Juggling Dynamite

This is precisely the discussion we have been having at our weekly coffee group for a couple of years now…

The credit bubble has enabled a massive build of large, expensive homes all over North America–especially in Canada–and other countries like New Zealand, Australia.  It’s not just that market prices are outrageous (enabled by 30 years of falling interest rates and rising debt), it’s also the insurance, taxes, cleaning, repairs, yards and other upkeep costs.  While people are physically able they may do lots of the maintenance themselves.  While still working, they may not mind hiring services to help.

But once retired few will want (or be able, see: The high cost of low interest rates on savers) to expend big outlays to maintain their house; let alone a house, a cottage and a ski chalet.  With most of these properties currently owned by the age 50-70 category, the obvious question becomes, who in the world will buy all these high-end properties from the boomers and at what price?

For those who think this won’t become an issue for years yet to come, it might be time to think again.  See Canada’s housing market faces looming demographic bubble:

“Older boomers are putting their houses up for sale, but they aren’t getting the offers they expect. So they take their houses off the market. Meanwhile nearby houses built on spec are selling at sharp reductions, as builders — and their backers — are forced to sell to get their money out.

“The baby boomers thought they had lots and lots of time,” Macbeth says, but the decline of the Alberta resource sector suddenly moved everything forward.

Rabidoux foresees something similar coming in Ontario, but the relative decline will depend on what kind of house and where it is located.

“You drive through the countryside, and in the middle of nowhere you’ve got this sprawling, 4,000-square-foot brand new house,” he says. “They’re everywhere.”

Rabidoux expects those rural monster homes will be some of the hardest to sell as boomers age and no longer want the responsibility of managing such properties. For the generation coming after, he thinks those houses will be impractical and unaffordable at current prices.”

Over the next 5, 10 and 20 years, the big demand push will no doubt be for smaller, more efficient, green, easier to maintain, but still luxury amenities, housing. That’s a no-brainer. But in order to move there, boomers will still need to sell their current monstrosities. A lack of able or willing move-up buyers is the problem. Perhaps renovating today’s large single family properties into multi-family units will be part of the solution.

The most valuable commodity on earth is fresh water. Depleting finite water supplies to extract less critical commodities is short-sighted and unsustainable. This reality will increasingly dictate our policies and procedures.  It’s quite literally adapt or die.

The future price of copper and the growth of companies that produce it could hinge on a single precious resource: water.

Mining the important industrial metal requires huge volumes of water to control dust and separate copper from the earth. But a seven-year drought enveloping Chile, the world’s largest producer, is forcing big miners to curb output and pitting them against small communities like this one high in the Andes.  Here is a direct video link.

Interim rallies notwithstanding, the Canadian stock market continues to come down from QE-inspired delusions.   The below chart since 2013 shows the story.  The black line is the TSX 60 market cap-weighted index (dominated by today’s most expensive companies so financials make up 40%) and the red line is the TSX 60 equally-weighted index (all 60 companies represented in equal weights so financials make up just 15%).

By stripping out the overweight in financials, we can see that the Canadian stock market has now round-tripped back to where it was in December 2013.  Some of the capital fleeing falling sectors like energy and materials rotated into the last standing ‘hot’ sectors over the past two years (dividend-paying, REITS and financials).  This only made these few still over-loved companies even more over-valued and dangerous for the capital bet there.

Beyond sector rotations, over the past year both foreign and domestic capital flows have been leaving the loonie and Canadian securities at the fastest pace of the 10 most developed markets.  The world’s love affair with Canada and our commodities is ending in a painful divorce. It is likely things will get a good deal worse in the months ahead.