F before the election: “By choosing to act in the best interests of our country, we can ensure a bright future for our children and grandchildren.” F after the election: “I am quite worried.”
Which kinda begs the question. Should you be worried, too?
Well of course you should, but not on the macro-economic level that keeps F up at night fretting over Basel 3, international settlements, capital reserves and how to keep hair stuck on the bald spot. Yeah, I know we face giant issues. Europe is committing financial suicide again, led by those fun-loving Greeks, now busy cleaning out their banks. The US faces a debt apocalypse and yet the biggest news this past weekend was Sarah Palin on the back of a Harley. Oil is mired over a hundred bucks and that quick little war in Libya is turning into a mess. Even Canada has dropped hundreds of bombs there, each one costing the same as a bungalow in Winnipeg.
The world’s a sea of risk. Of course F is a wreck. Does he keep on spending and fuel the debt crisis, or go all Mennonite on us? Find out next Monday.
But this blog is not about stuff you can’t control. That’s what Lady Gaga, Navy Seals and the Royal Family are for.
Instead we focus here on micro-economics, which these days almost always leads us back to house porn. The reality is, when it comes to family finances, people in this country have never been so exposed to this one asset, which currently sits at nose-bleed height. That’s odd enough, given high unemployment and swampy wages, but it’s all the most astounding since we refuse to believe we’re like any other humans.
Like the Irish. They had a real estate bubble, too. A mama of a gasbag, with Belfast bloating up to look like a green Vancouver. That hit its zenith three and a half years ago, at which time a guy named Jonathan Davis shocked the media, and was called an idiot, for predicting a collapse in prices of 50%.
So what happened? As of last month, Irish house values are down 47%.
“The house price bubble has been the biggest economic disaster for Northern Ireland, yet everyone was saying it was a good thing,” Davis says. “The prices to earnings were way beyond extremes, the borrowings were way beyond extremes, the investment speculation was way beyond extremes.” Sound, ah, familiar?
Of course, when the house bubble inevitably deflated (as all bubbles do), lots of Irish dudes who bought expensive houses with tons of borrowed money suddenly got nailed. They felt poorer. They stopped spending money on consumer stuff. The economy tanked. And you might have heard that Ireland went bankrupt and had to be bailed out – all just a few years after people were writing books about the ‘Celtic Tiger.’ Unemployment is 14.6%. And this may be just the start, since the average Belfast home has lost more value in the past 12 months (11%) than those in staggering America (8.2%).
But that’s Ireland, the Canuckistan house pumpers cry. This is Maple! We’re different. And so was Britain, the US, Spain, France, Portugal, Japan and (soon) Australia and China. In fact, there’s never been a real estate boom that did not turn into dust. The only constants have been human stupidity and denial.
Anyway, Ferenc could care less.
Hi Garth, I love your blog and read it a lot! Does it ever really matter if you lose or win money on a house you live in (i.e., it’s not for investment purposes) because when you sell it and buy a new house, the price of the next house will be proportional to the market at that time. For example if I bought a house 5 years ago for 250k and today it’s worth 500k, I wouldn’t be able to get a house that is twice as big now because all of the house prices have gone up by 50% (hypothetical). Similarly, if I lose money on a house all of the other houses will have gone down as well. So I’ve lost dollar amounts, but I didn’t lose what I can afford for my next purchase.
What do you think of this kind of reasoning? Am I off my rocker and just trying to justify buying a house in a market that I think is going down?
Uh-huh. Bad logic, Ferenc baby. There’s no safe way to catch a falling knife.
Of course, it might not matter so much what house prices did if the average family could afford to buy the average house. If real estate cost two or three times what the typical income amounted to. If a couple could manage to put down, say 25% of the asking price. Or the government didn’t need to subsidize the banks because nine of ten borrowers were high-risk.
But that’s not this world. So today almost all purchasers are forced to put almost all of their net worth into one asset on one street. No pretending a house is just a home any more, Ferenc. It’s a savings plan, an investment plan, a kids’ education plan and a retirement plan. When the housing storm hits, and it always does, a huge amount of net worth can be blown away, leaving only debt standing — erect, silent and as sad as chimneys in Joplin.
So buy if you want. But understand the odds.
F is worried. And he knows why.