Long, long ago in another time, in a distant galaxy, a bearded wonk emerged from the smoke with a tablet prophesying the end of the Great Property Boom. He stared down at the people from the rock upon which he and his trusty goat, F, were perched, raised a wizened finger, wagged it slowly and said in a strange tongue, ‘You are so screwed.’
That was the Spring of 2008. Five months later the financial crisis hit, real estate sales and prices plunged, and we all started talking about the next depression. But not before the Toronto Star real estate editor wrote a full page review of my book, ‘Greater Fool‘ in which numerous academics and industry people were trotted out to trash me.
However, the review also raised the spectre I might just be right. So it had some balance. Enough balance, in fact, that the editor ended up fixing punctuation on the night shift, and was replaced by a bouncy lady who writes about throw cushions.
Thus is the nature of real estate journalism in Canada – which is kinda like ‘jumbo shrimp’, ‘military intelligence’ or ‘progressive conservative.’ The modern real estate reporter has been turned into an employee of the advertising sales department, and is tasked with filling up the ugly white spaces between ads for sexy condos and houses in rolling meadows. Ditto for TV. I mean, how many real estate-pumping stories have you seen on Global or CityTV over the past year, with the interviewed ‘experts’ being people who immediately benefit from the coverage?
Given the kinds of trashy quasi-journalism news organizations have allowed since the crash of 08-09, is it any wonder so many young couples bought houses without any money, or so many speculators are about to close on condos that will ruin them? Given that real estate is now absurdly costly, likely at the pinnacle of its cycle and the biggest purchase in most lives, why was analysis of costs and mention of the obvious dangers left to dark, subversive blogs like this and guys with goats?
Good questions. They’re asking them in Ireland, too.
That country had a mama of a housing gasbag after it joined the Eurozone, and which crashed in 2008. Unlike here, cheap mortgage rates didn’t turn out to be the crack cocaine of the middle class, and real estate’s continued to crumble. But memories have not. Investors who poured billions of euros into new developments which were pumped and inflated by the Irish media’s property reporters are now mulling legal action against the ink-stained wretches.
The question: did these writers mislead investors? Was it intentional? Did real estate interests exert enough pressure on cash-starved media outlets to demand only ‘good’ news? Does the media try to trick people by running ad-support copy as hard news? And, if so, are they now liable for a breach of trust lawsuit? Or at least having their private parts nibbled on by a horny ruminant?
“Journalists fear they may be made legally liable for misleading readers who followed their advice and bought properties abroad, suffering major losses,” one property journalist is quoted as saying in a news story this week. “There’s a lot of anger among investors.”
You bet. And just wait for a few months until more people who bought homes in Vancouver or Toronto or Calgary – on the widely-spread news that real estate was a no-risk investment – start sliding into negative equity. Or closing on downtown condos they planned on flipping. Or trying to back out of towers that will never be built when promised.
The media for the past 18 months has carried a never-ending string of stories about the country’s booming real estate market, culminating in the maple syrup-drenched economic jingoism epitomized during the Vancouver Olympics. Then we knew for sure why the US middle class had been wiped out and their home equity turned into food stamps – because they deserved it. They were not Canadians.
Well, here we are. And it continues.
Two days ago the Vancouver Sun ran a story titled: “There are two million reasons for high prices in Vancouver – City’s housing affordability problem boils down to too many people on too little land.” It quoted more experts as drawing comparisons with Hong Kong and San Francisco, and a guy who said, “If you want Winnipeg-level house prices here, all you have to do is tear down the mountains and fill in the ocean.”
The conclusion by journalist Don Cayo was clear. It’s different here. Suck it up and buy a condo.
Of course, Vancouver’s now the least affordable city in the western world based on the price of real estate and the average income of its citizens. It is ground zero for a housing correction which is unmistakably forming and could last for some time. It means those who bought based on the bubbly media-fed statements of experts speaking in their own naked self-interest were likely misled and certainly betrayed. Not by the experts. We expect that. But by the media, where we do not. I may have more to say about this soon.
Recently Newsweek magazine sold for a dollar. CHEK-TV in Victoria was bought by employees for two dollars. CHCH-TV in southern Ontario changed hands for six bucks.
Nobody was surprised.
