Entries from October 2010 ↓

Boomers

If the door’s open the next time you hop on a Westjet flight to Vancouver, take a look at the captain. What one should look like. Tall, silver hair, slightly athletic build, eagle blue eyes, distinguished as hell.

Trevor’s 57 now, has been flying for more than 35 years and is at the top of his game. He takes control of a thing that weighs 154,000 pounds and is 117 feet across like it’s a jaunt home to Mississauga in his Prius. Total control. Makes you want to genuflect a little.

But, sadly, I know the other side of Trev. That house thirty minutes from the airport cost $825,000, of which $515,000 sits in a mortgage. It looks like a place where an airline captain should live – a guy who daily is responsible for the lives of 149 people and $65 million worth of airplane. But, as Trevor has discovered, it’s also illiquid. On the market now for one entire year, and no offers.

This is too bad, since my advice to him was to bail as fast as he possibly can. For a guy with a $165,000 salary, he’s a walking (sorry, flying) disaster. The company pension plan is nothing to brag about, and won’t possibly cover the cost of a homemaking wife, two teenagers and a Mississauga McMansion when he hands in the wings in three years. RRSPs amount to less than $125,000 and are invested in a dog’s breakfast of do-nothing mutuals and dead-end GICs.

“I really should do something about this,” he told me in a duh moment.

Well, Trev is a Boomer. Like many of the nine million in his cohort, he’s now in his peak income-earning years. He’s also fairly screwed, despite being a workplace deity. He may have net worth of more than $400,000 and a mediocre pension but three-quarters of that wealth is illusionary, sitting in a 4,000-square-foot palace nobody wants to buy. At least at that price. The odds are pretty good he might end up taking a $200,000 haircut, which means half his net worth will crash and burn.

TD Canada Trust must know all about this. The bank dumped a new survey on us this week. It’ll scare the poop out of anyone thinking the real estate market is not on the precipice of a demographic chasm.

For example, people in their mid-forties to mid-sixties should, of course, be mortgage-free. They should have buckets of equity, a diversified investment portfolio, balanced asset allocation, a retirement plan and no more than 40% of their NW in real estate. Anything other than that spells fail.

But, says the bank, less than half of Boomers in Ontario have paid off their mortgage (that number rises to almost 60% in Alberta). A quarter of Boomers have retired less than 40% of their home debt.

Now think about that for a second. We’ve just come through a decade of the lowest mortgage rates in a generation. Loan costs today are close to historic lows. Boomers are in their golden years for earning dough. If there ever was an easy time to trash debt, it must be now. So what the hell have these people been doing?

It means millions of wrinkly old snorts facing imminent retirement have no choice but to cut and run. They cannot quit work with fat mortgage debt (remember that 70% of people are not like Trevor – they have no pensions), since it’s cash flow, not real estate, they require.

If you don’t think this means a tsunami of new listings in the next few years, well, the bankers have more news for ya. More than 85% of Boomers “say their next move will be to a smaller home.” And the most-often cited reason for moving (natch) is to “save money.” This is the spin TD put on it: “Many boomers find that their needs and priorities have changed since they moved into their current home. If you find you have more room than you need, consider ‘right-sizing.'”

Hey, it’s better than squirrel steaks.

So, shed a tear for this poor, lost and misguided generation. After living five or six decades in a non-stop inflationary environment where real estate doubled personal wealth every decade or so, where university tuition cost $500 a year, employers actually hired people with arts degrees and aging rock stars with enlarged prostates are still considered cool, it’s come to this. Big illiquid houses, debt that will only get more costly and plastic hips.

So here’s the deal. If you’re a young person lusting for a house, wait. There’ll be lots of geezer carrion soon. If you’re a Boomer like Trevor, cut your losses and bail now. It only gets worse as this decade marches on. There will be no rebound in the value of suburban castles.

