Today we have a somewhat unique episode for all of our listeners, rounding up the news and information from the world of finance and investment before we welcome Ben Rabidoux back to the show. Ben was a guest on Episode 96, which aired early during the pandemic last year, and we are so happy to have him here for another appearance, to touch in with his real estate expertise, and his thoughts on the current issues facing the Canadian housing market. Ben is the Founder of Edge Realty Analytics and North Cove Advisors and is essentially a real estate analyst, which means he has many clients that are institutional investors and fund managers, who he helps with the real estate side of their portfolios. In this conversation, Ben gives us loads of insight into the current landscape of Canadian real estate, the roots of the contemporary conditions, and what the data can teach us about the high prices that are so prevalent at present. We also hear from Ben about some potential policy solutions, and how the pandemic has affected the rental market. So for all this and a whole lot more in today's episode, be sure to join us on the Rational Reminder Podcast.
Key Points From This Episode:
Some of the best media we have encountered recently; podcasts, documentaries, and more. [0:02:01.3]
News from the community and why we had to ban a user for the first time. [0:03:46.1]
Quick book reviews of the illuminating DeFi and the Future of Finance and Blockchain Bubble or Revolution. [0:07:05.8]
Changes in the world of finance and investment; Walgreens' new bank account and beyond. [0:12:22.3]
Today's listener question dealing with research-based investment decisions and frequently cited papers. [0:15:27.5]
Recent research from Robert Novy-Marx and Fama and French on US value premiums and factors that matter. [0:22:01.3]
How to view the possibility of a replication crisis in finance. [0:31:10.8]
Findings on US exceptionalism and the relationship between national economic growth and returns. [0:33:49.6]
Market crashes and the correlations between different countries. [0:37:12.6]
Reflecting on Ben's appearance on the podcast during the early weeks of the pandemic. [0:39:38.3]
The last few decades of the 20th century and how that explains the current climate. [0:43:50.2]
The chronic issue of under-supply of housing from the industry. [0:45:30.1]
Housing policies that would support the current rates of population growth. [0:48:20.4]
Examples and thoughts on the recent house price increases. [0:48:48.6]
Statistics of homes bought by investors; surprising numbers and data on purchases. [0:52:58.2]
News from the rental market and the interesting ways the pandemic affected it. [0:57:05.1]
Common Canadian perspectives on the potential for housing pricing to decline. [1:00:58.4]
Ben's thoughts on possible solutions to the current problems in the housing sector. [1:03:47.6]
The significant role of the private debt market in Canadian real estate. [1:08:02.2]
What we can learn from historic data about the current housing prices. [1:12:15.1]
Ben joins us for a round of questions from our Talking Sense cards about savings, happiness, and flow states! [1:15:27.4]
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, portfolio managers at PWL Capital.
Cameron Passmore: Episode 168, welcome everybody. And this is a bit of a unique episode where we have, we call an us episode. But we welcome back Ben Rabidoux as a special guest. He was a guest with us back in April of last year, right as the pandemic was getting going. And that was Episode 96. So he reached out to us and offered to come and join us, so we had him back. So we have him at the end. He's a real estate, I would say real estate expert economist, self professed Canadian housing macro credit ninja, he says, and he's a founder of Edge Realty Analytics and North Cove Advisors.
Ben Felix: Interesting segment. He's a real estate analyst. And I think he told us last time that a lot of his clients are institutional investors, maybe fund managers and stuff like that. So he's doing real estate analysis that's helping give them information to do stuff. As you'd expect, he's got lots of interesting insights and commentary on Canadian Real Estate. In the Rational Minded community, there was a discussion recently about the fact that the beginning of our podcast, we say that it's for Canadians. And this is not the first time this has happened, people say, I'm not Canadian and I enjoy your podcast, you should take that out of the intro, because it might deter some people. And I've always said, we've always said that, we're going to keep it in there, because our expertise comes from a Canadian perspective. And we are Canadian and our clients are Canadian.
Anyway, this is one of those episodes where when Ben Rabidoux starts talking, it's pretty Canadian-specific. So people might still want to listen to it, if you're interested in dynamics of the Canadian real estate market.
Cameron Passmore: Definitely, definitely.
Ben Felix: That's about as heavy of a Canadian tilt as we've had for a while, in terms of the content.
Cameron Passmore: So I've got some great new content for you. I found this podcast, I think I mentioned it before, but Masters of Scale with Reed Hoffman, the founder of LinkedIn. Anyways, his podcast I always enjoyed, but I always found it over engineered. So I listened to a recent interview that he had with Satya Nadella from Microsoft. And he mentioned in the podcast that they now have the full interviews behind a paywall. So I looked into it, 100 bucks a year, US, and you get extended interviews with these people. They are phenomenal, phenomenal interviews. He is a great interviewer, especially if you take out all the, what I think is over engineering. And I listened to Phil Knight of Nike, wow. I mean, we talked about Shoe Dog before, really good, really interesting interview. And then also Satya Nadella.
So I just discovered this the other day, but I wanted to pass that along, worth 100 bucks. We also talked about the book, Nudge, a couple of weeks ago. So the co-author of that book, Richard Thaler was on with Stephen Dubner on Freakonomics, great interview. And then this being the week after 911, I don't know if you checked out the documentary on Netflix called Turning Point: 9/11 the War on Terror?
Ben Felix: I saw it, I saw that it was there, I didn't watch it.
Cameron Passmore: It's really good, because it starts with the event, then it goes back through recent history in terms of what led up to this. And I learned a ton, so it's really good. And also 60 Minutes on Sunday night, did a special on the captains of the fire department. And they did this really sad, dramatic timeline of when the leadership of the fire department arrived on scene, and then they took some of the audio that they had and merged with audio from people who were unfortunately in the building and weren't saved. And they show the timeline as they were approaching each other in the building while they climb the stairs, incredible. So that's 60 Minutes from this past weekend.
You had some, an update from the community, couple nights reviews we received lately. One of them is even going to get us a free beer if they come and visit. ' Ktownbrown said, this is by far my favorite financial podcast. Love the format, variety and the banter. Also refers to how much time and effort that we must and our team must spend behind the scenes to put this thing together.
Ben Felix: Ah, come on, it's no time at all.
Cameron Passmore: No, no time at all. And speaking of the team, we wanted to welcome Sandrine to our team. She's joined us, and Angelica to pull this all together to help us on especially the social media part of the endeavor. We also heard from Mikey88, love the podcast, fills in the void of information with real fact-filled information and little fluff. So I don't think either of us have been accused of a ton of fluff. From Matt Fierro Mori, refreshing to have such amazing content from a Canadian perspective. And then from NR Fisher, it's refreshing to listen to finance podcast that is strong and open. Bias to indexing, but is willing to openly discuss the trade offs and benefits of other investing approaches.
Ben Felix: We talked to Jack Bogle for the live webinar, which was recorded yesterday. And then we had Antonio Picca from Vanguard who runs their factory strategies earlier this week. I'll tell you, the black and white idea of indexing good, other stuff, bad, it's many shades of gray. There was a time where I thought, like many people do, oh, index investing is good, period. But it's so much more nuanced than that.
Cameron Passmore: It sure is. Lastly, from the store, lots of interest in the talking sense cards, they are really a great conversation starter. So if you have kids over the age of seven, hop online, Angelica put a bonus in there, if you spend, like you buy $15 more, you get 20% off the cards or something. And you get a free pair of socks. So highly recommend it, good value. Anything else, Ben?
Ben Felix: No, that's good. The only other thing I'll say is because we finished the episode with Ben Rabidoux, so I'm going to say this now. We do always appreciate the reviews that people leave. So yeah, if you're enjoying the podcast, or if you're new to the podcast and haven't left a review yet, then we appreciate you doing so.
Welcome to Episode 168 of the Rational Reminder Podcast.
Cameron Passmore: So quick, couple of recent books for you. One is, we had to prepare for our interview with Cam Harvey that's coming up in three weeks, I believe. So you and I both delve into his most recent book, DeFi and the Future of Finance, which was co-authored by Ashwin Ramachandran and Joey Santoro. Suffice to say, great book, hard to understand at all, of course. I think you could do a complete undergraduate degree on learning about cryptocurrency and blockchain technology. But you really do understand the kind of impact this could have. So many people in our industry roll their eyes when you talk about Bitcoin or cryptocurrency. But this is no joke. This is a very serious development. Some people say it's as important as the internet. I have way, way more questions than answers, you're probably ahead of me on understanding all of this.
It feels a bit like the late '90s with Pets.com, that whole era where companies transitioned from that to today, which is Amazon and Shopify and the like. So I'm not sure how this will all shake out. I don't know how it's going to affect our industry. I don't know how, how will companies adapt? How will the regulators adapt?
