Oil prices and commodities surging. Real estate tumbling.
Trillions rushing into stock and bond markets. Taxes jumping, America staggering and a pension crisis gripping 11 million Canadians.
Between now and 2015 investors, homeowners and savers will hardly know what hit them. If you’re not prepared for higher taxes, the incredible fallout from the Boomers or crashing house prices, you’re not paying attention. The road ahead is paved with change. Already so many people are losing their way.
In “Money Road” financial guru Garth Turner explains why the global financial crash did not end in 2010, and what this means for stock markets, home values, gold, your paycheque and your retirement. Like no other Canadian guide yet, this one book is packed with hands-on strategies and tools you cannot afford to ignore.
- The secrets of contrarian investing, analysis and stock selection.
- Why real estate will fall and how to be a vulture when it does.
- The looming Boomer crisis. Even if you are 60, it’s not too late.
- Slashing taxes, tax-free pensions and how to deduct your mortgage
- How to make a perfect portfolio. Why many ETFs won’t cut it anymore.
- Investing in stocks, bonds with zero risk. Tax shelters that are too good to last.
- Over a hundred strategies specifically for Canadians.
Millions are now making life-changing mistakes. Don’t be one of them. Get on the Money Road.
Also by Garth Turner…
From a reader: ‘It read like a thriller. I was immersed in the intensity and depth of it…’
Garth: I just wanted to take a moment to thank you for the offering of your most recent work, After the Crash.
After having read daily (via a fairly decent and varied news feed) about the banking crisis over the past couple of years, I have found myself starved for a truly indepth and informed Canadian perspective on the imminent crisis taking place. Then suddenly on thursday morning I caught an interview with you on The Hour (a podcast saved on my computer). After watching the interview I pretty much ran out of the house and headed for the nearest book store to get my copy of your latest tome. I started it on Thursday night, reading 75 pages in a single sitting (in bed) before my wife clamoured for me to turn off my little LED book light – it read like a thriller and I was immersed in the intensity and depth of it. Friday morning I headed out to do my weekly shellfish/oyster deliveries and came straight back home in the early afternoon to get back to the book.
I finished reading it last night and saw your email address printed on your contact page (pretty rare occurrence, yes?) so I am motivated to send you a note about how important it was for me to have read this work. I am thrilled to have finally found a resource of approaches and ideas that are truly timely and useful.
I consider you to be challenging, open, thoughtful and, ultimately, compassionate towards a variety of worldviews without coming down on any particular side too heavily. This kind of tact is refreshing to see – I am just thankful that you’re Canadian! You have helped me to re-prioritize and more importantly, re-connect to my life’s purpose.
I am eternally grateful. Be well,
Garth Turner’s ‘to do’ lists for surviving financial end times
There’s a seemingly endless appetite for books that predict either looming economic disaster, or something approaching nirvana, where stock markets soar to the heavens, and the work week shrinks to a few hours.
From author Ravi Batra’s The Great Depression of 1990, published in the late 1980s, to Dow 36,000, written by authors James Glassman and Kevin Hassett in 1999, the book shelves are lined with such tomes.
Virtually all have been dead wrong — some hilariously so — but that doesn’t stop such books from appearing, year after year.
Perhaps it’s a primal thing. At some level, we humans must have a deep-seated need to work ourselves into a state of intense dread about the future, or alternatively, profound exhilaration about the glorious prospects ahead. Depending on our mood, of course.
These days, with the world in the vise grip of the worst recession since, well, the Great Depression, our collective mood grows darker by the hour. So you can expect a steady stream of books predicting a bleak world ahead, as layoffs mount and the global economy sinks.
Veteran author Garth Turner’s After The Crash is one such effort, and it won’t fail to disappoint those who see the economic storm of 2008 as merely the first chapter in what could become a decade of unprecedented pain and misery. The political maverick, two-time federal MP, personal-finance specialist, prolific writer and wealthy entrepreneur spares no detail in depicting a grim future of depopulated suburbs, abandoned big-box stores, empty universities and relentlessly plunging home values.
To be fair, Turner doesn’t exactly predict all this will occur.
