April 30, 2020

Episode 96: Ben Rabidoux: A Reality Check on Canadian Real Estate & Macro Economics

April 30, 2020

The economic effects of the Coronavirus pandemic have been unprecedented and the seismic shifts have caused numerous unforeseen challenges. While no-one could have predicted the enormity and speed of the current crash before it happened, several signs indicated that an economic contraction was on the horizon. Today’s guest, Ben Rabidoux, President of North Cove Advisors, a boutique research firm, is here to share some macroeconomic trends and what they tell us about the state of the Canadian economy. His research expertise includes Canadian housing, macroeconomic trends, and household credit. We kick off the episode with some listener feedback as well as a listener question, where we discuss how to incorporate invested stock options into your personal financial planning. There are several ways to go about this and numerous factors to consider, so it’s important account for them all. Ben then dives straight in, giving us an overview of the economic landscape before the sudden upheaval. He sheds some light on population growth and its relationship to economic growth. As a great deal of the economic gains was coming from non-resident growth, the crisis is likely to change this. We also talk about personal debt and HELOC loans. Coming into the recession, the household debt service ratio was incredibly high, with interest rates at an all-time low. Ben walks us through how these vulnerabilities might pan out and what could happen with HELOC debt. Along with this, we also discuss the relationship between housing and economic growth, with some truly astonishing data from Canada, the changes that are likely to happen with rental supply, and Ben’s take on some personal finance topics. This show was an incredible overview of some of the larger forces at play, and it went a long way to paint a clearer overall picture. Be sure to tune in today!

Key Points From This Episode:

Useful listener feedback and personal updates from Cameron and Benjamin. [0:01:50.0]
Data points about the increase in value of the top five S&P 500 stocks. [0:03:46.0]
A listener question about factoring company stock options into financial planning. [0:06:04.0]
Learn more about Ben, the work he does, his research focus, and his clients. [0:10:22.0]
Find out Ben’s take on active management vs index investing. [0:11:20.0]
The state of the Canadian economy prior to the COVID-19 pandemic. [0:12:05.0]
Canada’s recent explosive population growth and where that’s headed. [0:14:09.0]
Consumer and corporate debt-level, the source, and important takeaways. [0:16:13.0]
Why it’s difficult to draw parallels between the situation today and Japan in 1990. [0:20:50.0]
How different Canadian regions’ employment has responded to the crisis. [0:22:59.0]
Housing trends and the state of housing in Canada before coronavirus. [0:24:20]
The direct and indirect way that housing affects economic growth. [0:27:48.0]
Housing supply, construction activity, and rental market changes in Canada. [0:31:06.0]
What the data is saying about real estate prices across all market segments. [0:36:57.0]
Some of the economic shocks are temporary and will snap back quickly. [0:39:34.0]
The economic conditions in Canada’s previous housing downturns. [0:41:16.0]
Ben’s take on the Bank of Canada’s QE programme and how he thinks it’ll work. [0:44:07.0]
Renting vs buying: Why Ben thinks there’s no generic answer. [0:47:53.0]
Why landlords are often willing to charge rent that makes them a loss. [0:51:29.0]
Ben's advice for building resilience to economic shocks. [0:52:47.0]

Read the Transcript:

Ben Felix: This is The Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making for Canadians. We are hosted by me, Benjamin Felix, and Cameron Passmore.

Cameron Passmore: Episode 96?

Ben Felix: Yeah. Right off the top, we had some feedback from somebody. I don't know if this is true, but it's one of my favorite kinds of feedback, where somebody discovers our podcast, goes and listens from the very beginning, and takes notes the whole time, and then sends us the notes, or the feedback, or whatever.

Cameron Passmore: That happens more often than you would guess.

Ben Felix: It's happened maybe four, not that often, but yeah. It happens more often than probably you would guess. But it's cool because I know that person, assuming that they're telling the truth, which why would they not be. They've gone and listened to the whole progression of the podcast and how it's evolved. And we've changed the format over time. We've changed, hopefully maybe improved over time, who knows? But anyway then they can come with feedback knowing that whole history. I think that's very different-

Cameron Passmore: Be mindful of this feedback though.

Ben Felix: Yeah. But I think this still counts as a person update, I don't know. The feedback was that the intros, while easy to skip, are too long. I appreciate that, because sometimes I can feel that we are just rehashing what we just talked about in more detail in the episode which doesn't make any sense.

Our new resolution is to have shorter introductions where we keep it only focused on personal updates, and don't go over necessarily what we talked about in the episode. Maybe reference it briefly? I don't know, but not like a detailed overview of every topic.

Cameron Passmore: I agree.

Ben Felix: I think it's okay to have-

Cameron Passmore: That's good feedback.

Ben Felix: It is really good feedback. I think it's okay if we highlight favorite parts about what a guest talked about. I don't think that's problematic because that's kind of new content, but anyway, we won't rehash what we talked about in the episode.

Cameron Passmore: All right. So since we finished Ozark, we looked for a new series to watch. We were recommended to watch Ray Donovan. Pretty good, not quite as good as the Ozark, but we're going to give it a chance, especially since we paid for the whole season off of iTunes. But listen, have you watched? I have not yet, but if you watched The Last Dance, I've been a basketball guy.

Ben Felix: No, everyone keeps asking me that. I don't watch a whole lot of TV. I spend all week reading about quantitative easing and whether it's inflationary, my eyes were almost bleeding.

Cameron Passmore: I didn't watch it.

Ben Felix: I don't know. It's multi-part too. Right?

Cameron Passmore: Yes.

Ben Felix: I don't like multi-part stuff. If I'm going to watch something, I like to go sit down, watch a movie maybe before I go to bed. I'll link it into shows and this whole thing, and you got to watch it every day because you want to, I don't like.

Cameron Passmore: Today's episode is a little bit different. We kind of chucked her format for this week. So as last part guest, the guest is someone who was recommended to us on Twitter, because we wanted to talk about given this crisis, someone who has macroeconomics/real estate backgrounds. So we had Ben Robidoux join us. And he was great.

Ben Felix: Yeah, he was great. He's been on several other podcasts. He was on the Canadian Coach Potato podcast. I think that's how I first heard about him. Yeah. Expertise in Canadian macro, largely focused on housing and credit, but he's got data to back up everything he says, which we appreciate.

One thing that Cameron I were both conscious of after we kind of debrief the conversation that we had with them is that we often try to keep things actionable. How can you take this information and go and make yourself a better investor or a better person. And I think while this episode was fascinating and heavy on cool statistics and economic information, maybe a little bit lighter than usual on actionable stuff. So we hope that's okay. But I think it was still fantastic information.

