The little short
March 20th, 2016 | Book Updates | E-mail this blog post to a friend
As of Friday, four of the Big 5 Canadian banks were on the list of the most-shorted stocks in the nation. Whoa. These guys are money machines, right? Why would so many investors be betting against them, taking positions that would profit if bank stocks withered?
Well, might have something to do with Elaine. She lives in Vancouver, and would like to share this:
“There is mass hysteria here as people rush to buy now or be priced out forever. I thought things were crazy before, now they are just beyond absurd. It seems like people are doing whatever they can do buy now, including (probably) pledging their firstborn children. Some have this mentality that they must buy to ensure the future of their children, otherwise their kids will never be able to afford a place years down the road, since people seem to have forgotten that Vancouver isn’t the only city in Canada, or the world, that has houses.
“A friend of ours has been looking to buy
for months, to no success. Outbid on many properties, until they
finally found one that had no other offers. Bad location, they made an
offer and it was accepted. Price is $800k for a 3 bed townhouse. The
bank gave them the bad news: they didn’t qualify for the mortgage. No
s**t sherlock, hard to justify a $750k mortgage when the family income
is only $70k per year. Following some fancy footwork by the broker
(something that seemed to involve kiting cheques between family
members)-voila! The deal is done, townhouse is theirs. It seems
outrageous to me but this seems like a fact of life these days that it’s
an any-price type of game….doesn’t matter what the price is, the broker
can help you get the place you want. If the bank doesn’t follow
through, private lenders can step in too.
“Will the madness ever end? I have a feeling this is the tipping point.”
There’s a scene in The Big Short where a fund manager seeking evidence of a housing bubble interviews a Vegas stripper while she lap dances for him. Turns out she has five leveraged properties, and is appalled to learn her mortgages are adjustable-rate. He flies back to New York and pours everything his fund’s got into shorting real estate. In the end, he makes a billion. Toots, presumably, loses her houses.
A couple of days ago a smart US site called The Visual Capitalist reminded us of what a weird thing Canadians have done with their homes, in sharp contrast to a lesson the rest of the world learned. Quoting a top-rated Wall Street short-selling hedge fund advisor, it said, “The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates… A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.”
And this: “Canadian real estate has reached “peak insanity”, and it’s part of the reason that investors around the world are trying to find a way to bet against the market.”
Here’s the most startling thing our American friends noticed – last month, a record for Canadian real estate, if you were to strip Vancouver from the stats, our real estate market’s a dud. “Vancouver’ housing market sailed again in February, shooting up a record 3.2% in just one month. This is the best month for the market since August 2006. It was so good, in fact, that it single-handedly propped up Canada’s national index for housing. Canada’s market as a whole saw gains of 0.6% in the month, but it would have dropped to a lacklustre -1.1% without the inclusion of Vancouver in the 11-city index.”
Here ya go…(Click to enlarge)
By the way, the real estate industry is hoping you don’t notice this, that you take the buy-now-or-buy-never headlines coming out of Vancouver or Toronto as evidence this asset’s on fire everywhere. Last week CREA upped its forecast for 2016. “Canadian resale housing market trends this year are expected to resemble those apparent in 2015, with very tight supply leading to strong price gains in British Columbia and Ontario – particularly in the Lower Mainland and in and around the Greater Toronto Area.”
Realtors are now openly forecasting that the national average price – currently sitting at the highest level in recorded history – will bloat another 8% in 2016. That would be four times the expected rate of inflation and about six times the anticipated wage gains experienced by the average family. In other words, if true, it would signal a further descent into unprecedented household debt. Yep, held mostly by the big banks.
Of course, some people (this pathetic blog included) have been trying to spell out for a year that our housing market is incredibly unhealthy and uneven. Sales and prices in resource-based communities are toppling. Seven of ten regional markets are stagnant. There are fewer monthly sales in Toronto than took place two years ago. And the real estate industry nation-wide continues to obfuscate official numbers in a variety of ways, allowing moisty cub reporters and pandering politicians to do the job of fooling folks.
So when victims like Elaine’s friends pay $800,000 for a beater house in Van with three-quarters of a million in debt – over ten times their income – it sure feels like a Vegas lap dance. How can this possibly end well?
By the way, Warren Buffet figured this out a while ago when he looked at how real estate destroyed the US middle class:
“The basic cause, you know, embedded in
psychology, was a pervasive belief that house prices couldn’t go down
and everyone, virtually everybody, succumbed to that. But that’s the
only way you get a bubble is when basically a very high percentage of
the population buys into some originally sound premise. It’s quite
interesting how that develops.
“The originally sound premise that
becomes distorted as time passes and people forget the original sound
premise and start focusing solely on the price action. So the media
investors, the mortgage bankers, the public, me, my neighbor… you name
it — people overwhelmingly came to believe that house prices could not
fall significantly. And since it was biggest asset class in the country
and it was the easiest class to borrow against, it created probably the
biggest bubble in our history.”
Nobody’s certain how things will ultimately be resolved. We just know
those who believe prices will go up, forever, are wrong. The rest of us
should probably get out of the way.@garthturner
Canada's most-read real estate and financial blogger. Business author, financial advisor, ex-MP and minister, entrepreneur. http://www.TurnerInvestments.ca
Toronto ON
Joined October 2010
Source: http://www.greaterfool.ca/2016/03/20/the-little-short/
