In yet another sign that Vancouver’s housing market has gone soft, desperate developers are resorting to all sorts of gimmicks to encourage young buyers to spring for a new place – such as a year’s supply of avocado toast, or a free glass of wine every day for a year.
“It’s a slower, more competitive market,” according to Vancounver-based Wesgroup Properties VP Brad Jones, adding “The onus is on us to show we have the most attractive offering.”
As wenoted in April, the decline of Vancouver’s housing market has become worldwide news – with sales plummeting 46% over the past year to levels not seen since 1986.
Buyers continue to have the strong upper hand after years of manipulated price appreciation due to Chinese tycoon “hot money” flooding the market. That panic buying is now quickly turning to panic selling.
Prior to the August 2016 implementation of the foreign buyers’ tax in Vancouver, condominiums in Metro Vancouver were firmly in seller’s market territory, defined by a sales-to-active-listings ratio of more than 20 per cent for several months in a row, according to data from the Real Estate Board of Greater Vancouver.
But even condos proved unable to remain impervious to multiple government intervention measures. The ratio dropped from peaks of over 80 per cent to below 22 per cent in September 2018, where it’s stayed since. If it dips below 12 per cent for several months, it becomes a buyer’s market and prices tend to come down. –The Globe and Mail
And as condos sat on the market longer and longer – some hitting 40 days or more on average between December 2018 and February 2019 – developers have had to get creative.
Condos at one Wesgroup’s newest developments, Mode in Vancouver’s southern Killarney neighbourhood, come with a promise of a free glass of wine a day for a year. That incentive comes as a $1,500 gift card to a neighbourhood wine and alcohol store, which equates to about $29 a week to spend on a bottle of wine. –The Globe and Mail
“Now is the time to be creative,” said Jones, who noted that the wine incentive generated a “massive amount of interest.”
The wine promotion was launched after Woodbridge Homes Ltc. announced that anyone who bought one of their Kira condos in the West Coquitlam development would receive a year’s supply of avocado toast – in the form of a $500 gift card to a local eatery.
After the announcement viral, the developer sold 60% of their initial offering according to MLA Canada president Ryan Lalonde. MLA provides real estate sales and project marketing services to developers, including Woodbridge.
In the first three weeks of sales, Lalonde said nearly 85 per cent of purchasers referenced the sandwich campaign and four buyers became aware of the building solely because of the media coverage of the toast offering.
“We wanted to find a way to cut through that noise (in the marketplace),,” said Lalonde, who added that the flood of media attention they received was unexpected.
The Treasury Department dealt the final blow to programs in states like New York and New Jersey designed to help residents circumvent the $10,000 limit on deductions for state and local taxes.
The federal regulations, issued Tuesday, prohibit workarounds that would allow residents to create charitable funds for a variety of programs where donors can get a state tax credit in exchange, effectively removing the state and local tax, or SALT, limitation.
The rules could also curb donations to some similarly structured charitable funds for private school tuition vouchers in Republican-led states such as Alabama and Georgia. Treasury said such programs allowed taxpayers to claim too many tax breaks in exchange for the donations.
The 2017 Republican tax law capped at $10,000 the amount of state and local tax payments that filers could deduct from their federal returns. That change spurred states like New York, New Jersey and Connecticut to find a way to remove the economic pain of the cap, but Treasury said that most plans gave people too many tax breaks.
Here’s how it worked: A state resident could, instead of paying state property taxes, choose to donate to a state-created charitable fund, for example, $30,000. That person would then get to write off the $30,000 as a charitable donation on his or her federal taxes and get a state tax credit for some of that, easing the sting of the lower write-off for their SALT levy.
The new federal regulations say taxpayers can receive a write-off equal to the difference between the state tax credits they get and their charitable donations. That means the taxpayer who makes a $30,000 charitable donation to pay property taxes and receives a $25,000 state credit would only be able to write off $5,000 on his or her federal bill.
“The regulation is a based on a longstanding principle of tax law: When a taxpayer receives a valuable benefit in return for a donation to charity, the taxpayer can deduct only the net value of the donation as a charitable contribution,” the Treasury Department said in a statement.
The regulations formalize a proposal first floated last August to end the workarounds.
A senior Treasury official said Tuesday that the rules include a provision that give taxpayers the ability to elect to have some charitable contributions to state funds treated as state and local taxes. That would allow taxpayers to claim as much of the $10,000 cap as possible. That change helps equalize the tax treatment for some taxpayers who were disadvantaged in the initial version of these regulations, the official said.
Treasury gave taxpayers some leeway if the state tax credit they received was for 15% or less of their donation. In those cases, taxpayers don’t have to subtract the amount of the tax credit from the charitable donations.
