Everyone is aware of the manic rise in the price of real estate in countries such as Canada and Australia over the past few years. Yet many forget, for the entire rally, there has been a host of skeptics ringing the gong of doom, predicting a collapse that would make the 2008 Great Financial Crisis seem like a walk in the park. Eventually, these skeptics will prove correct about a correction as nothing goes up forever, but the truth of the matter is they have been spectacularly wrong so far.
Here is the price of the average Toronto house over the past couple of decades, along with some articles that demonstrate the mood during the rise. I chose Toronto, but it could just as easily be Sydney or Vancouver, the direction and attitude were pretty much the same.
Before you label me some sort of delusional real estate bull, let me make one thing clear. I am actually bearish on one particular asset. Probably more bearish than almost anyone. The difference is that I am bearish on the value of money. Central Banks are expanding their balance sheets at unprecedented rates, and are destroying the value of our savings. Yet I find it funny how with all this printing, market participants are surprised when the price of assets rise. Toronto real estate or US stocks are not increasing in value, no far from it. But they are increasing in price, because the value of the money we denominate these assets is being devalued at an alarming rate. Whereas most market participants believe Central Banks will suddenly become responsible and reduce their expansion, I suggest they will keep printing until the market takes their keys away.
So I am not nearly as bearish on real estate or stocks as most others. Not because I believe all is well with the world. No, I am less bearish, as I believe things are so FUBAR’d that Central Banks will keep devaluing the asset in which we price everything else.
Yet within this secular view, I acknowledge there will be cyclical moves that will provide opportunities. And there can be no denying that real estate is stretched. In the last year especially, the rise has become frenzied. The desperation of buyers in Canada and Australia has become so acute, many local governments are applying brakes to slow the rise.
But what caused the recent rabid buying? Was it just the madness of crowds? The final blow off?
That certainly seems to be the prevailing view. The Canadian real estate shorts, with the problems with Home Capital Group and the Moody’s downgrade of Canadian banks, seem confident the top is in.
The macro guys have all piled into shorting the Canadian dollar, pushing the net spec position to record lows.
I know that CME currency future trading is just a small portion of the FX market, and that this CFTC net number should be adjusted for open interest to be intellectually pure, but you get the idea - the hot money has rushed into shooting against the Loonie.
Emboldened by their Home Capital win, the housing skeptics have taken to making some rather bold predictions.
Well f’ me. “Canada will be worse… in different ways, but much worse.” The U.S. housing collapse during the 2008 Great Financial Crisis was pretty epic. Forecasting it will be “much worse” might be getting a little hyperbolic.
I recently spent some time listening to last year’s presentation by this short seller at the Grants’ Interest Observer Conference. Marc Cohodes did a terrific job, and it was a highly entertaining 45 minutes.. Yet I can’t help but hear his response to one of the macro questions asked of him ringing in my ears.
“I don’t get into that stuff. I literally short five, six, or seven stocks. If I told you how big I was, concentration wise, you would all vomit. People care about macro, but I just find, the shittiest, made up, bad management, bad balance sheet mother-fuckers I can find, and I go.”
Yeah, there is no doubt that Marc nailed Home Capital Group. And there is no doubt he is a superb short seller. Yet by his own admission, he focuses on stock specific situations. Why are we all taking his macro forecasts with the same sort of adulation?
I contend there is a big part of the puzzle that these doomsdayers are missing. And it was highlighted in a recent tweet by my favourite silver trader:
Silver Watchdog is of course correct. The ability to allow adjustments to be made in the currency market can mute any housing crash. The fact that the US is the reserve currency made their housing crash unique.
You can already see this effect on the Canadian housing market. If we take that same chart of Toronto house prices and denominate it in Chinese Yuan, it looks much different.
From 2010 to 2015, even though house prices were rising in Canadian dollars, for Chinese buyers, the price actually went sideways.
It isn’t until the last year that prices rose in Yuan terms. But that leaves the question, why the recent breakout?
To some extent, it was unique to Toronto. When Vancouver instituted their foreign buyer tax last year, the hot money fled to Toronto.
But there is another element to this story that most everyone, from short sellers like Marc Cohodes to government officials desperate to slow the rise, are missing.
I wish I could take credit for this next insight, but the truth is an old friend called me up to point it out. He doesn’t want any accolades or reference, but I couldn’t proceed without pointing out that this great observation was hardly my own.
A few years back, under the Obama administration, the United States instituted the FATCA Act. The Fair and Accurate Credit Transactions Act was designed to ensure the U.S. government collected all the tax money they felt they were owed. It introduced all sorts of disclosure rules for financial institutions, and in general, drove libertarians everywhere insane.
Well, the rest of the world looked at the American’s success in raising revenue, and decided it was a good idea. So they came up with the CRS Act. The Common Reporting Standard was adopted by a swath of countries and standardized the sharing of financial information in an attempt to ensure higher tax law compliance (all slides courtesy of Deloitte Development):
The CRS implementation occurs in stages.
And as you can see, most countries have already signed on, or are scheduled to join.
By the end of the year, much of CRS will go into effect.
You are probably asking yourself, so what? What does this have to do with real estate in Canada or Australia?
Well, here’s the genius of my buddy’s observation. CRS has all sorts of onerous reporting requirements for financial accounts. It is difficult to sidestep these disclosures. The authorities did a good job of locking down the rules to make squirming out difficult. In all areas, but one…
CRS made real estate exempt!!! So if you are living in a country where you are concerned about capital controls or taxation, and you want to diversify your risk without exposing yourself to reporting requirements, what is the best option? Buy yourself some real estate in a stable part of the world.
This massive real estate rally of the past year in Canada and Australia might have more to do with a rush to beat CRS implementation than anything else.
And if that is correct, then we might still have a couple of quarters of last minute shopping before this rally fizzles.
It’s always tough to call a top in the market. Yet most everyone is sure we have already hit the peak in the real estate market. Not only that, they are also sure it will be a doozy. Well, I am not sure of much, but I wonder if the route that will cause the most pain is for the rally to continue, confounding everyone, except for us, who have the benefit of understanding that the CRS implementation might cause the bid to last right until the end of the year. Maybe we have just been given an E.T.A for the man with the pin who will pop this bubble…
Thanks for reading,