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Abandoned house in Mississauga - Blog Dog photo

One afternoon last week, three hours apart, I met with two couples, both of whom read this blog. As it turned out, they both wanted financial help.

The young, urban couple – he’s in IT, she’s in HR – rent a one-bedroom condo and are shopping for a home. But not fast. When they do, I was told, it will be in the $700,000 range. They have $82,000 saved, and together make over $230,000.

The older, rural couple – he’s early retired and she has five years left with the province – live in a cabin in the woods, and for the first seven years scooped water from the lake. They still have an outhouse. But they also have $800,000 in a bag in a hole under the wood-splitting stump. Neither one has ever made over $40,000.

As you might imagine, they both came to see me for financial advice. You also might imagine what it was. The kids with the high-octane jobs, the iPhones and the house lust are on a trajectory to debt and divorce. The old snorts with the bag of cash need to remember what money is for, and get a damn flush toilet and a skid of Cottonelle.

If real estate is not at the absolute throbbing heart of most people’s finances, it’s never far away. For the young couple, it’s the one asset which will define them socially and signal their place in the financial hierarchy. For the hippyish Boomers, its shelter and freedom, along with inconvenience and want.

Interestingly, the young couple will use leverage to gain an asset and at the same time assume a massive debt. Risk. The older couple traded comfort for wealth, with their net worth all in cash. Also a risk. But in the world in which we’re entering there’s little doubt who the survivors are going to be, toilet or no toilet.

These snippets caught my attention on the weekend:

From Michigan: One Birmingham homeowner says he has made payments on his underwater mortgage despite a 40% pay cut. He has eliminated dining out and travel. He raided his 13-year-old son’s college fund to stay afloat. Because he works in financial services, he says he can’t default on his $470,000 mortgage on a house now worth $220,000.

From New Zealand: House prices are set to fall as the property market heads into what could be a winter of discontent for homeowners. A flood of properties being listed for sale in February has prompted warnings that it could swamp the market and bring an end to the resurgence in prices which occurred last year.

House prices were propped up last year by a lack of listings, meaning buyers often had to compete for properties. The market had also been helped by the extremely low mortgage interest rates, which he described as “`addictive” for property buyers, a situation that was likely to end around the middle of the year when the Reserve Bank is expected to start raising interest rates again. Currently floating mortgage rates are around 5.65%, while fixed rates range from 5.75% to 8.9% depending on their term.

From the Detroit Free Press: With more than 500,000 households in Michigan owing more on their mortgages than the homes are worth, thousands of Michigan residents are choosing to abandon their homes and walk away, even if they can afford to continue making payments. The number of people who have engaged in such strategic defaults more than tripled between 2005 and 2008 — from 5,100 to 17,250, according to a report by Experian-Oliver Wyman, a credit reporting and consulting firm.

From the Ottawa Citizen: With low mortgage rates, affordable prices and a healthy inventory, the housing market is bracing for a surge in new home sales this month. Act fast or risk missing the deals.

It’s March, when home buying fever strikes hard, and Ottawans are snapping up everything from hip urban condos to sedate retirement townhomes in the ‘burbs. Interest and mortgage rates are at a record low, making home ownership irresistible. Prices, meanwhile, are creeping steadily higher, a goad to buy now before they soar out of sight.

Real estate, as you know, is a local commodity. That’s why 39% of all families in Michigan can be in negative equity, while two hours away down the 401 houses sell for huge premiums in budding wars. Real estate values are the result of supply and demand – dictated by human emotion.

This also makes it a very dangerous asset, since emotions can turn quickly and sharply. If the popular belief is ‘buy now or buy never,’ prices rage. If rates jump or listings flood, the market can die in days.

The news reports above give you such extreme views – real estate as a trap and a destroyer; real estate as irresistible.

Like the two couples in my office, to everything there is a season.

And yet more Garth... here.

We’ve all done it. Drive by a house you owned a decade ago. For sale sign on the lawn. You slow, look at the realtor’s number, call it on your cell, ask the price, and guffaw. What idiot, you wonder, would pay that much for it? Then you wish you were selling it again.

