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April 6, 2016 | Being human

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.


The enemy of success is human nature. We buy high, sell low and believe realtors. Stuff we hear from peers or (the ultimate authority) family carries more weight than experts who are but a Google away. Our perception of things is coloured by emotion, and often wrong.

To wit. ‘Investors’ sucking up multiple condo units in the country’s two most inflated markets. CMHC says a quarter of 42,000 buyers survey have bought more than two concrete boxes, while at least 10% have snapped a minimum of three. Of course, nobody can buy a condo in 416 or YVR these days, at these prices, and collect enough rent to cover costs. The only possible hope is capital appreciation – enough of it to overcome commission and transfer taxes. Good luck with that.

But it gets worse. Nik Nanos’ latest survey found 33.1% of Canadians expect the economy will deteriorate  (24.7% believe it’ll get better), but almost 39% of us expect real estate prices to climb. It’s now the highest degree of housing optimism since the end of 2014 – and comes as the average house price crosses the $500,000 mark for the first time.

Why? One word. Millennials. Over eighty-five per cent of these poor, young things are convinced the best possible investment is a house.

We know why. A 24-year-old who became sentient seven years ago has known nothing but advancing real estate values and plunging money costs. It’s the new normal. People line up to buy apartments not yet built. House-horny parents tell them renting is throwing money away. Financial illiteracy is rampant. Nobody trusts financial markets, corps or central banks. Then along come politicians saying the rich will pay more so they can pay less and there may even be an annual income for all – while the government leads by example, spending vastly more than it collects. What else are they supposed to think?

So Nik found 83% of people don’t believe real estate can, or will, go down. That should scare you. Two reasons.

First, it means more upwards pressure in the key markets over the next few months. It’s now evident the mortgage changes Bill (“Charge it”) Morneau brought in did diddly to halt the market’s advance. Boosting down payment requirements on houses costing between $500,000 and a million ended up being a total non-event, defeated largely by private lenders and the Bank of Mom. If anything, anticipation of the late-February change propelled sales, as did a largely non-existent winter.

Most people, and virtually all of the moist ones, don’t think interest rates can rise (ever), nor do a majority of them consider mortgages to be debt. They’re just another form of rent, but one your parents approve of. Besides, houses always go up, so why wouldn’t you borrow as much as any goofy banker will give you?

The evidence of this insanity is with us daily, now. Average prices have catapulted higher by 15-23% in our two bubble cities at the same time commodity values have tanked and wage growth has stalled. The increase in debt shows where the bulk of the capital is coming from. The transfer of wealth from equity to debt to stunning. Savings are being depleted, RRSPs cashed in and investments deferred, all so people can throw available capital into a single asset class, now more leveraged than ever.

The second reason this should scare you? Most people usually err in their perceptions, then react emotionally. Thus, Nortel went from $120 to zero. Bre-X went from nothing to $286 a share, to nothing. Properties in Fort Mac have lost 40% of their value in two years because they were inflated by emotion, now felled by reality. Gold soared to $1,900 on speculation and mass buying in 2011 and is 36% lower. Oil was $140 a barrel nine years ago and now has a good day when it hits $36. The TSX lost 55% of its value in 2009, after a decade-long run had sucked billions into maple. It’s a safe bet you’ll be able to add bungalows in East Van and slanty semis in Leslieville to that list in the years to come.

Does this mean only fools would buy now?

Not in some markets, and not anywhere if they understand and accept the risks, or aren’t putting too much of their net worth into one, swollen asset. I own real estate. My last purchase was three months ago. But it was a distressed buy, a third below list price. There were no bidding wars, no bully offers, no competition. Just value.

Well, you may have noticed I’m no Millennial (despite the stubble and six pack abs). My world view was formed over years of boom and bust. That’s produced a cynical fossil who understands no asset class in history has ever risen without falling, and human nature has never evolved. Guys like me learned long ago it’s never different this time. Some of us didn’t learn to shut up about it, though.

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April 6th, 2016

Posted In: The Greater Fool

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