Mostly, let this be a lesson to everybody. Houses are shelter. They are not retirement plans. They’re not financial strategies. They can turn into wealth traps. And soon you’ll look at a pilot living in a big pile of bricks the way we scoff a loser driving an Olds Delta 88. Or maybe a Hummer.

BTW, I’m starting a Boomer Relief Fund. Are you in?

MarkAgeddon

This will not end well - Cowtown edition

The Railway Committee Room sits adjacent to Parliament’s Hall of Honour, sealed from the world by a double set of sound-proofed, leather-covered doors. Countless hours sitting there gave me time to soak in the fluted ceiling with its carved medallions, the columned walls and herringboned hardwood floor. On Wednesday mornings this is where the government MPs gather to caucus. Outside in the corridor a team of plainclothes RCMP officers with bulging waists and wires in their ears keep a gaggle of reporters behind a green velvet rope.

Other days it functions as a committee room, where a dozen politicians sit in a big U, flanked by staff, researchers and interpreters, facing a public gallery watching them question witnesses. Well, ‘question’ might be too strong a word. Actually the MPs make inflammatory little speeches and then pause briefly for a response. It borders on the absurd. I know.

Anyway, one of my old colleagues got off a decent question to Mark Carney, the dude in charge of the Bank of Canada (and the economy) a day ago. Do you think the housing market could collapse here, as it did in the States, Scott Bryson inquired?

Said Carney: I am not predicting a significant drop in prices, but given how far prices have risen and the high level of Canadians’ household debt, an abrupt drop in the housing market cannot be ruled out. Carney also told MPs the bank is limited in what it can do to use interest rate changes to encourage Canadians to reduce their debt.

There is news here. That the gov would admit an “abrupt drop” in the real estate market’s possible is a big deal. It peels off another black, executive-length sock in his ongoing striptease and flings it into the audience. Bit by bit the guy’s revealing to us the extent of his woody worry. A month ago he chastised us for spending more on housing than we have saved for nine years running. “This cannot continue,” he growled ominously. He followed that up with a spate of speeches warning about the level of household debt. And now he’s reduced his outlook for the economy and told us clearly to expect a sucky existence until at least the end of 2012.

Carney’s worth watching since he has more economic data and analysis than anyone else in the country. He tells F what’s going down. He yaks with Bernanke all the time. The guy is wired into everything and, unlike almost every Bank of Canada governor who has gone before, he’s telling you things in advance. Listen.

What does he know?

That the middle class is running on fumes. Were it not for the billions we borrowed in the last 18 months, our consumption would have dropped enough to already cause a deflationary spiral. Now, since the economy remains weak and jobs elusive, the wealth effect which came from rising house values (thanks to cheap debt) is fading. There is no doubt spending will fall as people worry about what they owe and realize their wages are stuck in neutral.

Carney also knows he has to raise interest rates as soon as possible. Because the moment things pick up a little, so will borrowing – unless he chokes it off with higher mortgage and loan costs.

Carney knows his cheap-money policy caused a housing bubble, and that – given the right conditions – it could pop as disastrously as that in the USA. That’s why he reads this blog. To ensure this kind of talk is restricted to the basement-dwelling losers, doomer Armageddonists and squirrel-munching whackjobs who call this pathetic site home. If we try to get out, those horsemen with the bulges spring into action. God help humanity if we ever, bleeding from every orifice, crawled on splintered elbows to, say, the CBC.

Carney knows his best hope, ironically, is the US Fed. If this buying-bonds-with-magic-money thing works (called quantitative easing), and gets the American economy rustling a bit, then demand for Canadian goods picks up and yet our dollar is not goosed higher. Eventually, the gov figures, this will work. Being a Goldman guy, he knows you never bet against America. But the problem for Carney is to duct-tape Canada enough to get us into recovery sans implosion.

It might work. But maybe not. You can keep your house and your big mortgage and pray. Or you can see how well leaders have handled the economy over the last five years, throw up a little, and decide to take cover.

I’ve already told you how. I’ve already done it myself.