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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 31, 2016 | Really?

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.

 

REALLY-modified

 

It’s February 22, 2005. Rates are low, the economy’s okay, real estate’s hot, pricing are boiling and everybody’s buying. A new book hits Amazon, “Are You Missing the Real Estate Boom,” authored by David Lereah, the seasoned economist for the National Association of Realtors.

“Are you missing the real estate boom? Can you increase your wealth from it? For most people—including current homeowners—the answer is a resounding yes.

“But it’s not too late to increase your stake in the greatest real estate boom of our generation. Author David Lereah shows why the real estate market is poised to climb higher over the next decade—and explains what you can do to profit from it.

“Lereah calls today’s market a “once-in-every-other generation opportunity.” Today’s boom is not just driven by low interest rates—there are a host of demographic and economic reasons why real estate will continue to outpace other investments, from the growing needs of the baby-boomer generation and the rise of the “echo” boomer generation to the new ways real estate is marketed and sold.”

Six months later, Lereah was still at it. “The continuing shortages of housing inventory are driving the price gains,” he told the Wall Street Journal. “There is no evidence of bubbles popping.”

Well, we know how this story ended. By early 2006 sales were slowing, listings rising and home ownership levels had reached almost 70% amid a record run-up in household mortgage debt. Two years later real estate values had crashed by 32% across the US, and over 70% in areas of Arizona, Florida and California where buying had been orgiastic. The real estate collapse brought down venerable Wall Street investment banks, crashed equity markets, plunged the country into a recession and resulted in a global credit crisis that threatened a rerun of the Great Depression.

David Lereah lost his job. He remains a hated man. Eleven years after the housing bubble burst, average prices have just recovered. Family finances have not.

It’s July 30th, 2016. Rates are low, the economy’s slow, real estate’s hot, pricing are boiling and everybody’s buying. In Canada’s largest newspaper, real estate guru and housing info entrepreneur George Carras tells readers “incredible wealth is being created” for “those who own houses.” Best of all, it will continue for ten years.

“If a homeowner were to compare value gains earned via an RRSP investment versus the value gained by their home over the past decade, the house would be the top performer. The TSX was down 3 per cent year over year as of June 30, while the average price of a detached house in the GTA increased 19.9 per cent to $979,445 and $1,259,486 in the city of Toronto, according to the Toronto Real Estate Board.

“New and resale housing prices have been rising at double-digit rates over the last two years and are likely to continue to do so over the next decade, driven by three main factors: intensification, low interest rates and strong demand.”

Do we have a new David Lereah in our midst? You bet. In fact, Canada’s full of them. Builders like Brad Lamb. Marketers like Bob Rennie. Economists-for-hire like Helmut Pastrick. Pumper CEOs like Phil Soper. So long as the real estate business remains a Wild West for regulators, with 130,000 realtors roaming the nation and bold, unqualified statements being published by media “experts”, we edge closer to the cliff that Americans were lured over a decade ago.

As for George Carras, he made this stuff up.

Toronto stocks weren’t down 3% over the past year, but up 4%. So far in 2016 (seven months), the TSX has gained 12.09%, more than Toronto real estate. Over the past decade an exchange-traded fund mirroring the Toronto market (XIU) has gained 46.7%, plus a dividend yield of 2.8%.

So, did George fib, knowing nobody will censure him, or does the professionally-trained engineer not understand how to do research and craft a spreadsheet? Hmm. I’m going with the former.

Anyway, let’s compare “an RRSP investment” (actually an RRSP is not an investment vehicle, but merely a channel for investing in other assets) with the average Toronto house over the past decade. In 2006 that house was $351,941. Today it’s $756,546. Big capital gain which, less selling commission, equals 97% over ten years.

Meanwhile a balanced, conservative portfolio (40% fixed income and 60% growth assets) inside an RRSP over the same period of time, averaging 7.1% annually (including the credit crisis years) would today have increased by 96.7% . So is housing “the top performer”? You win, George. By 0.3%.

But wait. The RRSP didn’t suffer ten years of property taxes, ongoing maintenance costs, lawn care and snow removal, legal fees for closing, mortgage interest, new Caesarstone counters or insurance premiums. Of course, you can’t live inside an RRSP, but the financial assets can provide cash flow and are also 100% liquid – unlike listing a house then watching people tromp through on showings.

Also important are these questions: if something has jumped almost 20% in price during one year, isn’t that a sane time to be selling it, not trying to buy? Why would a smart guy like George Carras have to fudge the numbers so badly to make a point, if housing is unparalleled? Why set up a competition between real estate and financial assets, when balanced people should have the right mix of both? And if you’re going to be handing out financial advice in a newspaper column to a mass audience, isn’t it irresponsible to say one asset is “likely to rise at double-digit rates over the next decade”?

If George Carras were a regulated financial guy, he’d soon be selling shoes at The Bay.

David Lereah, by the way, is now self-employed. Guess why.

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July 31st, 2016

Posted In: The Greater Fool

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