Canard, Part Deux

Andy Seliverstoff photo

Yesterday we brought you news that the dude in charge of Canada’s housing agency thinks real estate is a fat canard. We’re obsessed with it, says he. Realtors are drunk on their own excess. Society is nuts for glorifying the SFH. We’re made renters into second-class citizens. Worse, even. Losers.

Well, here are some interesting numbers. Sixty per cent of Millennials (18 to 37) have no savings. Zippo.  The other 40% have precious little – between zero and $25,000. And yet of those between 26 and 37 more than four in ten own real estate. Of that group about half got help from the Bank of Mom, and 92% have mortgages.

So, obviously, the kids couldn’t care less what some crusty bureaucrat thinks. The obsession continues. And people are willing to do whatever’s necessary – looting their families and indenturing to the bankers – to get it.

Now let’s compare that to the United States where, unlike here, everybody went through Houseageddon a decade ago. Real estate then lost 32% of its value (70% in some places). The mess was precipitated by the serious financial troubles of one in twelve homeowners who defaulted on mortgages they could not service. Mortgage-backed investment assets, stocks and entire banks cascaded soon afterwards. America teetered on the edge of a financial black hole.

That experience altered behaviors. For five years after the event, surveys showed a majority of young adults wanted absolutely nothing to do with mortgages or houses. Renters abounded. It was hip to lease. Smart. Prudent. Real estate values languished. Investment companies moved into cities across the country and scooped up thousands of foreclosures and distressed properties.

Now, as the Mills stare to at the big 4-0, married and breeding, things are changing. But the gap between Boomers and this cohort at the same age is stunning. In 1990, at an average age of 30, Baby Boomers owned a third of all real estate in the States. Today’s Millennials (average age 31) own just 4%.

The outcome of this disparity between moisters in Canada and the US? Simple. Our kids possess way more real estate and owe a ton more debt. Young adults in America have fewer assets but more money. The Canadians savings rate has plunged to 1% while in the Land of Trump it’s jumped from sub-6% in 1996 to plus-8% now. Three-quarters of US mills have a savings account, and a UBS survey found this is the most financially conservative generation since the Great Depression. On average, they’re putting almost $500 a month into retirement savings – while so many moisters here are stretching to service debts.

So what’s the best approach?

The upside of real estate, even when you have to scratch and sacrifice to own, is forced savings. Paying an amortized mortgage slowly builds equity and reduces debt. So long as the capital value of the property doesn’t plop, you build wealth over time. People who build it ultimately spend more of it, which is an economic good. Also, if you’re lucky (and smart) real estate can be liquidated when retirement rolls around. Moreover, if the experience of last ten years is repeated for another ten, you da man!

This, of course, is how the Boomers made a ton of dough. But it was during a time of expansion, growth and inflating asset values. Today, not so much.

The downside of real estate for the young is debt, entanglement and risk. Buying a property and swallowing a mortgage brings an inherent loss of personal flexibility and mobility. People tend not to chase a better job in another city, for example. With mortgage payments, property taxes, condo fees and insurance premiums to worry about, they may feel trapped in a job or career choice, instead of training for something more appealing.

Sticking all your net worth in one thing at one address in one city means no diversification. So if a market turns down, rates rise or the economy stumbles, you can get whacked far more than with a broad portfolio of assets. For Americans who remember the real estate crisis, this is a burning fear.

What to do?

Rent and invest, if you can stand the shame and possess the discipline. This is, by far, the cheapest way to live.

But if you do buy, be cautious. Buy what you can afford (my Rule of 90) and buy what you can sell later (nobody will want a loft with a creepy concrete ceiling in a few years). Don’t eschew investing – make sure you’re at least topping up your TFSA routinely. Don’t spend stupid money on a house, like adding a hot tub or even a swimming pool. Be very, very careful about condos. They’re turning into insurance timebombs.

Most of all, accept that reward (a house worth more than you paid) comes with risk (a recession could put you underwater fast). Meanwhile politicians have real estate in their tax crosshairs.

Canadian Boomers dodged a bullet. Your canard could end up being a dead duck.


