Tuesday, January 29, 2013

Do you feel like you have been screwed? You have been

Sorry to interrupt the normal RE news-flow. 

Today, you, the tax-payer have had your nose rubbed in the dirt. Two Government appointed civil servants, Dave Basi and Bobby Virk were charged and pleaded guilty to fraud and breech of trust in relation to the BC rail sale in 2003.

The big deal was the legal fee, which the Government picked up the tab for....$6 MILLION!!!!

The Auditor General wanted to look into the lawyers billings in detail and find out how such a humungous bill arose and today Chief Justice Bauman said .. no you don't! that would infringe upon client lawyer confidentiality.  WHAT???!!

Lets looks at this logically, shall we:

We have two Government employees , who have admitted to committing fraud, we have their legal fees picked up by the tax-payer (while fighting crown Counsel which we also pay for!) Now the Government watchdog wants to find out why the bill was so high, and the reason he can't find out is because of the secret code between the criminals and his lawyers who billed the huge fees??

Does that make sense?

Lets work out the Math:

Even if every scrap of work was done by a senior lawyer at $300/hour. At $6 Million. We are looking at 20,000 hours of work. At 40 hours a week...that's TEN YEARS OF BILLABLE WORK!! With no holidays or days off.

Yes I know many senior lawyers bill $400-500/hour or more. BUT please don't tell me a lot of this work wasn't done by juniors billing less. 

Also who is watching the till and bargaining? This Government has been nickle and diming the teachers and other groups, it SHOULD be demanding a great deal from private contractors. A fixed fee. Lots of other organizations bargain fixed legal fees or a ceiling, why not the Government.

And we will never know if the $6 Million was padded or fair? We don't know if a minister okayed the payment or some junior clerk just paid the invoices every month until it added up to $6 Million. I read that there were over 30 similar cases paid for by the Government. By not allowing the Auditor General access to the information, the Chief Justice has closed the door on any accountability.

Crazy eh? Pay $6 Million to defend two guilty Government bozos and don't allow any oversight from the auditor. 

We need a strong legal system or we end up like all the countries where people are being jailed for no reason, but the implication of this decision seems that if the Government is paying the bill go for broke!!

BTW- who were they selling the information too. Shouldn't there be some arrests on the receiving end too??


Talking of convicted criminals....

This convicted felon has a new job, though it seems he has moved from pontificating about how we should run our country to sex toys and yoga. Sounds positively awful.

Sunday, January 20, 2013

Whither interest rates

Interest rates have been moving up. The question every year, for the last few years, has been is this the year that rates bounce back up from their historic lows.

Here is the graph from the Bank of Canada. Not a huge move, but definitely a tick up. Is this just noise or the start of a more meaningful move.

US Yields have shown a similar bounce up.

How much can we make of this? To be honest yields are now impossible to forecast. It used to be fairly easy in the past.

The yields on long Governments bonds used to be based on a number of factors that could be analyzed. Inflation expectations of bond vigilantes, Government deficits, other investment options, whether we were entering a boom (higher trending yields) or a bust (lower trending yields). 

Now however, things are so messed up that no one has any clue where they will be, and the many predictions of higher rates have been 100% wrong for the last 4 years.

We have so many unique things going on that the equation no longer works. 

First we have low inflation. Even though the Central banks have dropped rates to near zero and bought bad debt and Governments have ramped up spending, the inflation genie has NOT come out of the bottle. The velocity of money (the speed at which it passes through the highly indebted economies has slowed), Debt is still being unwound in the private sector (Canada has just started) and Governments have just realized they cannot borrow and spend indefinitely. Second we have an anemic job market and therefore low wage pressure. All in all not a recipe for inflation.

Secondly we have Central Banks like the Fed and the ECB buying their own Government bonds..huh? What sort of bizarre Capitalism is that? Like a company buying it's own products when no one else wants it. They have to keep interest rates low by whatever means it takes. 

Take the US, it is paying an astounding $360 Billion interest a year alone- when rates are near zero. Imagine what would happen if they went to 5% which is the historical average.

Finally we have two pressures pushing rates down. The first is fear of 2008/9. The sudden deleverage that took place had people fearing widespread defaults of large banking and industrial institutions. This was averted by zero rates and tax-payer infusions of money and assumption of liability - to a criminal degree IMVHO. The fear is still there however. 

Furthermore the Boomers are desperate for yield. 

Each $1M of savings will yield $15,000-20,000 a year in Canada from GICs and even less in the US. That's before tax and is not enough to sustain a retiree. Hence they will jump on any chance of juicing the yield up a little by moving into longer duration bonds or accepting more risk than they should.

There are literally Millions of people looking for safe, steady yield at a time when none is to be had.