Conceived in the optimistic haze of a post-war world, raised amid continuous inflation, growth and halcyon burbs, Boomers were the best-educated, healthiest, most urbane, materialistic and narcissistic generation ever. It was all about them. Still is. And their houses.
And this is a problem.
More than half of these nine million people have less than $300,000 saved. At a median age of 53, trust me, that sucks. About seven in ten have no pensions. Life expectancy is pushing 85, even for cholesterol-reduced guys. So what the hell are they going to live on?
This is another reason why HouseAgeddon may await us. To a sickly economy, asset deflation, household and public debt, rising taxes and no jobs, you can add demographics. Several million couples in their sixties will have no alternative over the next five years but to liquidate their real estate.
Oh, they may toy with some other ideas, like one of those parasitic reverse mortgages. But that’s not much of a choice. For example, on a full paid-for $500,000 house, the maximum amount available would be about $145,000 – enough to live on for three years maybe. And the loan must be paid back when the house is sold or you croak. Meanwhile interest charges accrue at the rate of 4.5% – which will turn $145,000 boost into a $364,000 debt in twenty years. Isn’t compound interest fun?
No, the more likely choice of most will be to bail. And this is when the Boomer magic ends. By 2015 we could be mired in a property funk of biblical dimensions, coming out of a lingering recession and about to plunge into a ocean of new listings unleashed by stressed-out people with gray hair who still like Springsteen.
Of course, they should have sold last year. They should sell now. They should still sell in five years, no matter what the market nor how much money is left on the table. Residential real estate’s on its way once again to being just shelter. Not a substitute for working.
Boomers who miss this are screwed. The imbalance they will cause in the property market – coming at a time of real estate weakness – will cost them more than they now understand. Pensionless and without enough assets, they’ll be forced into an unfamiliar frugality which itself will drag on the economy.
And it’s all so unnecessary. A 55-year-old today who invests two hundred large in a balanced portfolio of sector ETFs, bonds, trusts and preferreds getting 7% will double that amount by age 66 (if the rate of return is constant) and have $775,000 at age 75. If the same cash were left in a house, it would be worth only what someone paid for it on a day of closing. That’s why homes are illiquid. Unlike financial assets, they don’t feed you.
And to those who say investing in such things is not guaranteed, of course it isn’t. But age is. And life’s long. The greatest risk now is not losing money, but running out of it.
And so a cautionary tale in Toronto, from blog dog Jenny:
A while back I wrote to you asking for strategies on how I could structure my own saving to help my parents – they’re 72 and 78, with little more than their CPP to live on, no savings, and I thought (until very recently) the equity that they’d built up in the house that they own. I’d hoped to convince them to sell the house, harvest the capital, and invest in dividend generating assets to supplement their retirement. On some level, I worried that they might not have enough, and wanted to figure a way to give their income even a little bit of a boost.
Silly me. It turns out that their house was mortgaged to the hilt ($580k mortgage, on $700k house = $3000mo payment to seniors with a combined income of less than $2000 a month) to pay for marble bathrooms and granite countertops – ostensibly to jack the price of the place up to sell it to greater fools, but somewhere along the way they got a little too comfortable, and stayed too long. Now it’s time to force a sale, but not before my sister and I have to step in, to cover the mortgage and a bunch of other bills to keep what little capital the folks have left in the house, until they can complete a sale, pay off their mortgage, and their other debts ($35k in fancy, store-bought credit cards!?!). It’s been a hellish few days for everyone concerned as my sister and I work to secure the funds, and consent of our spouses to bail our parents out, in the short term – only so that we can save them in the longer term.
The short term plan involves using lines of credit to cover their monthly payments until the house is sold now that the true extent of my parents’ incompetence became evident. It’s not a great plan, but better than my mother’s plan to go to a ‘private lender’ to cover her missed mortgage payments (at 14%, plus a $5000 application fee).
Garth, I offer this sorry mess as a cautionary tale for your readers. Normally the first freedom that children of doddering seniors must revoke is that of driving. In our case, clearly the first lost freedom is access to equity… and credit. At least no pedestrians were harmed, before the family stepped in.
Real estate is the emotional asset. The most seductive and enveloping. Like a jealous mistress, it blinds you to danger and cloyingly draws you closer.
Until you look down, and your pants are afire.