He does leave himself an out: “Hopefully the post-bubble years will bring merely a bad recession we snap out of by 2011 or 2012,” he says. “But there’s no guarantee.”
With that tiny caveat, however, Turner really gets rolling. He says Canadians should get used to seeing their net worth fall, their house prices shrink, their stock portfolios sag, and their jobs disappear. And hey, that’s the good news, relatively speaking.
If the economy really goes to hell, Turner figures we could all be going back to something akin to the 15th century. Among other things, he sees the likelihood of local food and gasoline shortages, mass migrations from the cities and suburbs as urban crime soars, escalating firewood prices, and regular power blackouts.
“While some of the above may sound extreme, enough will come to pass to make it clear we’re in changed times,” he says. “The decision each person must make is how to react, and to what degree.”
Turner’s book is full of helpful “to do” lists and practical guides offering advice on what items will be needed to survive the possible breakdown of civil society. His worst-case scenario — dubbed
the “This will get bad, I’m outta here” list — provides no fewer than 41 separate tips.
Give the man this: He’s thorough.
Turner says every home should have a “Bad Day Box” containing vital survival items (can opener, personal hygiene supplies, matches, cash, rain gear, etc.).
His so-called “Go-bag” of essential items reads like something out of a military manual. He even devises a “Go-bag” for each family pet, complete with a copy of their vaccination history.
Besides the obvious things — stockpiling water, food, batteries, vegetable seeds, soap, medical prescriptions and toilet paper, buying a generator,
installing a wood stove and loading up on gasoline — Turner also suggests getting basic fishing tackle, installing a clothesline, and yup, even buying a weapon.
“Are some of the above suggestions extreme? Most people will readily answer that they are. Some will not,” he says.
“Some folks will wonder how any of this factors into a financial book. Others will quickly see the connection in a time when our collective pursuit of consumerism and debt has led into debt and danger.
“After the crash we know much more about the fragility of our system and how it broke down. We hope for better days. But hope is not action. That’s for you. Take care,” he says.
As for me, I’m not sure what the
future will bring. I’ve never seen such uncertainty in my entire life. Like everyone else, we’ve been hammered by the downturn in the housing market, and the stock market.
But let me also say this. The future is never clear — even when you think it is.
Back in 1983, when my wife and I bought our first home in Toronto, the economy was a mess, interest rates were high, I had no full-time job, we were expecting our first child, and our annual household income was less than $25,000.
At the time, I was a freelance writer. I was so poor I had to write my stories on a rented typewriter. All of our meagre income was directed toward paying our $850 monthly mortgage fees.
Yet somehow, we managed to do it. Even after my wife gave birth, and stopped working. Eventually I found a full-time job, and my salary soared to an astounding $23,000 per year. Life went on, and we had a second child.
Six years after we bought that house, we moved west, and sold it for nearly three times the original purchase price. If we hadn’t made that leap of faith in 1983, when all was dark, and the world was terribly uncertain, we would have missed a golden opportunity.
That’s what exists today. On the one hand, uncertainty. And on the other hand, opportunity. You can choose to be fearful, or you can gather your courage, and move forward. As Turner says, that’s for you to decide.
Smarmy Globe and Mail review
It was inevitable that the greatest financial and economic calamity to befall the planet since the Great Depression of the 1930s would spark a run to the printing presses by central banks and also by publishers eager to cash in on a hot topic.
Some of the quickie books are positive in tone and content, designed to illustrate how shrewd investors can profit from the current distress. Of course, people who followed the earlier advice of some of these same soothsayers probably don’t have any money left to take advantage of the supposed bargains.
Other tomes are downright bleak, with titles like Contagion: The Financial Epidemic that is Sweeping the Global Economy… and How to Protect Yourself from it. Still others attempt to bridge both worlds.
Garth Turner , a well-known financial commentator, former journalist and more recently a party-changing federal MP, knows a hot trend when he sees one. In After The Crash, he steers toward the bleaker view of things, but avoids tying himself to a single hypothesis about the future. Why limit the market?
