Entries from October 2010 ↓

King cash

So, do you have an old guitar lying around? Left over from your Culture Club tribute band? Then give little Diane a call. She just placed this ad on Kijiji Toronto:

“After my parents bought our first house, they got really broke afterwords and I asked if I can (have) a guitar for my birthday but they couldnt buy it. I absolutely LOVE music! I cant live without it! I wish that I could have a guitar, any guitar would be perfect. So please, if you just so happen to have one laying around, I would gladly take it. My home phone number is 289-240-1664 and my cell is 289-356-1106 and my email address is mailto:[email protected] . So there is 3 ways to contact me. Ask for Diane if I dont pick up my home phone.”

While I’m thinking Diane’s new homeowning parents would be aghast to read of their poverty online (not to mention this blog), they’re sure not alone. This is one consequence of a society in which people without money buy houses. They get poorer.

This sucks for them. It’s also deflationary. Diane’s low-equity parents are likely so screwed over by big mortgage payments, insurance, utilities and property taxes that their consumer spending has tanked. And there’s a massive army of similar people – every single one of them at serious risk now of sinking into negative equity. So, not only will they be slaves to their houses, they won’t even feel good about it. The wealth effect will flee.

This is one of many examples of why you should expect a cascade of falling prices in the next few years. It will shock a lot of people expecting some hyper-inflation thingy. In fact dollars are about to get more valuable. In fact, they already are.

Wal-Mart just announced price reductions on thousands of items (including holiday toys), ranging from 10% to 40%. In the US, giant retailer Target stores has slashed prices on 1,000 toys. Best Buy and Future Shop have dropped prices. And, of course, real estate is just starting to go on sale.

Last month in Calgary, for example, sales crashed 38% from a year ago, while the average SFH dropped in price by 4%. Prices are down in Vancouver by about the same amount this year, and in Toronto the decline is just starting. If all goes as I believe, by this time next year anyone who was thinking of selling in 2010, and did not, will be a basket case.

This is what deflation does. It punishes sellers. Rewards buyers. Makes geniuses of people who wait.

Hell, even guys who work for house-pumper CMHC know that. Like Richard Chao, who told a reporter: “People are recognizing if there is a bubble then they’re holding on and waiting because prices might yet come down. It’s always the game.”

You bet. And it’s a game that turns real estate into a declining and illiquid asset, while putting people with cash into the driver’s seat. When values have clearly crested, and begin to soften, smart buyers hold off, knowing their dollars will only get more potent with the passage of time. It’s a lesson experience and insight brings, both of which are apparently still lacking among those young lemmings lining up at sales trailers in distant GTA burbs.

Of course, the growing clout of cash will be abundantly evident everywhere over the next two or three years. Computers, iPhones, after-market Harley pipes, cars – a whole host of things – will cost less. Interest rates will stay low. Bonds and preferreds will stay valuable. Companies will shed more jobs to stay efficient and maintain profits. Commodity prices will soften from current levels, without the economic activity to support them. Investors will scour for yield, especially income-starved Boomers.

So, unemployment will remain stubbornly high while wages and salaries stay put. Consumer durables and accommodation (including rent) will get cheaper. At the same time, personal and property taxes will probably rise, and families will not be happy. Unless they sold their houses in 2009 or 2010, harvested a tax-free capital gain, invested in financial assets which paid to own them, and bought again for tens of thousands (or hundreds) less in 2012.

One thing’s for sure. Their kids will have guitars.

Registration for Toronto event November 9th

As promised, we found a couple hundred more chairs at a deserted Leafs game, and dragged them to the DoubleTree Hilton on Toronto’s airport strip for my presentation there on Tuesday, November 9th. So, if you want to come (doors open at 6 pm, yakking at 7 pm), then just fill in the registration form below. You’ll receive a confirmation by email, entitling you to show up and get one free hug. Also bring a lighter for the more emotional parts of my speech. — Garth

[registration form removed – registration has ended]


This moist, primordial blog crawled out of the ooze in the Spring of 2008 as a warning about our house lust. Months later the financial crisis hit, real estate swooned and we all swapped squirrel recipes. A year later bidding wars raged as mortgage rates were forced into the dirt by a desperate government. Today our houses have made more money than we have, and the economy’s faltering again. The next chapter seems obvious.

