Entries from December 2010 ↓

Many dream of a simpler life. Alistair and Sharon among them. They’ve started a little early. He, 62, she 57. Now ensconced in a small town in rural BC, where they’ve been renting for a few years.

‘We believe as you do that real estate will not end well,” he says.

But that hasn’t stopped them from stepping out.

“Last weekend we put in an offer on 1.5 acres of totally beautiful but more importantly, totally usable growing medium.  The land is great but house & outbuildings need ~50K to bring them up to better energy standards.  We close in March.  We will grow all our own veg, chickens, ducks…”

It’s all good, I told them when they asked for an opinion. Real estate works when it puts you in control, stabilizes your shelter costs, does not require financing and pays dividends – whether that’s in the form of rental income, or chickens. Given the uncertainty of our world, there’s logic to this kind of a move.

But then I heard this.

“We have approx. 400K in liquid cash earning 9% annually, paid quarterly, and re-invested in the account.  All our cash is invested with a good friend of my wife’s in private mortgages.  I have always been uncomfortable having all our eggs in one basket, and have threatened to liquidate a number of times, but our greed takes over each dividend time.  We also have ~150K in RRSP’s with same company. We are not financially illiterate but need help with the best move for our future needs. I am 62 and only current income is CPP disability which will turn into CPP at 65.  She is 57 and only income at 65 will be CPP. Are we at risk?”

Big time.

There are serious errors here that need correcting. Like having over 70% of your total liquid net worth in a single investment – no matter what return you are getting. Like collecting a 9% yield, which is 100% taxable, and not seeing any of the money – since it is reinvested in that one asset. That just makes you poorer in terms of cash flow, even though it builds wealth on paper.

And the giant mistake, of course, is putting most of your net worth into somebody else’s second mortgage. With real estate values at their peak, interest rates near the trough and the economy losing ground monthly, this is hardly the time to be financing residential properties. The odds of some deadbeat homeowner walking out if home values head south are huge – since you probably have no idea how to go after them. So you might end up with a trashed house worth far less than the debt, and serious legal bills before you’re even allowed to sell it.

Are you at risk? Immensely. Get. Out. Now.

Hardly a day passes that I don’t talk with someone like this – financially illiterate, led astray by the lure of big returns, the naive recommendation of a friend of relative, or the reassuring tones of a mutual fund salesguy or the nice lady at the bank. The fact most families are mired in debt with scant savings, and yet put what little they have in such bad places proves they have no idea where to gain knowledge.

It’s ignorance and emotion which has built the current housing bubble. It’s greed and inexperience which leads young couples into 95% financing. It’s fear and hearsay which has put billions into bank GICs and high-savings accounts yielding less than inflation. And it’s the fault of the financial industry that so many people will run out of money before they run out of time.

After decades of writing books about financial stuff, lecturing across the country to those who wished to hear, using the media, or the Parliament, or this blog, to change the way things are, I feel like throwing in the towel. There are just too many sleazy fund salesmen collecting commissions while locking people into deferred sales charges. Too many bank employees masquerading as caring friends while they condemn seniors to penury. Too many brokerage account reps who churn their way through clients’ funds. Too many lenders devoid of principles. Too much fear. Too much greed.

But as hopeless as this may be, well, screw it. I’m too cranked to quit.

Oh yeah, merry Christmas.

Some years ago one of the richest families in Canada built a castle on a hill not far from the Bunker. Soon after the kids had bankrupted the inherited business, it went on the market for $24 million. And there it sits. Splendour in the grass.

Shockingly, the number of million-dollar digs is piling up in the horsey country that surrounds the Big Smoke. The local paper, fired for free onto my driveway by a Kamikaze in a Hyundai, has been reduced to a few news stories about prize heifers and snowmobile maintenance which fill in around the ads for unloved and unwanted estates built by people who should have known better.

As they’ve already discovered in places like Calgary, the first parts of a real estate market to die are the gilded ones. Overbuilt McMansions with massive Wolf stoves and man caves are now eschewed even by buyers who can afford them. This follows a trend in the US where some municipalities have changed zoning laws to allow endless houses in once-exclusive estate subdivisions to become multiple units. Yup, just like the fate which befell early 20th Century mansions as they morphed into rooming houses and great-looking brothels.

That this would happen should surprise nobody.

First, they cost a fortune to maintain – a burden which will increase as energy costs and property taxes rise. Both are inevitable. Second, only a fool would buy one with cash, since there’s a 100% chance of depreciation. But with mortgage rates now assured of jumping in the next year (according to Mark Carney), smart people who yearn for 12,000 square feet of space and a separate dog bathing room, will wait for the inevitable consequence – even more depreciation.

Big houses are also gauche, especially in a world where people like Nicole Foss get to wander and foment hairy revolution. Have you priced a private army lately? It’s ridiculous.

Mostly though, demographics are the enemy of big, expensive, suburban palaces. Even the best-off Boomers are reaching the realization few people want a house where you need to send an email to see if dinner’s ready; and is rapidly turning into a financial sinkhole. As a result, some are now listed for 50% of what they cost to build.

But is this a canary in the coalmine? You bet. Along with two other doomed species – the loft condo and the lakefront cottage. One will be the victim of oversupply and tightening mortgage conditions, and the other of an endless recession which has people retrenching to a single property. All three are about to exemplify what deflation really means.

And there’s another compelling reason why real estate as an asset class is doomed. Increasingly it spells danger. Just like precious metals.

By every measure, a house in Markham or Delta is not worth its current valuation. Daily this blog has listed the reasons why so many families have made such grievous errors in listening to the siren call of  property. The days of capital appreciation are over, just as the years of higher financing costs and illiquidity are about to begin. The wise among us will use any stiffening local markets to get the hell out, harvesting capital gains which will likely evaporate and not return in this lifetime.

Yesterday I raked Nicole Foss of The Automatic Earth for forecasting a 90% drop in Canadian real estate values. She deserved it. Extreme statements only give doubters a valid reason to continue being idiots. Likewise, I happily denigrate Polyannas like Helmut Pastrick, the nutbar economist at Central 1 Credit Union who made headlines days ago by saying Canadian debt levels are nothing to worry about.

There will be no crash. There will be no boom. We are now citizens of an economic purgatory and range-bound market which will simply grind up those families and countries that fail to adapt – who cling to the old notions of what wealth and success are.

I despair for all the young couples who come to this pathetic blog to see when real estate values will crash, so they can pile on, buy large, and turn into their parents. The good news is, a year from now there will be fewer of them, as the housing body count increases.

Often I’ve told you to love only one mistress. She lives without  shelter. Moves without effort. Satisfies endlessly. Opens all doors. Makes free.

Liquidity.