Risk. It’s a topic we return to often on this blog because it surrounds us. Marriage is a risk. So is the stock market and childbirth. Real estate is risky, just like driving on the 401 or the Coquihalla. Borrowing is a risk, like teenagers. Or taking advice from helo parents. The biggest risk for most people is probably running out of money.
These days I’d say debt is one of the evils to avoid. Let me give you some examples.
Below is the amount of debt US investors are shouldering as they take part in the ongoing stock market party. It’s called ‘margin’ and it has a nasty way of piling up to new heights just before the music stops. Notice the peaks in the chart below – record borrowing just before the dot-com bubble burst, then again before the mess in 2008, and today.
This does not mean the Dow is going to shed half its value (a 15% correction sometime soon is more likely, before the next move up), but it does mean any meaningful dip in prices will mean lotsa margin calls – as the value of borrowed securities falls below the debt outstanding. Nasty.
Now, below, is the amount of debt your neighbours, brother-in-law and the girls at work have. (I’ve run this chart once before, but it bears staring at again.) On Friday we learned that accumulated mortgage debt in Canada has soared past $1 trillion, and that while the pace of borrowing has slowed down a little, every day, week and month, Canadians owe more. It’s at about 164% of disposable income, which is just shy of the record we set three months ago.
Also on this chart you will see CREA’s Frankenumber, giving a representation of the increase in house prices over the past nine years. That’s the reason the debt numbers have exploded. Like ever-more-costly stocks, people borrow more to buy what is increasing in value. But unlike stocks, real estate loans are far bigger, represent vastly more leverage and are against assets which can’t be sold in two seconds.
Finally, I can write all day about how delusional the indebted people of Vancouver are, how detached homes in 416 have increased 15% in a year yet ‘experts’ claim there’s no bubble, or how the housing market in Halifax just imploded in a warning for all, but you’re sick of me. I can feel it.
So here is a graphic little story of Sayed and Anna he told me in an email that arrived as I was having the Amazons work on my foot. “I’m trying hard not to be house horny, but I’m failing miserably,” he says. And Sayed wonders if a humble young couple making $370,000 a year will ever be able to afford a home.
“I’m 30, wife to be is 32. I work in medicine making approx 250k a year, she works in sales making approx 120k a year – depending on commission. We have no debt. We have saved about 350k, none in RRSPs. We live downtown, but I commute out to suburbia daily to work. She goes to meetings all over and travels a lot. We don’t really want to move to the suburbs but we want a place big enough for a family (her clock is ticking), which seems almost impossible (unless you put everything into a house) with our income in the city. This seems ridiculous with our income, because if we don’t feel comfortable buying a 3 bedroom place or a detached house in the downtown area – who the hell can? The market is not making sense in my opinion.
“Now we are thinking of A – buying a condo downtown for around 1 million. B – buying a detached house (again ~1 million). Now here is where it gets interesting – if we buy a property our parents will gift us 300k but if we buy nothing, we get no gift. So we are essentially doubling our net worth but putting ourselves at risk for a real estate crash – and eliminating our diversification. We’re of course getting tons of pressure from our boomer parents to buy a house.
“So what do you think we should do? Suck up the risk and buy? If you think we should rent – how much monthly should we be spending on rent, and will that get us a family sized place downtown?”
Self-indulged snowflakes with no idea how perfect their lives are? Or a serious warning to people who make a third as much and have mortgaged themselves to their corneas? Do the people around you who have bought houses with less attention than they put into a new pair of yoga pants have any idea of how much risk they’re taking? And how is any of this much different than financial investors pigging out on debt so they can chase stocks higher?
Advice for Sayed and his ticking squeeze? I already dictated my response and sent it off. What’s yours?