The Housing Bubble Jane Jacobs Built

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When Jane Jacobs died in 2006, her Annex home sold for a reported $3,000,000. A lofty sum, but a fitting metaphor for the career of a woman so central to how we’ve come to understand cities and urban growth.

Cities, almost everywhere, are under a crunch to meet the needs of growing populations and affordable housing. In Canada two cities stand out as being places to go when you are looking for work, Toronto and Vancouver, and notably they have both been beset with rapidly inflating housing prices. And while I have covered this topic many times (many, many, many times), recently various governments have seen fit to try and wrestle the housing monster to the ground before it explodes and does long term damage to the economy.

First, a BC law was passed on foreign buyers. Totalling 15%, early signs are that it has worked in Vancouver and Victoria. Sort of. In late October several news outlets published the startling result that “Home Sales Plunge 38.8%”, which is helpfully misleading. The gross number of home sales on a year over year result (that is October 2015 vs October 2016) was 61.2% of what it had been in the previous year. 3646 homes were sold in October 2015, and 2233 were sold in October 2016. A corresponding decline in price for the same two periods was non-existent. Prices were actually up year over year, by 24.8%, though the average price had dropped by 0.8% from September.

The next set of laws has come from the federal government, which is trying to improve the financial health of those seeking mortgages by setting higher thresholds for banks and CMHC insurance qualifications. More recently imposed than the BC foreign buyers tax, we’ve yet to see what kind of impact these new rules will have, but I’m willing to posit a guess.

Like the BC law, the new national rules will do more to curtail the supply of property than it will reduce price and limit demand. The reason for this is that governments are attempting to tackle the part of the housing problem they feel most comfortable in, taxing and regulation. And while we know fundamentally very little about how many foreign buyers there are and what impact they are having on the Canadian market (among other obtuse aspects of Canadian realty, you can read about these issues here.), regulation and taxation are well understood tools that most politicians feel comfortable using even when the problem may still not be well understood.

What governments are loath to do though is tackle the part of the problem they could have the greatest impact on, which is supply. Governments, municipal and provincial, have a big say in what can get built and at what speed. But cities like Toronto frequently challenge their own growth, trying to straddle the boundary between their future needs while obsessively preserving some idea of a perfect version of itself.

 

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Proposed highway construction for Toronto

 

The efforts the city and province have made, to try and “densify” urban corridors while leaving the neighbourhoods of detached homes in between them untouched, is probably failing in some measure. First because the neighbourhoods themselves aren’t super excited about 20 story buildings going up within the line of sight of their homes. Second because many people don’t see themselves raising families in condos, leading to an abundance of 500 – 700 sq-ft spaces that only serve first time buyers, but not growing families.

The resistance that neighbourhoods put up to growth can be almost comical. From petitions to “Stop Density Creep” to city councilors objecting to condos not being “in keeping with the community” in our most urbanly dense sectors, citizens and their representatives can be almost hysterically opposed to any changes that might affect them.

tumblr_mtxtnjdxzb1s9jvclo1_1280And so we come back to Jane Jacobs. There is unlikely anyone more influential on how we think of cities than Jane Jacobs. She’s responsible for many great ideas about livable spaces, about how sidewalks and cities need people to thrive, the benefits of cities for bringing different people from different socio-economic backgrounds together and the importance of making cities for people, and not cars. When she lived in New York she fought against the likes of Robert Moses, and the push for more highways (frequently built at the expense of poorer neighbourhoods). When she brought her family to Toronto to avoid the Vietnam war (her kids were of drafting age) she moved into the Annex and fought against plans for the Spading Expressway (now Allan Rd) and campaigned so that its southern portion was never built.

But Jacob’s legacy has born some strange fruit. Though Jacob’s herself did seem to support growth of cities and solid development, the movement she helped birth and guide has become paranoid, myopic and NIMBY-istic. Here in Toronto we both benefit from her insight, and are hobbled by it as well. We have learned to love cities as places for people, but have grown suspicious of the development needed to accommodate our growth.

