Blessed by the Potato

Well, in my last update I reported that the trip to Turkey helped me lose over 5 pounds. Unfortunately I caught a cold on the plane, it’s Halloween which has lead to much candy eating/poor dieting, and of course I haven’t been working out every day like I was there, so I’ve already put 2 of those pounds back on :( Ah, well, on to the links:

Mike at Money Smarts puts up summary tables to review of all the online brokerages in Canada. I’m of course still a fan of TD Waterhouse (which now offers the lowered commission rate to slightly more households with the threshold of $50k), in part because of the ability to easily buy e-series funds, and in part because once you do get a live person on the phone, they’ve been great every time. Knowledgeable, interested in getting problems solved, and just generally helpful.

Preet asks the perpetual question “Is a variable rate always best?”. One important thing to keep in mind when making that decision is not just whether rates will go up, but how high they’ll go, and how fast they’ll do so. One really rough rule of thumb is to consider the case of rates that go up in a constant, linear way. In that case, you save money in the first bit of the slope vs. a fixed rate, so by the end of the 5-year (or whatever) period, rates have to go up to be as much over the fixed rate as they were below the fixed at the beginning to break even. So for example today, with a fixed at about 3.4%, and a variable at about 2.3%, you’d have to expect the variable rate to be over 4.5% at the end of 5 years to make going fixed worthwhile. The real world is a more complicated place, so of course rate changes won’t be smooth like that, and there’s also the impact of paying down your mortgage, which helps the variable case more: lower rates earlier on are more effective than the higher rates later on. You can always make a spreadsheet to figure it out, but I don’t think the finer points of the math is as important as the very uncertain rate predictions.

Canadian Capitalist has a good post on where some of the tracking error of currency neutral funds comes from. The research shows that it’s not likely that the tracking errors are purely random, so one shouldn’t expect them to cancel out in the long run. Michael James provides a good potential explanation for where this negative correlation comes from.

MacLeans has an article on the rent vs buy decision, quoting Patrick from A Loonie Saved (HT to Patrick who sent me the link :) Here’s his part:

Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”

Well-put, Patrick! Of course, I’ve got to nit-pick some parts of the article:

Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations.

As I’ve argued before, paying down a mortgage is a form of “forced savings” (which to put it another way, means that people are so bad with money that they only way they can save is if threatened with homelessness), but that’s a very poor solution to an inability to save: actually saving is better. Yet here MacLeans’ goes further and adds in renovations. But, generally speaking renovations cost money, and you don’t get that money back when you sell. The urge to renovate should be a point against buying a home for the financially strapped young Canadian.

Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”

I disagree with Moshe — the bloggers and forum lurkers like myself have perhaps been getting overly financial in the debate, but the general public has not. Or, if they have — with dreams of increasing real estate prices and easy roads to financial freedom — it’s because the financial debate has been very superficial. Far too often I’ve seen the old “rent is throwing your money away” line, or comparisons that forget to include big items like property tax, maintenance, or transaction fees. A financial notion only, not backed by any math. The debate is not nearly financial enough for most people. Indeed, I suspect that is how we got to a ~70% homeownership rate, a level that’s even higher than the peak in the US, where people now openly admit that banks loaned money to people who had no business buying a home: by people deciding that they wanted the ownership lifestyle aspect without taking the time to do the math. Plus, those lifestyle decisions — when to move, how much space will be needed for a family and when — should factor into the financial equations anyway.

Rob Ford won in Toronto. Part of the platform was to remove the Miller taxes on car registration and land transfer. I was in favour of the vehicle registration tax when I first heard about it, but am firmly against it now that I saw how poorly it was implemented: it wasn’t a small surtax, but a big charge that was as much as the provincial registration fee to begin with, making it twice as expensive to register a car in Toronto. Plus, it was easy to avoid if you had a friend or relative that didn’t live in Toronto, so it wasn’t good on the fairness front, either. It’s a bad tax, and I won’t be sad to see that one go.

I think the land transfer tax was a good one though: it was introduced at a time when real estate prices in Toronto were climbing double-digits per year, so the 1-2% tax was easy to sneak in, and it was basically just lost in the noise of the market moves. Since it’s not an ongoing tax, it’s also been priced in now, so there’s no reason to get rid of it.

