“My girl and I were casually making dinner,” says Matt, “listening to the CBC when the Barenakeladies ‘If I had a Million Dollars’ came on the radio and my girlfriend said ‘If I had a million dollars I could almost afford to buy a house.’ And when I laughed she got mad. Because she was serious, like seriously distraught.”
Obviously Matt has a death wish. He continues:
“I think if she could she would spend a million dollars on a house and be happy about it no matter where the markets go. Market forces are nothing when compared to the nesting instinct. There is too much emotion involved, it’s so much more than an investment, and the people selling houses know it. But for some reason they are allowed to push these emotionally dominating expensive boxes on us without a worry about all the debt we assume in the process. It would be like if drug addicts were investing in crack. Guess what?! They are going to buy, and the price doesn’t matter. Everything is too expensive because most people don’t really care about finance relative to what they want. Before she says yes to the dress, I have to say yes to the debt.”
Matt gets it. Real estate is Canada’s official religion, at least in those big cities where houses still trade at nosebleed levels. Politicians, the media, economists, the banks, your mom and (natch) the realtors all think it’s a cool thing when prices go up. Every real estate board report with bloated numbers is called positive news. When prices fall, it’s a disaster. What a fail.
When you think about it, swelling houses most hurt the very people who keep the market alive – first-time buyers (now 49% of all sales). They hurt move-up families who need bigger homes and must assume more debt. They benefit only the people cashing out to downsize or rent. In other words, this is the country’s biggest-ever transfer of wealth. The Boomers (at least the smart ones) get the money. They kids get the debt. Plus all the risk.
A few days go the IMF got into the act, saying Canada’s housing market may have a soft landing, but only if the feds tighten the rules and if the nation can avoid an external shock. Of course, it’s too late. Given a federal election in less than a year, the guys in government lack the political will to act, while the opposition members are busy diddling each other. Sigh. And the external shocks are materializing – the collapse in oil revenues, plus the coming US rate increases.
Surely Matt’s GF can see that. If she looked. But like most people, she’s not.
One of the nastier boom-and-bust housing episodes took place in California, where dumbass politicians let the economy become far too real estate-dependent (but not as much as ours now is). When property values sank from inflated highs, so did state revenues. Bankruptcy loomed for a region with roughly as many citizens as Canada, and an economy to match.
Writing in the LA Times a few days ago, Michael Kingsley said a house is worth only what someone will pay for it. “That number has two components: one is the value of occupancy — that is, the privilege of living in the house, mowing the lawn, calling the plumber and so on. This should roughly equal what the house would rent for. The other component is the investment value — how much you think the price of the house will go up when you sell it.
“Any investment value greater than zero (or zero plus inflation) is suspicious because it depends on the greater-fool theory. There is no physical reason why a house should become more valuable at all. It is not growing like a crop. It is not producing anything that you can turn around and sell, like a factory. It just sits there. It becomes more valuable because people believe that it will become more valuable. Worse, since the general assumption that it will become more valuable is already reflected in the price you paid, you need a buyer who believes that it will become more valuable even faster than the general consensus.”
Greater fool. Exactly. This has been my caution for several yers now, as people in 416 or Van or (more recently) Calgary pay ever-inflating prices for the same property based on the assumption it has inherent value and future buyers will shell out even more. It’s rank speculation. Like the idiots buying stock in a profitless Internet company, basing the inflated price on the belief the next guy will be hornier than you.
Doubt me? Then ask yourself: would you pay what you believe your house is worth today?
But you expect someone else to. And that’s the greater fool trap.
The big losers in the correction to come will be those who entered the market recently, who paid the most, put the largest amount of capital at risk, or assumed the fattest debt. They can only come out of this intact if they decide to sell before this event, and find that greater fool. Since our economy was wobbly and house-centric even before oil fell into the ditch and interest rates restore, there’s no reason to believe real estate will continue to ascend.
Matt’s babe may not get this. In a heartbeat she’d trade a mill for a house.
She’s the normal one. So, get ready.