Ben Felix: In your Pets.com example, we asked Cam Harvey about that. If somebody had told you in the '90s, that the internet was going to be huge. And that business was going to move to the internet. It was like, cool, someone could have told you that had been right. But nobody knew what to invest in to capture that. And for the most part, if you invested in stuff, you blew up. And I asked Cam, is it going to be like that with DeFi and crypto? And he just had a blank stare and said, it's going to be way worse. Because it's moving way faster than the internet ever did.
Cameron Passmore: Exactly.
Ben Felix: And it's changing, it's changing way more quickly. And I think the one of our big takeaways, Cameron, from reading that book, and I know you've read other books on the topic since then, because you read like a machine, like an actual reading robot. I think the big takeaway is that, it's what you said, is that it's not something to roll your eyes at. It is meaningful, it's going to change something. Cam Harvey described it as, not like the internet, it's the missing piece of the internet, is how he described it.
Cameron Passmore: So I started reading another book called Blockchain Bubble or Revolution, which is much more pragmatic. So I kind of linked that, so they talked about, well, how will this work? One example I read this morning, I actually sent you a screenshot of it, is cryptocurrency or Bitcoin, is it an investment? Or is it currency? Right now, many people are buying it as an investment. But you want your investment to go up. You don't want your currency to go up, because that causes all kinds of problems. So which is it? Is it digital gold? I don't know. And I think back to, off the top, I mentioned that interview that Reed Hoffman did with Phil Knight, Nike. Think of a company like Nike, public company, 74,000 employees, true global company. Think of the impact of blockchain technology, cryptocurrency on that? There's still going to be shoes bought, we all need shoes and clothing. Think of all the shipping, all the retail stores, it's massive. And there's no way that Nike is not going to be, I wouldn't think, not be aware of the impact of blockchain technology.
Ben Felix: I think Cam's point, when we talked to him, is that there are segments of the economy that are going to be disintermediated by this, and then the rest of the economy that's not being disrupted is going to become much more efficient. And access to capital is going to increase, and all that kind of stuff. So he sees it as a big opportunity. But one of my other big takeaways from talking to him, is that, it's not about digital gold so much as it is a platform that will facilitate or can facilitate decentralized finance. So if you want to invest in decentralized finance, if you believe that it is going to disrupt traditional finance and revolutionize the monetary system, one of the ways to invest in that is by investing in these platform tokens like Bitcoin and Ethereum.
But it's not a speculative bet on, it's not gold, it's not a store of value. It's saying, okay, decentralized finance is going to change everything. And one of the ways to capture that is by investing in the platforms that are going to allow it to happen. That was my take.
Cameron Passmore: Anyways, we'll keep learning, there's a whole lot to learn.
Ben Felix: Yeah, I don't know what you do with it, is the other problem. It's like the 1990s example. It's like, say, I agree, I don't know if I do or not. But say, I agree that yep, this is it, DeFi is going to be huge, crypto is going to be huge. The way you capture that is by investing in the coins that are going to facilitate all this. I don't know which coins are going to facilitate all the growth, is it going to be Ethereum? Maybe it's best positioned to do it, but there there are new coins developing all the time. And a lot of it comes back to, which one do people trust the most? I just don't know how you predict that. So I really don't know what you do with this information. But like I said before, the big learning for us was that it's not a silly joke. It's not a not a speculative mess. Although it has been, a lot of it has been that, and I think that's why people have dismissed it. But there's something to all of it.
Cameron Passmore: Definitely is. In other news, quickly, a story I saw this week talked about how much change is potentially coming at us, like cryptocurrency wasn't enough change for us. But Walgreens is now getting into our space, they're offering a bank account credit card wrapped up in a service that they call Scarlet, which will include some personal finance planning tools and financial wellness via an app. You'll be able to establish goals, track cash flow, pay bills, link multiple family members cards together to do an aggregation of your spending patterns. So I thought that was interesting, someone who you wouldn't think is in our space at all, like have people said, Amazon's coming after you, or Apple. But here, we have Walgreens. So I thought that was an interesting story.
Ben Felix: Raises the question of, what is our space even? Because there have been so many technology platforms that have looked for a minute, like they were going to change everything and disrupt everything, and that our business was going to be disrupted. But you realize, pretty quickly, that what people want is expertise from humans. And it's not just the expertise on, which account should I put my money in? Or what should my asset allocation be? It's the, I mean, it almost sounds tacky to say it, but it's the human touch. And being able to take the human experience and apply it to making financial decisions. And you can make as many apps as you want. I mean, maybe an app can eventually do that, I don't know. I don't know if an app can be human.
Cameron Passmore: But even something, as you mentioned off the top, around indexing, it's so nuanced. It's so particular to the individual, their preferences, their employment, their human capital.
Ben Felix: Their cash flow betas.
Cameron Passmore: Yeah.
Ben Felix: Reading John Cochran's paper too many times. All right, should we jump into our listener question?
Cameron Passmore: Fire away, yep.
Ben Felix: And we didn't really explain this, but our main topic today, or what would normally be the sort of media investing topic or financial planning topic, that's where we had Ben Rabidoux in. But we do have a listener question, which is easily a normal investing topic. So I don't think we're missing any content. It's almost like we have Ben Rabidoux, in addition to normal episode.
Cameron Passmore: I'm looking at the notes here, and there's enough beef here to keep everybody happy.
Ben Felix: That's good. People like the beef, except not actual beef. Because when I posted a picture of a steak that I was grilling in the Rational Reminder community, I got some grief for that. Because somebody else had posted... there's a thread in the Rational Reminder community called Scenes while Listening to Rational Reminder, where people post pictures of what they're looking at while they're listening to the podcast. It's a really neat thread, actually. Somebody had posted a picture of themselves hiking at a glacial lake. And I posted a picture of steaks that I was cooking on an open fire, which I do occasionally. And there was a discussion in the community about the glaciers melting. And then people pointed at me and said that one of the best ways to stop that is by not eating steak. So I shouldn't opposed to the steak picture. Anyway, I said that it was a mis-steak, to post the picture.
Cameron Passmore: That's pretty funny-
Ben Felix: I thought it was pretty funny-
Cameron Passmore: That's pretty catchy, yeah.
Ben Felix: So the listener question that we're going to answer is from Joel S. It was actually the first listener question in the thread that Angelica posted, asking for listener questions. It was posted back in July. And there's a great bank of questions in there. And we appreciate people continuing to post them. So the question is, considering the replication crisis in academic journals, and that papers that fail to replicate are cited up to 16 times more than those that were replicated. Should this affect our approach of research-based investment decisions? It's a really good question, and I think there's a pretty good answer. There were a couple other discussions in the Rational Reminder community, and actually, one was an email that I got that tie into this. So I wanted to kind of address them all together, because I think they fit together.
So I got an email from Richard. And I posted that email in the listener question thread in the community. This is a majorly condensed version of their question. But they're asking why an unexpected return based on historical data should carry any weight in decision making. And he used the example in his email, of the US beating emerging markets for the last 30 years, does that mean that we should expect the US to beat emerging markets going forward? And he's using that as an analogy to say, value stocks have done well historically, why should we expect them to do well going forward? That's an interesting question. And then we also had somebody post, after Episode 166, two episodes ago, we had talked about the exceptional outcome of the US stock market, and lessons from 100 years of stock returns was the base of that episode. And so Mr. Bozo, hilarious, come on.
Cameron Passmore: You always love the names.
Ben Felix: Mr. Bozo in the community asked, if the US has been this outlier for 120 years, is that not long enough to say that it's going to continue to outperform in the future? How much data do we need to believe that this is going to continue? That's also an interesting question. So that's kind of three questions that are all related, once you start talking through them. So we'll start with the replication crisis, or as Cliff Asness calls it in his blog post on this topic, the replication crisis that wasn't. So you can kind of see where this is going to go. Is there a replication crisis in financial economics? Cam Harvey, who's an upcoming guest in Episode 171, he gave some fascinating commentary on the incentives in academic finance.
Ben Felix: He said, he told us that the vast majority of schools in the world will give you tenure, they'll give you a job for life, I'm assuming he meant tenure. They'll give you a job for life, if you get a single publication in the Journal of Finance. Journals are ranked by their impact factor. So the impact factor is the number of citations from other journals, to the journal in question. If people are citing work that's published in the Journal of Finance a lot, which they do, and it does have the highest impact factor of financial economic journals, then that's what happens. So if other people are citing Journal of Finance works, then it increases its impact factor. That journal does have the highest impact factor.
Then the other aspect that is a little bit more nuanced is that, research papers with a positive result, so that means you propose a hypothesis and your hypothesis is supported by the data, as opposed to rejected by the data, those are much more likely to get cited. And then the negative results don't get cited. So if you're a researcher and you're thinking about wanting to get published, because you want to get tenure, which who wouldn't, I'm assuming, in academia, then you're going to look for significant positive results. So you kind of put all that together, and you end up with, well, you end up with what we have, which is a zoo of factors. And that was coined by John Cochran, who's another upcoming guest in Episode 169. He created that title in his presidential address to the American Finance Association.
