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July 23, 2015 | Pooched

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

History will show it wasn’t foreign buyers who pushed real estate values into the nutty zone in places like YVR, but the fact most people believed it to be. So they panic bought, forcing prices up. When almost every house was ‘worth’ more than a million bucks, they had all the proof they needed. Damn Chinese.

But relax. This post is not about HAM. It’s about perception. This is what moves real estate. As I posted here two days ago, a housing orgy even more intense than the one we have today raged in the late 1980s – when there was no 5% down, and mortgages cost 12%. But people perceived that high inflation would drive home prices ever-higher. So they panic bought. Big mistake.

Yesterday we looked at what actually causes a housing correction (which is often a slow-motion crash). It need not be a spike in interest rates, a terrorist attack, an earthquake or Kim Kardashian finding morality. Events that apocalyptic are rare. But worry is ever-present, and when it quietly augments, real estate can be seriously sideswiped.

We’re entering that space, it seems. On Thursday there was more to fret over. Loblaws shuttering dozens of stores just months after announcing a big expansion. More losses for the Canadian stock market. Oil now down to just $48 or 25% less than it was three months ago. The dollar at 76 and a half cents, promising a boatload of higher consumer prices. And who can forget the last holy-shit moment from the Canadian Payroll Association?

These guys have polled people for six years, and things are nasty. A hefty 51% of all working stiffs said in the last survey “I would find it difficult to meet my financial obligations if my paycheque was delayed by a single week.” Half of everybody. Only one week. Ouch. What does this tell us when 70% have houses and epic mortgages?

Of course. They own stuff. But no money.

This is borne out by the fact the payrollers also discovered 26% of people could not come up with just $2,000 over the course of an entire month if an emergency cropped up. And everybody seems equally hooped. Almost 80% of mature people say they’ll probably have to delay retirement while 63% of Millennials say they’re living paycheque-to-paycheque.

This last point – financially pooched young people – is an especially big deal for the real estate market. Already the cohort is stressed by educational debt, a crappy job market, over-qualification, falling compensation, competition and houses they want but can’t afford. They’re the ones who started the Occupy movement, moan on Twitter (#dontHave1Million) and float through Tom Mulcair’s sweetest dreams. They don’t hate the Chinese. They hate the Boomers. Conservatives. Banks. Anyone with a Harley or a Hummer. (Gulp.)

They’re also the fuel that keeps the real estate fires burning.

Housing consultant Ross Kay calls it the “equity pyramid” – first timers willing to swallow debt in order to unlock the equity of the people they buy from, who then go on to buy something fancier, unlocking the equity of others who do the same. “The fact is that housing bubbles only pop when first time buyers stop buying,” he says.

Here’s an example from Toronto, where the average house price (detached, condos, townhomes etc) is now $624,000:

  • The top 11% of sales in the GTA averaged $1,500,000
  • The next ladder saw 22% of sales take place at an average $820,000
  • The next lower step saw 44% of sales take place at an average $470,000
  • On the bottom rung were 22% of the buyers who paid an average of $276,000

Says Kay: “The entire pyramid collapses if those paying $276,000 on the bottom rung stop buying resale homes – whether it’s rising interest rates or employment for those most at risk of being impacted by any changes in the economy. When they stop buying the market corrects.”

Well, let’s go back to perceptions. What people believe to be true is more powerful than the truth. This is why investors, not markets, are the ones who create risk. They stampede into rising assets driving prices to unrealistic levels. Then they stampede out when they smell fear, accelerating price declines.

This is why 51% of us couldn’t last seven days without a paycheque. We’re fully engaged in a single-asset strategy that has sapped our financial resources, soaked up our cash, saddled us with long-term debt and left us unbelievably vulnerable. Now, as the economy turns, this looks like a really bad idea.

Sigh. I think we need to talk about puppies tomorrow. Who’s in?

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July 23rd, 2015

Posted In: The Greater Fool

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