Along the way, emotions have taken a beating. Some people think the doomer talk about housing is over the top and this asset will rise forever. They usually have all their net worth in real estate and are up to their curlies in debt. Others have been traumatized by the last two years, lost money in the crash, stuffed their wealth in the manly warmth of the orange guy’s shorts, and fret. Then there are those who smell of sackcloth and ashes, warn of depression or hyper-inflation, swear by gold and think recent gains will be repeated endlessly.

They are all nuts.

Housing values are not sustained by economic reality. Savers are getting a negative rate of return. And metals fanatics own the 2010 version of Nortel. The lesson’s simple: there is no silver bullet. If you’re not diversified and balanced, you’re future road kill.

By the way, my balanced portfolio (40% fixed income, 60% growth) is up so far in 2010 by 11%. Because it’s diversified, stock markets could plunge or bond prices tumble, and the consequences would be minimal. Oh yeah, and most of the growth is taxed at skinny rates while the whole thing can be converted into cash in three days.

Remember the rules: Diversify. Own stuff that pays you. Avoid tax. Be balanced. Be liquid.

And be smart. Which these people are not:

“Hi Garth: My wife and I are 31 and we live and work in downtown Toronto.  I spent 8 years in school, graduated in 2007 and am healthcare professional and my wife is a youth counsellor.

“We have rented for the past 3 years, within our means (approximately $1500). Our main expenses include my professional student loan (which thanks to Mike Harris and his deregulation initiative was at 155k upon graduation and is now 110k), my Canada student loan (13k), my wife’s student loan (6k).

“We don’t own a car, walk everywhere, and spend thrifty. Our combined income is approximately 150k a year. We have 50k in our rrsp, 1k in a TFSA and about 40k in savings.

“We would like to start a family and not have to worry about our unit being sold or otherwise and have move. During our search, we have found many homes in “cute” parts of downtown, from queen st w, leslieville and the annex (which we just can’t afford right now). It’s also quite frustrating going to view open houses where any decent house without major structural issues and/or decent part of town goes into a bidding war. What’s left is homes with the home inspector telling us the roof needs to be redone, the water heater changed and there may be foundation issues or not in a part of town we want to be.

“My wife, in an about-face from her thinking all along is inclined to rent for another year and save up a nice downpayment. I was thinking to buy in late winter when things are dire (seasonally). Secondly, can you suggest some preferred shares, ETF’s or other investment vehicles to help grow our rrsps and savings.

What do you think?”

Hmm. I think the age of entitlement is upon us, and this letter’s an example of why the outcome is so predictable. After all, here are two people in their thirties with $91,000 in equity and $130,000 in debt, for a net worth of negative of $40,000.

Yet, despite having less than no money, they’re merrily planning on having a family – which necessitates (they think) buying a house. Of course, with no money and yet an income of $150K, they’ll be granted a fat mortgage by any bank worth up to 95% of the value of a home. So I’d guess in about a year from now they’ll have a baby, a $400,000 semi in dodgy Leslieville, a wife on mat leave, no savings, no RRSPs, $130,000 in student debt and a $310,000 mortgage. Their negative net worth will still be $40,000. But if the real estate market declines by 15% over the next few years (that should be a no brainer), their negative net worth sinks to $100,000.

Meanwhile it’s a foregone conclusion their mortgage renewal in 2015 will be double or triple the rate they first sign at, which will just about eat up the last of the household income. All to feed Mr. House.

The greatest threat we all face right now is a collapse in the real estate market, and yet it is the most likely scenario. By driving the bulk of our collective net worth into houses, inflating prices and filling in the shortfall with record heaps of debt, we are imperiling an economy 65% driven by consumer spending. If houses plop, debt remains, net worth collapses and spending fizzles. That’s exactly what leveled the USA.

So long as young couples, as above, believe what they believe, then it will come. So long as bankers lend to people without net worth, it’s assured. So long as house lust blinds us to danger, the danger augments.

But there’s no simple solution. No depression, which means cash will continue to lose value. No hyper-inflation, no currency collapse, meaning gold’s just a commodity. No rebound, so houses deflate.

Rest assured, 95% of people won’t get it. Hope you do.

Toronto event, Tuesday November 9th

The venue for my talk in ten days has been expanded again with the addition of more seating. Consequently, there will be a new block of free tickets available here. You can register online Sunday night and Monday. The event takes place at the DoubleTree Hilton Hotel, 955 Dixon Road (on the airport strip). It is open only to blog readers.