The SALT change was felt most acutely by taxpayers in states where incomes and housing prices are high, places that tend to vote for Democrats. Representatives from those states say Republicans targeted their voters to pay for the tax cut law. House Democrats are working on a plan to increase the deduction limit or repeal it entirely, though any legislative action would likely stall in the Senate.
An IRS official said in March that the agency is also looking at prohibiting other workarounds passed in New York and Connecticut state legislatures that circumvent the SALT cap. The regulations issued Tuesday don’t address other ways to avert the deduction limit.
Connecticut allows owners of so-called pass-through businesses — such as partnerships, limited liability companies and S corporations — to take bigger federal deductions to absorb some of the hit from the SALT deduction limit. New York created a way for employers to shield their employees from the cap.
(by Jeff Clark) The data is in: based on a review of reports from multiple consultancies, the silver market has officially entered a supply/demand imbalance. The structure now in place sets up a scenario where a genuine crunch could occur.
The silver price has been stuck in a trading range for five years now. But behind the scenes, an imbalance has been forming that could potentially lead to price spikes based solely on the inability of supply to meet demand.
That statement isn’t based on some far-out projection or end-of-world scenario. It comes solely from the latest supply and demand data. As you’ll see, it demonstrates just how precarious the state of the silver market is. And as a result, how easily the price could ignite.
Here’s a pictorial that summarizes the current state of supply and demand for the silver market. See what conclusion you draw…
Silver Supply: It’s Fallen and It Can’t Get Up
Annual supply is in a major decline. And the downtrend is getting worse.
Check out how the amount of new metal coming to market has rolled over and continues to fall.
While the Fed may be surprised that low income workers aren’t as enthused about inflation as they are, we are not. A recentBloomberg reportlooked at the stark disconnect between Fed policy and well, everybody else but banks and the 1%.
While the Fed sees low inflation as “one of the major challenges of our time,” Shawn Smith, who trains some of the nation’s most vulnerable, low-income workers stated the obvious: people don’t want higher prices. Smith is the director of workforce development at Goodwill of Central and Coastal Virginia.
In fact, he said that “even slight increases make a huge difference to someone who is living on a limited income. Whether it is a 50 cents here or 10 cents there, they are managing their dollars day to day and trying to figure out how to make it all work.’’ Indeed, as wediscussed yesterday, it is the low-income workers – not the “1%”ers, who are most impacted by rising prices, as such all attempts by the Fed to “help” just make life even more unaffordable for millions of Americans.
Fears, and risks, associated higher prices comprise much of the feedback that the Fed has getting as part of its “Fed Listens” 2019 strategy tour, labeled as a multi-city “outreach tour”. So much for objectivity. Fed Governor Lael Brainard faced additional feedback from community leaders earlier this week in Chicago when she chaired a panel on full employment.
Patrick Dujakovich, president of the Greater Kansas City AFL-CIO, told the audience in Chicago: “I have heard a lot about price stability and fiscal sustainability from the Fed for a very, very long time. Maybe I wasn’t listening, but today is the first time I’ve heard about employment sustainability and employment security.”
The problem that the Fed continues to face is that it has backed itself into a corner. With the economy supposedly “booming” and the stock market at all time highs, rates remain low and any tick higher would likely begin to cause massive shocks to a debt-laden and spending-addicted economy that has been swelling into dangerously uncharted waters over the last 10 years.
As one potential answer, the Fed is now looking at “inflation targeting” (whose disastrous policies wediscussed here yesterday), which amounts to simply pursuing higher inflation for a while to “make up” for “undershoots” of the Fed’s 2% target since 2009. But the reality is that this idea cripples consumers, especially those at the lower end of the income spectrum.
Stuart Comstock-Gay, president of Delaware Community Foundation, told an audience at the Philadelphia Fed: “The sometimes positive impacts of inflation for certain of us have no good benefits for people at the lower end of the spectrum.”
And even former Fed economists agree. Andrew Levin, who’s now a Dartmouth College professor said: “The Fed and other central banks need to make sure they can foster the recovery from a severe adverse shock. But the answer is not to push inflation higher. Elevated inflation would be particularly burdensome for lower-income families.’’
Other economists have similar takes:
University of Chicago economist Greg Kaplan found that the cumulative inflation rate was 8-to-9 percentage points lower for households with incomes above $100,000 versus those with incomes below $20,000 over the 2004-2012 period. During that time, inflation averaged 2.2% which would be in the range of what Fed officials are now discussing as a possible strategy.
Luxury homes aren’t the only section of the American housing market that’s showing troubling signs of weakness. Increasingly, entrepreneurs who once saw the opportunity to make quick gains by investing in gentrifying markets before offloading their homes at a premium – a practice called ‘home flipping’ – are also heading for the exits.