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Against those challenges, stricter regulations for new home buyers and a tax on foreigners seems to do very little to solve the one problem we do have, not enough supply. While tightening the lending restrictions is important to stemming the growing debt burden saddled on Canadians, the goal should still be to restore a healthy real estate market to our major cities, both a certain way to avert a massive housing bubble implosion and a way of making homes more affordable. That seems to be a challenge our elected officials aren’t up to yet.

Hyperbole and a Half: Terrible Financial Advice

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Walking into my office this morning I was bracing for yet another day of significant losses on global markets. It’s a tricky business being a financial advisor in good or bad markets. But seeking growth, balancing risk, and managing people towards a sustainable retirement (a deadline that looms nearer now with every passing year) only grows more challenging in terrible markets like the ones we are in.

In some ways it can seem like divining, working out which thread of thought is the most crucial in understanding the problems afflicting markets and panicking investors. Is the rising US dollar enough to throw off the (somewhat) resurgent American manufacturing sector? Has China actually successfully converted its economy, and is no longer requiring infrastructure projects to drive growth? Is oil oversold, and if so should we be buying it?

Aiding me in this endeavor is the seemingly boundless supply of news media. There is never a moment in my day where I do not have some new information coming my way providing “insight” into the markets. The Economist, the world’s only monthly magazine that comes weekly, begins my day with their “Economist Espresso” email I get every morning. No wake-up period is complete for me without glancing at the Financial Times quickly. My subscription to the Globe and Mail and the National Post never go unattended. Even facebook and Reddit can sometimes provide useful information from around the planet. After that is the independent data supplied by various financial institutions, including banks, mutual fund companies and analysts.

So what should you do when the Royal Bank of Scotland (RBS) screams across the internet “Sell Everything Before Market Crash”.

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The answer is probably nothing, or at least pause before you hit the big red button. It’s not that they can’t be right, just that they haven’t exactly earned our trust. RBS, if you may recall, was virtually nationalized following losses in 2008, having 83% of the bank sold to the government. In 2010 despite a £1.1 billion loss, paid out nearly £1 billion in bonuses, of which nearly 100 went to senior executives worth over a £1 million each. In 2011 it was fined £28 million for anti-competitive practices. In short, RBS is a hot mess and I suppose it is in keeping with it’s erratic behavior that it should try and insight panic selling the world over with a media grabbing headline like this.

I may be unfair to RBS. I didn’t speak to the analyst personally. The analyst was reported in the Guardian, a newspaper in the UK whose views on capitalism might be best described as ‘Marxist’, and inclined to hyperbole. It’s not as though I am not equally pessimistic about the markets this year, nor am I alone in such an assessment. But it should seem strange to me that an organization whose credibility should still be highly in question, who undid the financial stability of a major bank should also be trusted when calling for mass panic and reckless selling.

The analyst responsible for this startling statement is named Andrew Roberts, and he has since followed up his argument with an article over at the Spectator (I also read that), outlining in his own words the thoughts behind his “sell everything” call, essentially spelling out much of we have said over the past few months in this blog. I find myself agreeing with much of what he has written, and yet can’t bring myself to begin large scale negation of sound financial planning in favour of apoplectic pronouncements that are designed as much to generate headlines and attention as they are to impart financial wisdom.

Panic Selling

The point is not to be dismissive of calls for safety or warnings about dire circumstances. Instead we should be mindful in how we make sense of markets, and how investors should approach shocking headlines like “sell everything”. I am not a fan of passive investing, the somewhat in-vogue idea that you can simply choose your portfolio mix, lean back and check back in once every decade for a negligible cost. I advocate, and continue to advocate for ongoing maintenance in a portfolio. That investors must be vigilante and while they should not have to know all the details of global markets, they should understand how their portfolios seek downside protection. My advice, somewhat less shrill and brimstone-esque , is call your financial advisor, discuss your concerns and be clear on what worst case scenarios might mean to your portfolios and what options are available to you. If you don’t have a financial advisor, feel free to reach out to us too.

Concerned about the markets and need a second opinion? Please drop us a line and we will be in touch…

 

Swiming With Rocks in Your Pockets

drowningSince 2008 governments the world over have tried to fight the biggest banking collapse since the great depression with modest success. Eight years on and you would be loath to say that the world has turned a corner, ushering in a return of unrestrained economic growth.