At curling last night, one guy shared the “factoid” that this October has 5 weekends and (5 fridays)… and that it won’t happen again for over 800 years! I naturally called bullshit: October has 5 weekends any time Halloween falls on a Sunday, which should happen approximately 1 in 7 years. Even in the full force of my overwhelming logic, he said no, he read it on the internet that “because of the leap years and stuff”, it won’t happen again for 800 years. Well, a quick scroll through my BB calendar shows that 11 years is all it will take (2021) for that to happen again. Besides, the extra days from leap years don’t get added to October. When I got home I tried to Google it, and sure enough the bullshit is prevalent enough that as soon as I typed “October 5 we…” it automagically filled in “5 weekends 823 years”. 81k results. I weep for humanity.

On the theme of running down of mysterious and wrong-sounding numbers spewed on the Internet, Barry Ritholtz looks into the “average holding period is 11 seconds with HFT” meme, and finds the evidence to be lacking.

Hope everyone has a fun and safe Halloween!

Rachelle at Landlord Rescue is hosting the first edition of the Canadian Real Estate Carnival. Head over there to check out a collection of articles about real estate in Canada, including one by me!

Mike from MoneySmartsBlog has published his guidebook to RESPs. I got to help proofread an advanced copy, so I can say that the book is a good resource to have when starting out with an RESP for your child. It covers all the bases, explains what an RESP is, why you’d want to set one up for your child, and details the rules you need to be aware of.

The Globe has an article on the power of 4chan. “But their apparent hatred for humanity is compellingly inverse to their love of animals. […] When they decide to avenge people, they do it according to odd whims, like some dark, mercurial supervillain with a soft spot for house pets.” Netbug responds: “4Chan… It’s like letting a swarm of piranhas out of their tank because you have a spare cow to get rid of.”

The Big Picture blog has a post about Freddie and Fannie. What I found interesting was figure “2.2” (the 4th? one down). This is the data I was talking about some time ago about how Canada isn’t as different as we think we are. You can see how having a bad credit score lead to higher rates of default, but having high LTV (i.e., low downpayment) was also a large risk factor, even without having a low credit score (having both was terrible). And Canada definitely has had a lot of high LTV mortgages written in the last few years, even if “subprime” isn’t as bad.

The Neurologica blog laments science education in the US. A topic near and dear to my heart.

Thesis sabotage. Just the thought makes me shudder.

My mom used to freak out when I’d go grocery shopping or something at 4 am, largely worried about the freaks that might prowl the nighttime.

For the most part, the people out and about at 4 am are like me: pasty, sun-starved geeks and shift workers, university kids stocking up on snacks, or sleep-deprived dads picking up diapers and pickle-flavoured ice cream.

But this weekend was different, aside from myself the people out prowling the streets seemed to be right out of my mom’s nightmares: a greaseball guy with a skinny twig of a girl 20 years younger than him who had a thick eastern european accent and dressed like a total ho, and a guy fresh from a goth/industrial concert wearing a leather vest, leather pants, and combat boots, and a grimace (probably because he was wearing head-to-toe leather in this heat).

Anyhow, while I have been consistently underperforming my daily exercise goals, my distance for bike riding has been going well. Unfortunately, I gained another pound this week, and now the heat is on, so the exercise is likely to suffer — and if not, I will (I’m sure the public health guys would agree that being fat is better than getting heatstroke in this nonsense).

Since I’ve now gone back up to the weight I was at when I started this plus a pound, I’ve opened the contingency envelope, which contains the nuclear response plan for just this dark scenario. I can only tell myself that muscle weighs more than fat and that all the exercise is doing the trick for so long, it’s time to take action. The diet has to be stepped up (or, technically speaking, down) a notch. I’m also going to have to become lamer and spend more of my time working, working out, and sleeping, and less blogging, having fun, and reading about non-science stuff. Sleeping 4-5 hours a day while trying to churn out papers leads to lots of late-night snacking, which is not helping.

Housing stuff:

Mr. Cheap at MS defuses the idea of your house being your “best investment”, but thinks that the overpricing in Canada will lead to a flat market for a few years until fundamentals catch up, rather than a crash/correction, like I’m calling for. I think that he’ll be proven wrong in short order, especially given that:

Prices in Toronto have already come down 5% last month [down 2.6% for the GTA as a whole]. I don’t know what the typical May -> June seasonality is, but I don’t imagine that June is traditionally all that weak [it was flat in 2008, and up slightly in 2009]. The TREB releases focus on year-over-year numbers, especially when the month-over-month looks bad for them (or year-over-two-years-ago when the year-over-year looks bad for them).