Cameron Passmore: Agree. So with that, we'll let you listen to episode 96.

Ben Felix: Welcome to episode 96.

Cameron Passmore: So have you noticed the increasing concentration of value of the five biggest stocks, the S&P 500?

Ben Felix: Like evaluated concentration.

Cameron Passmore: Yeah. Microsoft, Apple, Amazon, Alphabet, so Google, and Facebook are now worth the same as the bottom 350 stocks in the S&P 500.

Ben Felix: Wow.

Cameron Passmore: Now the summer of 2018, so less than two years ago, they were worth as much as the bottom 282. Now, they're worth as much as the bottom 350. That's just incredible.

Ben Felix: They've been resilient even though all this stuff. Well, relatively resilient, still dropped.

Cameron Passmore: Yes. And the S&P 500 trades at 17% below its all-time high. Right? However, below the service and when you take those top stocks out, the median S&P 500 trades at 28% below it's record high.

Ben Felix: Oh wow.

Cameron Passmore: So that's how much those big stocks are not just those five, but the big stocks are carrying a lot of the weight.

Ben Felix: Interesting.

Cameron Passmore: So many interesting data points that perhaps we can have more time in a future episode.

Ben Felix: Yeah. That does speak to my comment about the resilience of those bigger companies. It makes you question the value premium a little bit. Doesn't it?

Cameron Passmore: I know we're going to talk about that in a couple of weeks, but boy, we're getting at levels that haven't been seen, certainly since I think 1999, some of those charts that we were sharing this week.

Ben Felix: I got some really interesting data of US, and I don't think I have permission to share it yet. Maybe I can get that permission, which would be nice, but it's the price book for US? Well, actually it got US international and emerging markets going back for US to 1926 for international developed and emerging markets, not quite as far, but still as far back as the data go. The price at the spread, the difference in valuation between value and growth is as big as it's ever been. So the value spread is what some people call it is as wide as it's ever, almost as wide, not quite as wide as in the US as tech bubble time, but it's a hell away. It's pretty much there. It's probably there by now. Because that charts from, I think ending March. Yeah.

Cameron Passmore: Anyways. So up next, we have a listener question. So let's play the question and we'll come back on the other side.

Riley: Hey Cameron and Ben, my name is Riley and I work at a tech company in Seattle, Washington. A significant portion of my income comes from company stock awards, which vest over time. And so I was wondering how can I factor this into my financial planning, given that I can't diversify away the risk of holding so much in a single company until the stock actually vests. Is there some sort of framework that I can use? Thanks. Love the podcast.

Cameron Passmore: All right. So Riley in Seattle, thanks very much for that. So, Ben, what are your thoughts?

Ben Felix: I mean, this is something that we see a lot when people have a substantial portion of their income in unvested equity with their employer. And it's tricky from a financial planning perspective. We deal with this every day. How do you treat it and how do you think about it? I don't know if there's a right answer. There are different ways that we treat it in practice. Sometimes we treat it as an asset. So we take the after-tax Canadian dollar amount and maybe gross it down a bit because obviously volatility in individual securities and then include that as an asset in the plan.

Cameron Passmore: To me that's the key point though, right? We talk about the risk side of this a lot, and the fact that there is high amount of idiosyncratic risk and to have that discussion. So you don't count it as a diversified portfolio type asset with downside protection.

Ben Felix: Yeah, but I mean, when we're doing projections, we often will include it as an asset because I think the implications of not doing that are really important. You can end up massively over saving. Now, if it truly does go to zero, then I guess maybe you are under saving. But yeah, maybe to an extent it depends on the company too. If it's a tiny company, maybe you'd be more inclined to treat it as a riskier asset.

Cameron Passmore: Wow. I had a client who we're talking to last week who exercised a bunch of options with a company in the oil industry. And he says, he can't imagine what he can do the map. But at that point he's, I can't imagine how to held onto the impact of the current pricing would have had.

So it just shows you, and I've lived through Enron and Nortel and other experiences where there's been massive downside. We've also lived through a lot of this is someone with a tech company in Seattle. So they've lived through massive upside as well. And you don't get that kind of upside in a diversified portfolio.

Ben Felix: Yeah. In my experience with employer stock held like that is that you can't do a whole lot from the perspective of putting in place any colors or anything that. You can't use derivatives to protect your position in my experience. Maybe that's not always true, I don't really know that could be something that some people might say you should do. But again, from what I've seen, most companies have restrictions in place where employees are not allowed to do stuff like that. That's not to say nobody can.

Cameron Passmore: Well, I guess the question also really once it does vest, I guess it depends on the dollar amount, but we often advise people to decide on a liquidation strategy, deciding the amount of time you want to hold and just methodically chip away at those holdings by liquidating them. We don't know the magnitude of this person's holdings or concentration.

Ben Felix: It depends on the situation too, though, right? In some cases, if it's a big dollar amount, we might be having a conversation about what is the minimum amount that you need, assuming that there's more than you need to achieve your financial goals. What does the minimum amount that you would need to do that to fund future consumption, basically make yourself able to retire now, buy your house in cash if you want to buy a house, check all those boxes, sell enough to do that.

And then the rest if you want to take the idiosyncratic risk of an individual stock then go for, I think, psychologically doing what you said, Cameron, is chipping away over time. Psychologically in a lot of cases, people have had a lot of success with that. But I also think that our recent sample anyways is biased just because we've been having these conversations with a lot of people who have been employees of companies that have had stock prices that have gone up a lot.

Cameron Passmore: Exactly. We're very biased and it was hopefully Riley that helped. And if you have additional questions, please follow up. Anyone else out there that has questions, please do leave us an audio recording. We'd love to hear them.

Ben Felix: Just to add on that real quick, there's a ton of crazy data on the tendency of employees of companies to hold their own stock if that stock has performed well in the past. So that might be another really important piece of this conversation is recognizing that you're probably now maybe Riley's not because he's asking the question, but there's a good chance that your bias toward the stock of the company that you work for and that'll especially be true if it's a company whose stock has gone up in the past, even though that doesn't mean anything about what's going to happen to that company stock in the future. So checking those types of biases when you're making the decisions is, I mean, I guess that's just obvious, but I think that's one of the hardest things for people to do when they're dealing with their own company stock.

Cameron Passmore: So let's go ahead with our interview with Ben Rabidoux.

Ben Felix: Ben Rabidoux, welcome to The Rational Reminder Podcast.

Ben Rabidoux: Thanks for having me.

Ben Felix: Can you briefly introduce who you are and your business and the type of research that you focus on?

