Not greed. Not sex. Not even guilt lathered on by your mother-in-law is stronger. The most potent emotion people have is fear of loss. In fact, brain guys claim scientific evidence that people get twice as worked up at the thought of losing money as they do about making an equal amount. Maybe we expect good things, and are shocked when crap happens.
But it does. And the biggest surprise in 2013 for most people will be the value of their real estate.
Two days ago I referenced the nascent media negativity about housing. Expect this to continue, but at the same time as the real estate industry throws everything it has at misinformation. Realtors know people buy houses for emotional reasons. For the last four years greed and horniness have ruled, bringing inflated values and record debt. Going forward they’re in a sweat that fear of loss will send real estate reeling.
They hate me, of course. Now they can add Maclean’s mag, the latest publication to helpfully rewrite this blog, but with more hyperbole (not to mention the picture).
“A housing correction—or, possibly, a crash—is no longer coming. It’s here,” gushes the current issue. “And you don’t have to own a tiny $500,000 condo in downtown Toronto or a $1.3-million bungalow in Vancouver to get hurt. With few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect. Construction jobs will be lost. Homeowners will end up underwater. Consumers may stop spending… It all amounts to a dramatic reversal of fortune for Canadians, albeit one we brought on ourselves. Back in 2009, our hot housing market acted as a life preserver in a sea of economic uncertainty. Now it feels more like a cinder block tied around our necks.”
Can negative media hasten the correction and make it worse? Probably. Canadians have spent all this time since the 2006 US housing crash convincing themselves it’s different here. Now we have more debt and higher prices than the Yanks faced, stagnant incomes, tighter lending regs and a slower economy. Mix in some panic – not hard after last week’s numbers out of Van and the GTA – and suddenly your mortgage looks like a contestant on The Biggest Loser. No wonder people are in a tizzy about trashing debt.
Franko, for example, says, “Right now I am in the middle of a mortgage that is prime minus 0.65%. I have 2 years and 9 months remaining. What should I do right now with my existing mortgage? I want to blend and extend, but will I be able to keep my low rate? In the long run will I be able to get more savings if I lock in for 10 years, knowing what my payment will be for the next decade and allowing me to keep some hair on my head?”
See what I mean? Fear of higher rates almost three years from now is causing Franko to morph into a financial idiot. His current mortgage is just 2.35%, less than the inflation rate, meaning the bank’s subsidizing him. Far better to keep the cheapo loan in place, invest his money wisely in growth assets for three years, then retire a big chunk of the principal upon renewal. Blending and extending now would goose his rate by a significant amount, wipe out the benefit of 31 months of subsidized living, stretch his debt years into the future and make TNL@TB all tingly with anticipation and moist desire.
But wait. Franko has another confession.
“I bought my current condo a few years ago, and now we’re pregnant and need to move out to a bigger place. It’s in a desirable location in Vancouver, so it will be easy to rent, and I don’t want to sell for a loss. How long should we hang on to it, until the market recovers?”
News flash, dude: the market’s cooked for years to come. Despite prices dipping monthly in Vancouver (and soon Toronto), this correction has only just begun. Values are unsustainable based on incomes, economic growth, wage gains, employment levels or migration and offshore investment. There are a myriad of reasons for real estate to lose value, and virtually none why it should recover. The decline we’re starting to witness now will only accelerate after 2015 because of negative demographics, let alone normalizing interest rates and debt deleveraging.
This should be obvious. No asset class rises without end. Especially one whose value is linked to people being horny, greedy and indulgent. By fearing an immediate loss Franko walks into far more substantial future losses. He embodies a human flaw so widespread, it’s the greatest threat to middle class wealth.
But then, when people are misled daily, we should brace for the worst.
Below is a story from Sunday’s Vancouver Sun real estate section, trumpeting that a house sold “for more than $3 million.” It actually changed hands (after 67 days on the market) for $312,000 under asking and at a 2009 price. The responsible headline: “House sells for $600,000 less than assessment.”
When you finally see that, duck and roll.