So even though rates may have popped and moved off the bottom, there are very strong forces which are likely to keep them very low, for much longer than we think. We should not expect a 'rate shock' to be a major factor in any RE correction. We will have to get there on the basis of lack of affordability, reductions in Government inducements (stupidity), demographic changes and a change of psychology. 

In the US, Greenspan told everyone to go 'variable and not fixed in their mortgages' and then raised 16 times (yes it's true!) killing those who took his advice, and the result was a sudden bursting of the RE bubble, which could not be reflated when the FEd subsequently slashed rates. 

In Japan however, it happened without rates rising, just as a reaction to a decade of foolish over-pricing. We could follow Japan, rather than the US in this.

Finally I noted some great links on Vancouver Condo- hat-tip VMD. These show the effect on demographics on our economy. The numbers are quite staggering

This graph shows us that from 2010 onwards we are a point where the number of non-workers being supported by workers is going up very rapidly and will soon be 50% higher than the 2010 number and eventually twice the number. 

How is that going to happen? The worker must either pay a lot more tax or the recipient must receive less OR we do neither and just borrow and leave it for the next generation to deal with, as the US and Europe have done.

This paper from the Bank of Canada is easy to read and is a must read.  Our Aging population means less taxes and more entitlements. $20K a year healthcare costs when we go over 80! Add in pensions and other subsidies,  then throw in the fact that Canadians have saved very little for retirement. Stir in the demographic  truth that the fastest growing group will be the over 80s and you can see we have a very hot stew in the making!

Wednesday, January 2, 2013

The first RE news of 2013

The news of falling assessments was all over News 1130, CTV and the papers today.


Vancouver Sun

Ironically a falling assessed value makes things even more difficult to sell in hard hit areas.Why? Because buyers will start wondering why they should pay more than a number which is dropping. In fact maybe they should pay less to account for future declines.

And lenders who were happy and foolish enough to lend way over assessed value in the way up, will now look at assessed value as some sort of base value for lending (which it isn't). That unfortunately is how human psychology works.

Tuesday, January 1, 2013

We made it...now what?

2012 could well be recognized as the start of the housing correction in Canada. Sales are down, prices are down, the MSM is talking about it.... the usual spin-mesiters are out in force trying to play down fears of a significant drop, while Scotia has said that's pretty much it. 

Meanwhile the bears are rubbing their hands in anticipation of a spring no-show by buyers and some major reductions by the summer.

Either side could be right. We will have to watch the data and news flow. Of course there is observer bias. Basically, people can look at any set of data and justify their own point of view. It is hard to be neutral on such an emotional subject.

On the bears side...we have a clear break down in sales pressure and prices. We also have an incredible amount of recent buyers trying to sell in the market. Some stats show 20-30% of listings in some expensive areas were bought in 2011! I suspect some of these are in the tear-down-build-flip or renovate-flip category, others are probably washing local drug or off-shore hot money. There is no other explanation for someone buying a multimillion dollar home and trying to sell it a year later. I wonder if the banks and CMHC were willing partners in this speculation.

We also have a government that has belatedly come to it's sense and started to reign in the CMHC (which it hated as being too socialist, but then liked so much they doubled it) and started to reverse some of their own foolish mortgage decisions.

Immigration and demographics are working against our housing too. Lastly, all the magic bullets have been shot. If housing slows again significantly, what can the Governments do? The Provincial Government is cash strapped and deep in debt, despite accounting shenanigans, and cannot throw more money at this industry or buyers and the Federal Government would face a very embarrassing about-face to re-reverse! Meanwhile interest rates are still at near zero levels and cannot go much lower unlike 2009.

The most important factor however is psychology. The buying folk are getting more relaxed and the pressure is off. If they don't bargain, they feel like they have been suckered. No more realtors saying, buy at/above listing price or it's gone.

Ok what do the bulls have on their side. Quite a bit too. Even though sales are down, listings are down too, so we are not having the ballooning of inventory like 2008/9. Rates can't go much lower but they are pretty low already, the lowest in memory. Unemployment is still low and while prices are too high, maybe incomes will grow to catch up while prices stay stagnant. Sellers are being obstinate for now and prices may have stabilised.

Also China looks like it will have a soft-landing, good for commodities, and the Chinese will probably be back in our local market as buyers after the Feb 10th 2103 Chinese New Year, when our prices seem to have a boost up every year. Though the Chinese Government has been cracking down on some of the corrupt money barons.

The fiscal cliff in the US has been averted too, it seems, so the nascent recovery will not be snuffed out.

It won't be clear until it is. Looking at the chart, I expect a drop in the average below $1M to seal the deal. It was a shock on the way up and will no doubt be equally so, on the way down (if indeed we see that)

You know what my views are, but as always I will await the data flow.

Have a great 2013.