Yesterday’s pathetic entry was called ‘The Manipulators’ for a reason. Rarely have we seen institutions – an entire industry and a lazy media – team to manipulate public opinion as is happening now. Like it or not, residential real estate is in the early stages of a correction which will last long and nip deep. We know this as certainly as we know the US debt ceiling debate will be pure theatre or that realtors can’t stay away from this blog.
Here’s today’s example, courtesy of the cartel running the Toronto real estate market. Reporting their mid-month numbers, TREB said 1,469 properties changed hands in the last two weeks. “This result represented an increase of 2.4 per cent over the 1,435 transactions reported during the same period in 2012.” And as for prices, “The average selling price during the first 14 days of 2013 was by up by four per cent on a year-over-year basis.”
What, no softening? Is this truly that elusive soft landing taking place? Is Garth actually not omniscient (but still has a great butt)? “The GTA is not suffering a correction,” one of our resident realtors rushed to comment. “TREB stats prove. The so-called correction has turned to a fizzle. Awwwww. Sales up, prices up…say what, Garth?”
I say be careful what you swallow.
In January of 2012 the real estate board reported 1,506 sales. This January the number’s 1,469. This isn’t a 2.4% increase, but a 2.5% decrease. Every month the realtors fudge their numbers without publishing corrections, which means they can pretty much say what they want. And do.
And that price increase? Ditto. Let’s compare detached houses in 416 which averaged $743,993 for all of last January. This year that same house costs $720,759, which is $23,000 less. So how is a 3.1% decrease an increase?
But that’s not actually important. Real estate – like stocks, gold or philandering – is all about momentum. Sales have been falling on a year/year basis now for ten months, and the average detached house has not been at this price level since October of 2011. In fact that detached house has lost 7.8% of its value since September, and a significant 13.2% since April, when it cost $110,410 more than now.
All the numbers, by the way, come from the Toronto Real Estate Board, which really, really, really hopes you read the Toronto Star and have a memory as short as the minister of finance.
But it gets worse.
Some days ago I told you clearly why people throwing their extra cash at low-rate mortgages are making a big, ugly mistake. The argument is simple: tons of folks have mortgages with rates less than inflation (3.1% at the moment in Ontario). That means the bank gave them a wad of money that’s losing value faster than the price they ‘re being charged to rent it. Why would you want to pay that back faster and clean up the bank’s mistake?
Apparently if you’re a senior editor and business writer for CBC, you think this is great. “You can make an absolutely safe, tax-free investment with a guaranteed rate of return by paying off your mortgage,” says Don Pittis in a column claiming people with fat mortgages are lucky and should pay them off instead of investing in retirement plans. I guess he must know.
The trouble is, money can grow much faster in other non-scary assets, so if the goal’s paying down debt, why make extra mortgage payments? A balanced portfolio of fixed income and growth assets (no stocks or mutual funds) with 40% in safe stuff (like preferreds) has yielded 8% over the last three years and popped into double digits last year. Why not enjoy a five-year mortgage term with cheap payments, sticking it to the bank, while growing your extra money by 50% to trash the loan upon renewal?
In fact, do you really want to shovel more of your net worth into an asset which is on the decline? Isn’t creating a big pot of cash to finance 25 years in retirement more critical than paying back a subsidized loan? After all, most of us don’t have CBC pensions. And while we’re at it, when you can rent a $1 million house for $3,000 a month – which would actually cost $8,000 a month if you owned it outright without a mortgage (the income your money could generate) – why wouldn’t you?
We need income, not houses. Too many of us confuse real estate with security. God makes those people editors and realtors. She’s always testing us.