Days ago frenzied American shoppers stormed Wal-Marts and Best Buys to scoop $198 laptops. This year, unlike last, nobody died. It was a pathetic scene.
Last weekend, as I reported, thousands of people stormed an Oakville, Ontario sales trailer to buy unbuilt half-million-dollar houses with little down. It was an astonishing scene.
In both cases, money came second to competition. Good thing. Most people don’t have any.
Interestingly enough, I ran into a guy who runs a men’s clothing store, also in Oakville. Asked how business was going. Fine, he said, as long as we keep dropping prices. He told me about a customer who wanted to buy a topcoat that was marked 30% off, but for less than the advertised price. When he was rebuffed, the customer said he’s come back in a week when it cost less.
“The hell of it is,” the manager said, “he’s probably right.” He also said virtually all sales are on credit card, with new cash in the till drawer at the end of the day typically totaling under $20. Oh yeah, and all of his salesguys are over 60.
“They come cheap. They’re desperate.”
Does this sound like a community, or an economy, in which people are flourishing? Or is the only economy we really have because of pervasive consumer credit and artificially-suppressed interest rates? Is this what’s driving people crazy?
Weeks ago a friend called from Vancouver debating whether to not to sell his pokey house. He bought it for $470,000 four years ago, and after having his brained fried reading this blog, thought bailing at the top might make sense. Two local realtors confirmed it, and last week he listed for $1.23 million. In Toronto the same house in an equal neighbourhood would sell for less than half. In Winnipeg, a quarter. And it would still be overpriced. He expects offers this week.
As I have mentioned here before, the average down payment for a piece of real estate over the last year in Canada is 7%. As you may have seen scanning some comments on the weekend, lots of people coming to this blog scoff when I use an example of investible assets of $200,000.
Typical of the emails I receive is this snippet: “My wife and I are 46, two kids (9 and 11), and live in Calgary in a POS suburban house which cost us $520,000. The mortgage is now $380,000, and we have $10K in our TFSAs in cash, an RESP with $5,500 in it and cash (in I hate to say it, the orange guy’s shorts) of $28,000. Can you help us?”
No.
How can I? A net worth of $180,000 at age forty-six is a disaster. Paying for the kids’ university education alone will require more than a hundred grand in cash – wiping out all liquid savings when this couple is just a decade away from retirement, and will still have a big mortgage on a house likely worth less. There’s no easy answer – no investment strategy that will save people from themselves, or make up for twenty years of idiot decisions.
This is one reason I keep harping about the societal dangers of residential real estate. It is no longer a sure storehouse of wealth when so many people own so much of it, so extravagantly, with so little equity. Were it not for those government-engineered interest rates, we wouldn’t be having this discussion and Mike Holmes would still be wondering how to afford his next tat.
It’s also why I underscore the true nature of risk. The likelihood of running out of money is far greater than the odds of losing it, especially with life expectancy rising and financial literacy dropping. In a low-rate and low-yield world, GICs fail.
In other words, greed and fear are having their way with us. You’d only buy a Van junker for a million or a Calgary particle board box for half that if you were greedy for gains. You’d only lock money away for a negative yield if you feared the future. Meanwhile, both emotions lead to blindness and a retirement laced with KD and Alpo.
I’ve no doubt things will get worse before they improve. But for many, improvement will never come. How can it, when you’ve financed your life on consumer credit, achieved middle age without a pension or enough net worth, have a family to support, still have debt, invested badly and put most of your wealth in a depreciating asset?
I’ll leave this topic for a while and get back to real estate. But I hope the next time you see someone trample a pregnant woman while trying to get to a cheap laptop, scooping a $600,000 house with 5% down from plans in 20 minutes, or recoiling from buying a preferred bank share while mortgaging their ass to the same institution that you think about emotions.
There’s a men’s store waiting.
