In the blackest moments of the financial collapse two years ago I put the chances of us sliding into depression at 20%
Some people might shuck off two-in-ten odds. Not me. Nor should you. If you have life insurance, house insurance, car insurance, pet insurance, medical insurance or disability insurance, how can you not have depression insurance? At 20%, a rerun of the 1930s was probably more likely than you using a pneumatic hammer one weekend to nail your foot to a stud.
Depression insurance, financially, is having a balanced portfolio – lots of differing assets, and a negative correlation between fixed income and equity. So in the 08-09 meltdown, my portfolio lost 13% of its value when the Dow was down 60%. By the end of 2009 it was fully recovered – a year ahead of the S&P 500 (that happened Tuesday). Today it rocks.
Depression insurance, physically, is being as self-sufficient as possible. Hence, my Bunker. Its own water supply and septic system. Standby generator, transfer switch and wiring system capable of replacing the grid entirely in 30 seconds. Meal kits, seeds, fuel and a couple of tons of dog kibble. Oh yeah, and a Hummer with a gun rack. Hey, did I mention the fence?
Depression insurance, emotionally, is not listening to Nicole Foss. Here I draw the line.
For those of you fortunate not to know of her, Foss is a Canadian doomer who writes for a web site called The Automatic Earth, which I used to respect before it went squirrely. She’s now the poster mom for the survivalist fringe that believes 1932 was a one-nighter with Lindsay Lohan and Jack Daniels compared to what’s coming. This week lots of people have been sending me a link to her performance on a net broadcast with that gonzo Max Keiser guy – you can see it below, starting after 14 minutes of whatever.
Says Foss: Canadian banks will be decimated after residential real estate values fall by 90%. Yes, ninety. There is a deflationary credit collapse coming which will also wipe out commercial real estate. Oh, and people in Alberta can set their wells on fire, which presages the province becoming a desert.
While I’ve been warning people about over-inflated real estate values, their orgy of borrowing and HGTC home hornies, predictions like these are as believable as a Royal LePage house price survey. In short, the realtor community’s blowing serious sunshine up your rear with ‘projections’ of a normalized and balanced housing market. Foss, on the other hand, has a welding torch lit as she asks you to bend over. That she looks like Betty Crocker makes it even freakier.
As I’ve said before, there’ll be no depression – unless one hell of a lot changes, and quickly. The Canadian banks will not collapse, as the deals done this week by BeeMo and TD underscore. Profits are gushing, capitalization is adequate, business is diversified into investing, insuring, financing and retail – and the taxpayer’s on the hook for all those mortgages. So even a US-style housing deflation (prices off 40%) would likely not cause one single common stock dividend to be missed.
As for house prices here, I’m sticking with my forecast. A reduction in the average house price by 15%, with the most blood flowing in Vancouver, the Lower Mainland, the Okanagan, on the Island, in Calgary and Edmonton (already in full swing) and the GTA. That will take months to culminate, and be followed by several years of a melt – with real estate values fading by 5% or so a year.
The messy and more unpredictable part comes around 2015, when tens of thousands of below-prime mortgages loaned at emergency rates come up for renewal. Concurrent with that will be the exodus of house-rich and income-starved Boomers, as they dump their houses in a search for the holy grail of yield.
This means the prospects for residential real estate as an asset class suck. It certainly means those people with the bulk of their net worth in a house are sitting ducks for losses and disappointment. And it means thousands of hormonal young couples who bought in the last year or two with 5% down are about to learn one unforgettable life lesson. Yes, kiddies, when you buy stuff without money, there are consequences.
So, see? I can be as refreshingly depressing as the next wingnut. But only if you’re a greater fool who wonders how many tube tops Sandra goes through in a season of Property Virgin. If you’re normal, and understand how debt and greed have turned shelter into roulette, then I may actually make sense.
“We live in Toronto, in an average house worth $600,000, two kids, both 47, self-employed,” she writes. “Have $300,000 in cash, stocks, RRSPs and TFSAa. House is paid for. No debt.”
But they’re worried.
“Despite this, we have no company pensions coming to us down the line other than CPP. One of our biggest fears is what you always talk about which is not another market crash, but running out of money. We like our home and really don’t want to move right now. But, we believe this is a window of opportunity in which to sell. So, to satisfy both situations, we are considering selling and renting back. Are we wise?”
Oh, and Sharon adds this: “Love the blog. Been a reader for over 2 years, read your latest books and have managed to twist the arm of a few close friends/relatives to do the same. Most, as you can imagine, though think I’m from outer space reading this kind of stuff.”
Of course you’re an alien, Sharon. You have net worth of about a million, sans debt, high-quality liquid investments and you read this blog. If you only had a Hummer and a bad attitude, you’d be perfect!
But let’s parse this for a moment.
On one hand I have no doubt there will be a torrent of listings hitting the market in February. Realtors have been lubricating homeowners for months, telling them the sales slide of 2010 was an anomaly and everything will be back to normal (a.k.a. surging prices) in the Spring. Of course, exactly the opposite will be true, given what’s about to happen.
Because, on the other hand, the geniuses who run this country have finally awoken to the fact we are house-porning our way into oblivion. While real estate values have increased more than 70% in recent years and family indebtedness has reached epic levels, savings have plunged and we now have half of our collective net worth in a single over-valued asset. The majority of us have no pensions, are financial illiterates, actually believe Mike Holmes and think 3% mortgages are normal.
This is why central bank dude Mark Carney has been raising the alarm, making it clear the status quo won’t last. He’s been as subtle as a Lady Gaga fire-breathing brassiere. No doubt now that 2011 will bring higher interest rates, since he’s determined to stem piggy consumers by turning off the taps of cheap credit.
But that will happen gradually, and likely not until the summer. In the meantime, we have that little rascal F to contend with. This week he’s been busy selling his plan for a voluntary private-sector pension plan to the premiers, who love it because it makes them look proactive while costing dick. Soon he will be unveiling his new budget, and it sure looks as if it will lower the boom on the 5/35 generation.
As we’ve reported recently, even bank CEOs have been lobbying F to do something about the epidemic of HGTVitis sweeping the nation. They see the credit bubble from the inside, and can imagine the consequences of its gaseous implosion. I mean, how much more evidence do any of us need of the consequences of unattended bubbles?
The Tokyo stock and housing markets blew more than 20 years ago, and are still down 75% with that country in a perma funk. It’s now been a decade since the tech-heavy Nasdaq climaxed, and that market’s still 50% below its peak. And after five years of price declines and middle class decimation, the US housing market continues to sink. As you might imagine, nothing good for banks would come from a real estate conflagration here.
So the odds are mounting for new mortgage restrictions, a CMHC rule change knocking out 35-year amortization insurance or even a minimum 10% down-payment. What F chooses will be between him and his therapist, but don’t be surprised. And don’t wait.
The combination of far more supply, anemic demand, mortgage changes, rising long-term loan costs (thanks to that pesky bond market) and tapped-out households is a powerful one. It might even defeat the realtor fairy dust, all those nauseating, misleading Re/Max reports, and the best efforts of an army of sold-out pseudo journalists worried about their condo values.
So, Sharon, selling will give your family liquidity of $900,000. Invested in a conservative and balanced portfolio able to roll with the punches and yielding an achievable 8%, that’s $6,000 a month for rent. I’ll bet for that you can live better than you do now, with more freedom, less worry and without touching your torqued-up retirement nest egg. And your friends will mock and envy you!
But if you get the itch, history shows there’s a good chance of buying back your old place in a few years for less than you sold.