And the zoo currently has roughly 400 species in it; animals, factors, I don't know. Probably more than that, because Cam Harvey started a sort of an open source paper, I think it was a couple of years ago, to try and find all the factors. And I think people can still make contributions to that, if they find new factors. So probably more than 400 at this point. Now, given all that, it sounds like we're pretty ripe for a replication crisis in finance. But I think it's a little bit more nuanced than that. When we're thinking about factors, and Larry is the one that came up with a great framework to think through this, two of the big things you got to think about are testing out a sample. And that's where you're going to see replication die, I guess, in many cases. But from our perspective, we're not going to be interested in a factor if it has not been tested out of sample. So that's one.
But then the other big one is that there's got to be a sensible explanation for the premium. So if we take the value factor as an example, Fama and French had their big paper in 1992, using US stock market data from 1963 to 1990. Pretty small sample in a single market, so could have been spurious, easily. It's a tiny slice of history, they're testing one metric, they're testing book to market. Maybe it didn't work with earnings, or some other scaling, fundamental, but Fama and French went on to test that out of sample in a 1998 paper using 13 international markets from 1975 to 1995. And again, found a robust value premium, I think in 12 of the 13 countries. And then in 2007, using, going back from their original paper, from 1929 to 1963, they again found a robust premium.
Both of those papers were published in the Journal of Finance, for whatever that's worth. Then we have Asness, Moskowitz and Pedersen, they looked at value and momentum jointly in individual stocks, global stock indexes, currencies, global government bonds and commodity futures. And found again robust value premiums everywhere. Their paper was value and momentum everywhere. There's an interesting one that I found, Cliff linked this in his blog post on this topic. This was using return series from Goetzmann And Cowles, and those return series go back to 1825. And they had value and momentum data. So from 1825 to 1926, they again found a value premium that looked pretty similar to the 1926, 2020 value premium. Again, for US stocks.
Cameron Passmore: Sorry to interrupt, but speaking of Cliff, I shared with you the interview he did with the CFA Society of Orlando, excellent interview.
Ben Felix: I have not listened to it.
Cameron Passmore: A lot of discussion that relates to exactly what you're talking about here. So well worth checking out podcasts, easy to find.
Ben Felix: Yeah, well, we can link it in the notes too. There's the most recent paper from Fama and French that everybody got all excited about, where they showed that in the most recent samples, so the most recent 30-ish year period, yeah, 30-year period, they found that the US value premium was smaller, and not statistically significant. So everyone's like, oh, the value premium is dead. But the whole point of their paper was that you cannot conclude statistically that the value premium has changed from the prior period to the current period. So the realized outcome was not great, but we can't conclude anything, we can't infer anything from that, at least not reliably. So that was a lot about historical data that I just talked about, using the value premium as an example. There's similar data for momentum and for other factors too. But value and momentum are the ones where we have data going back to like the ridiculous 1800s, and stuff like that.
But in both cases, this is the important part, there's also a story. Why do these premiums exist? If there's no explanation, even if we have a mountain of data, it's pretty hard to think the trend is going to persist, especially if it means taking on more risk or costs to try and capture it, which is the part that's really important. If pursuing value didn't lead to any tracking error risk, relative to the market or some other benchmark, then none of this would be relevant. You would try and get the premium. But taking on the premium means increasing concentration and typically increasing costs and turnover, and all that kind of stuff. And for momentum, I mean, that's even more exacerbated, where the transaction costs are higher, the turnover's higher, the fees tend to be higher, too.
So even if this thing shows up in the data, if we're not comfortable that it's going to persist in the future, based on the theoretical explanation, then you might not go after it. Now, if you think about asset pricing in general, there are two main theories. One is that expected returns are explained by persistent behavioral errors. And the other one is that expected returns are explained by risks that investors need to be compensated for, while they're holding the asset. They're kind of two competing theories, the truth is probably somewhere in between the two. For value, we know that there are really strong explanations on both sides. And the other thing that's important to keep in mind is that, these theories stand on their own. They're not just explanations for value. It's not like, look what happened to value stocks, let's make up an explanation for it. You can test these theories elsewhere.
Like for example, value stocks do tend to be under distress, they tend to have high financial leverage, they face substantial uncertainty in future earnings. And they tend to be riskier than growth stocks in bad economic times, and only slightly less risky in good times. So you take that, and it's like, okay, there's more to it than just saying, oh, look, the returns were higher, it must have been riskier. There are other ways to test whether that theory makes sense. And then for the behavioral explanation, again, we know that humans extrapolate too far into the future. They assume trends exist where they don't. And they overreact to news, that can be tested outside of finance even. But it also applies to financial economics.
So again, we can test the theory, even outside of finance in that case. And that all leads to value stocks to trade at prices below their fundamentals, to be under priced, which leads to higher returns for the people that hold them. So in both cases, there's pretty robust theory that can be tested in sample, being like in asset pricing, but also outside of this field completely. So then the other side of that example, is finding trends that look like they exist. If you take the 1825 to 2020 sample, you could take that data and massage it and find something that looks like a robust pattern. Robert Novy-Marx had a kind of tongue-in-cheek paper, where he found that anomalies were explained by sunspots, the weather, global warming and the stars.
So that's kind of case where it's like, I don't care how much data you show me, if you're going to tell me that we're going to build a fund based on sunspots, I'm not going to pay 60 basis points to own it. So there's no sensible reason to assume that the returns are going to persist. Again, we're back to not believing in the thing. The other famous examples are butter production in Bangladesh, predicting market returns and the team that wins the Super Bowl or the conference, I think, that wins the Super Bowl. I don't know enough about football, that might have sounded completely clueless. And the starting letter of the company's name, there's statistically reliable anomalies that exist. But who's going to put money in that strategy? Well, nobody, because there's no reason to believe that they're going to persist in the future.
So we're talking about replication in financial economics and whether we should believe the data when we're building these investment strategies. I think there probably is a replication crisis within the factor zoo, if we're talking about 400 factors. But we're not building portfolios based on all 400 factors, or even on most of the newer factors. But there is a smallest subset of factors that do meet the out of sample robustness and the theoretical sensibility. Even within that debate of which asset pricing model makes sense. Like, is it the four-factor model, the five-factor model, do you include momentum, is it the six-factor model? All of the factors that we're debating there are robust, theoretically and empirically. So if there's a replication crisis in there, in those factors, then I think that would be a problem.
There's a 2021 paper by Jensen, Kelly and Pedersen titled, Is There a Replication Crisis in Finance? And they test the claims that factor research findings have one, and this is a quote from the paper. One, this is the claim that they're testing, that research findings have no internal validity. Most studies cannot be replicated with the same data, because of coding errors or faulty statistics, or are not robust in the sense that the main results cannot be replicated using slightly different methodologies, and/or slightly different data. And then the second one that they're testing is that the research findings have no external validity. Most studies may be robustly replicated but are spurious and driven by P-hacking, that is finding significant results by testing multiple hypotheses without controlling the false discovery rate.
Such spurious results are not expected to replicate in other samples or time periods, in part, because the sheer number of factors is simply too large, or too fast growing to be believable. So the way they set their paper up is they analyzed 153 factors across 93 countries using a Bayesian framework, which is effective for making reliable inferences in the face of multiple testing. Their framework starts with the prior belief that factors have zero expected return, and allows the in sample results to incrementally increase the estimated premium. So they're starting out on the assumption or with a belief that factors have zero premium. And then they're letting their framework update their belief when they're running these tests, based on the observations. So you're starting out though, with the assumption that the expected factor premium is zero. Then letting the data tell you the truth.
So what they found is that the majority of asset pricing factors can be replicated, can be clustered into 13 themes. The majority of which are significant parts of the tangency portfolio. They work out of sample, in a new large data set covering 93 countries. That's the other thing they did in this paper, is they also tested them out of sample.
Cameron Passmore: It's crazy.
Ben Felix: Yeah. And they have evidence that is strengthened and not weakened by the large number of observed factors. Also interesting, the 13 themes were accruals, debt issuance, investment, leverage, low risk, momentum, profit growth, profitability, quality, seasonality, size, skewness and value. So they're saying all of the 100 and some odd factors that they tested, fit into these 13 themes. And for the most part, I think they had like a 75% or 85%, depending on which segment they were testing replication rate, which is not terrible. So they conclude, US equity factors have a high degree of internal validity in the sense that over 80%, there it is, 80%, over 80% of factors remain significant after modifications in factor construction that make all factors consistent, more implementable, while still capturing the original signal. And after accounting for multiple testing concerns.