Why this is the case is a question not just unanswered by the average layman, but by experts as well. Huge amounts of money have been printed, financial institutions have been patched and repaired, interest rates are at all time lows, what more can be done to fix the underlying problems?

It turns out that nobody is really sure, but as we begin 2016 global markets are reeling on the news that the Chinese economy has even greater problems than previously thought. Only a few days into the week and most markets are down in excess of 2-3%, giving rise to concerns that a Chinese led global recession could be on it’s way.

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The S&P/TSX over the past week.

The difference between now and 2008 is that much of the resources used to try and stem the problems from nearly a decade ago have already been deployed, and there is little left in the tank for another round. Central bakers have been trying to get enough inflation into the system to raise interest rates up from “emergency” levels to something more “normal” but outside of the US this seems to have largely failed.

One of the saving graces after 2008 was that the Emerging Markets were seemingly unaffected. In fact, since 2008 the developing world has become more than 50% of global GDP but in that time the rot that often accompanies success has also set in. EM debt is now considerable, putting many countries that had once extremely healthy balance sheets heavily into the red. Borrowing by these nations has increasingly moved away from constructive economic development and more into topping up civil servants and passing on treats to voters.

World GDP

For some, myself included, it has been encouraging that the Chinese have not proven to be the economic übermensch that some had feared. The rise of the state directed economy with boundless growth had many people concerned that China might represent an economic nadir for the planet. To see it every bit as bloated, foolish and corrupt may not be good for markets, but at least takes the bloom off the rose about Chinese economic supremacy.

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Still, this all of this leads to a couple of frightening conclusions. One is that we have yet to come across any rapid comprehensive solution to a global financial crisis like 2008 that can undo the damage and return us to an expected economic prosperity. The second is that we may have been going down the wrong path to resolve the economic problems we face.

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If debt was the driving force behind 2008, you couldn’t argue we’ve done much to alleviate the problem. At best we have merely shifted who holds it. In the United States, the US government took on billions of dollars of debt to stabilize the system. In Europe, despite attempts to reduce balance sheets across the continent, every country has taken on more debt as a result, regardless of whether they are having a strong market recovery, or a weak one. In Canada, arguably one of the worst offenders, private debt and public debt have ballooned at a frightening pace with little to show for it. Rate cuts and government spending are no match it seems for a plummeting oil price and a lack lustre manufacturing sector.

Interest Rates Globally

Having faced the problem of restrictive debt, putting much of the world’s financial markets in grave danger, our response has been to simply acquire more. Greece owes more, Canada owes more, and now the Emerging markets owe more. It was as though while trying to right the economic ship we forgot that we should keep bailing out the water.

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These charts come from an excellent report by McKinsey & Company called Debt and (not much) Deleveraging. You can download it HERE.

 

None of this is to say that every decision since 2008 has been wrong. Following Keynesian policy saved countless jobs and businesses. But at some point we should have also expected to tighten our belts and dispose of some of the debt weighing us down. Instead central banks attempted to stimulate inflation by juicing the consumer economy with incredibly low interest rates. But as we have seen there is only so much that can be done. A combination of persistent deflation, an aging population and extensive debt have largely upended the best efforts to restart the economy on all cylinders.

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This shouldn’t be a surprise. Debt makes us financially fragile. It is an obligation and burden on our future selves. But if we found ourselves drowning in debt eight years ago, it is curious we thought the solution would be to add rocks to our pockets and expect to make the swimming easier.

 

A Financial Advisor’s Thoughts on the Election

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Politics is personal and we are not in the game of telling you who to vote for, nor are we endorsing one party over another. These are our thoughts about three issues we find relevant to what we do on your behalf and how we look at the market.

