Eventually 30-year-olds will stop asking me where to invest their down payment money. That’s a year or so away, I guess. By then it should be obvious we’re not going to click our heels and return to 2009. Or 2007. Hell, or 2005.

By this time in 2011, I expect the hots most young couples have for housing will be gone. Prices will surely be lower, substantially so, and mortgage rates will be higher, but maybe not so much. But instead of being an opportunity to buy a desired commodity at a discount to its true value (the current view of what’s coming), real estate might well be seen as young Americans view it now. A dangerous gamble. An asset that impoverished their parents.

Deflation. It’s been my theme this week.

It’s crashed equity markets, tumbled bond yields, spooked investors, sparked desperate political action and further nailed housing. Deflation – the opposite of inflation – means prices fall rather than rise. That makes money more valuable, since purchasing power goes up. It also means debt is harder to pay as dollars become more dear and wages stagnate or decline. Modern deflation comes with structural unemployment and this time with rising taxes.

Deflation hurts workers, reduces incomes, nails unsuspecting investors, brings down commodity values, erases corporate profits and therefore eats jobs. But it’s greatest economic impact is on residential real estate.

And while I believe this deflationary phase does not presage a new depression, and will eventually be replaced by strong inflation, it’ll probably last long enough to make anyone with a fresh granite countertop a bitter person. If you need proof, just look south. Real estate deflation has decimated swaths of the American middle class as house equity simply vanished amid falling values. Never before in recorded history has home ownership turned so quickly from a ticket to wealth to a recipe for ruin.

As I’ve told you, close to a quarter of all US families with houses now owe more money on their homes than the places are worth. Nesteggs based on home equity have been shattered as home prices tumbled from a modest 15% to a decimating 70%. And while the same pattern will not be repeated in Canada, for various reasons, it is entirely possible all our homes could be worth 25% less in the next year or two. In some communities, the drop will be precipitous, in others more moderate.

You see, deflation caused by a lousy job market, way too much debt, a loss of consumer confidence, wage declines, offshoring and a semi-collapse of our biggest trade customer won’t disappear in a few months. Why should it? What’s government possibly gonna do to change this? Interest rates won’t do it. Tax cuts are out of the question. Stimulus spending failed. What’s left?

The fix will come, but slowly. And not in enough time to save those Canadians who have foolishly put the bulk of their net worth into one piece of property. Sadly, that includes a few million now five or 10 years from retiring; who profited all their lives from inflation and never saw this coming.

Probably too late to save a lot of them unless, of course, they dump their houses now for far less than they think they’re worth. Given human nature, won’t happen. As values sink lower next year and the one after, this will be a defining generational moment. Kinda like Woodstock, but without the dope.

As for the kids, young couples who think this is all cool, who celebrate price declines and salivate over what’s turning illiquid and a little toxic, their moment approaches. Big detour.

Thus far, I’d say, they don’t get it.

So stop asking me.

Garth in Bubble City

As I’d hoped, the hosts for my Sept. 16 event in downtown Vancouver have arranged a larger room. The original 400 spots were quickly taken, so now there are 700. You can reserve seats here.

Saturday update: The online registration page linked above tells you the event is fully booked. Be patient. New tickets will be available there on Monday. I am committed to an event where everyone is welcome, and accommodated. — Garth