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March 31, 2016 | What could go wrong? Part deux.

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.

WINE modified

Tim and Steph have the hots. “Face it,” she told me two days ago, “there’s just no way a balanced portfolio of anything is gonna compete with the housing market. So stop trying to tell me otherwise.” And I did. I even said, good luck. Without smirking.

The two of them, late thirties, own four condos, all in negative cash flow. Not seriously – a couple hundred bucks each, monthly – but enough to make one wonder why they’d want to ditch financial assets, making money, to buy more property. Like I said, they’ve got the hots. The house they own doubled in the past decade, so they think they’ve a Midas touch. “The condos,” Tim assured me, “will be golden in a few years. We’re willing to wait.”

It’s interesting how people expect financial assets to give positive returns at once and consistently, or they get dumped. Real estate, however, plays by other rules – because it exists, can be touched and has social status. “We own four condos,” is something your mom understands. “Attsa my boy,” she coos. Telling her you have a balanced and globally diversified, tax-efficient and liquid portfolio of ETFs just doesn’t cut it. They never covered that in Mom School.

Anyway, these guys (Tim & Steph) now lust to purchase s duplex on the east side of the city for $1.8 million. With luck, rents will barely cover the overhead, which means it has a cap rate of almost zero. And they’re out of cash. So, the portfolio is being sold, putting 100% of their net worth into one asset class. Worse, they’ve talked her parents into “investing” seven hundred grand in the project.

The wrinklies can hardly afford it, with a total nestegg of $800,000 after selling their home. The pension income’s too scrawny to live on, so they need investment cash flow. Steph told them they can have a 3% return on their money and no risk. They bought it. Too bad the pittance will be 100% taxable in their hands, and the risk substantial. After all, if the younger ones could have landed enough bank financing, they wouldn’t need to emotionally extort 70-year-olds.

Stories like this are so common. A decade of real estate appreciation and cheap money, combined with the fear that the 2008-9 stock market mayhem engendered, has profoundly affected our nation. Debt’s exploded. We’ve become less diversified. Recency bias has made us think property is invincible. Risk is now misunderstood.

Of course the biggest factor, so far, is that real estate has not disappointed. Sure, most markets are currently stagnant or slipping a little. But there’s been no Big Short moment when the gates opened and the whole friggin’ bottom fell out of our expectations. With everyone so invested in a single thing, bad is impossible.

Young Americans thought the same. Until real estate reached a bubble state and corrected, of course. Because kids are always so much more heavily leveraged when they buy a house, they bear the greatest pain when markets revert to the norm (they always do). So today GenXers – millions of them – are truly struggling after investing in houses (because they’re always safe) and subsequently getting whacked.

Like here, people in their thirties and forties put everything they had in property, taking on significant debt when houses had hit inflated values. When rates went up and the economy went down, many slipped underwater, then into foreclosure. Today there are 19 million American renters who used to be homeowners, over four million of whom faced a foreclosure. Over half are under the age of 45. See the evidence below.


The American housing correction changed the lives of millions of people. They gambled and lost. They believed what they were told by their parents, the media, the government, the real estate industry and the lenders – that houses always go up. Safe. Predictable. And when assessments were rising faster than the value of anything else, they believed it was the new normal. It would last. The best possible chance for the little guy to catapult ahead without the stress or sacrifice of saving and investing.

Now so many are middle-aged renters with crap credit scores.

The lesson here is simple. People forming households, traditionally in their mid-twenties to late-thirties, using big leverage to do so, are always at risk. But when doing so in the apex of time when prices have never been higher and after years of asset inflation – and with money which cannot get cheaper – the risk is extreme. Far in excess of anything their parents faced when the economy was expanding, rates were normal and houses were just homes.

To think today’s conditions are normal – when wages are slack and a million buys a shack – is to delude yourself. Do not allow your daughter to believe it. And reject the compromised beliefs of those who tell you otherwise.

Like Stefane Marion. The National Bank chief economist this week dropped a few jaws by justifying prices in Vancouver – which increased 22% in the last twelve months, or ten times the rate of inflation and wage growth. Why worry, he asks, when there’s a greater expansion in the working age population in places like Van or the GTA?

“The underlying force for housing demand is household formation. If your population aged 20 to 44 is growing, you have it. If it’s not, home price inflation is not sustainable,” he said.

There ya go. The slaughter of the innocents.

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March 31st, 2016

Posted In: The Greater Fool

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