Just in case that past means going back to the time of the cave, he offers lists of things we’ll most certainly need, such as thermal blankets, bottled water, gold coins, wood-burning stoves, kerosene lamps, a home safe (he devotes a full page to the proper purchase and installation), hunting know-how and a big dog.
Turner plainly believes in being prepared for the end of the world as we know it â€“ or, as a friend of mine in Utah calls it, â€œthe Mad Max scenario.â€ He has installed a home generator in case the electricity grid collapses; and we have no doubt that he has stocked up on such survival essentials as vegetable seeds.
Turner does a nice job of explaining how we got into this mess, and his occasional slips (Wachovia, one of the stricken U.S. banks, is based in Charlotte, N.C., not Chicago) can be forgiven. For most quickie books, the how-it-happened part is relatively easy to produce, using newspaper and TV reports, published interviews and other secondary sources. The prescriptive part is much tougher, because it requires extensive original research and deeper analysis than you will find here.
To his credit, Mr. Turner knows his way around financial numbers, especially when it comes to residential real estate, on which he has written extensively and which he correctly tabs as being at the core of the spreading nightmare. Until governments figure out how to resuscitate housing, all the stimulus plans in the world won’t get this ship righted again.
He also knows how to engage a reader with clear prose, well-paced anecdotes, colour and personal accounts of the situations he describes.
Frankly, though, we could have done with fewer uninspired and repetitious to-do lists and more stories about his late brother, the hooker, the gold bar and the Cuban revolution.
Come to think of it, that would be a book I would pay to read, no matter how long it takes Mr. Turner to write it.
Brian Milner is a reporter for Report on Business.
Garth Turner says hard times have just begun
The Canadian Press
OTTAWA — Garth Turner is finding that the scarier things get, the more people pay attention to his doomsday alerts.
One reason is that he’s out of politics, he says, so his economic forecasts are no longer seen as possibly tainted by partisanship.
But more important may be that the former MP’s alarmist book about collapsing housing prices in Canada — “Greater Fool,” which he began writing last December when the sky seemed to be the limit — has turned out scarily bang-on.
If he turns out to be as prescient with his soon to be released new book — After the Crash — Canadians would be well advised to heed his warning and on how to survive the economic collapse.
Turner, who has worn a number of hats in his career including entrepreneur, journalist, broadcaster, author and combative politician, is predicting hard times for Canada over the next two years and he hasn’t ruled out a good old fashioned depression.
“We’ve had a crash. America has crashed, stock markets crashed, Wall Street crash, real estate crashed and the global economy crashed,” he says of the events of the fall.
“The world as we’ve known it is gone. You are not going to get credit cards in the mail, you are not going to get lines of credit easily. Those days are gone. The question now is are we going into a bad recession, are we going into a depression?”
Turner believes Canada’s gross domestic product will plunge five to eight per cent from the beginning of the recession, which he believes began after Labour Day, to the end, which he says won’t come until the spring of 2010.
As well, he expects housing prices will plunge another 30 per cent next year — on top of the 11 per cent drop so far this year.
For the first time since the Dirty Thirties, Turner expects many Canadians will wind up owing more on their homes than what their home is worth, particularly those who purchased in the last two years with little down payment.
That’s not a depression, as he sees it, but pretty darn close.
Most economists – but not all – would scoff at such doom and gloom, to which Turner replies: That’s what they said when he predicted Canada’s housing market was on the same disastrous path as America’s.
“It’s a relatively straight forward to weave some pretty ugly scenarios,” says Douglas Porter. “He’s probably not too far out of line to say things could be very ugly if policy makers make missteps or don’t step in to support the economy.”
Porter places greater faith in the massive economic stimulus packages being proposed around the world, and in Canada. Prime Minister Stephen Harper is pegging the deficit next year at up to $30 billion, mostly as a result of increased spending to help the economy.
The Bank of Canada and Ottawa have also injected over $110 billion in liquidity — cash –to grease the money markets, and interests rates have been chopped.
Turner agrees those bold actions could stave off the worse, but they also may not, he adds.
“We’ve never had this amount of money thrown at an economic problem, so we’re in uncharted territory,” he says.
“But by the same token, they are blowing their wad all at once, so this better work because we are out of bullets.”