Without a doubt, housing prices in cities like Toronto, Calgary and Vancouver have inflated excessively. In fact, to the point where homes are severely unaffordable according to international standards. As this blog tries to remind, asset values never rise without end. Prices always find their mean. All booms end badly. And this market’s overdue for correction.

But how about a longer comparison. Say, a generation or two?

How does an average family’s buying power today compare with that of a family six or seven decades ago? Are the same houses more or less affordable than they used to be? And, if not, how and why are prices continuing to rise?

A day ago I received a delightful note from a woman in Toronto who apparently hangs around here this viral hellhole. “Instead of wasting our precious time slamming our head against the wall, we’ve rented a fabulous big apartment which we got at a steal as it was a renters market and negotiated hard,” she reports. “We have trips planned this year to South America, Vegas, the UK and Iceland. I’m probably taking my Mom on a cruise as well to celebrate her retirement.  Better that we are off making memories with loved ones and doing what we love than lining a banker’s pocket. Seriously, your blog was exactly the wake-up call I needed. It freed me from the emotional and very real financial chains I would have put around myself.”

But she goes on to say something more profound, recounting one of those moments which should make us reflect on what we have done to modern life:

“I saw my grandparents old house on Gladstone Avenue in Toronto was for sale. It’s the house my Mom was born in.  I wasn’t considering buying it, but I did for one brief moment feel a bit of “what if …. ”   It was listed for $429,000 – 3 bedrooms and from the pics, very poky living in it. It sold for $531,000.

“My grandparents were people of modest means and this was their first house. My grandad worked for CP rail and my grandmother worked at home to raise their small family.

“Flash forward 60 years and their dual-income, well-paid, debt free grandchild can’t afford their poky west Toronto semi. Well, actually the bank would give me the money, but that is not affording it.”

It’s hard to see how anyone’s better off when homes are unattainable or debts stretched through an entire adult lifetime. In the last 12 months, Toronto prices have increased 19%. Wages have risen 0%. Household debt’s surged dramatically. Mortgages have crested.

You can walk down Gladstone and touch the same bricks, be shaded by the same trees, as families did a generation ago.

And if you listen closely, you might hear a distant echo of the middle class.

The most arresting thing about F’s budget?

F, of course. Check out that makeover. And just to think that under his new rules, Botox treatments are no longer tax-deductible. Where the hell did he get that idea?

On a more serious note, if that’s possible, is what this little federal exercise means. The budget is political, not economic. It sets the scene for an election this year (I told you 2010 would be a tipping point), in which F&H plan to get a majority. That will pave the way for the real budget, which is 12 months away – the one that could declare a debt emergency, ‘temporarily’ hike the GST, impose an income surtax and slash spending.

At that time, we’ll be well on the way to $600 billion in debt, be adding tens of billions more a year, have higher loan and mortgage rates, an army (still) of unemployed and a cascading real estate market. Ontario and BC will have had the HST for eight months, provincial taxes will be higher in most parts of the country, and we’ll all be chuckling about the summer day in 2010 that a SFH in Van hit a mil.

Just imagine how you’d feel if you were the greater fool who bought that.

All this is way more likely now that F spent less time on his fiscal plan than his hair. The country has gone from a healthy little surplus to a mastadonian deficit in the course of three years. According to the Parliamentary Budget Officer, a dude with a real set, given the aging population and the economic prospects, we could have a structural deficit now of $20 to $40 billion for as far as the eye can see.

So, budget 2010 was an early chance to do something about it. Turn off the spending tap, start working on a plan to deal with a world in which there are just two workies for every retired (a few years ago, there were seven people working for every person drawing a pension), and scale down government. Instead, federal spending increases by a billion, another $19 billion will be spent on stimulus stuff and there is absolutely no long term plan. Just rhetoric. Grecian Formula. That kinda stuff.

The implications should be obvious. The housing bulls who come here to take a dump are living on borrowed time. Those of our relatives and work colleagues who have mortgaged and borrowed their way to granite countertops and boy toys will regret it. Young 5/35ers will understand that leverage = risk. People with their money in the wrong place (like bond funds, for example), or with their net worth stuffed into one asset (like their house) will wish they’d heeded the Lessons from The Bunker. Those who think tax avoidance is unpatriotic will learn fast.

By delaying the inevitable, F makes it worse.

Kind of like fleeing your age.