And then another quote, we show that some out of sample factor decay is to be expected, in light of Bayesian posteriors, based on published evidence. Therefore, the new evidence from post publication data largely confirms the Bayesian beliefs, which has led to relatively stable Bayesian elf estimates over time. So if we think back to Larry Swedroe's criteria for a factor that you want to pursue, it's got to be persistent through time, pervasive across markets and asset classes, robust to alternative specifications, investible after transaction costs and sensible. So I think this most recent paper gives us more evidence on the data side, the factors that we care about are persistent, pervasive and robust. The sensible part has never been our concern, really, because on the theory side, I think we've always been pretty comfortable with the stuff that we're pursuing.
I think in a lot of ways, it's a bit of a caution for new research. If you see a fund that's based on like this new thing, look at this new thing that we found. That's always going to be a risk, and we talked to Cam Harvey about that too. But to answer the question, is there a replication crisis in finance, or does it extend to finance, not in a way that should affect the way that we invest. Maybe in the way that we assess new research as it comes out. And that's been cam Harvey's big point. He said that, with the amount of factors that have already been discovered, and the amount of testing that's already been done, the new T stat threshold for a new factor has got to be a T stat of three, is one of the things that Cam Harvey said in the last few years.
And I think that's probably sensible. If there are 400 factors in the zoo, the 400 and first might need some additional rigor, to be confident that it wasn't spurious. Now, the second part of the question, or the second two questions that I lumped into this one question, is how does this apply to countries? If we go back and think through the US stock market, it's this massive outlier in terms of performance. But if you tie that back to theory, why would that persist? And the answer to that is not so obvious. I love the piece that Cliff did on the Long Run is Lying to You. He shows in that blog post that almost all of the US out performance relative to international stocks, from 1980 to 2020, almost all of it is explained by the expansion of US price multiples relative to international price multiples.
US businesses did not do better, but how expensive they were per unit of earnings increased more, they got more expensive. Now, do we bet on that continuing? Well, I don't know. We just talked through the reasons that you might believe that lower prices predict higher future returns, and higher prices predict lower future returns. If we extrapolate the US experience in terms of returns further into the future, we're implicitly assuming further multiple expansion, or maybe massive fundamental out performance, I guess could also happen. And stable valuations. If we look out of sample and say, what has the experience of other countries been? Because how do you look out of sample for the US? I don't know how you do that, you look at other countries, that's out of sample.
Well, if we look at other countries, we know that, just like stocks, just like within each country market, cheaper countries, and this is something that Dimson, Marsh and Staunton have looked at pretty extensively. Cheaper countries tend to perform better than more expensive countries. You can build a country rotation strategy in the historical data, at least, that produces superior returns. So US is expensive. I don't know if it's the most expensive market, I haven't looked at PE ratios for every single country, but the US is up there. It's pretty expensive right now. So should we look at the US experience and say, yep, we expect that in the future, I don't know. I think that's pretty tricky to say.
Dimson, Marsh and Staunton had a recent paper, 2021 paper, on this basically, on US exceptionalism. And they had a pretty interesting analogy. They said, focusing on us returns and treating them as expected returns is like taking Google's parent company, Alphabet, Alphabet's returns as an estimate of future expected stock returns. The past performance of individual stocks is largely uninformative about their future returns. But when there's ex post selection bias on past success, historical mean returns will provide an upward biased estimate of future expected returns. So I want to estimate stock returns. Say, okay, well, Google's done the best. So let's take that as our expected return. Well, that doesn't make sense. And most people would agree that doesn't make sense. Taking the US and assuming that's going to be future returns, is kind of similar. That's the analogy that they're trying to draw there.
And they make the pretty obvious statement that this is why equity market, expected returns are usually based on, or related to, the performance of the entire stock market. Including the unsuccessful and successful stocks. And we know from the Bessembinder stuff, that there are many more unsuccessful stocks than successful ones, but the most successful ones tend to do exceptionally well. So it's the same kind of reason why we shouldn't just take the best performing stock market geographically, and decide, it is the best description of how stocks are going to do in the future. And likewise, we shouldn't necessarily take that market and decide, it's going to continue to outperform everything else in the future.
The other point that they make in their paper is that the US market was nothing in 1792. That's when stock started trading in New York, is 1792. And today, it's almost 60% of the global market cap. The US was an emerging market that ended up ex post, being an economic powerhouse. But nobody could have predicted that at the time. If you tell me what the next economic powerhouse is going to be in 120 years, then yeah, sure, let's invest there. But I don't know anybody that can tell you that. I don't even know if that's the right thing to say, because we know that economic growth doesn't correlate that well with stock returns in all cases. In the case of the US, it clearly did.
And then the other big thing we have to remember is that the US was spared, for the most part, from the devastation in the major world wars. And a lot of other countries that were previously economic powerhouses were devastated. And they had to go through massive recapitalization just to get their economy back in order. But when you go through that massive recapitalization, you end up diluting your earnings per share growth. That's the fascinating paper that Rob Arnott did, showing that there's not a great relationship between economic growth and returns. He used that as one of his examples, where he showed the countries that were most devastated by major wars, I think it was World War II that he was looking at. They had massive economic growth. But their earnings per share growth trailed the most, the biggest gap between earnings per share growth and GDP growth was for those countries, because they were being recapitalized. It was new capital being added, new share issuance. So their earnings per share growth trailed significantly.
It's been like that in the US, too, just hasn't trailed as much as it did in those examples. And the last point I want to make on this is, Cliff had another paper, we're talking about a lot of Cliff papers today, not a bad guy to reference, I guess. He's got a 2011 paper, International Diversification Works (Eventually). And in that paper, they find that in the long run, markets don't tend to crash at the same time. The point of the paper is in the short run, if you take 2008, correlations go to one, as people tend to say. Correlations increase in really bad times. So some people said after 2008, oh, diversification doesn't work, international diversification is broken. So the premise of this paper is that sure, in a panic, in the short run, that's true. But let's look at the very long run. And if you look at the very long run, all of a sudden, over, I can't remember the time period, 30-year periods, or 50-year periods, markets don't crash at the same time.
And it's because short term market panics, they're driven by different economics. But in the long run, it's the country's specific economic performance that dominates. And you can almost say it's just the, it's the discount rate changing in the short run. But it's the economic experience that drives the long term outcome. So Cliff finishes that paper saying, diversification protects investors against the adverse effects of holding concentrated positions in countries with poor long term economic performance. Let us not fail to appreciate the benefits of this protection. That's it, no replication crisis, and I don't think that we can extrapolate the US experience into the future.
Cameron Passmore: And KTownBrown should be put on notice that when he takes us out for those beers, it might be a couple beers if we get many questions from them. That was a great answer. Shall we roll and welcome Ben Rabidoux to the podcast?
Ben Felix: Yeah, let's bring Ben Rabidoux on the podcast. And people will also be able to hear Ben answer the talking sense cards this week, which I thought was pretty fun.
Cameron Passmore: So Ben, it's awesome to have you back on the podcast with us. You're one of only a few repeat guests on the show. So it's great to have you.
Ben Rabidoux: Well, it's great to be back, guys, thanks for the invitation.
Cameron Passmore: It's kind of a funny time, because you joined us back in April of 2020, when the pandemic was just really getting going and rocking the economy. And at that time, I remember you painted a pretty bleak picture of the economic landscape in Canada and how the household finances might turn out. And you talked about some pretty negative implications, especially for real estate. So here we are, a year and a half later, suffice to say predictions may not have all been accurate.
Ben Rabidoux: Couldn't have been more wrong.
Cameron Passmore: So how do you look at what happened?
Ben Rabidoux: To be clear, when we spoke, it was looking pretty precarious. And actually, if I rewind back just a little before the pandemic hit, there were some concerning signs even before we hit that recession. Then we talked about this, but maybe just as a refresher, we were seeing things like the debt service ratio was rising to a 30 year high. This is the share of household income that's being diverted towards paying debt. And of course, this was at a time where interest rates, even back then, were hovering near record lows. We had consumer insolvencies were rising quite rapidly. And so all of a sudden, you throw into that, this enormous economic shock. And from where I sat, it certainly looked like it was shaping up to be a pretty rough patch for households in Canada.
Now, what was amazing is not only was that wrong, but it was wrong directionally. It wasn't even like the magnitude was wrong, it was completely wrong directionally. And what I mean by that is, this is the first recession on record where households come out the other end in better shape than they went in. And so you can measure this in a number of ways. But if we look even at something like credit card debt. Credit card debt today in Canada is about 18% lower than it was when the pandemic hit. People have paid off their credit cards.
Cameron Passmore: Isn't that amazing?
Ben Rabidoux: And we have a quarter of a trillion dollars in excess savings, just sitting under the sidelines. That's about 10% of GDP. Savings rates, spiked, which is again, something that we've never really seen normally in a recession, especially in the early days. People draw down their savings to stay afloat, in aggregate. Because you have job losses and so on. We saw income growth actually accelerated during the pandemic. Now, a lot of that was these enormous government transfers, which was really the story of all of this, is that, I don't think I appreciated at the time, the magnitude of the government support that we would see. Something to the tune of 20% of GDP in terms of transfers to households.
