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March 17, 2016 | Go for it

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.


Earlier this week a famous bank economist who has way less hair than me, which might cloud his judgment (just a hunch), suggested real estate bears are nuts. “Hey,” said Doug Porter, “forecasting is hard.” He then detailed what cheap rates and house lust have done to prices over the last nine years. “Da Bears may some day be right, especially on the hottest markets, but getting the timing down is half the challenge,” he gloated.

Of course, Doug (I know him well) wasn’t actually talking about me. Nor does he, himself, offer long-term predictions. And he works for an outfit (BeeMo) that makes zillions papering the nation in mortgages. So a little context is helpful. Even with CMHC backstopping things, a housing correction of any magnitude would be really crappy news for our banking buddies.

Will the Canadian housing market crash?

Nah, it won’t. I’ve said this consistently for more than five years on this pathetic blog. There are a host of reasons a US-style rapid meltdown ain’t going to happen, most of them financial. But that’s not the point. House prices can (and will) flatline and then decline, and the potential impact becomes more consequential the higher prices migrate. Doug Porter is being your usual, irresponsible mainstream econo-banker for suggesting prices either keep catapulting, or they plummet. Neither’s likely. And I think he knows it.

Let’s recall that in 2005 it took only 8% of recent homebuyers in the US to get into trouble for the entire market to wobble. And that was with a household debt-to-income ratio lower than ours, plus a more robust economy. To suggest we don’t have risks today – when the average family can’t afford the average house in several markets – is naïve. Or on purpose.

Assessing that risk, in the context of your own life, is what matters. After all, real estate isn’t evil. I love it. And I own some, both residential and commercial. But what’s important with any asset – from Bombardier stock, to an ETF, gold or a house – is not to have too much of your net worth parked there. Balance and diversification don’t apply only to a financial portfolio, but your entire life. And the stupider house prices get, the more you should be rebalancing your exposure.

This is why somebody with a nice property that’s escalated in value to $2 million but very little else is delusional if they don’t cash out. They may feel rich, but they’re not. Having almost everything in one asset is the very definition of risk – unless that asset is cash. I also see lots of folks sacrificing cash flow and eschewing investing so they can pour every dollar into paying off a mortgage with a 2.5% rate. Bad idea. That’s concentrating net worth into one thing which today comes with substantial market and rate risk. Throttle back on payments and spread your eggs.

I know this is all confusing. So does Stephen, a millennial in Calgary. “I’ve been reading your blog for about 4 years now, since then I have seen many friends and family purchase homes as I’ve continued to rent,” he moans. “My question, which I haven’t seen you address much, is when is it right to buy?? If I can buy a house using your rule of 90 right now with a 20% down payment, is now a good time?

“Is your message that as long are you aren’t fully vested in your house, you maintain your diversification that any time would be a good time to buy?? I am just looking for advice and when is the right time, like you say you can never time the bottom of market and that’s risky, should you just buy when you can completely afford and stay diversified in your investments? Really hope this gets a response, I know many people my age (born in the 80’s) are wondering these same things.”

(There were people born in the Eighties?)

Actually, this is exactly what my Rule of 90’s all about – a simple guide to ensuring that a house doesn’t eat you. Ninety less your age should equal the percentage of your net worth to keep in real estate. So, kids can afford to romance substantial debt, while wrinklies can’t. You also need to factor in shelter costs, since you gotta live somewhere. Having said that, in major cities today it’s still cheaper to rent than to own – especially with an urban condo. Given the fact most condo units are no longer yielding capital gains, why would anyone want to purchase one? And, of course, buying a condo ‘as an investment’ to rent out is a formula for pissing away money. Instead go to Brantford or Nanaimo and grab a duplex.

So, I have nothing bad to say about Stevo buying a place. If he has enough money for a down and still maintains investment capital, if this stabilizes his shelter costs, if he buys something under market value that can be fixed, or a detached place with cap gains potential, and if he doesn’t try to turn it into a financial strategy and a retirement plan while being able to emotionally and financially withstand a lengthy correction, then go for it. But don’t expect to make 17% a year. And don’t wait for a crash. Just until you’re ready.

There, Doug. See how easy it is to be reasonable?

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March 17th, 2016

Posted In: The Greater Fool

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