Entries from August 2011 ↓

Social justice

Recently some people here have accused me of being arrogant and heartless. This is refreshing.

After all, this blog’s constantly being misinterpreted, since everybody loves extremes. The real estate humpers see a future filled with growth and hope. The doomers see one brimming with sorrow and detached body parts. Average folks have no idea what’s going on, but have a vague notion they should be stocking up on tuna.

The news, after all, conflicts. On the same day we heard the economy slipped into negative growth (at least for one quarter), another bank recorded fat profits. CIBC’s take was up 26% from last year – enough to reward stockholders with a higher dividend. So if banks are the harbingers, does this mean we’re okay? And if things are cool, why did the economy shrink?

This confuses the hell out of folks, so they go back to watching the nutcases on ‘America’s Got Talent’. Likewise on this miserable blog, when I predict no depression but warn significant numbers of families will fail, I’m accused of being an inconsistent dickweed. (I wish my mother-in-law would stop posting.)

But this is the world we now have. No 2008. No deep, dark recession or depression. No bank failures. No emergency. However, at the same time, a ton of people will lose most or all of their net worth. An army of Boomers will retire in desperation. Young house hornies will regret the day they closed. And the gap between the struggling and the wealthier will turn into a canyon.

Most people are making fundamental financial mistakes. You know this. They’ve embraced debt, because that’s the only way they can get real estate. It’s the new measure of social status and wealth, even when a house is sucking off so much cash flow that they save nothing. It’s the accumulation of debt that will do them in, just as it has in most other western countries. The outcome is obvious.

These folks think they shun risk by putting money into bricks. But with house prices at historic highs and interest rates at generational lows, both have but one direction in which to travel. This makes real estate (and gold) laced with risk. In comparison, stock and bond markets are boring and predictable.

Why am I heartless?

Maybe because I don’t care. This column, or my books, or my speeches, won’t alter what’s coming, since almost everybody you know worships houses, fears equities, saves nothing and owes much. This is why I’ve said it’s not a social justice blog. It won’t change a tidal wave of stupid. People will succumb to their emotions ten times out of ten. It’s hopeless. I give up.

But what I can do it talk to you, or those who trust me with their wealth.

To you I say the economy will soon resume growth, but it’ll be glacial. Governments seem ready to make some large mistakes. Corporations will make obscene profits because they have this recession thing all figured out. Stock markets will surprise like crazy on the upside. People with money, and liquidity, will see it grow as steadily as families with debt, and one asset, will decline. And those who took time to come here and learn about bank preferreds, real estate investment trusts, corporate bonds, exchange-traded funds, TFSAs, tax-deductible mortgages or income-splitting will do fine.

This is the arrogance part. I know what I’m doing.


The pendulum

Derek works in Detroit, lives in a small town east of Windsor. Commutes 160 km every day. Such is the price of love.

He used to have a townhouse in Windsor, but gave that up and moved into his fiancé’s place four years ago. Then marriage. And a baby.  “The commute to work is wearing me down,” he says. “If road conditions are great and the border traffic is good I can do the round trip in 2 and ½ hours; however, typically it is closer to 3 hours and in the winter, well all bets are off.”

So, they want to move closer to his work, back to Windsor. “I know that compared to TO and Vancouver, Windsor prices seem unbelievably low. Houses that my wife and I are looking at are in the $165,000 range, which is less than 3 times my income alone. I know, I know, $169,000 is NOT $700,000 so just man up and buy her a damn house (we currently rent in her home town).

“I just have this nagging feeling that once the housing bubble in the rest of Canada blows and CHMC suffers losses, that home mortgage rules will tighten at CMHC (just like they did in the US at Fannie and Freddie) and in five years the house that I buy now in Windsor for $165,000 can be had for $150,000 or less.

“Is this a realistic fear or am I just overly cautious? Maybe I should fear the Chrysler minivan plant and Windsor casino closing throwing 6 to 7 thousand people out of work in a city of only 209,000 people, that would torpedo housing prices.

“God, maybe we’ll just move to Nunavut, hunt seals, live in an igloo (I can learn to make those) and watch the Aurora Borealis … beats most of the garbage on TV now a days.”

The average house in Windsor costs $169,399, which is up a bit on the year, even though sales are down about 4%. You can buy the average detached, two-storey house with a double-car garage, big backyard and four bedrooms for about $240,000. Last month only 71 of those houses sold, in a city of 325,000 – but that was a few houses more than in 2010. The average income is $78,170, which means the average house costs 2.1 times what people make.

In Vancouver the average family earns $83,130 and the average detached house costs $898,886, which is about 11 times income. In fact, in July in the Windsor area, only four buyers paid more than $500,000 for a property. The Windsor-Essex Country Real Estate Board calls those “high end homes.” In Vancouver they’re called “garages”.

Derek’s letter reminds us that real estate is an intensely local commodity. For example, Windsor has 50% more people in it than, say, Saskatoon – and one hell of a better climate. And yet in Skatch, the average hunk of prairie dirt with a house on it costs $305,419 – or 80% more than in a large southwestern Ontario city.


Because, like love, real estate’s emotional. It can make you crazy, lose all perspective, and do stuff you thought you could only read about. So people in Saskatoon tell each other houses are valuable and everybody wants to move there and, bingo, they get expensive. Ditto in Vancouver, of course, where the only way families get real estate is by leasing out their furnace rooms to dodgy tenants and borrowing hideously unrepayable sums of money. Then, when most people are fully invested, it becomes a self-perpetuating ponzi scheme. Prices stay sticky even when demand falls because nobody cannot afford to sell for less than they paid.

Sadly, the ponzi does end. It sure did in California, Florida and just about every other US state. This happens when interest rates rise, the economy stutters, rules change, stock markets roil or any other event that turns greed and delusion into fear and loathing. To believe such things will not happen on the prairies, the coast or the godless GTA is what love’s all about. Makes ya nuts.

But back to Windsor (where you can buy a plenty fine apartment building for less than $250,000).

Derek, your town’s the future of Canadian real estate. Under the sway of Detroit and American earthiness, this is what happens once the pendulum swings back from excess to spare. Houses at two times income are as cheap as in decent parts of Phoenix. While other people in other cities have turned real estate from shelter into a futures play, in your city it still means ‘home.’

In Vancouver, Winnipeg, Calgary, Ottawa, Saskatoon or Toronto, distracted homebuyers are forced into taking risk many will buckle under. But in Windsor, the meek shall inherit the earth.

Man up, dude. Buy her a damn house.