Despite however sophisticated we may think we are, elections are still a confusing mess of promises, accusations and distractions. And making sense of what has been promised is quite difficult. Take for example the Liberals promise for an additional $20 billion in transit infrastructure spending over the next decade. That sounds great and will no doubt be welcome, but that works out to $2 billion a year nation wide (it is not being proposed to be allocated that way, but for simplicity purposes this will do). The cost of the controversial Toronto subway expansion is likely to exceed the $3.56 billion currently budgeted. Given the huge cost of transit infrastructure I’m at a loss to know how much difference $2 billion a year make across the country. Its a big sum, but I don’t know what it’s worth and I’d wager neither do you.

For this reason elections regularly fall victim to the desire of political parties and the media for an easier story to tell. And disappointingly this election spent far too much time talking about the niqab, an issue that, despite how you may feel, has only affected two people since the 2011 ban was first introduced.

There are a lot of issues in this election, but some that could have a meaningful impact on your investments and retirement savings, and I thought I’d share some thoughts on them.

TFSAs

Tax Free Savings Accounts have been a popular new tool for investing since they were introduced in 2009. Originally allowing for a $5000 per year contribution, then raised to $5500 and finally to $10,000 per year in 2015, the Liberals and the NDP have both vowed to roll back the increased contribution room to the more modest $5500 arguing that the room only benefits the wealthy. I have previously written that I think this is a bad argument and that TFSAs are a valuable tool for saving regardless of income. Obviously the Conservatives have promised to keep the contribution levels where they currently are, and notably there has been no discussion yet as to how a roll back would affect existing contributions and future contribution room, nor how the CRA would track this year.

Pension & Income Splitting

Pension splitting has been reaffirmed as a necessary and vital tool for retirees by all the parties. Conservatives, Liberals and the NDP have sought to reassure Canada’s most reliable voting block seniors that pension splitting will remain a part of their income options. In a telling move that illustrates how cynical perhaps our politics are and who will reliably turn up to vote, pension splitting will stay, but the NDP and Liberals would like to see income splitting go.

Income splitting, if I’m being honest, makes a lot of sense to me. Designed to help families with a large income earner and where one parent stays at home to raise children, it balances taxes paid where a two income family would pay less even though their combined incomes are equal to one large earner. The tax benefit is only open to families with children under 18 and capped at $2000, so it isn’t a necessarily huge tax write-off.

Interestingly, the argument against income splitting isn’t a great one. According to the Liberals (and backed up by independent think tanks) the tax credit is really only available to about 15% of Canadian households, and so by that logic alone has been described as a $2 billion tax break for the rich. My math suggests otherwise.

According to the 2011 census, there are just over 13 million private households in Canada. Couples with children account for more than 3 million of those households (3,524,915) or around 28%. That means (and I’ll admit I may have this wrong) eligible families for income splitting account for more than half of all households with children. So the idea that it isn’t a useful or widely available tax credit may not be as accurate as portrayed given who it is targeting.

Housing

Economist Canadian DebtAs you know, I hate Canadian housing, (but love talking about it). It’s a known disaster waiting to happen that consistently defies odds and makes everybody nervous. But while it’s where Canadians have accumulated the greatest amount of debt it hasn’t really been an election issue. The importance of reducing the cost of housing hasn’t really been recognized either. There are efforts from all parties to create more affordable housing, but that isn’t the same thing.

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To this end both the Conservatives and the Liberals have brought some terrible ideas to the forefront. Conservatives have made their once temporary home renovation tax credit permanent, although they’ve cut it’s value in half to $5000 from the original $10,000 and have pledged to increase the maximum you can borrow from the Home Buyers Plan. The Liberals are offering to allow you to dip into the First Time Home Buyers plan more than once. Neither of these plans are great. The housing market is too hot and encouraging the use of RRSPs (you know, your private retirement savings) to encourage more homeownership highlights the complicity of Canada’s government in the soaring debt levels of Canadian families.

Home Ownership

In the end we may long for a political party that advised caution against further home ownership in a country where it is already at record highs, and one of the highest in the developed world. Just a reminder, the view of the government is that while high debt is a natural byproduct of low rates, too much debt will still be your fault.

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We aren’t trying to influence your vote, but we think it is important to understand that underneath the bluster and mudslinging are policies which can directly impact the financial well-being of Canada, and Canadians like you. So please remember, on October 19th, vote!