Ben Rabidoux: Sure. Ben Rabidoux, I run a boutique research firm called North Cove Advisors. My main wheelhouse is Canadian housing, macro-economic trends and household credit. So we work with institutions to try to keep them ahead of big trends in the economy, and then also sort of idiosyncratic credit risk with individual companies.

Ben Felix: Interesting. So who would your clients be?

Ben Rabidoux: Well they're anything from Canadian, mutual fund type companies, with big banks to pensions, to hedge funds or big sovereign wealth funds. It's kind of a range. Anybody that may own some of the big Canadian banks or some of the smaller financial institutions or anybody that just has a keen interest in Canadian macro trends may find the research helpful.

Ben Felix: Interesting. So I'm mostly active fund managers, I guess, would that be a fair category?

Ben Rabidoux: Yeah. That's fair. Yeah.

Ben Felix: Cool. I got to ask, I wasn't going to go here, but since we're there, do you have a view on index investing versus active management?

Ben Rabidoux: Well, listen, man, I can't. I think today it is what it is, it's hard to outperform consistently, but I think there's also in a lot of cases, a lot of value to having professionals help you to not make mistakes when you get into periods of market turmoil, bearing in mind that my clients are the active managers. I'm not going to say anything bad about it. There's a very real service that they provide. So that's far as I'll go on that one.

Ben Felix: Okay, cool. I just had to ask because the conversation took that direction. Okay. So back to what we actually wanted to talk to you about, can you describe it just because have your head deeper in this stuff than anybody else. Can you describe what was the state of the Canadian economy before all of this coronavirus stuff happened?

Ben Rabidoux: Well, it's funny, there were some signs even ahead of this that there were some slowing in the Canadian economy, particularly coming out of the manufacturing sector. We were seeing that you starting to see manufacturing sales come under some pressure, you were seeing there was a pile of inventory piling up at both wholesalers and manufacturers, which generally portends to slow down in manufacturing output. You're starting to see things employment start to soften at the margin. Some of that call them the secondary indicators within employment. So things like temporary workers were starting to decline a bit. You were starting to see hours worked come off a little bit. And that's all generally indicative of just a modest softening in the job market. We'd seen, the market has been very tight for quite a few years. And if you think about what employers tend to do when you go from a very tightly market to a little bit of a softening, they don't want to let their salaried employees go because they've come out through a period where it's very hard to find that labor, so you don't want to let them go.

And so what you start doing is you reduce overtime hours, you cut temporary workers, you do everything you can to hold onto that core group. And we were seeing that. So I actually think that heading into this, there were some signs that there was some weakness already in the economy. The other thing that's interesting is the composite leading indicators had really taken a very lengthy and protracted and steep downturn heading into this. And so there were some signs that the economy was not quite as robust as the headline numbers suggested. And what's interesting is that a lot of the strength was driven by the expansion of the population itself. So in other words, if you looked at real GDP per capita, it had already flattened out. So the gains in the economy really coming from very robust population growth. And so that was where we were at heading into the recession.

And the interesting thing is that driver of economic growth being population is going to be one of the things that's really going to challenge Canada going forward, I think, because there's some dynamics now that are going to really challenge whether or not we can sustain anywhere near the current level of population growth that we're seeing. I mean, there's a few layers within that, but just in a very short kind of story that it goes that we had 550,000 headline nominal population growth in Q4, which is mind-boggling in Canada. Just an enormous number to the point where you could argue that you can't actually house that many, you can't build enough. There's physical constraints in the construction process and capacity. And so you end up doing all these things creating these rental crises around the country.

Now, within that 550, you have 200,000 that are non-permanent residence. And primarily that cohort is made up of work permit holders and student permit holders.

Cameron Passmore: What sort of work are they doing?

Ben Rabidoux: Well, everything. I mean, the braid across the economy. If you look at some of the research from the Canadian Federation of Independent Businesses, you had virtually every sector were reporting significant tightness in the labor and an inability to find both skilled and unskilled labor. So I was talking to one franchisee owner and he owns a handful of McDonald's franchise. And he was telling me he was bringing in 12 kind of middle management folks, foreign workers to fill that need because he could not fill it domestically. And what's interesting is he said people don't realize how expensive that program is for employers to bring those people here because not only do you have to pay them a competitive wage and prove that it's a competitive wage, you also have to pay an outsourcing firm to bring those people here.

So there's a fee layered on top of it. And so when I said to him, "Well, what are you going to do with when the economy softens." He was very clear, he said, "The moment we can hire domestically, we're going to do that. And then we're going to basically send those people home." And so what it means you take that dynamic and you multiply it thousands of times, what it means is that non-permanent resident cohort that's been a significant tailwind to population and then by extension to headline economic growth, that's most likely going to go into reverse. It generally does during recessions because those programs are designed to expand, to meet the labor market needs and then to contract when the economy weakens. So we came into the recession in a relatively solid place economically, but with some very notable imbalances or potential vulnerabilities.

Ben Felix: And what about levels of debt both consumer and corporate debt?

Ben Rabidoux: Well, this is an area where I've spilled a lot of ink, both are high, extremely high record highs, both for corporate and for household debt. To me, there's two elements to it. There's the one that gets a lot of the headlines is just the debt to income ratio, which of course that misses things the carrying cost of that debt, which in a lot of ways is more important.

So in other words, in a declining interest rate environment, it's very much what you'd expect to see in a lot of ways. Now, what's more interesting than that is we came into this recession with the household debt service ratio, which is the share of income being earned by households that's being diverted to servicing their existing debt. That was at a record high. So imagine coming into a recession with debt servicing at a record high at a time when interest rates are hovering rate near record lows. Now, you can talk about people like me have been looking at that dynamic and saying, look, this is a vulnerability for a long time, right. And you don't have to have predicted coronavirus, certainly no one did to have been right and flagging these vulnerabilities and pointing them out and saying you know what? We don't know when this is going to be a problem, but when it's problem, it's going to be a real problem. And I think that's the situation with we find ourselves in.

Cameron Passmore: What is the source of most of that debt? Is it housing debt? Is it general consumer credit debt?

Ben Rabidoux: Well, its about two third mortgage debt, but what's interesting in Canada is we classify debt a little bit differently. So in Canada, home equity lines of credit are counted as consumer debt, where in the US are counted as mortgage debt. So it's about two thirds mortgage debt. And then another third is non-mortgage consumer debt. But of that third, you've got over a half this home equity lines of credit. So you could almost make the argument that I got to do my math there, but you're pushing 80% of it is housing related debt.

Ben Felix: Jeez. How does that level of HELOC balances relate to the obvious comparative example, I guess, is the US when they had their housing crash?

