When real estate lawyers worry about cash flow, we all should. Twice in the past week, four provinces apart, I’ve sat with guys I’ve known for years, listening to their report from the front lines. These are the people who close deals at the land office, register deeds and mortgages, arrange title insurance and the transfer of keys. This is not about hype, marketing, listings or offers. It’s where real estate actually moves. If deals don’t close, lawyers don’t get paid.
I ask Greg, now in his sixties, a lawyer for four decades, when he’s going to retire. “I’m working on the Freedom 95 plan,” he growls. “I basically got wiped out in the mess back in the early Nineties, and the same damn thing is happening again.” By the way, his office sits in the middle of one of the most densely-populated suburbs crowding Toronto, the scene of explosive growth. “It was,” he says of the recent downturn, “like a switch being turned off.”
A thousand miles away Stefan sits looking over the condos and wharfs at the ocean. “So far this year,” he says, gazing distractedly out the window, “they tell me at the registry office that mortgages are off by fifty per cent. That’s dollar volume. I knew it was down from my own billings, but I had no idea…”
Making less business worse are lower prices. Legal fees, after all, are usually tied to the value of deal done. “In the last six months I’ve done more foreclosures that in the past three years. And every one of them is a nightmare.”
Lawyers, like real estate agents, insurance guys, mortgage brokers, carpenters, bankers. appraisers and drywall dudes, are all part of the FIRE sector of the economy. Since interest rates cratered the ‘finance, insurance and real estate’ industry has been on a roll. It now accounts for about 12.5% of the entire economy, while manufacturing sits in second place at 11% followed by mining and oil and gas at 8% (see below).
This is another legacy of cheap money, lax lending standards, and government policies deliberately targeted at promoting home ownership. Since 2007 we’ve seen the introduction of 40-year mortgages, 0% down payments, cash-back home loans, first-time buyer tax credits, property tax rebates, home renovation tax credits plus dirt-cheap interest rates, all designed to get people in debt and buying houses. It worked. In major cities three-quarters of families have real estate, and debt’s gone through the roof. All this, plus strong commodity prices, helped the Canadian economy skate through years when others were tanking.
Suddenly, it’s changed.
Commodity values have fallen. Oil sands guys are having a tough time attracting foreign capital as costs rise, demand slags and margins thin. Now real estate’s hitting a ceiling, thanks to inflated prices, stagnant incomes, fat debt and housing saturation. Mortgage rates can’t really fall much further, if any, while the jobless rate is going up and the dollar down. Just a few years after people here looked at struggling Yanks and felt smug, there are hedge funds working overtime to short Canada.
About 30% of our economy now emanates from actually making stuff, digging it up or exporting it. The other seven-tenths comes from consumer spending. The biggest asset people have, where most of their net worth and debt is concentrated, is housing. And since 2009 there’s nothing people have been obsessed with more than real estate. Collectively we’ve taken a massive gamble that this one asset class will hold its value. Because if it doesn’t, the downside risk is immense.
Nathan wrote me yesterday:
Garth, after reading your post this week I find myself wondering what will happen to the rest of us.
If I hold off buying a house (and believe me I intend to), continue to stuff my TFSA following a index investment strategy, and am generally wise with my money will I get swept away in the flood of debt generated by fools or will this nation eventually turn into a society of haves and have nots? Will the insistence of the masses to measure their worth by “stuff” eventually tank the economy and ruin it for the rest of us too? Any thoughts?
You’re smart to be worried, Nate. As housing weakens, millions of families will feel poorer with many owing more than their homes are worth. Some people will walk, most won’t. Instead they’ll just stop buying Fords, flat-screen TVs and vacations, resulting in more lost jobs and a weaker economy. It’s a vicious circle destined to melt real estate values further.
As I’ve said so many times, it’ll be the kids without equity, and the Boomers with too much of it, who get nailed the worst.
What to do, Nathan? Exactly as you are. As housing turns cold and unloved, the best refuge is liquidity. Concentrate on building a portfolio with the right balance between safe stuff (fixed income such as corporates and preferreds) and growth assets (like ETFs), plus diversification across asset classes, sectors, capitalizations and economies. Don’t overdo exposure to Canada. Learn what rebalancing is, and do it. Match risk with portfolio weightings. Buy at the right prices – typically along 200-day MAs. Shelter fixed income. Collect dividends and cap gains in a non-registered account. Maybe get some help.
And remember. Over 70% of people own real estate. Only 1.2% have a million to invest.
Yeah, social justice is so overrated.