013. YOY prices still lower by a few %. Do we go up from here? Well rates have ticked up. Mortgage rules have been tighetened. The CMHC has a new CEO and has  been capped, but at too high a level IMO.  So was this recent rush just a fear of higher rates? If so, then it should, as I expect petter out soon and we should enter much higher MOI by late August and early September and the correction will start anew and this time it will have significant drops. However if the buying pressure keeps up, then the correction meme has been invalidated and for now we go to higher highs. I favour the first scenario. However as we bears have learned, there is always something around the corner (usually Government meddling) which we did not account for. There is no doubt that bear fatigue exists. Look around the blogosphere. Many blogs have closed up and I am close to throwing in the towel if scenario one does not play out.  The subject of RE has dominated our lives for too many years in this city. Those that don’t own wondering if they should abandon prudent plans and just dive in. Those who own and are deeply indebted, and have all their net worth in RE worrying if they