Entries from October 2009 ↓

Maybe you’re one of the Boomers. If not, maybe you should pay attention to them. Lest you go down in the flames the way they are.

Do you have a corporate pension plan? If you do, is it adequately funded? Have you looked? Do you have a personal registered retirement plan? Or do you just have a house?

Evidence grows that this recession is redefining middle class wealth. And not for the better. Overwhelmingly we’re taking on more debt, saving nothing, and gambling that real estate will come and rescue our sorry financial butts. New numbers show more wealth is tied up in residential properties than ever before.

For people already retired, almost 80% of their net worth is buried in their illiquid homes. For Boomers, it’s equal, or close. Meanwhile legislation announced today in Ottawa on pension reform (which will come too late to help anyone over 50, and everyone who doesn’t have a corporate plan) shows we’re inching steadily closer to a retirement crisis.

Of course, in rising real estate markets, people tend not only to pump more money into their homes, but to save less, invest little in diversified assets and take on more debt. It’s called the ‘wealth effect’ – the unrealized capital gains in your house increase, so you feel like you’re worth more. Suddenly you take an interest in every sale on your street, and use each new high closing as the basement price for your own house. Soon you can talk yourself into a big hunk of money you’ll never see, while taking no other steps to secure your future.

That’s exactly what happened for years in the US, as real estate values soared. Millions of people borrowed money against that rising equity to live higher quality lives – but ended up only with a mountain of debt when houses crashed. Bad strategy. It’s why I’ve never varied from my own personal rule of thumb, which is not to allow real estate as an asset class to rise above 40% of my  net worth.

But I’m not normal. Especially compared to the bulk of people in my generation. The Big Generation. Big disappointment, as it turns out.

Those people  have grown up in a time of almost constant inflation, endless economic growth, technological advance and wall-to-wall progress that seemed to obliterate the need for personal responsibility. Back when the public pension system was being set up, the Boomers were in grade school and the country was rocking. Growth was rampant, corporations expanding, private pension plans were being set up right and left, moms were streaming into the workforce as never before and workers were being given a cool new savings vehicle called the registered retirement savings plan. The future seemed obvious and the CPP was designed for just one function – to supplement other forms of retirement income, namely those corporate pensions and RRSP savings.

Never, ever, did policymakers dream fifty years ago the bulk of those kids teeming into the public schools would end up like this. Three-quarters without corporate pensions. Millions discovering they’d been cheated when pensions were underfunded. Two-thirds having missed most, of not all, of their available RRSP contributions. Only one kid per class proving to be serious about retirement savings. Most learning that at age 65 they couldn’t afford to retire in comfort, or retire at all.

How could they have envisioned in the Sixties that a generation born into such education, promise and prosperity would borrow so much, spend so carelessly, save so little, invest so reluctantly or fail so spectacularly that those tiny supplemental public pensions might become their only salvation?

Over the coming decade, the Big Generation will have absolutely no alternative but to try and turn real estate into cash. This money will be needed for immediate income, but also for growth, since life expectancy is catapulting higher. The average Boomer, at age 60 for example, has 25 years or more yet to finance – years often devoid of either earned income or meaningful pension payments. That means the money from a real estate needs to be turned into lifetime investment income. The consequences for equity markets are obvious – a 20-year infusion of capital which can’t help but propel assets higher.

But before that happens, those suburban houses have to hit the market and be turned liquid. One more big reason that smart money wants very little to do with real estate in the years ahead of us. After all, imagine what will happen to housing supply and demand as one, two, or three million more properties turn into listings over the next 60 months.

House values are significantly impacted by supply and demand, and the Boomer dump could well up being the mother of all real estate events, driving down not only the value of competing suburban properties, but the entire market. This will be especially so after the housing bubble conditions I’ve already described – the result of Mark Carney’s experiment in super-cheap interest rates. Boom, then bust. Hardly the time to be trying to unload your big house. And a time you want to avoid.