Ben Rabidoux: Well, it's shocking in a lot of ways. So the one thing you have to know about HELOC in Canada is it's generally interest only and its revolving and non-amortizing obviously, and so there's a lot of appeal there to that form of debt.

And so when you normalize it for the size of the economy, the US peaked around 4.5% of GDP in terms of drawn HELOC balances, that was 2007. And today they're under 2% or a 1.8% is drawn yet. They've significantly delivered both as a function of paying down the debt of defaulting on some of that. And then also just lenders significantly tightening new credit issuance. Now in Canada, we're closer to 13%. So yeah, we're closer to 13%. So it's an astronomical number, now again, and that's interest only, very easy to carry, my contention or my concern has always been that when you think about vulnerabilities and kind of the credit ecosystem in Canada, there's always that chance that lenders can change the structure of HELOC debt.

People don't realize this, when you take out a HELOC or any line of credit, it's a callable loan. Now, the chance that the banks will fall out call, the chance of the banks going to call you up and say, "Hey, that's $200,000 HELOC, we want it back in 30 days." Relatively low, but what they could do, and what I suspect we will see is they could ask you to amortize part of it, right? They could say, it's no longer interest only, but we'd to see you start amortizing this, because we're getting concerned about property valuations. And this is entirely plausible scenario, but I think even more likely than that is that they just flat out start canceling some of the undrawn balances.

So you thought you had $200,000 from HELOC space. Maybe you have 20,000. Maybe you have none. Now that's not going to be for everyone, right? I mean, the banks still want to make money. So if you are a doctor with a stable employment and a good balance sheet and a low LTV loan on your house, are they going to cap that? Probably not, but if you're a self-employed trades person, that's sitting on a $200,000 undrawn balance, at what point do the risk managers start going, maybe we don't need to have that sort of potential risk sitting on our books.

Cameron Passmore: Or they can raise the interest rate on that debt as well.

Ben Rabidoux: 100%, they can do that. And what I think you will see is if you miss, people don't realize that if you miss a payment on an unrelated credit product, through that same bank, the lenders have the right to increase your HELOC debt or increasing HELOC interest rate. Not only on the undrawn belts, but on everything you've already got outstanding. So there's a lot of ways that banks can really screw with you on that HELOC. Now, again, it's one of those things that never happens when the economy is doing well, but when you get into a more stressed environment like we are today, the book gets rewritten oftentimes, and then what we're in right now is quite unprecedented. So it's hard to say that anything's off the table.

Ben Felix: Is it too far of a stretch? And I hope it is to compare our current situation to 1990 Japan.

Ben Rabidoux: I would say that's probably a stretch again, not being a Japan expert by any means, but certainly the demographics are very different. Japan was a very closed economy in terms of not wanting to bring in immigration, to kind of keep their labor market productive and young.

That's not really a problem right now in Canada. Now, my fear though, so I would argue that Japan, in addition to just being an incredibly egregious bubble at peak, both in terms of the property market and their stock market, which really is hard to make that same argument for Canada right now. But the risk is that like Japan, when the economy sours the sentiment and the politics changed such that immigration becomes much less palpable. And you do end up with a situation where demography just weighs on growth for a long time. To me that is very likely because as we talked about, I think the non-permanent resident courts can be a huge drag for the next little while, probably four to eight quarters.

But beyond that, when we tend to see in previous recessions immigration tends to plunge, right. For a few reasons, one is just that the job opportunities aren't there, it's hard to move to a country where the unemployment rates 15%, which is very likely where we're going, but not only that, the politics is just completely different. You start hearing these arguments and they're already out there. You can see them on Twitter from the fringes, but they're going to become much more mainstream. You're going to start seeing people going, are we willing to bring hundreds of thousands of new people to Canada when I don't have a job? And one of my neighbor is out of work, right? It's just a very different dynamic. And that was the road that Japan went down. I fear that to some extent we could end up there too.

Ben Felix: Interesting. You're so right about the bubble aspect though. Like Japan price earnings was 75 times Shiller CAPE or something like that, or 75 Shiller CAPE, which is almost twice what US was in the tech bubble, anyway.

Cameron Passmore: I'm curious on the employment side, you talked about the number of non-permanent workers. So what's the impact by region. I'm thinking mainly about this implosion of the price of oil. There must be huge regional differences, I'm guessing?

Ben Rabidoux: Well, there is in terms of the fallout I would say that, I mean, look, I think there's very enormous structural issues in Alberta right now in any of the energy provinces. And it would not surprise me if things don't turn around quickly, that we aren't talking about sort of federal bailout for both the provinces and the municipalities within those provinces, because it's an unmitigated disaster what's happening out there.

Now, the one thing if they had anything going for them coming to this recession is that they already kind of knew what pain was, right. To use the car analogy, if you hit a brick wall going at 20 kilometers an hour, it's a very different sensation than hitting it at 100. Right? And in one sense, Alberta's hit a brick wall going at 20, but Ontario is hitting it going at 100, right? So it's going to feel very different. The shock is going to be very different. So from an absolute basis it's going to be a very different experience in terms of the hit to population growth. Toronto really was the main recipient of a lot of the immigration coming into Canada. It's unlikely that's going to be the case going forward. Alberta really was not. I mean, you can see in the data certainly was some inflows, but nothing like what we're seeing in the big cities in Ontario and BC.

Cameron Passmore: Interesting.

Ben Felix: Can you talk a little bit about, because we talked about the economy in general. Can you talk about the state of housing in Canada before the whole coronavirus situation?

Ben Rabidoux: Sure, it looked awesome, right? It was crazy. We came out of a period in 2017 and into 2018 where you had the combined effects of policy measures aimed at kind of curbing speculative demand. Let's call that foreign buyer taxes and Airbnb measures. And then you compounded that with these very significant credit measures, macro prudential measures from [inaudible 00:24:40]. And so 2018 and into early 2019, you saw pretty significant weakness in places like Toronto, parts of Vancouver. You saw in some regional pockets, you start with prices come under substantial pressure. So the high-end single family homes in York region in Toronto, a lot of places there sought 20% to 30% off peak to trough. So very significant declines, but that was by no means a metro level decline, if you were looking at entry level, still stayed firm. So you kind of skated that. And then by mid-2019, it got to the point where one of the strange dynamics we saw was that new listings started to really fall.

