What Were We Thinking?


First, a small review of past advice. Then the No.1 cause of Boomer erectile dysfunction.


More than a year ago this blog erupted in a giant hissy fit when I said Sell Canada, Buy America. So I hope you’ve been keeping up with the news. For example, as condos crash and contractors moan over a miserable 2013, building permits issued in BC have deflated faster than NHL libidos. A 40% plunge in Vancouver, 31% drop in Victoria and a dive of 84% in the Fraser Valley. Since what goes shooting up must come limping down (more on Boomer appendages in a moment), this troubled province is leading the country in construction flaccidity.

Of course, we already know what’s going on with sales and prices in Van and 416, both with a 12% drop in SFH values since the spring, and 30% fewer deals. And as I’ve told you already, GTA builders are in shock with new-home sales (condo and low-rise) down 40.5% over 2011 levels.

It’s all consistent with what this pathetic blog forecast. And, more to come. Meanwhile let’s contrast that with the latest stats from south of the border, where the biggest price jump since 2006 has just taken place. Resale houses have gained 6.2% in the last year, with higher values now reported in 45 states. Hardass Arizona, for example, just saw a 21.3% eruption. Of the largest 100 urban areas, 83 have higher prices than a year ago.

More to come here, too. The supply of available homes has fallen to a 10-year low, at the same time mortgage rates are close to record lows and the number of people who have just entered into deals (which will be closing in 2013) is the highest in six years. Is it any wonder builder confidence has jumped the most since 2005, when the US was in the midst of its greatest real estate fetish ever?

Again, by way of contrast, look at the mess Canadians have created with their four-year-long bout of house horniness. The average piece of real estate here is about double of that to the south, where there’s ten times the population and economic output. We’re far more in debt, and have taken on that massive obligation to buy houses and condos now certain to decline. Smart.

Just listen to what the dudes at the Bank of Canada said of the urban condo market a few days ago. And they rarely get excited about anything:

“If the upcoming supply of units is not absorbed by demand as they are completed over the next 18 to 36 months, the supply-demand imbalance will become more pronounced, increasing the risk of a sudden correction in prices. This would likely lead to a decline in housing activity, adversely affecting household incomes and employment, as well as confidence and household net worth, which would in turn reduce household spending. As the declines in incomes and employment impair households’ ability to service their debt, loan losses at financial institutions would likely rise. These effects may be amplified by tighter borrowing conditions as lenders come under increased stress. These interrelated factors would further dampen economic activity and add to the strains on household and bank balance sheets. They may also cause house prices to fall below the level required to correct any initial overvaluation.”

Sound familiar? It should. Exactly the pattern of the 2006-12 housing bust in the States. A drop in demand plus overbuilding brings lower prices, which wounds an economy too dependent on real estate, which causes economic decline, stressed banks, less credit, still lower prices and loveless nights for an indebted middle class. When central bankers start talking like that, take note.

But, none of this surprises. Don’t bet against America. Just Canada.

Now what continues to shock me more are emails like this, from poor Marv:

I am a senior citizen raised by depression-era parents.  Like many people my age I am concerned about preserving my capital so I only put my money into GIC’s that are protected under the Canadian Deposit Insurance Act.  (I know I’ll never get rich in this way — but it beats a stroke or heart attack from worry.) I opened a GIC with the Canadian Imperial Bank of Canada the other day and discovered a new wrinkle.  I had to sign a form reading: “Upon your death, we will deal with your Estate Representative.”

My concern is that by signing this I have authorized the CIBC to take a percentage of the GIC for so-called handling of this portion of my estate.  I signed one agreement for a small GIC but have not signed two additional agreements for two GIC’s of greater value  they have mailed me. I am thinking of refusing to sign these latter two ‘agreements’ as, quite honestly, at my age I don’t trust anyone.  I would welcome your opinion.

Where do I start? Marv should know the biggest problem folks faced in the Depression was a lack of money, especially liquid assets that provided much-needed income. So how, exactly, could a locked-in, non-redeemable GIC which has a zero income stream help anybody if the wheels came off?


Not only that, but how could the Canada Deposit Insurance Corporation (assets $2.4 billion) make whole all the people who have collectively put $116 billion into CIBC deposits they think are insured? And if this bank failed, why wouldn’t the rest – where Canadians have squirreled away $622 billion in cash they naively believe is covered by the feds.

Mostly, though, if Marv doesn’t already have a pot of dough or a good pension, he’s courting big risk. The greatest threat is running out of money by burying cash in an illiquid vehicle paying less than inflation and throwing off non-existent income which is then taxed at your marginal rate.

Why invest your savings in a bank GIC paying 1.75% for a five-year commitment, fully taxed, when you can buy stable preferred shares in the same bank paying 5%, plus the dividend tax credit? Is this a masochism thing? Is it ignorance? Willful blindness? The impotence of mistrust?

Marv, grow a set. Stop stressing about service charges after you’re dead.

And to think we used to be hippies. Oh, the shame.

avatarGarth Turner - The Greater Fool posted Sunday, December 9th, 2012.

1 Comment for “What Were We Thinking?”

  1. There are various reports that appear now and then that may indicate that the U.S. housing recovery is not quite so great as it might seem. The reports center on “shadow inventory” – millions of foreclosed homes that financial institutions hold on their books, but which they are keeping off of the real estate market. And there’s never enough information to allow the reader of these reports to decide how much of this shadow inventory is real, that is, how much of the inventory is in saleable conditon, how much is fixer-uppers, and how much is so run down that it needs to be bulldozed?

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