And then some of the other programs that came into effect, the mortgage deferrals, et cetera. Here we are today, by the way, consumer insolvencies are sitting near 20 year lows. So no one's defaulting. Credit card delinquencies, all time lows. So it's such a strange pandemic, or such a strange recession, in that we went into it with all of what would seem to be the hallmarks of a really nasty sort of balance sheet type recession, that had a lot of potential, negative ramifications for households and for the broader economy. And not only did none of that pan out, but it was literally the opposite. That we came out the other side of that, with households in better shape.
Now, the corollary of that is that really what we've seen is that, the government has pulled a lot of that risk onto the sovereign balance sheet. And of course, we can discuss whether those programs were targeted sufficiently, whatever it might be, whether it was excessive, all this stuff. But the point being, the government absolutely stopped what would have been a really terrible outcome, with just an unprecedented flood of liquidity to households. And I guess, thank God they did, because we were looking at a really nasty outcome.
Ben Felix: Does that explain the unexpected spike in real estate prices that we've seen?
Ben Rabidoux: No. I mean, it's related to that, but it's a bit of a different dynamic. The way I see what happened with housing in Canada, first off, if we go back, just prior to the onset of the recession, we had housing inventory in Canada that was already sitting at 20 year lows. So this is before the pandemic hit. So it was an extremely tight market. And before the pandemic, what was funny is, we talked just as things were starting to unravel. But had we spoken a month earlier, and had you said, hey, what are you saying to your clients, I would have said, well, actually, we're pretty constructive on housing. Because as much as I'm concerned about the balance sheet of households, the supply demand dynamics in the resale market are just extremely positive.
Well, now the recession hit. And for about four or five months, everything was turned on its head. We saw a big surge in inventory, an enormous drop in sales. But it was really maybe a four-month issue. And then it completely went the other way. And so you had this dynamic where we had a shortage of single family inventory, before the pandemic hit. And I want to focus in on single family, because this is where it gets really interesting. And in fact, if we back up from that, okay, let's look at the decades leading up to the 2000s. Because this helps explain a lot about how we ended up where we are right now in Canada.
If you look at the decades, every decade, 1970s, 1980s, 1990s and the 2000s, we pretty consistently averaged about 3.1 million people added to the Canadian population each decade. And in turn, we built about 1.3 million new single family houses. And so that was a pretty consistent ratio each decade. Well, then you hit the 2010s. So this is the decade ending just last year. And all of a sudden, population growth ballooned to 4 million in that decade. But the number of new single family homes built dropped to 1.1 million. And so you had this tremendous imbalance in what was being delivered and what was in demand. And then you throw on top of that, a pandemic, where now what's in demand is lower density, suburban living. Everyone wants out of their condo, everyone wants out of the big city, everyone wants a recreational property. And that's the exact thing that we were in shortage of, heading into the recession.
And so there was a temporary blip where we saw prices drop, it was, I mean, literally a three month affair. And then it just did a rapid U-turn and away we went. Now, you throw on top of that, record low interest rates, you throw on top of that the income growth, which shockingly hit 20% during the recession. Again, something we've never seen before. That's just the magnitude of the fiscal response from the feds. And you had a lot of freed up income from things like the mortgage deferrals and demand just took back off again. And so here we are. So it was sort of a perfect storm that everybody, myself included missed, in that we all expected this would be a negative outcome for housing. It was anything but.
Ben Felix: Why do you think the industry was so slow in providing supply of housing?
Ben Rabidoux: Well, it's been a chronic issue for years. And so I think that's a complicated question. And there's a lot of sort of theories on why that is. If you just look at basic housing starts, or let's say, the pipeline of construction of new homes that are under construction, or that are coming, that will be built. It's very high, it's at a record high, in fact. Housing starts are sitting at 40 year highs. But then when you dig into that, you find that most of that is actually apartments, both rentals and condos. And what we have been building enough of the single family. And so you've seen a shift over time, away from lower density and into the higher density. Now, some of that is driven by regulation. So you have higher density requirements on municipalities, you have greenbelt regulations. But some of it is just what we might call NIMBYism, Not In My Backyard. And it's a weird thing.
So this is one of the issues with housing in Canada, I've sort of come to appreciate more and more is, it's like one of the things that we can't question in Canada is immigration policy. And I think that's a mistake. Because, look, I want to be really clear on this, we need a high level of immigration in this country. And if you doubt that, all you have to do is pull up a chart that shows the natural increase in the population over time. So that is births minus deaths. And it's just been plunging. So Canadians are making fewer and fewer Canadians. And so we need a strong level of immigration. I don't want to be that person, it's like, you know, we don't need immigration, we absolutely need immigration.
But the issue is, we have the immigration targets that are set at the federal level, but the housing is actually permitted and delivered at the municipal level, where you have politicians that literally have to deal with their neighbors. That they have live with these people that are complaining, well, I don't want this development in our neighborhood, I don't want this going on. And so you end up with a scenario where the immigration targets are not necessarily, they don't align with the ability or the willingness sometimes, of municipalities to deliver the housing needed. And so to give you an extreme example, back in 2019, we had a confluence of factors that led to just this incredible population growth.
You had a lot of non-permanent residents that were coming here, and so these were primarily international students and work permit holders, because the labor market was so tight. But you also very strong immigration. So we were adding almost 600,000 people to the population. Now I'll just say, I don't believe that we have the physical trades to deliver enough housing to meet that level of population growth. And so where I stand, that's a policy error. And again, it's not that I don't support strong immigration levels. It's that we need to be thoughtful about, where are we going to put everyone? And how do we incentivize municipalities to build and to sort of ignore the NIMBYs that are like, oh, we don't want new development. Well, we can't have that, if we're going to have robust immigration.
And so I know you guys want to go into housing policies in the election, and it's encouraging to me that a couple of the parties have picked up on that and are trying to find ways to bring municipalities on board and bring more housing supply.
Ben Felix: We talked about the patch home price increase, primarily, you talked a little bit about the dynamics there. Do you think that, where prices are now, are they supported by fundamentals? Or are we seeing a "bubble"?
Ben Rabidoux: Yeah, well, look, there's almost no question that some of the house price increase that we've seen are just patently absurd. What's been really interesting during this particular cycle in the last let's say, year and a half, has been that it hasn't been the Torontos and Vancouvers that have led, it's been the smaller metros, the secondary and kind of the tertiary markets. And in particular, to put up an example, you look at some of the smaller metros in Ontario, and especially those that skew more towards the recreational properties. So North Bay, up 50% year over year. You've got like the Kawarthas up 50%. You've got my neck of the woods, which is like Grey Bruce Owen Sound around to southern Georgian Bay, 45, 50% year over year. These are crazy moves. So none of that's justified, I don't believe.
And so it would not surprise me, whatsoever, to see some of those places settle back, because you just can't sustain that sort of a price increase. Is it a bubble? A year and a half or two years ago, I would have said definitely. My view's kind of gotten a little more nuanced in that, I've come to appreciate that there really is a shortage of supply. And we've under built. So is something a bubble if there's an actual shortage of supply? I don't know. I'm very concerned about household leverage, notwithstanding that it looks better than it did a year ago. What really concerns me is when we pull back and we look at the extent to which housing has driven the economy. Now, we talked about this last time I was on, but I'm telling you, it's gotten even crazier since then.
So residential investment, which is just, it's sort of three components. It's new construction, it's renovation expenditures, and it's, let's just call them transfer costs. So things like realtor fees and legals, et cetera. Just those three things are now 10% of Canadian GDP. Where prior to the recession, it was like seven and a half percent. And so it's one thing to look at it on an absolute level, but if you look at how much of the growth, it's been two thirds of the economic growth, since coming out of the bottom of the recession, has just been housing. And if you go back over four years, it's still almost 60% of the growth. So I mean, this is just getting like, to me, that's the bigger question, is like, well, is it a bubble, is it not a bubble? There's really concerning dynamics, but there's also very valid, like there's a real shortage of supply. And so is that a bubble? I don't know.
But what I would say is, you just can't have an economy that is that levered to housing. And one more example that's really stunning to me, is if we look at, okay, you look at all investment across an economy. So you look at what governments are doing, you look at what businesses are doing, you look at what households are doing, as it relates to real estate. And so we call all of that gross fixed capital formation. And I know this is getting a little technical for a personal finance podcast, but we call that gross fixed capital formation. So you look at, well, what is the share of gross fixed capital formation that's just real estate? Just residential real estate? And in Canada, it's about 44%. And then you go, well, what does that mean?