So new supply coming into the market was down dramatically. And so that was occurring at a time when sales started to pick back up. And so by the time that we ended 2019, we actually had over a 10 year low in active listings across the country. So the inventory was very low. Sales they were not robust, but they had picked up enough that you were kind of back to reasonable level of demand. But because inventory was so low, I was making the argument with my clients that this market was so tight coming into 2020, that we would see 15% to 20% price appreciation nationally by the summer, if something didn't change. Now, the reason I mentioned that, and the reason I think it's important is it's very different coming into an economic slowdown in a housing slowdown if you're starting at a position of two months of inventory, right, which is a very tight market versus coming in with eight months of inventory because it does buy you time.

And the one thing we know about recessions in Canada and housing downturns is that the magnitude of the downturn is actually less important than the duration, right? So to use '08, '09 as an example, it was a very steep, very quick recession here in Canada. And that matters a lot for housing because people have this incredible ability in Canada to kind of keep their fingers in the dam and muddle through and find a way to not default and find a way to not sell into weakness, but that only lasts for so long. And so if the economy drags on and the recession persists beyond a year, or even a couple of quarters, let's say, that changes. And so then you start seeing distress selling. And if that distress selling is coming into a market that's already well supplied, that's a recipe for a very weak housing market. And so I would say that the important point there is that we've come into this recession with a bit of time in the major markets. It's going to take a while before the market sort of shift back towards the seller market.

Ben Felix: It's really interesting because I noticed in our neighborhood, there is a definitely a lack of supply, new construction is going on, but it's slowing. So I'm curious how important is real estate to the overall economy. And what's the dynamics there about supply coming online. And there's this dislocation that I'm witnessing as we walk around our neighborhood of new housing, old housing, nothing listed, how does this all sort itself out?

Ben Rabidoux: Well, it's a great question. I would say that the sort of two main ways that housing boosts economic growth and they're sort of the direct channel and the indirect channel. And so the direct channel would be directly through what we call residential investment. So that's construction of new dwellings, that's renovations, transaction costs, and all of those are at or close to record highs in terms of their share of GDP. So we have never been more reliant on the direct channel of housing to the economy. One sort of microcosm of that is if we look at what's called real estate transfer costs, which is primarily realtor commissions, but also legals and transfer taxes, et cetera. But primarily the realtor commissions, it's almost 2% of GDP in Canada. It's like 1.8, you go with that and you go, well, what does that mean? What, in context historically what does that mean?

Well, it's way above where it's ever peaked long-term, but it's normally around 0.8 to 0.9, and in the US it peaked around 1.5. So just that one sliver just gives you an indication of how reliant we are on housing to drive economic growth.

Ben Felix: That's huge.

Ben Rabidoux: That's a direct channel, it's amazing. Right? It's amazing. It's stunning to think of that. There's been some quarters in Canada where you look at the headline GDP growth, and it's been 30% of the gains have been just from the increase in real estate transaction costs. Right? So in other words 30% of the headline gains is we're paying a realtor's more.

Ben Felix: Like markets globally like Australia and New Zealand that have had crazy high prices like Canada, how do we compare on those stats to them?

Ben Rabidoux: That's a great question. I don't have the data for those countries. I would assume they would also be similarly record highs. I mean, they have a lot of the same dynamics that we're having here. Either you can argue that Australia is much frothier and much more fraught with risk than Canada is, but it's the same story.

They've seen huge inflows of foreign capital, lots of domestic speculation. Their building boom is significantly more pronounced than ours there. So it's got to be, I have think it's the same dynamic, but the US is kind of the easiest comparison, because they're our neighbors, generally the economies tend to sort of mirror each other all the time. And it's just such an interesting thing to see that we are so far above where they were by this metric and especially where they are currently. I mean, residential investment in the US is back down to like 3.5%, 4% of GDP, which is just bouncing along record lows, right?

So that's the indirect channel. And then just as importantly, I would argue is consumption. And consumption is to some extent a function of things like wealth effect. So how wealthy you feel is often indicative of how much you're willing to spend, particularly as it relates to large discretionary purchases, vacations, and purchasing toys like boats and ATVs or whatever it might be. That really is a largely of a confidence game, but also an access to capital gain. And so as your house rises in value and you can access incredibly cheap debt via a HELOC, your propensity to consume goes up. And so if you put consumption and residential investment together, it's been about 85% of real GDP growth over the last five years, so it is the economy is [inaudible 00:30:49].

Cameron Passmore: Wow. So what would you tell someone considering buying a new home right now?

Ben Rabidoux: Well, I would say it wouldn't hurt to wait and see how it plays out. Actually, I realized I missed part of your question. Let me bounce back because you also asked about the supply picture in construction activity. It's interesting. So we are at a record high for what's under construction across the country. It's about a little over 250,000 dwellings are currently under construction. That is a record high. Now, we're also seeing a record high in purpose-built rentals. Sorry, I shouldn't say record high. We're at a 50 year high in purpose-built rental activity. There's been a lot of talk for years about, we're not building enough rentals, we're not building enough rentals, that's changing, about 70,000 rental units under construction right now. What's interesting is six months ago, you could look at that and say, even at this record high, I don't know that it's going to be enough just given how strong population growth is.

Today, that's very different, right? Because those units are probably going to be completing into a very different demand picture. And again, there's so much about this whole crisis that is unprecedented and unknowable, right? Both in terms of the magnitude of the hit to the economy, but also the size of the fiscal response. So the feds have already said, nothing's off the table and I believe that nothing's off the table. Could they double or triple the Canada emergency response benefit next month? Yeah, of course they could. Right. And so to what extent are they willing to underpin and support incomes? That's going to really matter in terms of how this all plays out. So I speak as if I've got some level of confidence in this. When I say this is probably going to be delivered into a very different demand environment, but I have no idea, but I think a reasonable base case is that there will be substantially more supply relative to demand in over the next six months or a year.

Ben Felix: What are the data's showing right now about just you've mentioned the rental supply. What are the data showing now about rental supply coming online? I keep hearing about things Airbnb is being put in the long-term rental market?

Ben Rabidoux: Yeah. It's a thing, that's absolutely happening. So there's a few dynamics there. One of the most interesting things that we noticed in the back half of 2019 is we started seeing just a huge spike in rental condos being listed on the MLS. And I'm talking specifically in Toronto, Toronto is where we get the best data for this. I don't know if it's the thing in place Ottawa. I would imagine it probably isn't. I know it's a thing in Vancouver, but just using the Toronto real estate for data, we started to see this big spike in condos that were listed for rent. And we're talking 30%, 40% year over year, these big gains month after month after month. And to the point where track the condo rental market pretty closely in Toronto. And we started to see that rental rates started to flatten out. You saw rental demand was up substantially 10%, 15% year over year, but you were seeing persistently 30% to 40% increases in supply.