Jonathan Chevreau, National Post
â€œIf I were among the many people tuning into TV shows like “Flip this house” and thinking of speculating on real estate, I’d certainly want to consider Turner’s arguments before borrowing money in the hope of instant riches at this stage of the game. It’s one thing to have a paid-for home you live in and quite another to be speculating on real estate on the hope prices will always rise and a greater fool will arrive to save you from your greed and foolishness.
â€œMuch of Turner’s criticisms are directed at people who have saved nothing for retirement or even for emergencies and who live beyond their means, buying more house than they need with such atrocities as 40-year amortizations. I agree with Turner that if the only way you can afford a home is through a 40-year am, then you’d be better off renting and waiting until you do have enough money saved to buy a more modest home.â€
â€œTurner’s advice to homebuyers is to avoid 40-year mortgages and for existing homeowners to stop basing their financial decisions on the notion that real estate prices will continually climb. ” I think people should get used to two or three or four years of a flatlining real estate market, at best,” Turner said.â€
“I don’t want to be an alarmist, but people have to realize there is danger in this market,” says Garth Turner who has released a book this month on Canadian real estate. “There are a lot of catalysts happening right now, whether it’s more taxes, or job losses. At some point people will eventually say, why am I spending $700,000 to live in a crappy home in Leaside?”
â€œAnd the numbers support Turner’s claim. Price appreciation in Toronto’s downtown neighborhoods has been particularly steep. A detached home in Toronto’s modest Leaside neighborhood that sold for $470,000 in 1997 at the start of the housing boom, sold (after renovations) last year for $1.55 million. â€“
OTTAWAÂ – Is the U.S.-style housing meltdown in Canada’s future? With more and more Canadians taking on record levels of debt to enter the red hot housing market, some analysts are beginning to see some of the practices that led to the U.S. housing crash last year developing in Canada.
At the moment, there is no sign that the Canadian housing market _ which has seen the price of homes rise between nine and 11 per cent annually for several years _ going down the disastrous road of the U.S. But as this week’s Royal Bank report showing the cost of owning a home in Canada at the highest level since 1990 suggests, it wouldn’t take much of a downturn in the economy for sky-high house prices in Canada to come tumbling down, and the wealth many Canadians had built into their homes vanish.
The study found that debt had risen to 131 per cent of household income, or $80,000 per household, from 91 per cent in 1990. “Just like in the U.S., everybody is feeling good right now. They are taking on debt, but they are not worried because the prices of their homes are going up. But it would be easy to see house prices going down five or 10 per cent.”
Garth Turner, a business journalist and author whose recent book “Greater Fool: The Troubled Future of Real Estate,” is among the most pessimistic forecasters of Canada’s housing market, saying a loss of consumer confidence, mixed with aging population, could see the edifice come crashing down. “We’ve got this delusional situation where the American housing market is going through the worst crisis since the 1930s and we think we’ll continue to buy houses from each other for more and more money,” Turner said.
Turner believes that cities like Vancouver, where a typical two-storey fetches $650,000, could see a price drop of up to 20 per cent in the near future. For Toronto, where a similar home costs about $476,000, he says prices could flatten this year and perhaps drop 10 or 15 per cent in the next few years. With 83 per cent of Canadian’s net worth tied to real estate, even such modest reductions could spell disaster for many, he said. “We have so many people buying real estate with basically no equity, that even if real-estate flatlines or go down a little bit, that’s a pretty serious situation for them.”
But Turner’s pessemistic view isn’t shared by all. Canadian Mortgage and Housing Corp. senior economist Brent Weimer sees few parallels between the Canadian and U.S. situations, particularly the subprime fiasco that sent the housing market crashing last summer.
Although some Canadians are purchasing homes with little or now down payments, what Weimer calls the “near prime” market, he says there is no Canadian equivalent to ”2-28” mortgages that have been so disastrous in the United States.
Canada Mortgage and Housing, a federal Crown corporation, is the country’s largest insurer of home mortgages _ providing comfort to the lenders if borrowers can’t make their payments _ so Weimer is well-placed to monitor default rates. “We haven’t seen any signs there is trouble, and we are forecasting that prices this year will rise about five per cent, which still represents growth.” Home prices rose an average 11 per cent in 2007.