But while activity surged to new cycle highs, the average return on investment, not including renovations and other expenses, dropped to 39%, an almost eight-year low.
All told, profits slumped to their lowest level in eight years.
Anybody who remembers the heady years ahead of the housing market crash will recall the role that unchecked speculation allowed unqualified investors, hairdressers, strippers and others, to secure adjustable rate ‘liar loans’ that helped them enter the speculation frenzy.
Speculators are on the housing market’s front lines, where softening price growth, waning demand and longer times to sell can turn quickly into shrinking profits, or even losses. Purchases of previously owned homes fell 4.4% in April, the 14th straight year-over-year decline, according to the National Association of Realtors.
“Investors may be getting out while the getting is good,” Todd Teta, chief product officer at Attom Data Solutions, said in the report. “If investors are seeing profit margins drop, they may be acting now and selling before price increases drop even more.”
The average gross flipping profit of $60,000 in Q1 2019 translated into an average 38.7% return on investment compared to the original acquisition price, down from a 42.5% average gross flipping ROI in Q4 2018 and down from an average gross flipping ROI of 48.6% in Q1 2018 to the lowest level since Q3 2011, a nearly eight-year low.
On Tuesday, Federal Reserve Chairman Jerome Powell, in his opening remarks at a monetary policy conference in Chicago, raised concerns about the rising trade tensions in the U.S.
The extremely negative environment that existed, particularly in the asset markets, provided a fertile starting point for monetary interventions.
Given rates are already negative in many parts of the world, which will likely be even more negative during a global recessionary environment, zero yields will still remain more attractive to foreign investors.
This idea was discussed in more depth with members of my private investing community,Real Investment Advice PRO.
(Lance Roberts) On Tuesday, Federal Reserve Chairman Jerome Powell, in his opening remarks at a monetary policy conference in Chicago, raised concerns about the rising trade tensions in the U.S.,
“We do not know how or when these issues will be resolved. As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
However, while there was nothing “new” in that comment, it was his following statement that sent “shorts” scrambling to cover.
“In short, the proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance.
“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare.”
“To translate that statement, not only is the Fed ready to cut rates, but it may take ‘unconventional’ tools during the next recession, i.e., NIRP and even more QE.”
This is a very interesting statement considering that these tools, which were indeed unconventional“emergency” measures at the time, have now become standard operating procedure for the Fed.
Yet, these “policy tools” are still untested.
Clearly, QE worked well in lifting asset prices, but not so much for the economy. In other words, QE was ultimately a massive “wealth transfer” from the middle class to the rich which has created one of the greatest wealth gaps in the history of the U.S., not to mention an asset bubble of historic proportions.
However, they have yet to operate within the confines of an economic recession or a mean-reverting event in the financial markets. In simpler terms, no one knows for certain whether the bubbles created by monetary policies are infinitely sustainable? Or, what the consequences will be if they aren’t.
The other concern with restarting monetary policy at this stage of the financial cycle is the backdrop is not conducive for “emergency measures” to be effective. As we wrote in“QE, Then, Now, & Why It May Not Work:”
“If the market fell into a recession tomorrow, the Fed would be starting with roughly a $4 Trillion balance sheet with interest rates 2% lower than they were in 2009. In other words, the ability of the Fed to ‘bail out’ the markets today, is much more limited than it was in 2008.
But there is more to the story than just the Fed’s balance sheet and funds rate. The entire backdrop is completely reversed. The table below compares a variety of financial and economic factors from 2009 to present.
“The critical point here is that QE and rate reductions have the MOST effect when the economy, markets, and investors have been ‘blown out,’ deviations from the ‘norm’ are negatively extended, confidence is hugely negative.
In other words, there is nowhere to go but up.”
The extremely negative environment that existed, particularly in the asset markets, provided a fertile starting point for monetary interventions. Today, as shown in the table above, the economic and fundamental backdrop could not be more diametrically opposed.
This suggests that the Fed’s ability to stem the decline of the next recession, or offset a financial shock to the economy from falling asset prices, may be much more limited than the Fed, and most investors, currently believe.
While Powell is hinting at QE4, it likely will only be employed when rate reductions aren’t enough. Such was noted in 2016 by David Reifschneider, deputy director of the division of research and statistics for the Federal Reserve Board in Washington, D.C., released a staff working paper entitled“Gauging The Ability Of The FOMC To Respond To Future Recessions.”
The conclusion was simply this:
“Simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited [ability] to cut short-term interest rates in most, but probably not all, circumstances.”
In effect, Powell has become aware he has become caught in a liquidity trap. Without continued “emergency measures” the markets, and subsequently economic growth, cannot be sustained. This is where David compared three policy approaches to offset the next recession:
Fed funds goes into negative territory, but there is no breakdown in the structure of economic relationships.