And so what it was very interesting is it was people who owned condos and then wanted to trade up to let's say semi's or detached, whatever it might be. But rather than lists their condos for sale, they would keep them as rentals. And so we're hearing this anecdote from everyone in the real estate industry, and you could corroborate it with the data. So the reason I mentioned that is because like I said, that had the effect of taking a lot of the froth out of the rental market coming into this, rents were already flattening out coming into this. Now you layer on top of that a very different demand picture via lower population growth and a pile of new supply coming online in the next year or two, right. We're projected to have record completions in Toronto for condos in 2020 and 2021 and a 50 year high in completions and rental unit purpose-built rental units, all of that's coming online in a very different demand environment.

Not only is it going to be the population growth is lower, but I suspect we're going to find that household formations sort of organic coastal formations are going to be very slow. And what I mean by that is in a normal functioning environment or economy, I should say, you'll see young people who are living with their parents. They might move out and they'll get a couple of roommates or whatever, and then they'll live there together for a while. And then they sort of all go up, they form their own households. And so those household formation is sort of relatively predictable when you look from that perspective. But when you get into these economic shocks, I mean, all you have to do is ask yourself how many kids who are living in their parent's basement right now that in normally economy would be going out, starting careers, getting their own place, either renting it or buying and just starting a life that way.

How many of those people are going to look at this economic environment be like, maybe I'll wait a year and just see how this pans out. Being in mom and dad's base is pretty safe right now.

Ben Felix: I have got two of them.

Ben Rabidoux: That's a very significant dynamic as it relates to rental demand and housing demand at the lower end. So I think demand for rentals getting hit from multiple fronts. And then again, to your point, all of this is happening at a time when you've got 15,000 Airbnb units in Toronto, that some large portion of that is going to enter the long-term rental pool or will be sold off, right? Because you've got regulatory changes from the city, plus the fact that you've got a 95% reduction in revenues, right. Which is going to force their hand for a lot of these people.

Cameron Passmore: 15,000, that's incredible.

Ben Rabidoux: It's a lot. It's been kind of the obliged on some of the urban areas that you've just siphoned up so much housing stock and these sort of ghost hotels.

Ben Felix: Now, are our rents falling, or we're talking about the data suggesting that they probably will fall?

Ben Rabidoux: Oh, they are falling. Yeah. I know at least in Toronto and Vancouver, you're starting to see them soften. Now again, you're looking at anecdotes. You're seeing very specific buildings where this exact type of unit, two bed, two bath was trading consistently at, pick your price level 3000 for the last year. And then all of a sudden you get one listed at 2,900 and then at 2,700 and just in the last six weeks, you do see it. I mean, it is happening. And I wouldn't be surprised if in places like Toronto, you see the headline rent drop 10% peak trough, I mean easily, peak trough. Now that's not to say it's tricky because the overall data may not show that because we report average rent across the entire rental universe. And that changes very slowly. But the people who are transacting, the people who are actually moving those rents, the spot rents are going to fall I suspect at least 10%, maybe 20. I mean, start rents fell 30% in Alberta.

Ben Felix: So that's rent. What about real estate prices? What are the data saying about that?

Ben Rabidoux: Well, it's you have to think that the bias is going to be downwards. Try to find or estimate the magnitude of any potential drop is very difficult because you're into then estimates around various property types and you're trying to get the temperature across the entire country, but I'll say this. I would say the high end of the market, the less liquid components, the luxury markets tend to perform the worst. They go very illiquid. The financing tends to tighten their first and we're already seeing that. It would not surprise me to see luxury market get hit 20%, 30% in some areas. The entry level gets a little trickier. They tend to be a lot more liquid. I mean, we could use the 2017, 2018 downturn in Toronto as a great example. Core Toronto, single family and condo in the core, primaries fell maybe 5%, 10% peak trough, and then recovered quick.

The further you got away from the core and the more expensive you got the worst hit was. So that by the time you were out in York region for $3 million homes, they were literally trading now to two million. Right? And that's a very plausible scenario in a lot of the big metros, but again, it gets back to... To me the bigger question is the length of this downturn. That's really going to be the question here. We know it's an incredibly steep downturn, but if it's a two quarter recession, that's a very different picture for housing than if it's six quarters, eight quarters. And that's the difference in a lot of ways between '08, '09 and say '89 to '93. And I know a huge difference in interest rate environment between those two, but the point being when you get into this protracted downturn you had in the early 90s, it's just devastating for housing.

Ben Felix: Is the duration your biggest concern. I mean, you're working from home. You're looking at all these different numbers is what is your biggest worry?

Ben Rabidoux: I don't think that's my biggest worry. The magnitude is stunning, right? I mean, this really is unprecedented, but I think you're almost used to these incredible charts. Every single macro chart is broken now, right? It's going to be broken forever. I mean, the magnitude of the job losses, you're going to have to literally snip out the next six months because you won't even be able to see the trend change on the chart going forward because the magnitude is so enormous right now. It's almost like you get used to the shock value, right? So we know it's a tremendously deeper session. We're probably looking at 30% Q2 GDP decline on an annualized basis. Right. Which I don't even know it during... We don't have great data going back as far, but I do know during the great depression we saw fall that much. So it's going to be stunning.

Ben Rabidoux: But the big question is how much that's going to prove to be temporary, because there will be a big portion of that that's going to snap back once you start lifting some of these restrictions. So in some ways it's a very unique shock to the economy. But yeah, I would say my concern right now is what the macroeconomic environment looks like a year from now, right? That to me is going to be the big determiner of how house prices perform.

Ben Felix: Interesting. I guess another big difference between this and the great depression probably I haven't studied it in any detail, but the fiscal policy response, what we're seeing now is unprecedented. I don't imagine they had anything similar during the great depression time.

Ben Rabidoux: Yeah. I'm not an expert either, but certainly the fiscal policy, I would have to think as much more aggressive or however you want to frame it right now, but also the monetary policy.

Ben Felix: Yeah.

Ben Rabidoux: Going to zero rates and some of the measures that they've taken to keep liquidity flowing is stunning, right? I mean the Bank of Canada's balance sheets is just unbelievable. So there's a lot of things that are unprecedented about this full thing. And that's why it's so hard to have any concrete view on things. You sort of have to think about a base case and then think about the distribution of outcomes on either side of that.

I think a reasonable base case is that the pressure from here is downwards on housing. Right. Now, pick your number. I mean, it's not hard to get the 10%, 15%, 20% as a base case from here. With significant very large tails on either side of that, because we just don't know, we'll get to a 30% national house price decline? Absolutely. Right. Could it be 10% in a very quick snapback, such that we're back to zero or back to where we were within 18 months? Yeah, that's totally plausible too, right. Nothing's off the table right now. But my bias is that this is probably going to be pretty bad for housing.

