Welcome to the brave new world

After much posturing, the Bank of Canada has finally acknowledged that we are coming into an era of slower growth. If there is anything surprising about this it’s the fact that it has taken the BofC so long to acknowledge what everyone on the street already knows, that Candian economic growth is no longer a given. Bank of Canada deputy warns investors to adapt because slow growth is ‘new reality’.

It would seem that in this “new era” the pressure on housing as the sole store of wealth will potentially put additional pressure on housing prices.

A while ago I read a report that tried to explain the rise in housing prices in major centers in China. The author concluded that one of the factors was the absence of alternative investments-bonds, stocks, and other financial assets. In the good old days, we bought bonds as the foundation for an investment program. Bonds yields were four or five per cent and you could lock in that rate of return as the basis for your retirement planning. In the era of low-interest rates, this has become impossible.

You don’t need to do a lot of statistical analysis to conclude that the stock market is probably one of the only places that a long term investor has any opportunity to make consistent returns on financial assets. Hard assets such as gold, silver, art and others come and go. Investors who looked to those assets as the foundation of investment portfolios found out that it was a losing strategy.

So what are we left with? Residential real estate for most Canadians who are not financially literate. Canadians being as risk averse as they are seldom are interested in investing in small businesses (the lack of venture capitalists in Canada proves out that point). Those who do start small businesses have little access to capital and bank financing and must self-finance. For those that are successful, my hat’s off to them for sticking it out.

So we get back to investing in residential real estate. Remember, your house was never intended to be an investment. It was supposed to be somewhere to live. In Toronto and Vancouver, it has become a get rich quick scheme. This can only come to one result, crash, crash, crash.

Here come the politicians

Now the politicians have finally gotten wind of it, so eventually they will kill the goose that laid the golden egg for many.

The whole issue of taxes and residential real estate speculation has come to the fore. The government of BC is now encouraging the federal government to more aggressively root out the speculators (Canada Revenue Agency probes tax loopholes in real estate speculation).

Like all Canadians, I am very concerned over allegations that some wealthy Canadians are not paying their fair share of taxes,” Diane Lebouthillier, minister of national revenue, said in a statement. “That is unacceptable and I’ve since asked Canada Revenue Agency officials to look into the specifics of the case.

As I mentioned earlier, residential homeowners are only allowed tax-free gains on their principal residence. I think that it will turn out that many have abused this rule and not declared their income on house purchases and sales where the property is not their principal residence. But go find them notwithstanding the comments of the Minister of National Revenue. It’s one thing to point out the problem, another to offer a viable solution.

Who knows

I have no idea where this goes. I’m not that smart. But one thing I do know is that what’s going on one way or another is unsustainable. When interests rates go up, many homeowners will feel the crunch. If interest rates go up a lot, well look out below.