Well, here's what it means. Over the last 20 years, there've only been a couple of OECD countries that have ever gotten close to that. And they are Spain, Greece and Ireland in kind of 26, 27, 28, prior to their major meltdowns there. And the reason why this is so concerning, is it tells us that we are investing, like if you picture, okay, for every $100 that are being invested in the economy, you have less and less of that that's being invested in new businesses and things that make us more productive as an economy. And you've got more and more of it that's being directed towards just real estate. And so then it begs the question, well, where's the productivity going to come from to support house prices going forward? And that's really what concerns me. So to me, the bigger question is not, is it a bubble? But like, how do we grow the economy in a way that benefits people, and is sort of less reliant on the housing boom and more reliant on actual productivity growth going forward? And I don't have an answer for that.
Ben Felix: I'm going to give you a definition of a bubble, Ben, from a paper on housing bubbles. It's quoting the economist, Joseph Stiglitz, they say, if the reason that the price is high today is only because investors believe the selling price is high tomorrow, when fundamental factors do not seem to justify such a price, then a bubble exists.
Ben Rabidoux: Yeah, well, okay, so I get that. But I think it's more nuanced than that. You can get into things like elasticity of supply and all this other stuff. On the expectation side, what I would say is, there's absolutely some concerning dynamics on that front. So for example, Bloomberg and Bloomberg Nanos has this great Consumer Confidence Index, and one sub component of that is real estate expectations. And so we probably remember 2017, we sort of had that little mini boom and bubble here in Southern Ontario. And it was kind of popped when they brought in the foreign buyer tax, and you saw some parts of Toronto, you saw prices come down like 10, or 20%, in parts of the 905, let's say.
And if you go back, and you look at, well, what were real estate expectations looking like then? I mean, I think the index level hit something like 47, which, okay, that doesn't really mean anything. But it was kind of bumped along around 40 or whatever, jumped up to 47, back down to 40. And then all of a sudden, in 2020, late 2020, early 2021, it jumped up, spiked to like 60. So it was way above the 2017 highs, and it's just started to roll over now. And when you then overlay on top of that, you're talking now nationally, we've got over one fifth of all homes being purchased or being bought by investors. Now I don't know, and we don't have great historical data on that. But that's data from the Bank of Canada. And it's a little higher, and as you would expect, in the big cities like Toronto and Vancouver. But they estimate that on average, across the country, it's one in five.
And again, I don't know what that looked like in the US at the peak, I would think it was probably higher in the US peak. But that's still concerning to me, because, when you start getting into it, when you talked about the fundamentals, one of the things I wrestle with is, okay, let's look at condos in Toronto as sort of your typical investment vehicle. So I tracked this pretty closely, and I have sort of a cash flow index that looks at, well, what are the typical rents? What's the typical price? Typical interest rate? And you sort of look at, if you bought today at 80%, LTV, what would your cash flow be from day one, counting for all your expenses? And it's generally been kind of positive over the years by like 100, $200. Then it flipped negative in 2016. And it's just kept going more and more and more negative.
Now, here's what's interesting, though. And here's again, where my thinking is getting a little more nuanced than that. So then you say, okay, who in their right mind buys a condo today, where they're out of pocket 500 bucks? As I was talking to people about this, I realized that, well, actually, what they're thinking is, I'm out of pocket $500, but my mortgage is, let's say 2500 bucks. And at today's interest rates from, day one, almost two thirds of that is principal repayment. And so I might be 500 bucks out of pocket, but I'm up $1700 in principle repayment. And so then what I did is, well, I thought, okay, well, that makes sense. So then I updated that index to include what it looks like once you account for principal repayment, and it's effectively unchanged.
Now, I don't love that math. I hate the idea of being out of pocket on an investment. And in theory, it's building equity, but I'm feeding the fire every month. But I get the mindset. And so it's just sort of like, it gets back to this dynamic, it's like low interest rates have distorted everything in the world. And so I don't know how I feel about that, but again, would you call that a bubble? I don't know, I don't know anymore. It's a little more nuanced, I think, than I used to think.
Ben Felix: Yeah, that is really interesting. Do you have data on the frequency of transactions, or the holding period for when people are buying houses? Are people flipping properties, I guess is what I'm asking.
Ben Rabidoux: Yeah, it's a great question. So I don't have data on that. The people that have done the best work on that, John Pasalis, he's a real estate broker in Toronto, but I mean, he's a super smart guy, he's doing his PhD at the U of T. Really bright guy. And he's done some great work, because he has access to the MLS, which the average person like me does not have, as a broker, he can go in, and he can pull that data. And so what he found out, I don't think he's updated it more recently, but it was exactly what you would expect to see in 2017, where you saw the sharp increase in people flipping in, especially the 905 around Toronto. I would assume that that's happening now. I think certainly, if you correlated it to real estate expectations index that we talked about, I mean, it's a pretty clean fit. So as you expect prices to rise, you generally see more speculative activity overall. So no question that's happening in Canada right now.
Ben Felix: What's going on in the rental market?
Ben Rabidoux: Well, that's a really interesting dynamic. So getting back to the pandemic, one of the things that happened early on in the pandemic, as we saw, population growth absolutely plunged. So again, 2019, just before the onset of the pandemic, we were running almost 600,000, year over year. Today, we're 150,000 year over year. So it's like it's been cut by three quarters. So that's the lowest we've seen. As far back as we have data, we've never seen the population growing this slowly. And yet, housing demand is huge. So you're like well, how in the world do we square this? Well, what happened and what's not captured in the aggregate data, is you have to think about population as sort of three buckets. The first is, let's call it net international migration. So what we generally think of as immigration. You have people coming here from other countries, you have people that leave Canada, and so that nets out and average to kind of 250 to 300,000 a year.
Then you've got the second bucket, which is natural increase, which is Canadians making new Canadians, minus the ones that are dying. And that, of course, has been a trend that's just been plunging over time, as we discussed. But the third one, and the one that really moves the needle, quarter to quarter, and that's very volatile, is this net non-permanent residents. And so this is like your foreign students and your work permit holders. And that's super volatile. In 2019, it was adding almost 200,000 to the population. Now, as soon as the pandemic hit, one of the things we saw, is you saw foreign students were like, wait a minute, I can take this class online? I don't need to be here, I can go home and be with my family during this pandemic, I'm out of here. And so you saw a huge outflow of foreign students.
And then you had a lot of the work permit holders, well, all of a sudden, unemployment rate hits, effectively, 25% once you counted for all the people that were technically employed, but not working, or that were discouraged. A lot of those non permanent workers, their contracts weren't renewed, they went home. And so that number actually went like massively negative about 150,000, negative. And so that really is what accounted for that steep slowdown in population growth. Now, the reason why that matters and the reason I highlighted here, is because those are primarily renters. And so you had this strange dynamic early in the pandemic where population growth plunged. But it was driven by an exodus of renters. And so you saw rental demand in places like Toronto, and especially in the condo market were hit very hard. And so we saw at peak, rents for condos were off about 25%, from the peak levels.
Now, we're now to the point where the borders are starting to reopen, we've got international students returning. And so the rental market is tightening quite significantly. It's still not back to where it was at peak, but it's gotten much better. By my estimates, as I track, we've seen rental prices in Toronto for condos have increased 10% in just the last two months. So pretty dramatic. But what I would say is longer term, Canada's famous for like fighting the last battle. And to me, there was a rental crisis in some of these big cities in 2018 and 2019, which was driven by this enormous surge of non-permanent residents. Almost 200,000 year over year across Canada. We did not have enough rental space to house everybody.
So now what we've seen is if you look at rental units under construction across the country, they're absolutely surging. About 100,000 rental units under construction across Canada, and building more every day. And so, in my mind, I actually think that going forward, I don't think we're going to get back to peak population growth for many years, but yet, we're going to have a lot of new rental supply coming. So I actually think the rental market, the worst is behind us, but we're not going back to those 2018, 2019 crazy tight levels for probably many years. So I don't know if that answers your question, but it was weak, it's gotten better. I don't think we're going to go back to those crazy rental prices. I think we got a lot of supply in the pipeline that's going to make it better for renters going forward.
Ben Felix: All right, so we had this potential for a real estate decline that never actually happened, and now we've seen prices just skyrocket. Do you think we have a whole generation of Canadians at this point that just don't believe that real estate prices can decline?
Ben Rabidoux: It's a great question. It's funny, because we've now seen, you're talking about classical conditioning. You saw in 2008, when the financial crisis hit, we had the mildest of real estate recessions like six months long, then it snapped back. And then you fast forward, if you were in Vancouver, they had like a little mini correction in 2016, that snapped back. In Toronto, we had one, in 2017, it snapped back. Now nationally, you had one in 2020 that snapped back. You're right. I mean, you can't be faulted for thinking that housing is a sort of a one way bet. And any dip is to be bought. Again, I think that sets up for disappoint, because we've seen the long stretches where housing has returned negative in real terms for a decade. We saw that in the '90s and the end of the mid 2000s. But what I would say is, I did not foresee the extent to which the government would roll out measures specifically to support housing.
