Over the last few days I’ve terrorized Vancouver, the Okanagan, Kamloops and Saskatoon. Soon I will savage the Annapolis Valley, Halifax and the South Shore of Nova Scotia, then plow another furrow through the Lower Mainland, and onto Calgary and into godless Toronto on November 9th. I’m like a pestilence. A hairy plague with a message.
At least that’s how some see it. In Vancouver some media wiseacres declared me ‘patently wrong.’ The mighty Kamloops daily called me a ‘merchant of gloom.’ And I noticed a piece in the Toronto Star as I started by current scorched-earth tour cautioning, ‘Don’t listen to the doomsayers on housing.’
Obviously a lot of people have a tough time understanding what’s happening to our economy or our society. Poor suckers. Many of them, like business journalist David Olive, are wrinkly Boomers who measure human happiness by lot width and postal code. Despite all that has happened to real estate in the US, Britain (now entering a housing double dip), Spain, France, Greece, Australia (soon, mates) and others, these pathetic economic fossils think Canada is different.
I mention Olive, because a slew of readers here sent me his piece of a few days ago on how stupid Americans can lose their middle class to voracious real estate, but why it will never happen here. These are his four big points. Try not to wet yourself.
1. The US is unique. Because wages rose slowly, Americans borrowed against their houses excessively. That caused the problem.
2. We had no housing boom because ‘strict Canadian lending standards kept exuberance in check.’
3. There is no comparison between the countries because their market collapsed and ours is inching lower.
4. Toronto is different, “routinely scoring among the top five world cities in quality of life. It’s in the midst of a second population boom in four decades, and in recent years has been among the fastest-growing cities on the continent.”
Hmm. Perhaps your parents, GF or house-lusting spouse has been making similar arguments with a persistence that makes you dream about the long-gun registry. Whadda you say in response?
Well, try this. First, the US and Canada are hardly unique, but share more characteristics than almost any other two countries. This includes loving house porn, living beyond our means and having central bankers stupid enough to crash interest rates to manipulate spending with borrowers myopic enough to comply.
So the housing crisis down there was not caused by stagnating wages and desperate families borrowing against their homes to afford medical premiums for dying children. American real estate exploded in value after Nine Eleven when the Fed slashed rates to prevent recession and was too slow to raise them again. Greed and equity ran rampant. A credit explosion shot house values higher and to keep the party going lenders lowered borrowing standards once prices had punted – until prices went higher still and gravity took over.
This is exactly what’s taken place in Canada – mortgage costs dropped to encourage borrowing. Excessive credit goosed prices through bidding wars and the antics of rapacious realtors and vendors. Loans given to anyone with a pulse and a pen. And bubblicious prices in our major cities – Toronto, Calgary, Vancouver and even the flat bits, like The Peg and Saskatoon.
And as for those strict Canadian standards for mortgage lending, would that include the teaser interest rates destined to reset higher with unknown consequences? How about selling houses to young couples without money who needed 95% financing? Or those cash-back bank mortgages which gave the kids downpayment money even if they lacked the 5%? Or Ottawa’s dangerous dalliance with 0%-down, 40-year mortgages? Or CMHC encouraging reckless lending by wiping away the banks’ risk? Or self-recognition mortgages which didn’t require proof of income? Is this what David means?
Thank God we’re Canadian.
Now why is the US market haemorrhaging, while ours only piddles? Just wait.
Finally, is Toronto different? Or Vancouver, Calgary, Ottawa, Winnipeg?
Well, last I heard San Francisco, New York, or Chicago were pretty dynamic places to live, with robust populations, lots of immigration, technological advance and comparable incomes to ours. They even have scenery and the Internet, I hear. But speaking of quality of life, American families pay at least 50% less on average than we do for shelter, plus score low-cost mortgages locked in for 30 years and the ability to write off loan interest. That sure helps afford the rest of your life when you’re not shovelling 50% of your net earnings into a house in Toronto, or 70% in Vancouver.
So, what exactly is the Canadian advantage?
Naïveté. It’s so sweet. So virginal.
Yummy.
After most speeches I give, I talk to people who’ve asked for some time and advice. This time it was unique. All were Boomers. Most, in trouble.
