Juggling Dynamite

In a series of heart-stopping swings, since mid-December, the tech-heavy S&P 500 and Nasdaq are currently up 2.9% and 2.7%, respectively, while the US dollar (as measured by the DXY) has fallen 10% against major trading partners. The more economically sensitive Dow Jones Index is down 2% since December, while the S&P 600 (small-cap companies) is down 10% since the November 2024 peak and down 3.7% since November 2021.

Still, the consensus remains extremely bullish, and FOMO (fear of missing out) is rampant.

Under the indices, the most cyclical segments of the US stock market are in various stages of decline: S&P 500 autos & parts (-31%); home furnishings (-30%); homebuilders (-28%); office REITs (-21%); media (-16%); residential REITs (-12%); retail REITs (-10%); US regional Banks (-11%); and Dow Transports (-11%).

In Canada, the TSX has fared better, up 5.9% since December 6, 2024, helped by a rise in precious metal companies (XGD, +25% since October), while its heavyweight fossil fuel sector (XEG) is down 11.8% since April 2024.

Little covered by financial media is the fact that Treasury bond prices have been rising with much less volatility and principal risk than equities. Not counting interest payments received, Canada’s 3-year Treasury bond is up 9.5% since March 2024, the 5-year bond is up 8% since August 2022, and the 10-year bond is +10% since March 2022.

Not surprisingly, a world full of salespeople promoting equity allocations insists that Treasuries are for dummies and stocks are for the savvy.

Corporate bonds, meanwhile, are priced as if risk-free, with investment-grade bonds yielding less than 1% over similar-dated treasuries and low-quality “junk” bonds less than 3% — about half the historical yield spread norm.

Conflicts of interest are so endemic that US President “Pump” Trump is openly promoting financial products and those of his supporters while publicly demanding that the central bank slash interest rates.

With tariff threats and inflation still lingering, the US Federal Reserve and the Bank of Canada are set to maintain policy inertia this month. Their reticence is understandable, but with the labour market weakening and loan delinquencies leaping, rescue efforts will come later than usual this cycle.

A record 11,400 Americans turn 65 every day amid extreme capital risk in their savings.

Approximately 30% of the population belongs to the 55+ age group, who own some 79% of all stocks and equity funds (Deutsche Bank research), now trading at irrationally high valuations—the S&P 500 is priced at a whacky 210% of US GDP. We’ve never seen such madness.

When prices ‘correct’ the pain and suffering will be widespread and difficult to recover from later in life.

I’m tired of pointing out the obvious, and I’m not sure who needs to hear this, but we are living through a wild confluence of factors.

Minimizing capital losses has to be the priority. That requires staying focused on our own financial plan and not succumbing to popular delusions.

Toronto home sales rose 8.1% in June, but were still 35% below the decade’s average; the average home sale price dropped 5.2% year-over-year to $1,151,600.

Condo sales in Toronto have declined by 75% over the past three years (-37% in Vancouver) and are down 22% from June 2024; at the same time, new listings are up 25% year-over-year.

Toronto mortgage delinquencies are surging at a rate much faster than the rest of the country. In two and a half years, the delinquency rate more than tripled (3.67x) from the record low in Q3 2022 (chart below via Better Dwelling, see Toronto Mortgage Delinquencies Have Tripled, Highest In Over A Decade):

The rising delinquencies are just one of the compounding issues materializing in Toronto real estate. After a nearly 26-year run where the market seemed invincible, there’s been a sudden shift with sales plunging to multi-decade lows for both new construction and existing homes. At the same time, the market has the most inventory on record—yet prices remain lofty.

Nationally, the average Canadian asking rent is down 2.75% year-over-year, and this is beginning to show through in the CPI statistics. Services make up more than 60% of Canada’s Consumer Price Index, and nearly 30% of the index is driven by shelter costs that are now deflating. The trouble is that the average Canadian asking rent of $2,125 in June remains 28% higher than $1,701 in June 2021. Rents and home prices will need to drop significantly further to return to a reasonable percentage of household income.

The good news is that market conditions (increasing supply, flat population growth, and below-average sales) are likely to continue suppressing shelter costs for some time–much needed to help restore affordability. But this is bad news for those who bought, refinanced, or lent against properties near cycle highs in 2021-23.

While publicly traded Canadian Real Estate Investment Trusts (as represented by the XRE index) have rebounded since April, the basket remains 12.7% lower than its peak in January 2023.

The same Canadian real estate index fell 59% from February 2007 to March 2009, when Canadian home prices declined by just 8.2% nationally, as measured by the Teranet–National Bank House Price Index. Canada’s financial share index (XFN) fell 51% over the same timeframe.

The average Canadian home sale price has so far declined by 18% since the peak in February 2022, when fear of missing out (FOMO) drove many irrational financial decisions.

Adjusted for inflation, the average Canadian home price fell by roughly 25–30% nationally between 1981 and 1985—food for thought.

For those with the attention span and patience to follow and understand cycles, there’s a lot of opportunity in the making here, but only when we can resist the siren song of consensus views.

The discussion below addresses some of the history and headwinds facing real estate in Canada’s most populous areas.

Our guest this week is Ben Rabidoux—Founder of Edge Realty Analytics and North Cove Advisors, and one of the most respected voices on Canadian housing and economics. In this episode, he joins Dave to tackle some of the biggest questions facing Canada’s real estate market today. From the condo market crash to vacancy rates for rentals to the role of HELOCs and immigration policy, Ben explains how we got here, what’s coming next and what it all means for affordability in this country. He also shares the story of catching Fortress as a fraud and offers a candid take on whether Canada is too soft on white-collar crime. If you care about housing, affordability or the future of Canada’s economy, this episode is a must-listen.  Here is a direct video link.

If we had a loonie for every person who believed, “You can never lose money in real estate.”  Unfortunately, many well-meaning older folks ignorantly aided and abetted younger folks into a massive housing bubble. Many are doing the same thing now with corporate securities markets back at historic highs.

The masses are increasingly realizing and regretting capital allocation mistakes that they’ve made, and, as usual, many are looking for others to blame. Many co-signors are in a particular world of pain, as Ron Butler explains in the segment below.

Back in 2020, 2021, 2022 Canada had the highest numbers of Co-signer Mortgages in its history, at one point over 25% of Mortgage applications for Purchases had Co-signers, FOMO, Multiple Bids & desperation to buy caused many parents to sign on to Mortgages to help their adult kids buy homes. 5 years later some of those parents want OFF those mortgages And it ain’t easy! Ron explains. Here is a direct video link.

Remedies from here include cutting losses or throwing more good money after bad. Neither is appealing; however, lasting financial enlightenment can be achieved by those who are willing to admit, repent, and reform their behaviours.

At all education and wealth levels, it is common for humans to believe that recent price trends, no matter how extreme and irrational, will continue indefinitely. And yet, everything is a cycle.

In the immortal words of Bob Farrell (his 10 market rules are summarized below):  There are no new eras; markets tend to return to the mean over time, and the public buys most at the top and least at the bottom.

So far, since the cycle peak in February 2022, Canadian home sale prices have fallen about 18% nationally, and many lay people and would-be experts are proclaiming a bottom. But with for-sale listings leaping and prices just back to May 2021 levels, still some 8x the median household income, history suggests that more mean reversion is coming.

In Bob Farrell’s timeless observation: “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.”

Would-be sellers are learning once more that real estate (especially when it’s richly valued) tends to be an illiquid asset, while debt requires monthly payments.

Real estate, the most widely held and leveraged asset class, has led the harshest economic downturns historically. On the upside, the few who have cash, value discipline and patience tend to reap extraordinary buying opportunities in the end.