So, do you have an old guitar lying around? Left over from your Culture Club tribute band? Then give little Diane a call. She just placed this ad on Kijiji Toronto:
“After my parents bought our first house, they got really broke afterwords and I asked if I can (have) a guitar for my birthday but they couldnt buy it. I absolutely LOVE music! I cant live without it! I wish that I could have a guitar, any guitar would be perfect. So please, if you just so happen to have one laying around, I would gladly take it. My home phone number is 289-240-1664 and my cell is 289-356-1106 and my email address is mailto:email@example.com . So there is 3 ways to contact me. Ask for Diane if I dont pick up my home phone.”
While I’m thinking Diane’s new homeowning parents would be aghast to read of their poverty online (not to mention this blog), they’re sure not alone. This is one consequence of a society in which people without money buy houses. They get poorer.
This sucks for them. It’s also deflationary. Diane’s low-equity parents are likely so screwed over by big mortgage payments, insurance, utilities and property taxes that their consumer spending has tanked. And there’s a massive army of similar people – every single one of them at serious risk now of sinking into negative equity. So, not only will they be slaves to their houses, they won’t even feel good about it. The wealth effect will flee.
This is one of many examples of why you should expect a cascade of falling prices in the next few years. It will shock a lot of people expecting some hyper-inflation thingy. In fact dollars are about to get more valuable. In fact, they already are.
Wal-Mart just announced price reductions on thousands of items (including holiday toys), ranging from 10% to 40%. In the US, giant retailer Target stores has slashed prices on 1,000 toys. Best Buy and Future Shop have dropped prices. And, of course, real estate is just starting to go on sale.
Last month in Calgary, for example, sales crashed 38% from a year ago, while the average SFH dropped in price by 4%. Prices are down in Vancouver by about the same amount this year, and in Toronto the decline is just starting. If all goes as I believe, by this time next year anyone who was thinking of selling in 2010, and did not, will be a basket case.
This is what deflation does. It punishes sellers. Rewards buyers. Makes geniuses of people who wait.
Hell, even guys who work for house-pumper CMHC know that. Like Richard Chao, who told a reporter: “People are recognizing if there is a bubble then they’re holding on and waiting because prices might yet come down. It’s always the game.”
You bet. And it’s a game that turns real estate into a declining and illiquid asset, while putting people with cash into the driver’s seat. When values have clearly crested, and begin to soften, smart buyers hold off, knowing their dollars will only get more potent with the passage of time. It’s a lesson experience and insight brings, both of which are apparently still lacking among those young lemmings lining up at sales trailers in distant GTA burbs.
Of course, the growing clout of cash will be abundantly evident everywhere over the next two or three years. Computers, iPhones, after-market Harley pipes, cars – a whole host of things – will cost less. Interest rates will stay low. Bonds and preferreds will stay valuable. Companies will shed more jobs to stay efficient and maintain profits. Commodity prices will soften from current levels, without the economic activity to support them. Investors will scour for yield, especially income-starved Boomers.
So, unemployment will remain stubbornly high while wages and salaries stay put. Consumer durables and accommodation (including rent) will get cheaper. At the same time, personal and property taxes will probably rise, and families will not be happy. Unless they sold their houses in 2009 or 2010, harvested a tax-free capital gain, invested in financial assets which paid to own them, and bought again for tens of thousands (or hundreds) less in 2012.
One thing’s for sure. Their kids will have guitars.
Registration for Toronto event November 9th
As promised, we found a couple hundred more chairs at a deserted Leafs game, and dragged them to the DoubleTree Hilton on Toronto’s airport strip for my presentation there on Tuesday, November 9th. So, if you want to come (doors open at 6 pm, yakking at 7 pm), then just fill in the registration form below. You’ll receive a confirmation by email, entitling you to show up and get one free hug. Also bring a lighter for the more emotional parts of my speech. — Garth
[registration form removed – registration has ended]