A CMHC study of homeowners released Wednesday supports the optimism with 88 per cent expressing confidence they can manage their debt. But that is at a time when Canada’s employment rate is at a 33-year-low, incomes are rising at about four per cent, and there are more Canadians with jobs on a percentage basis than at any time in our history. In other words, at the best of times, or darn close.
BMO deputy chief economist Douglas Porter also sees the fundamentals of housing in Canada getting out of whack, although he says the situation is not nearly as drastic as what the U.S. faced two years ago. “Up until last year I thought the strength of the Canadian housing market was justified, but I do think the market got overheated last year,” he said. But he added that as long as Canadians have jobs, housing prices will not suffer a U.S.-style correction.
And he said with the Bank of Canada continuing to cut interest rates, affordability should improve. Still, Turner sees Canadians blindly buying into the latest commodity craze, much like Dutch tulip frenzy of the 1600s, the dot-com bubble of 2000 and the U.S. housing explosion following 9-11 when the U.S. Federal Reserve slashed interest rates to minuscule levels.
“The U.S. problems were caused when the price of real-estate got way out of hand and it got to a point where the average family could no longer afford the average home, so subprimes were a response to that,” Turner said. “Now we see in Canada, we have a similar situation. Real estate prices have gotten out of hand, particularly in some markets, and the reaction is that we now have 40 year amortizations to drop monthly payments, and one or two or five per cent down payments.”
These bubbles all end the same way, he points out. They pop.
B. Francis, Vancouver
I picked up your book today and I cannot put it down. You have hit it right on the mark. We are so overjoyed that someone has finally put it in black and white. I really hope homebuyers read your book before investing their present and future life savings in this insanity. You are definitely not going to be praised by some, to put it mildly, for pointing out the obvious truth, but then again look at where it is coming from. Thanks for a very enlightening and enjoyable read.
The author of a new book, “The Greater Fool: The Troubled Future of Real Estate,” Garth Turner thinks the pieces are in place for a real estate collapse in this country.
The U.S. financial sector has been rocked by subprime mortgages, which essentially provided a way into real estate for people who wouldn’t qualify for conventional mortgages. But Turner told CTV.ca the real story is that housing prices in the U.S. got more expensive than Americans could afford. In Canada, real estate prices have essentially doubled in five years. Turner said he didn’t think that was a “reasonable” increase.Over that period, household incomes have stayed essentially flat, he added.
“What’s been the Canadian response? Well, guess what? We’ve brought in a new kind of mortgage — 40-year amortizations,” Turner said. You can also get a home for virtually no money down, Turner said. “You tell me what the difference between subprimes and a 40-year, no-down-payment loans in Canada is. The net effect is exactly the same. People buy houses who otherwise couldn’t buy them.”
In the biggest markets, people are unquestionably house-poor, he said. The RBC’s affordability measure for a detached bungalow in Vancouver is about 74 per cent and more than 47 per cent in Toronto. Places like Calgary and Edmonton come closer to the national average of 41 per cent.The affordability measure is the proportion of median pre-tax household income required to service the cost of mortgage payments (principal and interest), property taxes and utilities.
The measure has traditionally been around 30 per cent, Turner said. “We’ve got a very screwed-up personal financial situation right now, and I see some dangers in that,” he added. RBC’s Amy Goldbloom told CTV.ca that in 1990, the affordability index hit 46 per cent. But in 2002, it per cent of disposable income versus about 79 per cent in Canada. Total household debt was also much was 32 per cent.
The RBC study finds that for 2007, the U.S. situation was worse than here. Mortgage debt there was 119 per cent of disposable income versus about 79 per cent in Canada. Total household debt was also much higher in the U.S. than Canada. “Americans are more indebted and more leveraged,” she said. Goldboom said the RBC’s analysis and prediction of moderate price increases took into account a slowing U.S. economy’s effect on Canada. “We aren’t forecasting outright declines in prices as we’re seeing state-side,” she said.
