Juggling Dynamite

There’s now just a .13 yield bump to buy a 30-year over a 10-year treasury bond, and short term treasuries 3 months and out are yielding more than S&P 500 stocks with their 30-year+ duration and huge principal risk.  Capital is finally being paid to come in the risk curve, look out below.

Here is my partner Cory Venable’s spread chart showing the much smaller relative tightening that triggered asset bubble bursts and the 2001 and 2008 recessions.

According to Bank of Canada numbers, some $700 billion of mortgage debt is up for renewal in the next 12 months at higher interest rates. According to the latest Stats Can numbers, about 1/3rd of Canadians rent their home, 1/3rd own a home with a mortgage, and 1/3rd own a home mortgage free.

This means bubble real estate pricing, weak wage growth and record levels of all kinds of consumer debt are making it difficult for two-thirds of Canadians to own a paid for shelter, get out of debt and build saving for retirement, education and productive investment.  This is having compound costs for our country in the form of weak savings, innovation, business startups and reduced productivity.

Lower debt, lower shelter costs and higher savings levels are the road to prosperity.  To get there though we have to go through the financial strain, slumping sales and lower asset prices part of the credit cycle, and that is going to be unpleasant for many.

The average Canadian home price at $495K in April is still 7 x the median household income of just over $70k a year and compared with the long-term norm of 3 x the median income.  To get back to normal/sustainable affordability levels, that allow people to live and build essential savings for the future, either median incomes have to double quickly, or home prices need to fall an average of about 50% nationally.  The mean reversion has started, but likely much more to come.  See National home sales sink 14% to lowest level in 5 years: CREA:

The Canadian Real Estate Association says national home sales sank to the lowest level in more than five years in April, falling by 13.9 per cent year-over-year.

Sales were down in 60 per cent of all markets, led by the Fraser Valley, Calgary, Ottawa and Montreal.

CREA says the national average sale price decreased by 11.3 per cent year-over-year last month to just over $495,000.

On a monthly basis, home sales were down 2.9 per cent from March to April.

Unfortunately, thanks to price indiscriminate fund flows and index replicators, what little savings Canadians do have is more than 1/3rd concentrated in some of the most heinously over-valued financial shares on earth (financials make up 35% of the Canadian TSX index as well as all the funds and managers who seek to mirror it).  And while our largest banks may well tap government support when coming loan losses mount, that did not stop bank shares from plunging 50% in the last two credit crunches in 2001 and 2008. Home prices and financial shares that boasted the appearance of household wealth on the way up, portend an equal and opposite effect on the way down. The recovery of household balance sheets that follows, is likely to be slow and arduous.  Many, at or near retirement today, will struggle to recover stability for years.

It is wise and self-preserving to see, understand and be prepared now for the next phase.

Vancouver has magnificent mountains, luscious trails, enviable waterfront views, well-maintained bike paths… and a contentious real estate market.

How did we really get here? What does the future hold? Hold your judgment and listen to the newest CBC Vancouver original podcast. SOLD! digs into the generously-sized debacle that is Metro Vancouver’s real estate scene. Can we ever hold curb appeal again?

Hosted by CBC Radio One’s Stephen Quinn, SOLD! will address how we got here, why foreign investment is only part of the story, and where B.C. goes from here.

SOLD! is available now in 6 Episodes here at CBC Podcasts or Apple Podcasts. Here is a direct audio link to the trailer.