I mean, everything from the Bank of Canada buying mortgage bonds to drive interest rates lower, QE just generally driving rates lower, mortgage deferrals, I mean, all of these programs; rental assistance, deferring rents, all of these things that were targeted towards maintaining asset values. And I don't know if you remember, before the election was called, you had Adam Vaughn, who at the time was the Parliamentary Secretary on Housing. And he was on one of the political shows, I forget which one it was. And they were talking about this housing affordability issue. And he basically came right out and he said, this governments never going to do anything that's going to jeopardize housing equity. And I'm starting to realize that that is, unfortunately, the view of the government. You've got two thirds of the population are homeowners, home ownership represents an enormous amount of typical households' net worth, you can't do anything that's going to affect that and expect to be reelected.
So I don't know what that looks like going forward. I feel like the government's just got a very different view on supporting housing going forward. I don't think it's a healthy thing. I really don't. I think if you want to make housing more affordable, you let prices fall. I mean, it's that simple. Otherwise, all these other measures that we've seen proposed, where it's like, well, we'll let you take on debt and pay it off a little longer. Well, it doesn't really solve the problem, all it does is make credit more available and helps the first handful of people to buy, but it drives up prices for everybody else. So I don't know, guys, I just think that we're in an era now where there's a lot of experimental economic thinking. MMT and deficits don't matter. And so if deficits don't matter, well, what can't you do to support house prices? I don't know, it's going to be a different dynamic than what we've seen in the past.
Cameron Passmore: So you mentioned solving problems. And this is not a political podcast, but we are in the midst of an election here in Canada. So can you talk about what some of the possible solutions are to these problems you talk about?
Ben Rabidoux: Well, I'll tell you, the ones that encourage me the most, and there're sort of a couple variations over them, specifically in the... And again, it's not to be political, it's not to endorse anything, just to be clear, but both the conservatives and the liberals in their housing platforms had sort of similar approaches where they wanted to tie funding for municipalities to some of these density targets and these construction targets that we talked about. And so the idea there is they want to say, look, if you exceed your density targets, and you build more housing than you sort of had said you would, then there's literally a monetary value attached. Now, conservatives are more around funding transit and infrastructure. And the liberals haven't really laid it out super clearly. But it sounds like it's like a monetary value that you just get if you hit these targets.
And I think that's really important. That's, I think, getting back to what we talked about, I think they're recognizing that, at the end of the day, the gatekeepers to the housing supply issue are these municipalities. And you've got these people that are elected that have to deal with literally their neighbors. And they have to keep them happy, as opposed to potentially ticking them off and building houses for people down the road that may or may not vote for them. So that, to me, is really encouraging. Other than that, a lot of it relates to trying to bring about new rental supply and affordable housing. And I mean there's some kind of cockamamie crazy ideas around different programs to help people save up for down payments.
And honestly, to me, the most encouraging thing in all of it is just trying to find ways to get municipalities on board. And the other thing I thought was kind of interesting is like some of the proposals around freeing up some of the land that's held by, basically federal government assets that could be then redeveloped for new housing. So for the first time, I think we're actually seeing some out-of-the-box thinking. The other thing that's certainly welcome is anything that is going to target unwanted speculation, which I guess is any kind of speculation, all of it, I guess, is unwanted in a sense. But I think sometimes we we find the wrong enemy. Like they're talking about, while we want to target flippers that go in and they buy a house and they renovate it, and then they resell it, well, to me that's not really the enemy here. That person, they're adding some value to the house, and then they're they're selling it again. I don't really get too worked up about that.
Where I think it matters a lot is if you get non-resident demand. And you get people that are buying, that aren't here in Canada, it's out of the rental stock and it's out of the ownership pool, that's a real problem. And again, we don't really know how big that is. And there's been some conflicting data on that front. But I don't really think it matters. It's just like, it makes sense. We're in a housing crisis, we don't want to be this sort of poorest country for a listed capital. So we want to tighten up. And the one that I think makes the most sense on that front, is where the liberals have come out and basically said, we're going to build a beneficial ownership registry.
And so for your listeners, what that means is, if you're going to own a home in Canada, and you're going to put it in, let's say, a numbered company. So let's use sort of a, I guess this would be like a cliche example. But let's say you're a wealthy business person in China. And most wealthy business people in China got there through some level, like, graft and just corruption. And so you want to move some of your assets outside the purview of Beijing, because tomorrow, if they want, they could take your money, they could take your life, it's a very different system. And so you want to go to Canada, but you don't want it to be easily found that it's you that owns it. And so what you do is you set up a numbered company, and you have a person at the law office, that's like the secretary. And there's just no way to trace it back to you. Even though you're the beneficial owner.
And so what they've said is, well, that's not going to fly. We want to know every house in Canada, who actually owns it. And not only know, but have it searchable, have it as a searchable database. And to the extent that there is some illicit capital flowing into Canada, I think it's very clear that there is, that's a huge deterrent. Because if you're trying to hide money, the last thing you want is a searchable database that your government back at home can search up and be like, hey, how did you get the money to buy this place? So I think stuff like that, you're finally starting to see that sort of stuff. And it's hard to know how much that moves the needle. But it's one of those things where it's like, well, if it makes sense, let's just do it right. There's no downside to doing that.
Ben Felix: What role do you think the private debt market is playing in Canadian Real Estate?
Ben Rabidoux: It is significant. Well, I want to be clear, it's not a huge number. So when we talk about private lenders and mortgage investment corporations, for example, as a share of total mortgages outstanding, they're still relatively small. But in terms of their growth and the share of incremental volume that they're accounting for, it's much more significant. And you have to remember that it's that much more so now, because you have more stringent regulations around the stress test. And so some people that otherwise, might have been with a big bank, are now, they find they can't borrow as much anymore. And so the next best thing is these hard money, private lenders. It's very difficult to get good data on it. But I'll tell you, I spend a lot of time just talking to folks in the mortgage industry and sort of have a sense of what's going on. And they're all very much of the view that volumes in that space are exploding, they're very high.
And we've talked about this before, these are generally one year loans, interest only. Oftentimes, the financing capital behind them is sort of risky, not risky, flighty, let's say. Mom and pop, they're retired, they're looking for a little bit more yield. And so it's interesting, during the pandemic, one of the things we saw from a number of these mortgage investment corporations is that they gated redemptions. And some of them stopped paying their dividend. And so it's a good reminder for your listeners that you might think this looks like an interesting opportunity. And it could be, it could be. There are some well-run, very thoughtful, risk-oriented managers out there that I've personally met, that I would trust these guys with my investment capital, no problem.
But you have to understand that in times of crisis, when you may want liquidity, that's the exact time where you can't get it. And so we saw that during the recession. The other thing that we've seen more recently, is you've seen some pretty nasty stories coming out about some of these bigger debt funds that are less so on the mortgage side, but more on the private business loan side, that it's very clear now that you've got all sorts of conflicts of interest that were happening behind the scenes, sending money to personal friends, getting kickbacks on some of these deals. I mean, that's the problem with this, is they're relatively loosely regulated. And the opportunity for abuse is very high. So I would say, my personal preference is like, in general, they're not a great investment, unless you really feel like you know the person well who's running it. Because there's a lot of trust that has to be put into whoever's running. For most people, you can't do that level of due diligence.
Ben Felix: So when we see pitch decks saying that private debt funds are going to give equity-like returns with bond-like risk it's too good to be true.
Ben Rabidoux: Look, man, I don't mind saying this, I think there's a handful of these out there that are just outright frauds.
Ben Felix: Wow.
Ben Rabidoux: The stuff that's coming to light, I mean, you just shake your head, how is it not fraud? It's fraud. I mean, I don't want to get too far into it, because as you guys know, I've had my fair share of legal running for stirring the pot. So I don't need that anymore of that. But I will tell you, in having done some analysis in some of these, you can see where they've lent a lot of money to a specific company. You can follow that company through the bankruptcy proceedings. You can see the court say, there is no recovery for the creditor. And this not like a small loan for this portfolio. And you'll never find, their returns just keep ticking up. It's like straight line, no losses, no write downs, nothing. And I look at that, I'm just like, that literally is impossible.
Ben Felix: Wow.
Ben Rabidoux: So I've seen this, I'm not going to throw out any names, but I've seen this in doing some of the due diligence on some of these.
Ben Felix: Wow.
Ben Rabidoux: I'm convinced they're frauds. But I don't want to get into it any more than that. Well, here's what I would say is, if you're thinking about investing in any of these, and I would like run as far away from some of those I could, but if you're thinking of investing in some, go out and pull up the portfolio of the loans involved, and just search and see if any of those companies are in trouble. And especially if they've been through any sort of bankruptcy proceedings. Because all that's public record. So anyway, I mean, I'll let you guys decide if you want to leave that part in. We haven't named any names or anything, but there's some really just suspect stuff happening in that space.
Ben Felix: I see no reason not to leave it in, I think that was...
Cameron Passmore: It was good.
Ben Felix: That was a good.
