This week a magazine that leaves glossy droppings on the doorsteps of Toronto’s horsey set has been asking a panel of experts to create an email string on this question: ‘Whither real estate?’ Included among the chosen are rock star economist Sherry Cooper, controversial developer Harry Stinson, hot realtors Elli Davis, Elise Kalles and Barry Cohen and, for comic relief, me.
On pain of having my fetching derriere sued off, I cannot quote this stunningly incredible exchange in advance of it being published. But I can tell you all the key points made by all the participants (except me and another). Well, actually there’s only one. Real estate always goes up.
And as evidence that house values will continue to climb, this august panel points to the evidence that it has pretty much ascended in the past. So, what’s the problem? Buy now or be priced out forever. More importantly, all those people who bought in the last couple of years since the financial crisis – even with nothing down – are now in a “position of excellence” because they have “achieved equity.”
Which, of course, is crap. Their profits are illusory. Unrealized capital gains, the result of price inflation. If the market turns and buyers split, this equity can be gone in a week or two. These folks with 5% down and 35-year mortgages have paid virtually nothing off their massive debts, and are yet being told by people with gray hair and Bimmers they made astute investments.
As you know, this is exactly the kind of thinking which ate the American middle class. But then, we’re different. We fixed gravity.
Now here’s a question that flows from the above, and relates to our discussion of The Boomer Problem yesterday. If residential real estate is the foundation of Canadian personal wealth (seems to be the case), and we’re at the end of two of the best years ever for swelling house values, thanks to cheap rates and public insanity, then what gives with this latest survey by Sun Life?
The company found most people just ain’t buying all this real estate sunshine. In fact, they’re sum bitchy.
Last year most said they expected to retire at 65. Now, just twelve months later, they’ve jacked that up to age 68. In fact people making less than $50,000 a year figure they’ll need to work to age 70. Even worse, people already age 60 think they will need a job until they’re sucking oxygen and heaped over a walker at age 72.
What does this mean?
Well, as I said yesterday, none of it is good news for young people who are still ingesting the butt sunshine of the housing industry and leaping into debt. All these Boomers refusing to retire and die quietly mean fewer job openings over the next decade – and already youth unemployment is a staggering 14.4%.
Worse, older people are pissed because they can see the obvious. The economy’s flatlining, with the clear potential to decline. Says this study: “Canada did not witness the extensive economic rebound it had hoped for, with unemployment still high, gross domestic product increasing at low levels, and continued worries about the health of other countries that could impact our economy.” This could be why the priority of those surveyed has changed. It’s not being house horny, but rather paying down debt.
Many of us know what can happen to interest rates (it’s hard to forget when you have a 16% mortgage), and how excruciating it is to pay off debt with dollars you actually earn. If I’m half right, this is exactly what awaits untold thousands who jumped into real estate since the crash. Rates will be higher next year, and the one after. House prices will be stagnant at best, and likely lower and falling. All those fat mortgages will not be erased by year-over-year price increase, but have to be paid off by, ugh, working.
But, why waste my breath?
As I sat typing my response for the slick magazine, I realized that coughing up valid arguments for real estate caution is hopeless. People are greedy and obsessed. House porn addicts. This blog’s also shown that proffering sound investment strategies is equally useless. Most are fearful and ignorant, ready to trash every asset they misunderstand.
Is it any wonder Freedom 55 is a joke? How did we get so off track, in this, the richest society in history?
I have two answers. An email and a vid. And then I might give up.
I stumbled upon your blog early last year and have been a daily reader ever since. I thought that you would find this story amusing. I was giving financial advice to a colleague at work. She currently rents for $600/month in Toronto and wants to save money to buy a house. I asked her typical questions about how much she could afford to put aside etc.. During the conversation she was surprised to find out that I rent as well. She joked that she should not be taking financial advice from someone who doesn’t even own a home. I told her that I owned my money in the bank and that the day would come that house prices would correct themselves and that’s when I would consider buying. To which she responded, without hesitation, “well if house prices correct then I’ll just buy a house too!”
“Just buy a house” like she was buying a new pair of underwear. I burst her bubble by telling her that sadly she would need more than 1% as a down payment and probably closer to 20% if there were a correction and banks began foreclosing. When I ballparked 100K as a down payment she laughed and walked away from my desk.
Did you ever envision someone who hardly makes rent at $600/month and has a savings plan of $40/pay could use the phrase, “Then I’ll just buy a house too”?
Sadly, I’m sure she could find a lender to give her the money if she went looking today.