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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 29, 2016 | How Bad?

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.

NO DOG

So, how bad could it be?

Given the Crash Tax turmoil in Vancouver and CMHC’s panicked over-valuation call on Toronto, what would actually happen if those housing markets plopped? After all, it sure looks like we’re getting closer. What next?

Some people like to shrug off corrections, thinking they’re similar to adjustments in the stock market. You know, like Brexit. A surprise event caused equities to tank by 6% and a week later they were all recovered. Whazza problem? Universally on this blog people shrug off real estate declines saying a 30% drop “would just get us back to last year” and that markets would stabilize and continue their advance.

Not so fast. If a Van crack shack appreciates by 30% from $1,000,000 to $1.3 million, and then declines by the same percentage, it drops in value to $910,000. Oops. Now it has to appreciate by 43% just to get back to where it used to be. Yes, math is hard.

Harder still is the realization that houses don’t move like financial equities. The trip up can be fast, but the trip down usually is not. First sales stagnant, followed by a plump in listings, then sellers sit on unsold houses for six months or so before they accept the reality of lower prices. It’s a lengthy process. Corrections take years. They can be very painful if you were unwise enough to buy anywhere near the top.

Here’s what I mean.

First, the GTA crash. The market peaked in a speculative orgy of multiple offers, bully bids, media hyperventilation and an ocean of hormones in the late 1980s before going into a funk in the early Nineties, bottoming in 1996 and not recovering fully until 2002. Actually when you factor in inflation, a buyer in 1989 did not get her money back unless she held on until almost 2005 – 16 years later.

Here’s the data:

CORRECTION modified

You’ll notice that house prices (the average, not the median) were down almost 28% from the beginning of the correction to the trough – which isn’t far off the 32% decline that threatened to eat the American middle class a decade ago. That hurts. But the salient feature of the correction is its sheer length, which underscores that real estate turns illiquid when markets tank and (unlike a stock, bond or ETF) cannot be disposed of in any efficient manner. That sucks.

The Canadian slow-mo crash was not unique. Take a look at recent US experience. As of this week, it’s taken 11 years form prices to climb back to their pre-flop levels. The median home price in the States last month touched $231,000, 9% higher than a year ago and just about equal to the previous record of $228,000 which was hit in the summer of 2005.

(Aren’t those cute little prices, by the way? Just about exactly where GTA values were sitting in the late 1990s. While we’ve been pushing real estate costs into the unknown, Americans have just ground through more than a decade of zero appreciation. The good news? Most people there can afford a home. Household debt has shrunk every year. And they have no Chinese Dude Crash Tax.)

If history is any guide, it’s reasonable to expect a drop in the range of 30% in house prices in Vancouver (less in Toronto where the market is far larger and more diverse). It’s also reasonable to expect no recovery for at least ten years. If interest rates normalize during that time (count on it), then values could take a lot longer to restore. Deduct realtor commission upon selling, factor in a little inflation, and today’s 30-year-old Yaletown condo buyer could be thinking seriously about retirement before her unit gives back the money she first paid. In that period of time a balanced portfolio of financial assets should (if history is any guide) have quadrupled.

Good luck.

GreaterFool does Saturday

As a public service to those sad people with empty lives addicted to this pathetic blog, The GreaterFool will now be open seven days a week. Just like the convenience store down the street. Or the new Ashley Madison. Commencing this weekend there will be alternating weekly blog postings by Ryan Lewenza and Doug Rowat, who are fancy Portfolio Managers with Turner Investments, which is where I hide out from the comments section. These guys think they know everything. They have no idea what’s coming.

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July 29th, 2016

Posted In: The Greater Fool

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