On Friday, as the mighty Royal Bank warned of a ‘painful correction’ for some Canadian real estate markets, I mused (the winsome coquette that I am) on whether my work here might be done. After all, it’s been a dusty and lonely trail. Three years ago I said only time separated us from a date with reality, that our house lust and real estate porn would not end well, and smart people should diversify.
That day has come. If you can’t see the risk bubbling around you, and ignored my endless bleatings, well, show time.
Pathetically regular readers will know over the past year in particular I’ve tried to highlight some safer havens. Corporate and government bonds to hedge against equity risk. Bank preferred shares for a stable flow of tax-smart income. ETFs to harness growth without the penury of mutual funds or the capriciousness of stocks. Real estate investment trusts as a massively better alternative to buying a rental condo. The proper way to harness my hot little offspring, the TFSA. Even small apartment buildings with a cap rate beating the TSX.
And with each article, the haters have descended to trash the asset described. I’d say yesterday’s posted comments regarding income-producing real estate was a case in point. And not a day passes without a drive-by calling me out because house prices have yet to go to zero.
This might suggest I should quit. But screw that.
Instead, it underscores how much myopia surrounds us. People who see risk everywhere – even in owning equity in banks, government bonds or a fully-rented sixplex – continue to immerse themselves in the greatest risk of all. Real estate debt. Despite overwhelming evidence this is the wrong time to leverage, they simply can’t help themselves. They’re victims of a herd mentality that’s taken us all to the point where (as I wrote yesterday) it is technically impossible not to lose money buying a house.
But I won’t repeat. Too late now.
What I will remind you of is why the rest of this year could be toxic for those among us who’ve chosen to have most of their net worth in one asset at one address in one city.
In order for real estate to appreciate and overcome the massive buying costs and lost earning power of your equity, we need economic growth and rising consumer confidence. The odds of this happening are fading fast. For example, we’re one month from a federal budget which will be the beginning of an austerity period few people voted for. As needed as it may be, expect cutbacks, and consequences.
More troubling is the prospect of a global slowdown, and what that means to a trading nation like Maple. I mean, have you been paying attention to what’s going on in that place past Newfoundland?
On Friday the rating agencies nailed Greece again, and it looks all but certain it will hit the wall in the next few weeks. On Saturday, Italy’s outlook was revised to ‘negative’. Big deal. Italy is a huge economy, and a world leader in womanizing. And in Spain’s elections, the ruling Socialists were spanked by voters who don’t like either insane unemployment or belt-tightening government measures.
In fact, this is the problem. There are too many people in all these countries who think like Canadians – they want it all. That means papering over debt, ignoring signs of financial stress and looking to government to backstop personal lifestyles. So, some fear (count me in), that public rebellions like we just saw in Spain will lead to the failure of austerity programs, more countries defaulting, and a mama of a mess.
After all, it’s one thing to blow off Belgium (also downgraded) or those nuts in Iceland. But when Spain or Italy wilt, the dominoes fall. This is why stocks markets plopped on Monday, with more plopping to come.
It’s also why houses have no upside potential, and a huge pull downwards. Lower global growth is not about the Greeks. It’s about oil, car and potash exports. It’s a reason why household incomes in Canada will flatline, why our banks are tightening up on credit and why a $700,000 bungalow in Scarborough suddenly looks ridiculous.
Some people say developments of the past few days will retard interest rate increases in Canada. That could be. Mark Carney may wait until the autumn, knowing as he does what’s coming. But those who think this will stoke house prices, and jump in, will know regret. Cheap rates sure didn’t save America. They won’t save anyone’s over-mortgaged butt here, either.
My hope is that some people heeded my words, and have prepared. The trip ahead could be a long one. The best way through is not hiding in cash or silver bricks in your garage, but in assets that will pay you to own them.