Stagnation in the Canadian Housing Market

A LESSON IN TIMING, INCENTIVES, AND PSYCHOLOGY

The Aug 8^th 2012 edition of Canada’s Globe & Mail newspaper boldly stated that the country’s economists had reached a consensus: the bloated housing market will first slip 10-15%, and then “stagnate for years.”

The Frost Report has been warning prospective buyers about the coming decline of Canadian (and world) home prices since the first peak of February and March 2010 (see Spin City).  So, why are economists lagging so far behind?

First, the news is coming out now because it can.  The economists in the article -- who are employed by financial institutions -- have nothing left to lose since the market is “effectively exhausted” (their words).  People who have already bought homes have given the banks and brokerages their business, and can no longer benefit from the advice.  Those who don’t have homes after years of low interest rates either can’t afford them or don’t want them.

Secondly, economists have virtually no natural incentive to accurately predict slowdowns and price declines.  Nasty predictions about the most popular investment in the country (real estate) are unpopular, unwanted, and of no benefit to the companies who employ economists.

And then there are the clients…

It’s dangerous to advise a client not to buy real estate.  Contrary to what is taught in most investment psychology manuals, clients take declines in prices (“who could have known?”) far better than missed opportunities (“you said not to buy and prices went up 50%!”).  Furthermore, a client who has already decided to buy (which is typically why they are speaking with a banker or real estate agent in the first place) will never, ever listen to advice anyway.  If a client, who has already decided to buy, asks a banker if it’s a good time to do so and the banker replies, “I don’t believe it is,” that client will usually spend the next 15-20 minutes explaining to the banker why he is wrong.

The Cinderella party in Canadian housing is officially over.  I sincerely hope that the moderate 10-15% decline predicted by the nation’s top economists is accurate – but I doubt it.

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See also:

Canadian house prices to slip, then likely stagnate for years

Summer chill cools Toronto, Vancouver property markets

 
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Why would anyone Buy Bonds right now?

Last week, bond manager Bill Gross (a man who should know better) made the curious statement that the stock market is sure to provide bleak returns for years to come.  This is despite the fact that stocks have historically outperformed every major asset class, particularly after prolonged downturns.

Of course, it's not completely unexpected for Bill Gross to be dismissing stocks. As the manager of one of the world’s largest bond funds, he’s expected to be a bond pimp (though to be fair, he now says that bonds won't perform well either).  So, how are bonds as an asset class?

When bonds are popular, long-term yields drop (there is no reason to offer a high interest rate if people will buy them with a lower one).   And just how popular are bonds at the moment?

As of August 1st 2012, the US 30-year treasury yield was 2.614%. For the first 6 months of 2012, the rate of inflation was 2.37%.  Therefore, 30-year treasurys yield a Real Return of exactly 0.244%.  At this rate of return, you will double your money every 298 years.

Canadian bond yields are excellent in comparison, though still dismal.  The Canadian 30-year treasury yield on Aug 1^st was 2.297%, with inflation during the first 6 months of 2012 at 1.95%, for a Real Return of 0.347%.  Far better than US treasuries, Canadian bonds allow you to double your money in slightly less than 200 years (198 years and 3 months).

The other problem with bonds is that when interest rates rise (as they are sure to do, well before 20 years from now), prices drop.   If interest rates rise at all, there is an excellent chance that your .244% USD bond return will disappear completely.

If you have billions of dollars that absolutely needs to be in a guaranteed investment (for international real estate escrow, for example), there may not be anywhere else to put your money.  I’m quite certain that most readers won’t fit into this category.

If your reason for buying Government bonds is, “I've heard that Government bonds are safe and I don’t want to lose my money,” then you should buy my book, The Intelligent Investors Mind, which clearly explains why this way of thinking is dangerous.

Normally, bonds -- especially Government bonds -- are one of the best and safest investments around; but in the world of investing, the exception proves the rule.  At present, bonds are bad news.

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"The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well."

Bill Gross

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