Cameron Passmore: One last question about housing prices. So instead of making a prediction on housing prices, and where they might go, can you talk about what the data say, when prices have been this high relative to some sort of economic fundamental?
Ben Rabidoux: Well, sure. Well, actually, let me first start by saying, or at least painting a picture of where we actually are in the housing cycle. So we can kind of think about this mathematically. So right now in Canada, there's a really important measure, that's called months of inventory in the housing sector. And the way that it works is, let's say, there's 100 homes for sale in this neighborhood, and 20 of them sold last month, you would say there's five months of inventory. It would take five months to sell those 100 homes at the current rate of 20 sales a month. And so I use five, because that's actually the long term, well, actually a little higher than the long term. Long term averages closer to six. But five is important because you don't get prices begin to flat line until you hit five months of inventory.
Okay, now, let's back up and look at where we are in Canada. Last month, there were 2.2 months of inventory, among the lowest we've ever seen. So then you say to yourself, well, what does that mean, mathematically? What it means is we need housing supply to effectively rise somewhere in the order of 130% from current levels, or you need sales to fall somewhere around 60%, or some combination of the two, before you get back to that five level where we can reasonably expect prices to flat line. So when we can finally expect a soft landing of sorts. So that's just a framed picture of like how far away we are from a balanced market. This is the furthest thing from balanced market.
Now, having said that, so you talked about house prices. A couple interesting observations. In the second quarter, we saw real house price growth in excess of 20%. So real house prices accounting for inflation of 20%. We've never seen that. And we have data going back at least to the '60s in Canada, we've never seen anything like that. So folks who may be listening who remember the 1970s cycle, we had a housing cycle, then late '70s, had a pretty nasty cycle, late '80s, never did we see house prices, real house prices hit 20%. So you get back to talking about the fundamentals, they're very stretched.
On an affordability perspective, like when we look at carrying costs as a share of disposable income, they're right near the all time highs, especially in that single family segment. And that's with interest rates at record lows. So I'm not saying we're not stretched from a valuation perspective, I think all signs are that we're absolutely crazy and at the extremes. I just, at this point, a lot needs to change before we get back to a balanced market. And the reason I highlight that is the housing market's like a big ship, it doesn't stop on a dime, it doesn't turn suddenly. It's a slow moving ship. And so, even if we saw sales start to weaken, and we finally started to see some inventory builds in these big cities. This is not a story for 2021. And it may not be a story for 2022.
It may be that it's going to take a while for inventory to build and maybe the back half of 2022, we start seeing the market back and more balanced. But we've got a long ways to go.
Cameron Passmore: That's great. Thanks, Ben.
Ben Felix: Yeah, fascinating stuff.
Cameron Passmore: So we finish off every episode with, we go through some talking sense cards, you're willing to join us?
Ben Rabidoux: Yeah, let's do it.
Cameron Passmore: So these are the cards from University of Chicago Financial Education Initiative. So Ben and I just big cards at random and we just asked each other the questions and see where it goes. You want the first one, Ben?
Ben Rabidoux: Yeah, sure.
Cameron Passmore: How do you avoid spending money you've saved?
Ben Rabidoux: Oh, great question. Well, I think a lot of times, if you talk to people and you ask them, why did you end up dipping into this savings pot? The answer is often an unexpected expenditure. Most people that have a pot of savings don't touch it unless they absolutely have to. And so I think that gets back to kind of the pointer on having an emergency fund, in addition to having a pot of savings. And an emergency fund that's meant to be tapped into, as opposed to your long term savings. Because it's very difficult to have a pot of savings without accounting for the fact that life just throws curve balls at you. I'd leave it at that and see if Ben is anything else to add.
Ben Felix: I think that's a pretty good answer. I think shoveling money into accounts like an RSP or an RESP, where there's some negative implications to pull it out, that can definitely help as a deterrent. But I think the proactive approach of having the emergency fund to avoid doing that, makes a lot more sense. But the question was, what was the question again, Cameron?
Cameron Passmore: How do you avoid spending money you've saved?
Ben Felix: Yeah, so the emergency fund is the, that's the correct answer. What would you say, Cameron?
Cameron Passmore: I'd try to map out big spending items ahead of time. So I try to plan these. As I get older, I find I get less enjoyment out of buying stuff, which used to be my enemy in the past. But so now it's mainly trips, we plan those out. Okay, Ben Felix, I'll let you go first on this one. Would you rather have a job that made you rich or one that made you happy?
Ben Felix: Wow, it's kind of a tricky question. Because if you had a job that made you rich, it doesn't give you any timelines there. If you had a job that you didn't have to work for very long, that made you rich quickly, then you could do whatever you want afterwards. If I had to work the job for an extended period of time, if it's a 30-year horizon for the question, then I would rather the job that I enjoy, rather than the one that makes me rich. There's no sense in being rich 30 years from now, if I'm going to be miserable the whole time. I think the question is a little bit misspecified.
Cameron Passmore: Ben, what do you think?
Ben Rabidoux: So I don't know if you guys listen to Scott Galloway, prof at NYU, I find him-
Cameron Passmore: Yeah, Prof G.
Ben Rabidoux: ... Prof G, yeah... funny and often insightful. And I thought, a point he raised that I thought kind of resonated, he said, find what you're good at. He's said, you got all these people that come to these commencement speeches, and they talk about, oh, pursue your passion. And you look at how they made their money and it's like coal mining, or just some obscure, that no one goes into for the love of it. And he makes good points, like find what you're good at. And then put in the time and the effort to become great at that thing. And then once you stand out from everyone, then all of a sudden, you'll find that you actually really enjoy being the expert at that thing. And most often, the financial aspect will follow in suit, and you end up in a career that has a lot of the positive elements, you enjoy it and you make a lot of money. And I think that's actually really good advice.
Because I think oftentimes, you say, well, find something that you love to do, and you get kids that jump into these degrees, that there's no real future for them, or whatever it might be. And it's like, well, no, find what you're good at, and then become great. And then you'll enjoy it, and you'll make a lot of money.
Cameron Passmore: Good answer. I'll go first on this last one, what is something you can do for hours without realizing how much time has passed? So I would say for me, it's learning about our industry. People know this, they hear Ben and I talk about this a lot on the podcast, other podcasts to listen to, or books. But I can get into a zone where I'm listening to material about our business, our industry or just business in general. And I could just go for hours and not even realize it. So that's mine.
Ben Felix: Sounds like you're in the zone that Ben Rabidoux just described a second ago.
Cameron Passmore: Yeah. Ben Felix, what do you think?
Ben Felix: When I really get lost in time, is when I'm doing the 3D modeling stuff on the other computer. Like if I'm designing a new combat robot in Fusion 360, I can lose seven, eight hours, no problem. Forget to eat. That's it for me.
Cameron Passmore: Ben?
Ben Rabidoux: Yeah, for me, it's fishing. I mean, put me on a lake in a boat and I'll fish till it's dark and totally lose track of time. That's my passion.
Cameron Passmore: Interesting, none of us mentioned scrolling through TikTok.
Ben Felix: Yeah, I don't have TikTok. I don't even have Instagram, I'm way behind.
Ben Rabidoux: Yeah, you and me both.
Cameron Passmore: You're not even on Reels, Reels is the hottest thing, apparently. I'm just learning about this-
Ben Felix: I don't know what that is.
Cameron Passmore: There we go. Anyways, Ben, it's been a blast to have you join us this week.
Ben Rabidoux: Well, thanks for having me, guys. It's been great to catch up.
Ben Felix: That was great, Ben.
Ben Rabidoux: Thanks, guys. Probably a very different tone than last time. But it's such a strange market. I don't know. If things break one way or the other, I'd love to come back on, if we actually see things actually breaking, but I just don't, man, it's such a crazy... I mean, you guys must see it, you guys are over Ottawa all the way, right?
Ben Felix: Oh, yeah, the prices are crazy-
Ben Rabidoux: It's a crazy market out there-
Cameron Passmore: Yeah, it's nuts. There's fields of houses going around where I am on the south end, fields, like hundreds and hundreds.
Ben Rabidoux: Yeah-
Ben Felix: Yeah, that's crazy.
Ben Rabidoux: Yeah, there's a lot of new construction. I did some modeling on that, I mean, you take what's under construction and if you add all of it to, like all the single family housing, to the existing inventory in the resale market, it's like, man, you're only back to inventory levels we saw in 2016. We're just so low on inventory. So I don't know what changes that. But it's moving in the right direction, for sure. We're seeing a lot more new construction, and so hopefully that translates into a balanced market. But it's not going to be this year, just won't.
Cameron Passmore: Cool. Great to see you.
Ben Rabidoux: Thanks, guys. Thanks for having me. Appreciate it.
Ben Felix: Thanks again. All right, Ben. All the best.
Ben Rabidoux: All right guys, take care.
Cameron Passmore: And to everyone out there. Thanks for listening, we really appreciate it.
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