The last few days reinforced what I’ve heard for months now, across the country. That retirement crisis I once forecast would hit us in 2015 is here, quiet, desperate and ugly. Can’t begin to tell you how many people I’ve sat down with across the country who are sixty, or close to it, with south of $250,000. No pensions. Some money going gangrenous in a GIC. Some dying in the orange guy’s shorts. Lots ensnared in high-cost, do-nothing mutual funds.
These are people who, until a few years ago, thought they were doing okay and, if they weren’t, they had time to recover. Now, in the wash of an endless recession, staring at a collapse in home equity, scary financial markets and the reality nobody would hire them again, they feel the icy fingers of dread. And so they should. Many are screwed.
So, this may not be common wisdom – especially among the Gen Xers and Yers who think the Boomers sucked the economy dry, inflated house prices and turned their drugged, wasted youth into affluent, job-hogging atrophy – but the financial descent of these former hippies now threatens everyone.
We know this: over 70% of us have no pension. Six in ten have no savings. Half have no RRSPs. Almost sixty per cent live paycheque-to-paycheque. And by far the greatest concentration of personal wealth has been in residential real estate.
Now, the coup de grâce. Recession.
The workplace massacre which has taken place since late 2008 is more brutal among this group than I had imagined. Early (forced) retirements. Salary reductions. Job sharing. And wave after wave of layoffs due to corporate restructuring and downsizing. I spoke to one woman two days ago who had been vice-president, corporate finance at a company which ditched 1,200 people 15 months ago. She’s 59 and has applied for 112 jobs without scoring one interview. “They look at the birth year of 1951,” she said, “and I’m goddamn toast.”
By the way, she’s divorced, owns a mortgaged condo in Surrey (worth $350,000) and received a severance of one year’s salary – $142,000. She has $230,000 in savings and RRSPs, and a net worth just shy of $350,000.
“I thought I was doing everything right – no debt other than on my home, retirement savings building nicely, secure executive job, and at least six more years to get my act together. Now,” she told me, “I’m freaking out at night that I’ll never work again.”
And she probably won’t. Not as a v-p, anyway. Maybe serving food somewhere on 60 Ave.
Fact is, millions of people like this live in Canada and the States. Numbers here seem not to exist, but in America we know there are 2.2 million jobless Boomers, half of whom have been out of work for more than six months. The unemployment rate for this generation is 7.3% – the highest ever, and a cruel twist for those who never saw it coming. Never prepared.
Why does this matter if you’re, say, 35?
Well, it means a ton of residential real estate will be for sale over the next few years, when the market needs it the least. There’s a very good chance the price of housing will be forced substantially lower for at least an additional decade as a result. If you own property, it’s a wealth destroyer.
Second, having nine million old people worried about their finances means the engine which powered consumer spending for the past four decades is dry. Hard to imagine the loss of new car sales to Boomers will be made up by a rush on Depends.
Third, Boomers vote. In fact, they form the single biggest age-centric voting block in the country. And no political party will ignore 32% of the population – which doesn’t exactly bode well for taxes on everyone else when CPP and health care system are under assault.
But there’s some hope.
Let’s go back to the out-of-work executive in Surrey. Can she possibly look after herself for the next 30 years with no earnings and $350,000 in net worth?
Not if she does what 90% of her cohort opts for, putting her wealth in safe, secure and guaranteed assets, like interest-generating GICs. At a return of 3%, she ends up earning $18,000 a year (all of which is 100% taxable), plus about $7,000 a year in CPP after age 65. And trying living in the Lower Mainland, or in Toronto, on $25,000.
But if she invested in a portfolio of fixed income (corporate bonds and preferreds) plus some trusts and sector ETFs and equals the TSX return of the last 20 years (7%), her income would average $31,000 a year – much of which would be taxed at a far lower rate. Add in the CPP, and she’s a lot closer to $40,000.
This is called asset allocation. It’s the same $350,000 – just put in different places. It gives her an income higher by a half, along with choices and dignity.
I’ve said repeatedly the greatest risk we face is not losing money in assets that fluctuate, but rather running out of it. Never has this been truer. Galloping life expectancy and lousy habits guaranteed a problem. Now recession and real estate make it worse.
Boomers need a wake-up call. Then a kick in the ass.