Ben Felix: Can you speak to, and a lot of people don't even realize that we've ever had these in Canada, but we have had housing downturns in major markets in Canada in the late 80s and 90s. What were the economic conditions like then and how do you think that compares to what we're seeing now?

Ben Rabidoux: Well, it's funny. So you're right. The big one was kind of '89 and '93, but we also had a housing cycle in the late 70s as well. It seemed there was one over almost every 10 years for a while. We had one late 60s, late 70, late 80s, nothing so much in the 90s. And then it blew up again in 2008, 2009, very quick blip. What's interesting to me. And this gets back to your question earlier about how levered we've gotten the economy on housing both directly and indirectly. If you look back at the late 80s and early 90s, one of the defining characteristic of the Canadian labor force is that we were a manufacturing powerhouse. And so when the central bank slashed rates and decimated the currency, it was a boon for all of these manufacturers and it just roared back. And it really, it ended up soaking up a lot of the relatively low, skilled labor that was shed out of the construction sector.

Now, it's not clear to me how you easily stimulate the economy at this point when you are starting out of position where rates are so low, right? And you don't have the same sort of leverage to declining currency that we had back then. It's going to be very difficult. I mean, the easy way to think about it is if you look at the household defective interest rate, which is kind of the blended interest rate that households are paying across all of the outstanding debt. Heading into 2008, that defective interest rate was about 6.5%. So, I mean, just imagine telling people today that just once at 13 years ago, the average rate across all the mortgage debt outstanding, credit cards are at 6.5%. We look at you like you're crazy.

A year and a half later, it was 3%. So an enormous decline, there was shocking off value from the Bank of Canada cutting to zero. Now, you fast forward to today, we're coming into this recession with that effective interest rate of about 3.3%, right? And they've cut to the lower bound. They've already cut to 0.25% of the Bank of Canada. We're down to 3.1. Where's the shocking off, right. So if you don't have 300 basis points of rate cuts to stimulate demand, what are you going to do? That's been my concern here is how do you leverage the consumer to pull the economy out of a recession, which has been the playbook for decades now. It's very different. It's a very different environment.

And that's why I've said to my clients, I think what we're going to see this cycle is very dramatic and unconventional monetary policy, negative interest rates wouldn't surprise me. I mean, extremely aggressive QE, the fed in the US is already buying high yield debt ETFs. I mean, it's who in the world thought even legally that they could do that. Right. So we just don't... Get back to the big question. We have no idea what policy makers are going to do here, but it's probably going to be pretty crazy. Right. It's going to be something that's going to rewrite the textbook.

Ben Felix: Yeah. QE is a fascinating experiment too.

Ben Rabidoux: It is.

Ben Felix: The Bank of Canada I think just started doing the QE program, do you have thoughts on whether that's going to have any effect or not?

Ben Rabidoux: Well, it's going to have an effect in that, I think there's a lot of concern that's going to be inflation. For quite a while it's going to be hard to see that. I'm conflicted on that. So on one sense, if you think about the economy is a boat, let's say, this maybe a bad analogy, but before $2.3 trillion economy and real GDP is probably going to be off somewhere in the order of 5% this year, for the full year. Well, that means you're going to need somewhere on the order of $100, $120 billion in direct stimulus just to plug the hole so that the boat doesn't sink, just to keep you at stable level. Right? So not getting into any sort of excess inflationary type money printing, that's just what's going to be needed to fill the hole.

So it's necessary. Right? And the problem is that the feds and the provinces now are going to be issuing so much debt in the markets to try to stimulate their own economies that there has to be some question around whether the appetite is going to be there to take all that on. Right. So I don't know, it's certainly something that rightfully should give us some level of concern, but at the other end what are you going to do? It's when the crap's about to hit the fan, you got to do something, even if it's going to be wrong. Right. You got to do something. So that's kind of where they're at, right?

Ben Felix: Yeah. And I guess empirically, we've seen in the US, in Japan, well, Eurozone too, they've had these huge QE programs and it has not been inflationary at all.

Ben Rabidoux: Right. Completely broke all the models on that. You're totally right. The one thing that worries me right now, and again, not being an expert on this, but I would say there's a couple of things. One is, I do think that there will be some inflationary pressures just based on what's happening with supply chains, [inaudible 00:45:44] broken. I think you're going to see supply chains start to be repatriated for lack of a better word, but people will start to question the stability of their sourcing materials and parts overseas.

And that's going to be inflationary because it's going to be harder to source that at such cheap levels. So that's one thing. I also think there's a very good chance that we see the Canadian dollar get hammered here. Right? I do think that we're going to challenge the current AAA rating on terms of sovereign credit ratings. And if you look at the leverage in Canada across all sectors, people often have this assumption that because the federal balance sheet is relatively pristine, that we sort of standout international.

But what people miss is that Canada is unique and that the sub sovereigns, just to say, the provinces primarily bear most of the burden for healthcare and education, which in most countries is the biggest expenditure and the biggest strain on the fiscal balance sheet.

And so when you layer on top of the feds, the provincial debt, municipal debt, households, and corporates, all of a sudden we're among the most levered. And then when you look at us relative to let's say the G20 aggregate, we're about 60 points above. By my math, we're close to 330% debt to GDP, which is way above the G20 aggregate, right. Way above a lot of comparable countries like the US, Australia, the UK even. And so this downturn is going to be a lot of entities and parts of the economy needed to be bailed out. And it's not clear to me that you can keep that AAA rating. And so if that starts to happen, and if the currency starts to get hit, which I think it probably will, then you also have the issue of importing inflation via imports, right. Then everything starts to become more expensive. So to me, that's the other risk in this.

Ben Felix: I think I just have one more question on housing. Can you just talk about your thoughts separate from the current situation on renting versus buying a home? This is something that I've talked a lot about. I think renting is as good of a housing choice is owning, I guess so? Say it that way.

Ben Rabidoux: Okay. So first off, big caveat being that, any personal finance question, new questions like that I always say it's asking how long is a piece of string? It's like well, it depends. So is it the right time to buy? Is it the right time to own a home? I don't know how stable is your job? How big is your down payment? How stressed do you have to be to afford that home? How long are you going to stay in that area? These are all the sort of personal finance elements that make a question that impossible to give a generic answer. But I'm [inaudible 00:48:09] to your view that there's this tremendous bias against renting in Canada and I think it's unwarranted. The one pushback to that would be that it's unfortunate in Canada we don't have great long tenured single family type rentals. And so the issue that we've had in Canada is a lot of the rentals especially a lot of the nicer or higher end ones end up in the hands of sort of retail landlords.