But Turner rolled off some troubling statistics, such as sales activity of resale homes in Canada falling six per cent in February – although some critics have argued that blip could be due to stormy winter weather.
If you still want to buy a home, Turner makes the following recommendations:
- Don’t take out a 40-year mortgage
- Aim for a 20 per cent down payment
- Don’t make monthly payments – accelerate if possible
- Consider what future homeowners will want to purchase (i.e., don’t buy a huge, energy-hogging suburban home)
But if you don’t own real estate right now, consider remaining a renter for the short term. “We’re into the most incredible renter’s market coming up. If you simply want to make money and secure your finances, you’re going to rent, because renting is far, far less than the cost of owning right now,”Â Turner said. “And it will remain that way for the next couple of years.”
OTTAWA – With the subprime contagion spreading around the world, Canadians who hoped their homes would be immune from the carnage are wrong. The disease is here and coming soon to your neighbourhood, says financial author Garth Turner.
The effects of the U.S.-induced mortgage crisis were everywhere on Thursday – in the crumbling U.S. dollar, in Carlyle Capital’s $16-billion mortgage writedown in Amsterdam, in mounting housing foreclosures in the U.S. and in crashing stock markets in Europe and Asia.
“Absolutely, without a doubt, that contagion is spreading to the Canadian real estate market,” said Turner, the author of a new book on the subject titled Greater Fool, the Troubled Future of Real Estate. Within 18 to 24 months, Canadian homeowners could see the value of their homes fall by 10 to 15 per cent, Turner warned, saying early signs of a deteriorating real estate market are “all around us.”
Sales of existing homes fell off the cliff in January tumbling six per cent in January alone – or 72 per cent on an annualized basis. At the same time the number of listings nationwide shot up 11 per cent, Turner said, quoting the Canadian Real Estate Association. And prices are starting to fall, in such once hot markets as Calgary and Edmonton.
At the same time, the cost and availability of mortgages is squeezing the market, as Canadians banks are no longer discounting the posted rate, and as companies like Xceed Mortgage Corp. and MoneyConnect Inc., which lend to riskier borrowers, sharply pare back operations. A big part of the problem, Turner said, is that shaky lending practices that coloured the U.S subprime market are now creeping into Canada.
The availability of that easy money in the U.S. drove house prices to unrealistic levels, which ultimately drove that market into its precipitous retreat. Both factors are at play in Canada, where prices have risen to lofty levels and have only been supported lately by one thing: the 40-year mortgage, which in two years has come to represent more almost half of new borrowings in Canada, which require very small down payments and which add sharply to borrowers total debt repayments.
“If the U.S. crisis was accelerated by people getting mortgages to let them buy houses they couldn’t really afford, we’re doing the same thing here,” Turner said. While he is not predicting the 30-per-cent declines that have become common in such hard hit areas as Florida and California, the danger to Canadians is magnified by our inclination to tie up so much of our money in the homes we own.
“I think this is a giant threat,” said Turner, referring to the 80 per cent of family net worth that Canadians put into real estate.
And adding to the threat of an imminent price correction is our aging population, so many of whom will be trying in years ahead to unload the same four-bedroom three-bathroom suburban homes that were the fashion of their time.
“People are gambling that for some reason Canada will be immune to what’s happening to our giant partner to the south and what is happening in other markets, like Britain, where real estate values are falling,” Turner said. As the declines that began in Canada in January gather momentum, “a lot of homeowners who bought in the last year will find the value of their homes falling under the value of their mortgages,” Turner said.
“We are weeks, maybe more likely only a few months from that.”
Turner’s advice to homebuyers is to avoid 40-year mortgages and for existing homeowners to stop basing their financial decisions on the notion that real estate prices will continually climb.
” I think people should get used to two or three or four years of a flatlining real estate market, at best,” Turner said.
â€œHe’s good at seeing patterns and identifying potential trouble, even if he can’t tell how far off it is. He doesn’t pull punches either, blasting the media â€“ real estate sections in particular â€“ for letting industry people dominate debates about our housing market health.