BNN had a housing bear on today, which may also be telling. He’s predicting prices to go back to where they were in 2005 (before the CMHC rules changed and “rampant speculation” began), which would be a 26% decline for Toronto, and he’s saying that will happen around mid-2012. I’m a little more pessimistic, counting on ~35% decrease for Toronto, but also more patient, figuring that the bottoming out will be in 2013-2015.

Other stuff:

Woot is being bought by Amazon, and their letter announcing the deal is a fun read. They also poke fun at the AP today for stealing from their amusing letter, poetic since the AP wants to charge others for quoting even short snippets from their stories.

First London StarCraft 2 LAN party planned for August. Unfortunately, SC2 won’t have LAN support (unless we can change Blizzard’s mind!), so we’re all going to have to connect to BNet over the host’s internet connection. If that fails, we may have to play something else…

It’s been a rough few years to be a young adult in Canada and not own real estate. The media keeps firing off article after article about how it’s different here, how real estate always goes up, and how the systems and perverse incentives that lead to the bubble blowing up in the US totally don’t apply here.

Here’s a few recent ones to pick apart.

First up, CNBC asked around after the G20 in Toronto why our housing market didn’t crash. Amongst the silly answers given:

there are just six big Canadian banks that own the bulk of the mortgage market, and they don’t securitize and sell off loans at nearly the rate U.S. lenders do. They hold nearly three quarters of their loans on the books, and 80 percent of Canadian loans carry mortgage insurance.

In the same sentence they undermine their point. It doesn’t matter if the loans are securitized and sold to someone else, or insured, the effect is the same: for 80% of the loans made by Canadian banks, the risk has been offloaded (in our case, to the taxpayer, rather than AIG). The effect on behaviour is the same: sell sell sell full steam ahead, and damn the torpedoes. How many times have we heard of banks “helping” people find ways to borrow way more than they should qualify for, looking the other way on “creative” downpayments (that aren’t downpayments at all, but often other loans, sometimes even credit card cash advances). When they don’t bear the risk for making a bad loan, they make more bad loans.

Or this gem of misinformation and lawyering up the definitions:

Canadian banks also had and have no such thing as the Alt-A, or low-doc, no doc loans that fueled bad borrowing and consequent defaults. At the height of the Canadian housing boom barely 5 percent of loans were considered “subprime,” while a full third of U.S. loans were either subprime or Alt-A.

The CMHC will insure a person with a credit score of somewhere down in the 610-620 range, which is below Alt-A and into subprime in the states, but here AFAIK it doesn’t get a different name. It’s all good, baby. Not only that, but high loan-to-value mortgages (i.e.: CMHC insured) are rampant here. According to GT, the average downpayment on a new mortgage is now 6% (and since the minimum is 5%, that means a lot of people are not putting much equity in their homes). Small downpayments are almost as big a predictor of default as bad credit; combine the two risk factors and defaults rise exponentially. The difference in US and Canadian lending is not a difference of kind, just of degree (plus, our taxpayer bailout is built-in). Yes, there were fewer subprime mortgages issued, and the very worst dreck (negative amortization/interest only) was avoided, but just barely (40-year 0-down is not all that different).

Then this especially terrible article from the Toronto Sun was forwarded to me. In it, the author (a condo marketer and saleslady) recommends first-time buyers buy preconstruction condos because the builders aren’t as strict as the banks, and will let you create a payment plan for your downpayment, so you don’t need anything saved up. Spoiler alert: I’m going to recommend that people don’t buy condos (or pledge to buy condos at some unknown future date) when they don’t have any savings!

Recent statistics from BILD report that the typical high-rise condo suite price was up $25,108 in April, or 6.3% compared with April 2009. Where else can you get that kind of return-on-investment in this day and age?

Ouch, bad choice of timeframe. The TSX was up 28% in that period, not including dividends. And, it won’t cost you 10% in transaction fees to realize your profit. Of course, there is a logical reason for pre-construction to go up: your capital is locked up for 3+ years while your unit is built. And through all that despite real estate being an “investment you can touch/live in”, you can’t touch or live in or preview your pre-construction unit. How (and when!) it actually turns out can be a nasty deviation from what you were lead to believe in the sales pitch, and this is another risk pre-construction speculators are rewarded for. That this premium has now dropped to only ~5% is a statement on just how distorted the market has become.

