None of your predictions have become true and I guarantee they never will be. You are such a chicken cockroach who cannot take any criticism, be a man for once.
Several times each day words like that, and far worse, show up in the queue of comments waiting to be published on this blog. They don’t make it. I trash them. After all, they add nothing to the discussion here. And almost always they come from realtors or haters.
True enough, for some time I’ve been convinced residential real is the most dangerous asset. I raised the current alarm four years ago with my book, “Greater Fool,” when I was still a star-crossed member of Parliament. This blog followed. Two years later I opened a financial advisory practice to actually help people find alternative, safer ways to finance their lives. I’ve walked the walk. It’s earned enemies.
Since then, some housing markets have tanked. This blog’s comment section daily contains stories of folks in Calgary condos, Kelowna houses or Victoria McMansions who are already underwater. Houses are turning illiquid from the west side of Vancouver to the populous mass surrounding the GTA. And while in-demand areas will always attract buyers and maintain values, most markets in the country won’t. Finally, you can always count on the media, and your mother-in-law, to be the last with facts and the first to cough up a pro-house opinion.
Since I began the warning, residential values have risen considerably. Critics say this proves I’m wrong. But real estate’s not safer now because it costs more. It means danger has swollen. Every new buyer in the past three years, especially those with faint equity, resembles a Nortel investor in 2000. And older folks with the bulk of their net worth in their homes might as well be boozing it up at a retirement casino.
First, residential prices in Canada are at an all-time high. Logic tells us buying anything when it’s never cost more is a losing proposition. The financial crisis of 2008-9 started a healthy correction, but the government rush to crash mortgage rates and tell the nation the recession was over, sparked a new orgy of buying. Sadly.
Meanwhile American home values were in fact correcting after a similar speculative run-up engendered by cheap money and lax lending standards. The breadth and depth of that correction is witness to the power of real estate to destroy the net worth of families who believed they were investing in the most secure, stable and riskless of assets. All markets revert to their mean after periods of excess. Canadians should learn that.
Home ownership here has become a mantra, a universal goal. While Americans, Brits, Aussies, Spaniards, Irish and others disdain something they now know can bite, we clamour to buy in. Seven in ten families have houses, whether they can afford them or not – the greatest mass investment ever. Meanwhile half of us have no retirement savings and four in ten can’t pay the monthly bills. Is this a cult?
The rise in housing values is not the result of prosperity or higher incomes. Therefore it’s happened because of speculation and debt. This is not an asset appreciation based on economic factors, rather one bid up through emotion, lust and competition. It’s a recipe for instability and sudden collapse.
The role of debt cannot be diminished. The greatest ponzi scheme comes from using borrowed money to buy something based only on the expectation it will rise endlessly. Fools sell to greater fools, each taking on a proportionately greater hunk of risk. Never before have Canadians owed so much mortgage debt or household debt. This is a direct result of record home prices and home ownership levels.
Is it different this time? You bet. While real estate has boomed before – with each of those episodes ending in a bust – this increase is without parallel in the past sixty years. But unlike in the 70s, when the Boomers were madly nesting, and the 80s, when inflation raged, making mortgage debt melt away and asset prices soar, this time it’s cheap debt plumping house values. We all know this will pass. We know the consequences.
But aside from all else, there’s a bomb in our midst destined to go off. Nine million Boomers – 32% of the population – are approaching the time large numbers will be selling houses to finance their retirements. Of equal concern are far smaller generations trailing the bulge, guaranteeing there will be no more real estate bubbles for years – perhaps decades – to come. Those now jumping into the Millennial housing boom could be buying in at prices which will not be replicated in a lifetime.
I have not mentioned the gross overbuilding of condos that’s taken place in Toronto, Calgary or Vancouver. Not the tightening of lending regs as policymakers try to stem the mortgage tsunami. The above does not factor in a weak economy with rising unemployment in Canada, nor the absolute unpreparedness of most families for any kind of a downturn. Left unmentioned as well is the fickle, irrational, flighty nature of public opinion upon this most of the current housing boom is based. When fear replaces lust, there is no bottom.
So you can ignore me. Billions do. Call me a chicken cockroach. No problem.
But I know how this will turn out. I’m ready. Are you?