Fed funds returns to zero and keeps it there long enough for unemployment to return to baseline.
Fed funds returns to zero and the FOMC augments it with additional $2-4 Trillion of QE and forward guidance.
This is exactly the prescription that Jerome Powell laid out on Tuesday, suggesting the Fed is already factoring in a scenario in which a shock to the economy leads to additional QE of either $2 trillion, or in a worst-case scenario, $4 trillion, effectively doubling the current size of the Fed’s balance sheet.
This is also why 10-year Treasury rates are going to ZERO.
“There is an assumption that because interest rates are low, that the bond bull market has come to its inevitable conclusion. The problem with this assumption is three-fold:
All interest rates are relative. With more than $10-Trillion in debt globally sporting negative interest rates, the assumption that rates in the U.S. are about to spike higher is likely wrong. Higher yields in U.S. debt attracts flows of capital from countries with negative yields which push rates lower in the U.S. Given the current push by Central Banks globally to suppress interest rates to keep nascent economic growth going, an eventual zero-yield on U.S. debt is not unrealistic.
The coming budget deficit balloon. Given the lack of fiscal policy controls in Washington, and promises of continued largesse in the future, the budget deficit is set to swell back to $1 Trillion or more in the coming years. This will require more government bond issuance to fund future expenditures which will be magnified during the next recessionary spat as tax revenue falls.
Central Banks will continue to be a buyer of bonds to maintain the current status quo, but will become more aggressive buyers during the next recession. The next QE program by the Fed to offset the next economic recession will likely be $2-4 Trillion which will push the 10-year yield towards zero.”
It’s item #3 that is most important.
In “Debt & Deficits: A Slow Motion Train Wreck”, I laid out the data constructs behind the points above.
However, it was in April 2016, when I stated that with more government spending, a budget deficit heading towards $1 Trillion, and real economic growth running well below expectations, the demand for bonds would continue to grow. Even from a purely technical perspective, the trend of interest rates suggested at that time a rate below one percent was likely during the next economic recession.
Outside of other events such as the S&L Crisis, Asian Contagion, Long-Term Capital Management, etc. which all drove money out of stocks and into bonds pushing rates lower, recessionary environments are especially prone at suppressing rates further. But, given the inflation of multiple asset bubbles, a credit-driven event that impacts the corporate bond market will drive rates to zero.
Furthermore, given rates are already negative in many parts of the world, which will likely be even more negative during a global recessionary environment, zero yields will still remain more attractive to foreign investors. This will be from both a potential capital appreciation perspective (expectations of negative rates in the U.S.) and the perceived safety and liquidity of the U.S. Treasury market.
Rates are ultimately directly impacted by the strength of economic growth and the demand for credit. While short-term dynamics may move rates, ultimately, the fundamentals, combined with the demand for safety and liquidity, will be the ultimate arbiter.
With the majority of yield curves that we track now inverted, many economic indicators flashing red, and financial markets dependent on “Fed action” rather than strong fundamentals, it is likely the bond market already knows a problem in brewing.
However, while I am fairly certain the “facts” will play out as they have historically, rest assured that if the “facts” do indeed change, I will gladly change my view.
Currently, there is NO evidence that a change of facts has occurred.
Of course, we aren’t the only ones expecting rates to go to zero.As Bloomberg noted:
“Billionaire Stan Druckenmiller said he could see the Fed funds rate going to zero in the next 18 months if the economy softens and that he recently piled into Treasuries as the U.S. trade war with China escalated.
‘When the Trump tweet went out, I went from 93% invested to net flat, and bought a bunch of Treasuries,’ Druckenmiller said Monday evening, referring to the May 5 tweet from President Donald Trump threatening an increase in tariffs on China. ‘Not because I’m trying to make money, I just don’t want to play in this environment.'”
It has taken a massive amount of interventions by Central Banks to keep economies afloat globally over the last decade, and there is rising evidence that growth is beginning to decelerate.
While another $2-4 Trillion in QE might indeed be successful in further inflating the third bubble in asset prices since the turn of the century, there is a finite ability to continue to pull forward future consumption to stimulate economic activity. In other words, there are only so many autos, houses, etc., which can be purchased within a given cycle.
There is evidence the cycle peak has been reached.
If I am correct, and the effectiveness of rate reductions and QE are diminished due to the reasons detailed herein, the subsequent destruction to the “wealth effect” will be far larger than currently imagined. There is a limit to just how many bonds the Federal Reserve can buy and a deep recession will likely find the Fed powerless to offset much of the negative effects.
If more “QE” works, great.
But, as investors, with our retirement savings at risk, what if it doesn’t?