Even if we weren’t tipping over the edge of our own housing crash, I’d almost always advise a first-time buyer to avoid pre-construction. A Tarion warranty is next to worthless, and as a first time buyer you’re probably keen to get out of whatever situation you’re in now (rental, parents’ basement) and don’t want to wait several years before your purchase is completed. Not to mention that you may not have the stability to effectively plan that far in advance plus a few years to know for sure that the imagined condo is where you’ll want to be living 10 years from now. No, leave pre-construction to the speculators and retirees, even if you do have to scrounge up a bit more for something you can inspect right now.

Then, on the same day in the Sun, “No bubble trouble to report here“:

We experienced a true bubble in the late 1980s and early 1990s, when mortgage rates skyrocketed and speculators flooded the market. Despite the fact that conditions are very different today, people continue to compare our current success in home sales to that time. I don’t understand why.

Look, no. Rates did not skyrocket in the late 80’s. Rates do not have to go up to pop a housing bubble — you just have to run out of buyers. In the early 80’s, there was a brewing bubble that was smashed by high rates (the 20% rates your parents still wake up in the middle of the night in a cold sweat thinking about). But the bubble that popped in ’89 was not fuelled by low rates or killed by high ones. Look them up yourself. Rates spiked all of maybe 2% (starting from ~12%, the equivalent of going up about 0.6% today) over the course of about 8 months in 1990, after the housing boom had already started to die. The late 80’s housing bubble can’t be laid at the feet of interest rates. Plus, we’re at rock-bottom interest rates now, so if conditions are different, it’s in a way that makes the current times look even more bubbly!

Speculation though, that’s a good measure of when things are getting bubbly. How much speculation was going on back then? Unfortunately, I don’t know of any good measures of that, but there is a heck of a lot going on now.

Then, after acknowledging that bubbles happen, this guy goes on to say:

Prices are only going to go up…

Unless, as they’ve done many times before, they go down. The Toronto Life article said that up to 40% of new condos are held by speculators. That’s a lot of future demand pulled forward, so we can easily keep putting roofs over the heads of families even as prices crash…

And again, in what must be the Sun’s G20 silly real estate report section:

Pricing is affordable, while construction-related job creation is averaging around 170,000 per year over the last five years in the GTA alone.

Do the math on that one. Average of 170k per year over 5 years. 850k. There is no way, absolutely no way that 850,000 new construction-related jobs were created in the GTA alone. That would mean that, of the ~5.6 million residents of the GTA, roughly 1 in 6 works in construction, and just started doing so in the last 5 years. If it is true, it’s terrifying, as a city of nothing but people building homes to sell to each other sounds like a frightening ponzi scheme to me, and will mean that when a downturn does come, there will be incredible positive feedback loops (where here, “positive” means “bad”).

And it’s not just the Sun, widely recognized as the paper with let’s say the least amount of journalistic prestige of the big 4 papers in Toronto. Even the Globe is making these goofs, such as “the little matter of affordability” which actually recognized that condos sold today can’t be rented for a profit. Rather than coming to the logical conclusion that a bubble exists and prices would come down, the author instead warns that rents are due to jump ~40-60% in the next few years. (And repeats the figure that up to half of all new condos are bought by speculators). Rents, of course, are constrained by wages to a much larger degree than owned housing prices, and can’t be leveraged up by low rates; we simply will not see rents jump ~50% just because that’s what’s needed to make the speculators’ numbers work. Not with an already healthy vacancy rate.

Kids, time to tune this shit out. The denials will continue to get stronger and more frequent as the wheels come off the market, and it won’t be until well after the decline has finally started before the majority of the stories turn into tales of woe and despair and talk of bubbles bursting.

Anyway, nobody listens to me these days because — despite the fact that I do research and am right — I’m not a “journalist” at a “respectable” paper. They can’t print this out and plunk it down in front of their parents to explain why they aren’t “building equity” like other kids their age.

Except for Julia, who is therefore awesome.

Just a week after putting out a release saying that the bank economists were wrong and that Canada won’t have price declines, CREA has come out with another release revising their earlier statement. They now predict prices to decline nationally through 2011, driven by (unstated) declines in BC and Ontario. For those in Ontario and BC (which is pretty much all of my readers AFAIK) this means it really isn’t time to buy a house now — even the CREA thinks it’ll be a terrible idea!

All provinces are forecast to post modest average price gains in 2011, except British Columbia and Ontario. The forecast decline in activity is sharpest in these two provinces… The national average price is forecast to decline by 2.2 per cent in 2011 as a result.

So even though they’re calling for the rest of the country to go up, the declines in Ontario and BC will be enough for the overall national average to be pulled into negative territory (and remember that CREA is generally one of the most bullish sources of predictions!).