While the first three business days of a year mean diddly in the scope of things, pay attention. This is precisely the pattern I’ve been telling you for months to expect. Financial assets ascending. Real assets descending. Money surging from bonds to stocks. Commodities squished. And real estate taking it on the chin.
So, your bond fund lost money this week. So did your house in Vancouver. And your silver and gold. In contrast, the S&P 500 (the only US market to watch) rose 4.6% and is now at the highest level since December of 2007. The Dow added 3.8%. Even the Russell 2000, an index of small companies, surged 5.7%, to an all-time crest.
Last year the S&P added more than 13%, despite the fiscal cliff, a US election, the Israel-Hamas war, revolution in Syria, global debt worries and Justin Bieber. Why? Because you should never bet against America, where unemployment continues to slowly erode, the real estate market has bounced off bottom, recession talk’s over, Obama romped to re-election and corporate profits surged 11% in the last quarter.
Face it: there’ll not be another 2008. The world will slowly grow out of its debt morass. Bond prices will fall and yields rise. Central bank stimulus will end. Rates will eventually normalize. US unemployment will fall to 6%, and never again will a house in Phoenix, Miami or Chicago trade for what it did in 2010.
This is why a no-stock, no-mutuals, middle-of-the-road, low-tax, balanced portfolio gave a double-digit return in 2012, beating housing, gold and shaming your pathetic high-interest savings account. Will it continue this year? Beats me. But I’m guessing.
Left at the curb will be Canadian real estate. That much seems clear.
I thought about that as the CBC reporter fussed with her equipment in my office Friday afternoon. She was there to get some pithy little sound bites (no, I do not have a lisp) on this week’s gruesome numbers out of Toronto and Vancouver realtors. As you know, sales romped lower last month by 31% in Vancouver and 19.5% in Toronto – compared to the previous December. Van detached homes are now devaluing by 1% a month, while the price melt is just coming to the GTA.
For nine months now the big pool of buyers has been drying up. That’s news. But even bigger news is that it’s now news. The fact CBC’s flagship national radio newscast ran a piece on the “condo scare in Toronto” and the “awful numbers” in Vancouver where buyers are sitting back, “waiting for the bubble to burst” should scare the probiotics out of sellers everywhere.
And then there’s this:
Yet another scary chart and real-estate-is-screwed story in the MSM, this time the Globe and Mail. The week ended not only with a CBC assault, but a worthy column by academic George Athanassakos with the headline, “Why housing prices aren’t coming back.”
Smart George neatly summarized some recent themes here: house prices are supported by debt, not increased income or economic growth. Real estate now comprises w-a-y too much of the overall economy, just as it did in poor California. And the biggest shark in the soup bowl is demographics – what all those hideous, wrinkly Boomers will be doing to real estate, starting in about 24 months.
That chart up there plots the ratio of working-age people to the young and the old. The more people not working, the higher the ratio goes and the more negative for real estate. As the population ratio jumps, home prices come down. And there’s nothing anyone can do about it.
In fact, Professor A makes me sound like the ultimate voice of reason.
“I calculate that the price of condos in Toronto should be, on average, about $100,000 less than they are now;” he writes. “As a result, one can expect about a 25% decline in condo prices over the next few years. In the long run, the decline could be even more significant.
“Of course, different regions may have different results, but I believe a perfect storm is coming in the housing market. Canada will experience significant “secular,” or long-term, decline in house prices starting around 2015, when the population ratio is about to turn upward based on Statistics Canada projections. The extent of this correction will surprise many people. Once the cyclical decline in housing is thought to be over and everyone prepares for an upturn in the housing market, the long-term impact of demographics will make itself felt and it will not be pretty.”
The perfect storm in the real estate market, now starting to feed the media, and becoming a tenet of Main Street thinking. As more people – especially the virgins – see the potential for loss and financial entrapment, that house horniness we’ve been living with will ebb. Meanwhile those parts of the world where citizens have tackled debt, devalued real estate and deleveraged, move closer to renaissance.
Don’t fight it.