And they're just prone to do all sorts of stupid things. Try to rent evict, with that sell it the most inopportune time, in short holding times. All this stuff that inconvenience you and so at some point, if I was a single person, yeah, renting all day, I mean, it makes a ton of sense. When you start throwing kids into the mix and the risk of having to deal with retail, landlords that are going to rent evict and all sorts of other stupid things coming to the point where the cost of convenience is worth a lot too, right. And the cost of not having to move in the middle of the school year, all those intangibles come into play as well.

So I agree with you. I think this is a great time to just wait and see how things play out. Because again, my bias is that this is more likely to exert downward pressure on housing. I think it's more likely that you can end up with very good deals in the rental market and later down the road in the resell market. But even outside of that, I think that the economics make a lot of sense around renting right now.

Ben Felix: Right. Yeah. I agree. Renting is pretty good.

Cameron Passmore: We know Ben agrees with you.

Ben Felix: I rent, I have three kids, four kids, geez. I just had another one.

Ben Rabidoux: Yeah. But you know what I mean? If you can get a place where it makes sense and you're comfortable that the landlord is going to do some stupid, like absolutely. I mean, it's crazy. So we rented, it was a beautiful place. We had our two kids when we were there and our rent payments, I think we're kind of sitting back their property taxes were about five months of rent payments, just to cover the property tax. I mean, we were looking at this going these people are giving this away. I mean, this is an unbelievable subsidy on our living. We would have stayed there for a long time, but it was same thing. They eventually wanted to think about selling. And we're you know what? The kids are going to be school-aged, we want a fairly low cost housing environment than where we are.

And it's well we found a great spot that we loved and we ended up buying it, but had it not been for that, if we could have stayed together place probably would have for quite a few more years. Right. So a lot of it to me comes down to stability of tenure I think.

Ben Felix: I've often thought that in Canada, and you might have the data to back this up, which is why I'm bringing it up. In Canada in many cases landlords will do that. They'll accept losses on renting a place out because they have such high expectations for the capital appreciation, is that something-

Ben Rabidoux: Yeah. Absolutely. Well, the data's clear on that. I mean, we know about how [crosstalk 00:50:46] or it's our cash flow negative when they take possession of new condos. That's even with their down payments. So you're right. It ends up being a subsidy. Now, the counterpoint to that, and one that I'm not a fan of this math, but the math isn't necessarily wrong.

So one of the things that gets lost in that is that with interest rates as low as they are, about 50% once you're below 3% mortgage rate on a 25 or 30 year [inaudible 00:51:11] half of the payments from day one is principal repayment. So the argument that they would make would be, okay, I'm out of pocket 200 bucks a month, but I'm getting 600 or 700 bucks of principal repayment. So net I'm up 500, 600 bucks a month. If you actually then look at that in terms of my down payment on a levered basis the math is actually really interesting. It's a very good investment.

Ben Rabidoux: Now, I don't like that math. I think that math is... If it's one person doing it, you go, okay, well, that's kind of interesting, but if it's half of all condos are coming into the rental market with that math behind them, well, it creates potentially a systemic vulnerability when you hit a shock like we're having right now, where all of a sudden, I may not have that money to pay that out of pocket because I'm unemployed and my tenant might be unemployed. So I'm not getting that rent. And so then it becomes very serious. Then all of a sudden, everyone goes, okay, now I understand what people want, cash flow, and positive cash flow. So I'm with you. I think both the low rates, the reach for yield and the capital appreciation that we've seen in recent years has brought a lot of people in the long-term rental market, into the investment market, maybe shouldn't have been.

Ben Felix: Fascinating. Our last question, and I know personal finance is not you, I'm not saying you're an expert in it, although you may be, that's not what you came to the podcast, but I can ask the question anyway. Knowing what you know and be just spending so much time with the data and seeing what's going on from an economic perspective, is there anything special that you're doing right now to prepare yourself and your family's personal finances?

Ben Rabidoux: Well, that's a good question. We're pretty fortunate in that we've had a fair bit of liquidity coming into this and really positioned. I mean, not as well as I would've to have been in terms of just... I mean, everyone wants something like the States, you always wish you had a little more cash on the sidelines, but for us personally, I mean, it was just maybe you build up a bit more of a reserve because you still don't have any idea how long it's going to last for. I'm fortunate that my household really hasn't seen any sort of income interruption from all of this, maybe would be a little different if I sort of rephrase it to what the average person might want to think of doing. Like, yeah, it makes a ton of sense to start building more of a safety net or a cash balance or emergency fund.

And just think about de-risking things right now. Because I mean, not de-risking the sense of selling equities right now or whatever it might be, but just make yourself a little more resilient to these sorts of economic shocks, especially something like this that we don't know how long this could drag on for. Right. It's it certainly highlights the importance of having a liquid emergency fund.

And by the way, is not in the form of a line of credit that can be called in when things could get distressed. Right. I mean, that to me has been one of the weird sort of personal finance things that we've seen. Its like well, you don't need emergency fund if you have a home equity line of credit there. Well, what if the banks cut it, right? What if all of a sudden they take your limit down to nothing, right?

That's the sort of thing where it's completely reflexive in that the banks do things that exactly the time when you would want it. Right. It's like they will saying that bankers are someone who gives you an umbrella on a sunny day and then wants it back when it's raining. That's all you have to remember about bankers is you can't count on them to have that credit line still there when you really need it. So to me that's one of the big personal finance takeaways and all of this.

Ben Felix: I totally agree with you. The scary thing is if everybody does that, we end up in a situation where there's no recovery.

Ben Rabidoux: Well, you're right. It's not interesting. So that's that whole paradox of thrift. And it's something that I've actually thought about a lot is that I do think coming out of this recession, you're going to see savings rates rise a lot. We've seen saving rates in Canada over the last three years of average, a little less than 3%.

In the US they've been 8% or 9%. So we like to sort of laugh at these crazy Americans that blew themselves up. The reality is they've repaired the balance sheets dramatically, and they've been saving at a rate that's three times what we've been saving. So you're going to see savings rates mostly rise significantly on the other side of this. And you're absolutely right, it's a major headwind to consumption.

Ben Felix: Jeez. All right. I think we'll leave it at that. This has been awesome Ben.

Ben Rabidoux: My pleasure guys.

Cameron Passmore: It's been a lot of fun and man, I'd to have you back on a regular basis to get these kinds of updates, this has been great.

Ben Rabidoux: Always happy to chat guys.