Days ago a marker was likely passed. One of the house-humpiest media outlets in the country ran a story predicting the end of real estate’s golden age. At least in Toronto. As the Star reported, a growing army of economists have joined this gnarly blog in forecasting the market will either flatline (best case scenario) or tank (about 25%).
As you know, my unwavering belief is that the GTA and (especially) Vancouver will go through a substantial correction, then plateau. This is when the suckers rush in. After that, given the economic future we face, I’m betting on a slow, inexorable hemorrhaging until we achieve a return to the mean. Precision is impossible, but I’d say 2015 will have a lot in common with 2005. After that, thanks to the oxygen-sucking, house-rich and liquidity-poor wrinky Boomers, it might all get worse. Especially for the suckers.
But this is theoretical, based on what we know. Debt’s overwhelming. Houses cost too much. The economy’s tepid. America is in the soup. Rates will rise. Wages are stalled. Demographics are against us. Broke governments mean more taxes. And we have an asset bubble. The mama of Canadian gasbags. Unsustainable.
What the pointy heads in economics departments cannot measure, and always miss, is human nature. Because the lust to own a home is in our DNA, it causes irrational behaviour. People just flip out. The longing to nest, for example. Or simple greed and fear. We panic to buy stuff that’s appreciating and run screaming from assets in decline. It makes the ascent more breathtaking and the decline a terror.
Talked this weekend to a westside Van guy who bought a $700,000 house four years ago and just sold it for $2.6 million. “Everybody on the street says I’m a frigging idiot,” he told me. “Why would you sell now?, they ask, cuz it’s going to four mil.”
See what I mean? Quantify that. Chart greed. Humanity just makes such a damn mess of economics.
Like Jake. Spent time with him over the last few days, after he sent me this email:
I just turned 50, Garth. I married in 96 and then started thinking about purchasing a house. Should have bought something but had no cash, no down payment, and job wasn’t that good. But then things picked up. Starting saving, had 2 kids, moved to a small rental house.
But in 2001 prices started spiralling out of control, and even though my income and savings increased, I am still chasing the market up. I could rent a much better and bigger house than I could ever buy, so did just that. But I am running out of time.
So if I wait until 2013 or 2015 to buy in, and I could as I have now saved, I will be 54 by then and ready to retire. And every rent payment is going right out the door, I don’t even want to think how much I have spent on rent in the last 15 years, I could have bought 3 houses.
I work for Government, and my pension from BC Pension Corp starts at 55. I have 31,000 in an RESP, and 90,000 in RRSP money, of which 50,000 was destined for the HBP. 5,000 in a TFSA.
Am I screwed as far as owning a 4 BDR House in Victoria ? Is it time to throw in the towel on my dream, rent til the kids are gone, and then buy a 76 Winnebago and live off the land?
Following up, I found his two kids are 11 and 13, his wife doesn’t work, the family income is seventy grand, he’s desperate to retire at 55 and his pension will be $2,800 a month gross. So here is the situation – devoid of emotion.
The average SFH in that city is $630,000. His down payment will max out at $80,000 (with the HBP and cashing in his TFSA plus the rest of his RSPs). That’s 12% down, which means (with closing costs) a mortgage of $562,600. Of course, he can’t risk going variable since rates have nowhere to go but up, so a 4% fiver amortized over 30 years would cost $2,734 a month, and then escalate. With property tax and insurance, that climbs to $3,134.
His pension income, after tax (at 20.6%), would be $2,416 a month. So, carrying the house would take 129% of his income. No food. No gas. No cable TV or new clothes. No car. And only $31,000 in RESPs to help his two kids through a collective eight years of university.
See what I mean? Home ownership’s a dream denied by his own financial reality. The only hope might be to move to rural New Brunswick, buy a place for $139,000, shoulder a mortgage in retirement, and have zero savings. Or, Jake could rent for 50% of his after-tax pension income, still have money to live, plus $95,000 invested.
If financial security and quality of life are the goal, renting’s the only sane option. But I know from his conversation with me, that ain’t gonna happen.
“Needless to say, I am not whining about my position in life, I thank God for what I have, I know I am in a better position than some that have shared their stories on the blog,” he said, “but this is my goal. A house by 55.”
Such is the break between humans and analytics. Our emotions pee all over them.
Most people don’t even remember the last major real estate downturn. They don’t understand this irrational market came through monetary policy manipulation. They now believe what we have – rising prices and dirt cheap money – will last indefinitely. The new normal could hardly be more abnormal.
This is why my friend got $2.6 million last week for a $700,000 house. It’s why Jake’s happy to eviscerate himself reaching for something he already has – a place to live. It’s why the irrationality around us could last longer than we thought, and end in much higher flames.
But it will not be with a whimper.