Clearly, there are no alternatives to a real estate fire sale. With Boomers now streaming into their sixth decade, it’s obvious time has run out to grow savings enough to finance the future. There’s no way stock market gains or secure fixed-income investments can make up for thirty years of new cars, Cuba, Nikes, flipping houses or affording your kids.

If you are a house-bound Boomer, I think you know what you have to do.

If you’re a GenXer or a GenYer lusting for revenge from the terrorizing generation,  just wait.

Garth`s latest podcast is here.

One day not so long ago, in a fabled city on the wet coast, 900 newbies packed a seminar room to learn why they should buy a house. Quite the sight. That it happened in Vancouver is testimony to the power of human delusion. And marketing.

The industry group behind the spectacle, the Greater Vancouver Home Builders, had a fabulously impartial lineup of speakers. There was the local analyst from CHMC, the guys who bring you 5/35. A vice-president from subprime insurer Genworth Financial. A mortgage hawker from the TD Bank. And the prez of the local real estate board. Now, how could you get a more balanced view of the market?

And while I’m all for investor education, it’s hard to imagine any advice for prospective new, young Vancouver buyers more constructive than this: “Run!” After all, the average detached house in Van now costs $741,632. In West Van it’s $1.4 million. And a 2-bedroom condo can easily set you back $600,000. This means anyone buying that ‘starter’ home (an 800-square foot box in the sky) will need about $42,000 in cash for a downpayment and closing costs and the stomach for a $570,000 mortgage.

And what does that cost? Man, just $1,900 a month with a super-cheap VRM of 2.25% and a 35-year amortization. Oh happy, day – and an income of merely $72,000.

But what happens in five years if, as central banker Mark Carney suggests, rates return to ‘more normal’ levels? After all, the average five-year mortgage rate over the past two decades is 8.2%.

Well, this happens: Monthly payments become $4,074 (even with a 35-year am), and you’d better be earning $146,000.

Hmmm. I wonder if they brought that up at the seminar?

Actually what’s happening now across the country as the real estate industry preys on the inexperienced and hormonal should have everyone’s attention. We all know mortgage rates are at the lowest point, and will rise. We know this will crash affordability. And we know as a result the real estate market will slow – perhaps dramatically – and valuations will fall. We know Ontario and BC are bringing in the HST next summer. We know it will make houses, commissions, legals, moving costs and lots else more expensive. We know that will crimp incomes and hurt housing. And this is just the start. Add in a post-Olympic flop, deficit-induced tax increases and rising energy bills, and any experience real estate junkie can see the result.

Which, I guess, is why they’re feasting on the kids.

CHMC sure is. They’ve got a new report showing 57% of all real estate action is coming from first-time buyers – about double from a year ago. And they’re ready, with heaps of bank-saving insurance.

CREA sure is. They’ve got a new ad campaign aimed at young couples. Says their spokesguy: “The focus of our messaging is around the value a realtor brings to the table and so in that context it offers value to first-time home buyers. Realtors know things you don’t stemming from their experience.” I’ll bet.

The banks are sure after the kids. Like BMO, which has podcasts for first-timers, and even a box full of ‘tools’ for $24.95 (rebated if you take a mortgage of, oh, $400,000).

And it’s all apparently working. TD Canada Trust’s latest survey found Canadians “aged 18 to 34” are more confident about buying a first home than their parents were. A full 51% claim they are “financially ready” to take the plunge.

Well, maybe they are – into 2.25% mortgages and a rising market in which equity gains blunt the pain of mortgage debt. But we all know this is an aberration. We know where this is going. The banks know. CMHC and CREA know. The Greater Vancouver Home Builders Association knows.

If the market declines by even 10%, all those new buyers with their 5% down and equityless monthly payments will be wiped out. They would have been far better off renting, since negative equity is a real possibility, especially in frothy places like Vancouver. The responsible thing would be to sell them homes they can afford to carry at mortgage rates which will exist at the time of renewal. If no such homes are out there, they should wait. It’ll come.

But where’s the fun in that?

Bring on the virgins.