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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 16, 2016 | Losing our way

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.

 

Dave’s a 54-year-old career teacher in Ontario with two kids in uni and a wife at home. Like most teachers, he’s financially undisciplined (“But I have a great pension …”) having saved less than $200,000.

But that’s not his new problem. Mom & Dad are.

“My parents are in their late 70s, and are in good health.  They like to winter in Mexico, but announced that they will probably not return next winter as their retirement nest egg is almost gone.  They do not have pension income beyond CPP and OAS, and own a home that is probably worth $250-275K.  They are contemplating selling it as a means of continuing to fund their retirement and their winters south, but that would mean renting.  They have asked my brother (who is self-employed and far better off financially than am I) and myself if the two of us would buy a condo and then rent it to them.  My brother has no problem doing this, but my wife and myself are not quite sure it is the best option for us.  What do you think Garth, should we buy half of it or fund our current retirement plan?  The condo will cost about $250K.  We would probably put 25% down which would leave us owing $200K.  So a monthly mortgage payment is probably about $1,000, which my parents are willing to pay as their monthly rent.  That leaves taxes and condo fees which combined will total about $700/month.  I am in for half this amount.  I would like to help my parents continue to enjoy themselves and travel, but don’t want to jeopardize my own financial stability in the process.”

Dave’s little family tale is another reminder of how we’ve lost out way. Buying more real estate is not what life’s all about.

In fact, there’s a time comes when you’re best off to dump it. Clearly Mom & Dad should sell the house, invest the money prudently and rent. Duh. If they’re willing to pay $1,000 a month for shelter, and if the house proceeds can generate another grand a month (at a lowly 5%), what’s the problem? Why do the kids need to cough up $50,000, backstop a $200,000 mortgage and chip in $700 a month?

The cult of ownership is rampant, and continues to lead us to a difficult place. As real estate values detach from incomes, debt explodes and everybody thinks capital appreciation will turn every deal into a guaranteed profit. As stated here, higher prices bring higher prices. Until it stops. That’s when the exits clog.

Michelle’s a Millennial (“in shock,” she says) living in the burbs of YVR – an hour by car from the hipster condo featured in yesterday’s post. In fact, there’s zero cool about her hood. And yet it’s also been infected. The 30-year-old condo buildings in her area, Michelle adds, are “ripe with special assessments” since it was “victim of the leaky condo construction of the 80s.” So every few years condo owners are routinely hit with ten or twenty-grand bills (above condo fees) because of dwindling contingency funds.

Yet, what’s happening?

“The market has gone absolutely bonkers here in the suburbs since the spring. Apartment units in November/December 2015 were routinely selling for $300-380 per square foot depending on renovation level. Now in May 2016 the average unit is selling around $500 per square foot and it doesn’t even matter if the unit is renovated or not. They routinely get bid 50-100k over asking price. If you do the math a 1000sq unit for easy numbers used to go for around 380k, that means they are now going routinely going over 500k.

“In less than 5 months prices have skyrocketed off the charts. We are at peak insanity. We aren’t even that close to Vancouver (almost 1 hour drive downtown with traffic, maybe 40 minutes if you are lucky). What is going on… can you please let me know.. something is not right.”

Well, Michelle, all this pathetic blog can say is, stay a renter. The winds have changed and now blow FOMO in from all directions. Last month Canadians traded almost 61,000 houses worth more than $30 billion, which was not only a record but a 24.8% increase from the same month a year ago. Not only did the higher down payment requirements which took effect in February have no impact, but our collective house horniness and embrace of debt have moved to a whole new level.

Why? Are Canadians taking their cue from a new federal government that’s joyously borrowing and spending more than anyone imagined? Have the Millennials and the GenXers finally been convinced rates will never rise? That politicians will never let house values fall? Are we all on weed already?

The similarities to the dot-com era grow more noticeable by the day. Only this time it’s way more serious. In 2000 people piled into cool, sexy speculative investments in profitless new companies in the belief it was different this time and prices could never fall. But they did. The market lost 80% of its value. Nortel went from $120 to (eventually) zero. It wasn’t different, because it never is. Unlike our obsession with real estate now, most of that investing wasn’t based on debt.

Getting old sucks. But it does bring some perspective. In 1990 nobody thought house prices in Toronto or Vancouver could tumble. They did. It took more than a dozen years for the average price to rebound. When people lined up for hours on Yonge Street to buy ounces of gold at the most inflated price ever in 1980, it seemed like a no-brainer way to make money and beat inflation. Everybody did it. Then bullion lost 82% of its value, and has never recovered.

Leaky suburban condo prices up 60% in a year? Kids queueing to buy units at $1,100 a foot? A teacher goaded into more real estate for his septuagenarian elders? A weird cultist belief if you don’t buy now some foreign dude will? That $1.4 million average prices are the new normal?

My work here may well be done. This blog failed. We’re screwed.

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May 16th, 2016

Posted In: The Greater Fool

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