When you’re as irresistible as I, you get used to attention. Even when it comes from girly-men. In fact, those who hate risk (and they’re legion) like to hate me. I’m scary.
First, some context. Most Canadians are living in a dream world where houses are a right, everyone gets a pony and there are no consequences to how you vote. They’re convinced what exists today (cheap mortgages, rising real estate, government largess) will last forever. They’ve shrugged off lessons from 2008 (debt kills, jobs vanish, houses plunge) and redefined risk. Now it means not buying stuff, especially a home. Ironically, this puts most people at greatest risk – of running out of money.
Oops. Sorry for that scary thought. Let’s get back to the sunshine.
This week a quarterly survey done by a Toronto ad agency confirms our collective delirium. Six in 10 say their personal finances have improved over a year ago, while eight in ten say they expect to do even better in the year to come. But at the same time, half of them admit their expenses have increased without any rise in income, or growth in their investment portfolios.
Huh? Most people have less cash flow and no more saved. Many make less money than before the recession, have zippo job security and have seen their investments wane. Why are they so damn happy?
Says researcher David Herle: “It appears that the boost in real estate values is the only thing that is making them feel positive.” A majority believe their homes have soared in value, and that makes them feel rich. It’s called the wealth effect, and was endemic in the US, circa 2005. It fueled a surge in consumer spending that ended in hurt.
And it’s dangerous as hell. It means most everyone you know, work with or sadly have as family members have staked their security on one thing. So a real estate correction is unthinkable. If house values do drop, says Herle, or interest rates pop, “then you’d have a lot of people who really have no idea how they are going to retire.”
Of course not. Most people are wicked dumb when it comes to their finances. Let me remind you of last week’s big news: 30% of Canadians can’t pay their monthly bills. Forty per cent have zero savings. But 70% own houses.
All of this means the vast number of folks around you have reached the same conclusion. House = safe. It constitutes their single financial strategy. They’re screwed, of course, but there’s always hope. Which brings us back to this oft-assaulted blog.
What we do here is push back the curtains. Real estate is vulnerable, and values will fall. I’ve told you why. People without liquidity are gamblers. That makes houses full of risk. Savers, like those too afraid to invest, are but a few years from regret. Long-term debt will sink you. DIY investing’s usually fatal. And putting most of your net worth in one place is the dodgiest strategy of all.
Which brings me to this. It’s a column trashing me on the wimpy MoneySense site, written by a young father of three brave enough to be anonymous. I read it, and know why. I’d ignore this, as I do most of the invective hurled my way, but this is instructive. It goes to the heart of the sentiment described above. House = safe. Sad to see that in a magazine which says it gives “the latest investment news, tips, and guide, money making ideas and money management articles.”
The ballsy author takes a recent post here wildly out of context, then rakes me for suggesting that borrowing against one’s home to invest in a diversified portfolio, giving an 8% return and tax-deductible interest, is a strategy worth considering.
I said: “This is called diversification. It mitigates against having the bulk of your net worth in one asset alone. It lets the government pay for a big chunk of your borrowing. It takes non-performing real estate equity and turns it into income-producing capital. It takes advantage of generationally-low interest rates to create your own carry trade. It builds up the critically-important non-registered side of your investment portfolio, since RRSPs are destined to become tax bombs.”
He says: “This advice is so bad that I don’t even know where to begin. First, an 8% expected return from a balanced portfolio is not very likely at a time bonds are yielding 3%. Second, it doesn’t make much sense for anyone to borrow short at 3% and lend long at 3%. Third, holding bonds in taxable accounts is terrible when Al also has $200,000 is his RRSP account. Fourth, home equity is not “non-performing” when the owner is living in it (and not paying for the privilege). Fifth, borrowing against a free-and-clear property is not “diversification”; it is leverage.”
And I say: An 8% return is no stretch, when this portfolio gave 15% last year. Low-yield bonds form just 10% of this portfolio but add needed stability and, of course, would be swapped into an RRSP to avoid tax (duh). Preferreds are held outside, to suck up their delicious tax credit. And real estate equity which is not growing is certainly non-performing, a lesson too many people will soon learn. This blog has shown repeatedly that occupancy costs are about double those incurred by renters. As for borrowing against that equity, it could be the one genius move that saves the ass of those smart enough not to read MoneySense.
There will not be an Armageddon which blows financial markets apart. That’s doomer fiction. There won’t be a crash putting a quarter of all Canadian homeowners under water or dropping houses in some cities by 56% – as in the US. That’s extremist.
However there will be millions of people, if they stay on this path, just getting poorer. Too late they’ll learn houses peaked shortly after the financial crisis and Canada was no different. What we all need – more than stuff – is money.
Sure, it’s scary. Investing takes confidence. People will call you names. It works for me.