He writes that a reckoning is imminent because we’ve been as greedy as Americans, who are enduring their worst real estate deflation since the 1930s. He takes issue with claims that our banks are prudent, arguing that zero-down mortgages and 40-year amortizations are useful only to speculators and people who can’t really afford to be in the game.
He also cites recent reports that personal debt levels in Canada are at record highs and savings rates at record lows, leaving many short on options should hard times hit.
“An anti-real estate mood has swept America. Within months it will be here,” he declares. He claims that suburban trophy houses in some areas of the GTA are lingering on the market and falling in value. He says the collapse will be widespread and long-lasting, in part because boomers will flood the market with houses to finance their retirements â€“ especially since so few employees outside the public sector have much in the way of pension prospects.
His scenario gets scarier, if you fear that manufacturing jobs are in danger due to the strong Canadian dollar and the likelihood the U.S. will slip into recession. The logic is that it won’t take many deeply indebted, freshly unemployed people to trigger a wave of desperation selling. That, in turn, would drag down property values for entire neighbourhoods, leaving many people with mortgages worth substantially more than their homes.
It’s that situation that caused an estimated 1 million Americans to walk away from their homes last year, with predictions that twice that number will follow in 2008. Frightened enough yet?â€
Garth Turner is predicting doom and gloom in his new book, Greater Fool: The Troubled Future of Real Estate. Recent changes to buying and selling real estate laws, such as allowing 40-year mortgages and zero down payments, have allowed Canadians to plunge the furthest into debt in the last 10 years.
“Our real estate values have gone way beyond the ability of the average family to afford houses and the only way they can afford them is taking on all kinds of new debt. That’s exactly what got the Americans into trouble,” Mr. Turner told The Hill Times. “The same conditions exist here.”
Mr. Turner held a book launch on the Hill last Wednesday in room 238-S Centre Block. After a late House Finance Committee meeting and a series of votes in the House, MPs and Senators attended the event to hear Mr. Turner’s real estate advice. He said that more people are unnecessarily buying “great big fancy brand new houses” with all the fixings and they can’t afford them when they should be downsizing or working within their budgets. He wouldn’t divulge how much he spent to buy his own house, however.
With the housing bubble starting to burst, Mr. Turner said the House Finance Committee should be looking at the debt crisis to make people more aware of it and in the process, softening the blow. “Nothing goes up forever and booms end badly. That’s a law that we’ve forgotten,” he said.
How do you know that Canada “has its own, hidden debt crisis just as dire as the subprime mortgage fiasco” in the U.S.?
“Many people think the American real estate market went from good times to terrible times because they had been giving mortgages to people who didn’t deserve them, called subprime mortgages. Actually, in Canada we had pretty well the same situation. We’ve developed in the last couple of years, mortgages that actually are paid back over 40 years instead of 25. That drops monthly payments and it lets people buy houses they wouldn’t be able to afford normally, so we have our own version of these subprime mortgages in Canada. At the same time, our real estate values have gone way beyond the ability of the average family to afford houses and the only way they can afford them is taking on all kinds of new debt. That’s exactly what got the Americans into trouble. The same conditions exist here. It’s just we’re a couple years behind what’s happening in the U.S. Meanwhile, Canadians have 80 per cent of everything they own tied up in real estate. I mean, we have this huge gamble that we’ve taken that real estate will go up forever. You know what? Nothing goes up forever and booms end badly. That’s a law that we’ve forgotten. The conditions are very similar today in Canada to what they were a year and a half ago or two years ago in the U.S. I think there’s no doubt in the world that we’re cruising for the same thing, maybe not a disaster with real estate the way the U.S. is having, but certainly things are going to go down.”
When is that going to happen in Canada?
“It’s already started.”
Has the bubble burst?
“It’s already unwinding. In January, the number of resales went down dramatically across Canada and in February the number went down dramatically in Toronto and the number of listings have gone up. A lot of people are bailing out of houses already and prices are starting to fall. It’s not grabbing headlines yet, but it’s definitely out there. So it has started and I think over the next year or so, it’s going to become a really big story. “
So what’s your advice to homebuyers?
