Over the last few posts I’ve brought you close to several people grappling with their financial lives. More in a moment. I do this for the satisfaction of trying to help them (and anyone reading this), and to make economics human. There are two lessons I cannot return to often enough. Real estate is now dangerous. And, your goal should be liquidity.
But humans, being what they are, usually screw it up. People with liquid wealth lust to buy houses. And people with illiquid houses are desperate to get out.
All this plays out against a tapestry of fear. It’s the overriding public emotion. A survey last week found that 75% of people think they’ll be in worse financial shape next year, and four in ten believe this is no time to buy much of anything. These thoughts are the precursor to deleveraging, of course. That’s when people spend more time trying to get out of debt than acquiring new stuff. It creates the death spiral for real estate.
Ironically, liquidity – having a portfolio of financial assets – is a far better defence against economic, social and political volatility than sticking your wealth in a house. You can adjust your assets to suit conditions, avoid danger quickly, or swoop to scoop opportunity.
Real estate, by comparison, is fully exposed to market, interest rate and emotional risk. It can take weeks or months to trade, with huge transactional costs. Is this the kind of asset you want in an unstable world? Would it not be better to have securities paying you to own them (or financing your rent) instead of snorfling your cash flow?
This is what I mean by grappling. Collectively we’ve come to see real estate as riskless, when it’s anything but. I’m amazed daily at what I hear.
So, here’s Sarah. I told her in an email yesterday she’s a textbook case in property-based delusion:
After seeing you in Kelowna and reading your latest book, we felt the need to sell our big, two story , 4 bed home !! We made a profit of only $30M after selling for $100,000 lower than its highest appraisal value just before the 2008 drop. Unfortunately we refinanced and spent the equity on, you guessed it RE!!!
We moved closer to Vancouver not by choice, but for job transfer . We are renting a house for $1900/mth. My husband hates it and feels we are throwing money away!! If we were getting this place cheap, then perhaps it would be ok and we could sock away the savings!!!
We know there will be a market correction, but we are still looking to buy something in the $500,000 range-rancher or something that will be marketable in future! We only have 10% down, but payments will be less than $1900/mth. (we have to borrow the 10% down from family (good rate/pymt plan) since we declared bankruptcy last year. Long story but got caught in the real estate speculation hype and lost everything! Well not everything, we have a condo in Kelowna we can’t sell, but at least it is rented!! Mtg is $312M, prop value $300M. Cash flow is negative marginally. We also lent money from our home equity during the boom, when we refinanced. They have defaulted and have not paid us back. We hold a 2nd mtg on their property in St Catharine’s which is not worth much now!!!
Does it make sense to buy? We hope to be here 5 yrs. We are in Langley where we feel any correction would be much lower than in the city. We would be happy to break even and at least enjoy our own place for a bit. We have kids that would like a place to call home!!
Pray for this woman. How much money does she and her husband have to lose before they learn the lesson? Apparently all of it.
While most people (like her) don’t realize it, the threats facing property owners are vastly higher than those with exposure to equities, bonds or a slew of other fixed-income or growth assets. Real estate’s been a drug. It makes people believe interest rates will stay low forever, prices can rise endlessly, occupancy costs are trivial or that everyone who drives by is horny to own their home.
It’ll take time for the new reality to sink in. But more people get it. Like Dylan:
My wife and I are selling our place and renting for a while. We are amazed at what we are finding. This listing is $3100 per month all inclusive. Purchasing in this area a similar house would go for between 1.5 million and 3 million depending….
We are taking your advice of buying capital safe assets that pay us monthly to help facilitate the rent for this place. Who in their right mind would purchase at this pricing level vs. rent is beyond me!
Sarah would. Just lend her the deposit.
Have I ever mentioned this will not end well?