The canard

Are single-family homes a waste of space, a crime against Greta, arrogant, egocentric, bourgeoisie and a hateful, hedonistic social extravagance? Duh. Of course they are. At least governments are now thinking that way, and the consequences are piling up.

BC and Vancouver have declared war against detacheds, as you know. As a result, valuations have taken it on the chin (even condos are following now). Second homes are taxed extra, just like those the state thinks are under-utilized. Digs in expensive hoods get a property tax penalty, while in Toronto we’re just days away from a new uber-land-transfer-tax on top-end homes. The GTA may also soon have a vacancy tax, along with an 8% increase in municipal levies. (Van is going up 7% this year.)

The latest vitriol against single houses comes from Evan Siddall, the boss of CMHC who’s just unloaded on the nation’s realtors as he prepares to leave his post. “Our dream of home ownership is static and regressive,” he says. “We need to call out the glorification of home ownership for the regressive canard that it is.” And this: building more SFHs is ‘wrong’ and the real estate industry, “is drunk on its own excess.”

Wow. But 68% of Canadians own houses, and a recent poll of Millennials aged 28 to 32 found 72% of them are salivating to buy. In the US a similar study of the moisters found 63% of renters want to own and 83% of owners think they’re geniuses.

By the way, that survey also discovered the kids justify over-spending on real estate not for spouses and kids, but for dogs!

Here’s the issue, though:

(a) Houses cost too much. Prices have been inflated by cheap money, pro-housing policies, easy credit and rampant speculation.

(b) The result has been epic, historic levels of debt and the need for massive mortgages.

(c) Wage inflation hasn’t kept up with price inflation and new buyers are at risk as never before.

(d) The economy’s in the 11th year of an expansion and so we’re overdue for a reset, so

(e) any downturn would absolutely nuke first-time buyers with mucho debt and poco equity. Therefore,

(f) maybe dudes like Siddall are right. Building 2,000-foot suburban houses on forty-by-100 feet of former fields with $300,000 in materials so two people (and a dog) can live there and drive a minivan on a divided highway to work an hour away is insane.

But, that’s the dream. It’s everywhere, and being challenged. Look at the UK for example. Eerily similar to us here in Meghanlandia. In 1991 67% of young adults in Britain owned a house. Not it’s 38%, and falling. The average UK property costs eight times average income – same as Toronto, but way lower than YVR. Half of buyers there need the Bank of Mom. In London it’s two-thirds. A million more 18-to-24 year old Brits live with their parents than in 2002.

In the US experts say the real estate market would likely crash if it weren’t for obsessed young people taking on big debt. Inflated house prices in places like California have led to serious social upheaval, as the Moms4Housing episode has shown. Working people cannot afford to own, and yet owning remains the dream Siddall is talking about.

This sense of disenfranchisement is leading us to a new place – as governments are asked to ‘level the playing field.’ That could mean letting squatters take over Oakland houses that are sitting empty, having Toronto and Vancouver level a vacancy tax, jacking the property taxes owners have to pay with after-tax dollars, busting up protective neighbourhood zoning or taking $53,000 for nothing every time the average GTA detached house changes hands.

There’s a pattern developing here. Surely you can see it. If the bulk of your net worth is in residential real estate, challenge that. You’ll soon be the enemy. You might even consider what Phil did. Here’s his Sunday email to me.

I’ve been following you for a long time. We sold the house in 2010 in Kelowna and rented a two bed condo the minute the kids left the house. Our son called and said, “I guess this means I can’t ever come back”, which of course was the point.

We’ve kept all equity and as much as we can in the markets. We retired, at 55, last January and have been playing since then. Currently travelling for a year in a 22 foot camper van. The first three months was a test to a 32 year blissful (really) marriage as we had repeated issues with the camper and getting used to living in a phone booth. The last two months we are back on track. We left in September and I’m writing from a coffee shop in Southern Louisiana…Cajun Country (many oppressed Acadians settled here in the 1800’s). We are sampling the culinary delights of cracklin’, boudin, crawfish, and gumbo. Other than the camper, we are “homeless”. Having a blast.

Home is not a thing. It’s where you are. The dog doesn’t care.