Tempus fugit

“It wasn’t until dad died,” he told me, “that the state of the family finances was revealed. We were shocked.”

“And I’ll tell you one thing for sure now,” he said, his voice dropping lower, “there’s no damn way I’m lettin’ that happen to us.”

As I found out, father passed in his sixties, at which point the kids discovered their parents had no savings, no pension and no investments. Just a bungalow in North Toronto worth maybe $350,000 – meaning mom would have to survive on CPP and a part-time job in a retail store. Gross income: About $26,000. In Toronto, that’s called poverty.

Of course, the bung’s now for sale. No takers yet. And the only hope the over-mortgaged siblings have of seeing their mother financing the next 25 years of her life is for a quick sale and then plowing the proceeds into income-producing assets maybe lifting her back into a middle class existence.

But in a deflating housing market, it may never happen.

This is a story being played out in countless families. Boomer parents who thought buying a house and paying it off constituted the only retirement they’d ever need. They feared investing, eschewed tax shelters like RRSPs, threw every available dollar against the mortgage, and figured a buyer would always be at the door with a bucket of money. Worse, untold numbers of people in their 50s and 60s are now living in move-up trophy houses with fat loans against them.

Tony in Calgary made this comment hours ago in an email lamenting his parents’ situation: “They currently own a home on the far-outskirts of the city which was purchased in the $450,000 range a few years ago and now is valued in the $550,000 range (by realtors, for what that’s worth). They are both around 50, and due to some health issues my father faces, I suspect he will look to early retirement or at least semi-retirement. They owe $250,000 – $300,000 on their mortgage and will not have the house paid off before they retire (I believe it is amortized over 25 – 30 years at this point, with payments in the $1,700/mo. range). Sadly, they will not even talk to me about selling.”

For the sake of an army of middle-aged, house-rich, cash-poor, indebted, investment-starved and delusional Boomers out there, I seriously hope I’m wrong. But I doubt it.

The last real estate dive in Toronto, by the way, starting in late 1989, built to a crescendo in the early Nineties, and prices did not recover until 2003. So anyone who bought near the peak had to wait more than decade just to get their money back – not including years of mortgage interest, property taxes, closing and selling costs and inflation.

If this correction is as intense (and why wouldn’t it be?), then it could be 2020 or beyond before residential values equal those seen in, say, 2009. Which is a bitch if you’re a 60-year-old Boomer with no pension and the bulk of your net worth in a house. Of course, it helps if you like KD and Alpo.

But, as I said, I could be wrong. There are certainly groups who think so, like the CD Howe Institute. This week they unveiled a report saying there’s no bubble and housing will not dive, just a day after another report called real estate ‘an accident waiting to happen.’

“Many of the concerns about the Canadian housing market are motivated by recent U.S. experiences,” says economist Jim MacGee, author of the Howe report and an associate professor of economics at the University of Western Ontario. “A comparison of housing market policies in Canada verses the U.S. suggests that there is a little likelihood of a U.S.-style surge in foreclosures or a collapse of house prices in Canada.”

And what is this optimism based on?

“Banks north of the border did not engage in the same volume of risky loans. Low documentation, interest only and adjustable rate mortgages were driving sales in many markets. During the U.S. housing boom, both private insurers and government sponsored enterprises facilitated looser underwriting standards.”

Well, now I know we have problems. First, foreclosures are not our enemy and this is but a red herring. Instead, it’s negative equity – when house values fall below mortgaged amounts – which leads to a drought in consumer spending, economic slag and more lost jobs. Second, our banks and other lenders have certainly engaged in the business of putting people into houses they could not afford without a lowering of the lending bar. How is a 5/35 deal, made when house prices are the highest and mortgage rates the lowest, possibly responsible? It’s a speeding car without brakes.

But mostly, as I told you, this market’s cooked because people are fagged out. Too much debt. Too much house porn. Too high prices. Too few jobs. Too little confidence.

Who cares if there’s a “US-style” crash or not when any prolonged, garden-variety housing correction can wipe out the equity of legions of young couples and trap struggling Boomers in their illiquid homes? And when both of those things have the potential to screw the economy for everyone else?

This is the property’s secret shiv. The sooner we see, the better.

Teach your parents.