Over the last two days I related two stories. Eddy and Anna. The young over-sexed engineer blurted his negative experience with the true cost of owning a condo (and hot women). The distraught millionairess mama couldn’t handle being priced out of an insane housing market.
I chose the two tales with some care. They tell us about ourselves.
Nothing affects choices like emotion. For property virgins – especially in a world now dominated by social media – the overriding influence is peer pressure. So people like Eddy get sucked in their twenties into the vortex of expense and debt, only to discover buying a condo is one hell of a lot easier (and often cheaper) than getting out. With little or nothing down, fat closing costs and monthlies higher than rent, their only hope is that prices will continue to escalate.
And people like Anna are pushed along by societal forces. You know, that non-stop condescension renters feel, and the quiet censure directed at parents who don’t own houses. Lately, with home prices pushed up by cheap rates and house lust, there’s also a panic that this is a new normal, that values will rise forever and failure to buy into a rising market will bring heartache.
Of course, all booms end. Always badly. The only thing new is that we have to learn it again, every time.
Eddy and Anna represent something darker, though. Call it collective insanity or group greed. Maybe it’s simple ignorance. Or worse, a total messing up of priorities.
As I said yesterday, seven in ten of us have houses. Four in ten have no savings. Three in ten can’t pay their monthly bills. And for the first time in the history of sexy underwear (eternal), almost half of all people retiring (voluntary or otherwise) are saddled with debt.
There’s a direct line leading from home ownership to financial failure. We’ve simply put far too much of our earnings and confidence in the wrong asset. So even at a time when mortgage rates are the lowest ever, people have the most debt. Real estate horniness has turned a giant opportunity (to pay off a mortgage when it’s cheap) into a bottomless trap (we bought big and now owe more, with rates set to rise).
This is the opposite, obviously, of what most people believe.
For them, real estate is wealth. It’s replaced both savings and investments. Worse, its influence has seeped into every corner of life. What else can you say when stunning numbers of your friends and co-workers save nothing during their working years and retire still owing money?
And speaking of retirement (according to a Royal Bank survey), guess what most cash-deprived Canadians think they’ll do to finance their KD and cable? “The most common responses to squeezed finances are to move – to either a smaller place or a rental – or to live more frugally.”
This is one major reason real estate is doomed. There are 9,000,000 Boomers who own an estimated five million pieces of real estate. Far from making them wealthy, many have their entire net worth and life savings trapped in those houses and cottages. Without pensions (70% of us are pensionless) or a big pot of money (40% of us have no savings), what else are they going to do but bail?
The real estate obsession could turn out to be the single worst decision an entire society has made. With Boomers turning 65 (starting next year), with interest rates rising, the economy more volatile, inflation once more raging, taxes swelling and record levels of debt, the bubble’s doomed. And yet people in Toronto think immigration will propel houses higher, in Edmonton it’s the myth of surging oil and in Vancouver because the world wants scenery.
The moral of Eddy and Anna is not that real estate’s bad or destructive. It’s we who embody risk.
Walk outside and look at your neighbour’s house. He’d probably die defending it.
That’s danger.
Two years ago Anna and her husband decided to sell their house on the west side of Vancouver. “At the time it seemed like a good idea,” she says, “because interest rates were forecast to rise and we were seeing a housing recovery here after the global recession. Our goal was sell high and buy low, anticipating a decline in the market.” The five-year-old house went for $1.2 million. They were ecstatic. That was $1.1 million more than they had the day before. But joy has turned into gut-wrenching, debilitating stress.
The same house today sells for $1.4 million. Meanwhile Anna, her husband and 15-month-old daughter have been living in a 500 square foot suite for $1,100 a month – with $1.2 million sitting in cash in the bank. Idling. Coiled. Waiting to pounce. In their minds only one asset class exists – a house.
“We are getting very claustrophobic. My husband is getting anxious and wants to re-enter the housing market. I want to wait. However I am also very scared because it seems the market keeps rising. There seems to be no end in sight for increased prices.”
The ‘buy now, or buy never’ fear has etched their minds and strained their lives. The clear logic they felt before – sell high, buy low – has been replaced with an icy, pervasive terror that real estate will rise forever, and a confused couple with only $1.2 million in cash will be locked eternally in a basement suite. Deprived. Wanting.
Yesterday Anna wrote: “This afternoon we are putting in an offer on a 1979 boxy Vancouver Special listed for $1,328,000, in the same neighbourhood as where we sold. We already have the inspection lined up before the offers are presented. I can’t believe we are doing this, never did I think I would get caught in this frenzy of bidding wars. I’m scared and confused about our decision. Not able to sleep, so here I am writing my thoughts to you. I’m really confused what to do. And how long will we have to wait before the market comes down. Any ideas? We are already at a loss of $200,000,000 and can’t afford any bigger loss. Anna.”
We live in a world where too many are lost. Blinded and manipulated, disoriented, awash in bad decisions. Never before has so much information and knowledge been so available, and yet people take action based purely on perception and emotion. This has already led us back to the edge of the precipice.
On the same day that stock markets raged dangerously higher, commodity prices soared and the cost of living erupted with $1.40 gasoline and $2.29 cauliflowers, came news of a systemic financial failure in Canada. According to two major bank surveys 30% of people can no longer pay their monthly bills. Almost 40% have no savings. None. And four in ten retired people say they’ve run out of money and must return to work.
These sound like numbers you’d expect in a developing nation – three in ten families running out of money and almost half the population with no reserves. This leaves the whole nation, where consumer spending equals 60% of the economy, exposed and susceptible to any kind of shock. On any given day, it is a few shards of confidence away from crisis.
But this is also a country when seven in ten families own a house – one of the highest margins in the world. And, ironically, it’s been this very obsession and fixation with real estate that has come to destroy the very fabric of personal financial security. And with it, put us all at risk.
Nor does it stop.
This week the real estate industry in Ontario, for example, released numbers saying 70% of renters want to own while 90% fear if they don’t buy now, they will buy never. So in the months leading to a provincial election, the realtors are lobbying for reduced land transfer taxes, and a permanent reservoir of government money to help people renovate.
Meanwhile in the US, where real estate is the most affordable it’s been in a stunning 40 years and home prices have tumbled nation-wide by 32%, owners are flocking to become renters. The home ownership rate is tumbling fast, and 18.4 million houses are now vacant. But the personal savings rate is on the rise.
There’s little doubt where this will end. Canadian real estate values will fall, which means 70% of the population will be negatively affected. Close to half the population have no savings and very likely all of their net worth in their houses. Already a third of us can’t make ends meet. Gas and food costs are swelling. And there’s only one way for taxes and interest rates to travel.
In short, we’ve beggared ourselves with granite and stainless. Traded security for debt. Confused an address with self-worth.
Like Anna and her husband, sitting on enough cash to make them free but desperate for what they don’t have, we’ve lost our way. This week they’re making the mistake of their lives.
When all this becomes evident, there will not be enough buyers to save the sellers.
So save yourself.