“If you haven’t bought a home yet, be careful. I wouldn’t take one of these 40-year mortgages, I wouldn’t buy a house with five per cent down, I wouldn’t do what a lot of young buyers are doing today because the only way they’re going to be okay is if houses continue to go up forever and it’s not going to happen. If you’re a 50-something baby boomer with a four-bedroom suburban house, get rid of the sucker now, okay, because things aren’t going to get better in a year or two. If you’ve been thinking of selling, do it. I think we’re at the top of the market and it could be a lot of heartache for people who don’t realize it.”
You’re saying people shouldn’t buy, but people should sell? If people are selling when you’re saying don’t buy, where do the buyers come from?
“That’s the name of my book, it’s called Greater Fool. You’re always hoping that there’s a greater fool who’s going to come around and buy your house. That’s what people have been hoping for in the States. We are going to get an imbalance of buyers and sellers and that’s what makes a market go crazy. Before we had more buyers than sellers, so prices went up and now we’re getting more sellers than buyers and it’s the other side of the pendulum.”
Should Parliament be doing anything about it? Can it do anything about it? Can it prevent something like what happened in the U.S. from happening here?
“There are a few things. These 40-year mortgages are not good news, and they only came in two years ago. In fact, back when I was a Conservativeâ€”I admit itâ€”I was the only guy who objected. I was on the Finance Committee and these things came before us and I said this is going to be a big problem, but we passed it, so that’s something the government should look at. The easier we make it for people to get into debt, the more debt they’re going to take and then there’s going to be more problems so that’s an issue. Interest rates, we have to work hard to make sure they stay as low as possible. Of course, the thing that should really happen is everyone should buy my book and read it and then they’ll know exactly what to do.”
Toronto Life magazine in a recent cover story suggests this generation of home buyers is “house poor” and a “mortgage enslaved generation.” Do you agree with that?
“I do. I think because houses have gone up and not only that, the fact is everyone wants granite countertops, everybody wants a media room and a deck and everything, so it’s not just that young people are buying houses, they’re buying great big fancy brand new houses with a small amount down. We’re the most indebted generation. Canadians have never had as much debt and mortgage debt has gone up seven fold in the past 10 years. So yeah, people are going to pay a big price for that granite countertop.”
Can you tell me how much?
“Nope, but I follow my own advice.”
Greater Fool: The Troubled Future of Real Estate, by Garth Turner, Key Porter Books, $21.95, 220 pages.
Why every Canadian needs a financial advisor â€“ now!
â€œSurveys consistently show most Canadians fear they will lack enough money on which to retire, and theyâ€™re right. With life expectancy increasing as never before, we risk running out of money far more than losing it in a bad investment. Half of us are making no RRSP contributions, in large part because we have every available dollar trapped within the walls of houses, or devoted to mortgage debt service payments. Collectively, we are so far behind in our retirement savings contributions we likely will never catch up. We have billions invested in assets, like Canada Savings Bonds, which give a negative real return, while at the same time throwing money at things which hit new lunatic highs, like gold bullion.
This is behaviour almost guaranteed to cause financial heartache. But none is worse than our misdirected and misinformed love affair with houses. We invest in real estate, almost without exception, devoid of impartial or independent advice. Instead of working with an advisor who is compensated over time by the real growth in our diversified portfolio â€“ as a manager or advisor is â€“ we employ an agent whoâ€™s paid a one-time commission payment on the closing of a deal.
Ensure you never confuse a realtor with a financial advisor. Agents are focused on one asset only, not your entire portfolio of assets or your lifelong accumulation of wealth. And so it should be. But you need more help. Real estate assets must fit into an overall financial portfolio, and never be a substitute or those other things which can provide steady growth and liquidity.
The bottom line for millions of us with houses is stark: Will all the money there be safe, or at risk? If the market does decline, will it recover? Do I need to take action to protect myself and my family? What should I expect? Will I be able to get at my money when I need it? When time is not on my side?
Clear answers elude us. Few people in Boston, where home values doubled between 1997 and 2007, would have then expected, without warning, the worst market decline since 1938. I trust nobody in Vancouver, Kelowna, Saskatoon or Toronto expects that, either.â€