Entries from April 2014 ↓


PARENTS 2 modified

A few words for the children. Your parents have been lying to you. Best get over that now.

Boomers are the worst collective source of information on the planet. Don’t listen to them. They were formed in another time and are loopy enough to believe the past will repeat. It’s why they want you to be exactly like them and, sadly, why so many Gen Xers (or Millennials or whatever they’re called) are rapidly turning into their parents. Big mistake.

The wrinklies grew up in a time of inflation and sustained economic growth. Today we’re closer to systemic deflation and a flatlining economy. It’s no fluke interest rates have been in the ditch for six years because without that artificial stimulus we’d have a jobs crisis and falling incomes. As it is, youth unemployment’s 14% and wage growth trails the cost of living.

Inflation and expansion for the Boomers made making money easy. Buy a house, make minimal mortgage payments, and wait. Every year salaries rose, real estate plumped and debt got easier to pay. Of course, that all ended circa 1989 when rates jumped and houses crashed – but most Boomers think nothing of consequence has happened since then, anyway.

Your parents went to university and it paid off. Tuition was cheap and a degree was gold. A cult of higher education was born, and it became de rigeur for every Boomer baby to head off to college. So now everybody has a degree, and it means diddly. But that piece of paper cost a ton of money, so student debt is off the chart.

Big debt. Few jobs. See where this is headed?

Worse, lots of education and a delayed adulthood don’t equate to more income. According to Stats Canada university grads have made almost no ground over the past decade and a half. For example, the average guy with a BA living in BC earns 39 cents an hour more than a grad did in 2000. Women with a degree make 67 cents more (but still earn lss than $20 an hour).

During the same period, thanks in large part to their parents, house prices have doubled in most places. So what are the wrinklies doing to ensure their children turn into them? Surveys now show at least 40% of the kids expect the Bank of Mom to help them with a real estate down payment. And this march into condo indenture is being assisted by the banks (plus CMHC), who are happy to loan money to people with none of their own, unstable employment, diluted degrees, student debt and little or no credit history.

Of course this is being encouraged by the Boomers at a time when real estate has never cost more and rates have never been lower. So what lessons are being taught when you push your kid to buy an inflated asset with extreme leverage and no skin in the game? That they’re entitled? Or special? Or that real estate always goes up, because it did for you?

As I mentioned yesterday, you can buy the average condo in Toronto with 5% down and $2,465 a month in carrying costs plus $380,000 in debt. Or you can rent it for $1,600. No debt. Leasing spares you from borrowing a dime while giving freedom and mobility to chase elusive jobs in a tight marketplace. It eliminates the substantial risk that even a small real estate correction would wipe out all equity and put you underwater on the mortgage. And it lets you start building a portfolio of liquid assets – essential in a world which could drift inexorably closer to deflation and swampiness in the years ahead.

So, moist virginals, just stop listening to your elders and don’t take their down payment cash (it’s all a plot to keep you from changing cities, anyway). This is not the Seventies or the Eighties. The last thing you should want right now is a boatload of debt at rates destined to rise, which is tied at a property you might be selling at a loss. What helped your hippie parents build wealth in years of double-digit inflation could cream you in the no-growth decade ahead.

They had Jefferson Airplane. You’ve got the TFSA. No comparison.

In extremis

BBQ modified

If yesterday’s little tale didn’t scare you, then you’re too horny or too distracted. This is late-market behaviour in extremis, when speculation and panic turn buyers into fetishizing fools and realtors into predators. It’s hard to believe a thousand people would descend on a 90-year-old beater Toronto house, that fifty offers of more than a million dollars would materialize, or the agent running the auction (and privy to all the bids) would prompt his own client to pay double the asking price.

This is as normal as Miley Cyrus. We may be closer to the zombie Apocalypse than I feared.

As you know, we’re not the only ones to have gone through this real estate obsession, leading to irrational acts and herd hysteria. The US lived it nine years ago, with a price/sales apex, then a 32% decline in average prices, followed by seven years of hurt, and finally a robust price recovery, but with dramatically fewer people willing to give housing a second chance.

This week we learned how deep it all cut. The homeownership rate in the States is at a 19-year low, down to 64.8%, which is where it was back in 1995 before Bill Clinton started pumping houses. The peak was 69.2%, reached in 2004 when everybody was convinced prices would continue to rise for a generation. They didn’t. (About 9.2 million Canadian households currently own homes. That’s 69%. Interesting coincidence.)

The immediate reason for the precipitous fall is that US houses cost too much, now that mortgage rules have been tightened. Prices have been rising steadily – up 12.9% in the last year – even while sales have been declining. Hmm. Like here.

And it will all get worse, says a big US apartment REIT executive, with the US rate plunging to 55% over the coming years. The reason? People are delaying, postponing or denying marriage and children. The number of married Americans has been falling for a decade. Meanwhile all those Millennials in Florida, California and Nevada want nothing to do with the asset that ate their family’s net worth. It’s a backlash with bite.

“The deferral of marriage has such a staggering impact on real estate and I just don’t think people focus on it,” Sam Zell, the REIT exec told a housing conference. “I don’t think the multifamily market has ever had a better set of future demographics.”

Well, more to think about when all of your friends buy houses, flaunt their bloated mortgages, and make fun of your pathetic renter’s life. Today we have groupthink in broad display, as everyone around us pretty much apes those Americans circa 2005. And the fascinating part is that Canadians are so steeped in housing propaganda they actually think they’re doing a wise thing financially in buying assets at values which will likely decline, with money borrowed at rates destined to rise.

Of course, they don’t believe either. But we know better. And here are a couple of things to say that will really irritate your (former) friends.

Real estate a better investment than, say, stocks? Hardly. Not even in the biggest market in the country. Between 1988 and 2013, the TSX gave an average return of 7.09%, even including the worst market crash since the 1930s. During the same period of time, the average GTA house price increased by 5% annually, which includes the most gaseous property bubble in Canadian history.

By the way, stock prices in Canada are not at their historic peak. House prices are.

The average condo in the GTA costs $386,800 to buy and $2,465 a month to carry after putting $20,000 down and accepting a $380,000 CMHC mortgage. You can rent the same place for $1,600. No debt. Ouch.

And when the correction comes (as it already has in a growing number of places), real estate turns cold and illiquid, plus costing you money to own. Your financial assets are always liquid, and pay you.

There is a reason tens of millions of Americans fell out of love with houses, even after rates and prices fell. They learned something. Your friends are still waiting.