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April 28, 2019 | The Problem

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.

Let’s start with Vivian. I think she hates me.

“My husband has been reading your blog for a while now,” she writes. “I have a problem.”

Oops. Okay, Viv. Get it off your chest.

“All of your posts about “don’t buy a house” always only take in consideration the money aspect of things. What about the whole comfort side? Knowing you aren’t going to see your entire life go up in flames because the stoned neighbour kid dropped his weed smoke on the carpet and was too stoned to put it out? Or because the old man on the other side fell asleep while cooking? You pay rent for 30 years and after that, what happens? You have nothing. You pay mortgage for 20 years, you can then turn around and sell it and get some of that money back.

“Living in an apartment or townhouse causes stress. Instead of constantly saying buying a house is bad, maybe you should try giving usefull advices on how to do it.

“Dont get me wrong, I have tried investing. I’ve tried placing $100 in a TFSA 3 years ago to see what would happen. I only put this small amount because I was skeptical. Over the years, it dropped down to $97 and now own $100.04. Same with my RRSP. I’ve put more money in it for the last 3 years than what it is currently worth. WOOPDEDOO. Investing is sooooo exciting. I feel like I’ve earned so much money /sarcasm. Investing feels like a risky money scam much more than buying a house to me.

“I have 30k in a regular savings account ready to be used for a downpayment. I fear if I listen to you and my husband and “invest” with it, I will just lose more money. Also, I hate hearing the neighbours yell when I am taking a bath.”

Now, aren’t you happy you’re not married to her? Lord knows what she does in the tub to attract the neighbours’ attention. But she got mine. And this is why we’ve been teetering on the edge of a real estate meltdown. When people who have no money (and thirty grand these days is nothing) think it’s only a blog standing between them and home ownership, disaster is but a few unexpected events away.

Vivian’s right that renting an apartment in the wrong building sucks. But lacking the money to own (clearly the case), she and her poor husband can always rent one. Trying to buy would financially cripple them, and any housing correction would quickly drown their meagre equity and send them deep underwater. But the fact this woman thinks it’s some weird, old guy on the Internet standing between her and heaven is the real concern. How many people believe they’re entitled to real estate? Is it everyone now?

Plus, note the reference to her prolonged and detailed experiment with investing. She lost three bucks. So it must be a scam. Most likely this involved a few units in a high-fee, low-risk, meagre-return mutual fund flogged by [email protected] So combine the two – feeling a house is an entitlement and financial illiteracy – and you get this. The seeds of a market meltdown if anything big goes wrong. A recession. Jobless jump. Rate spike. Trade war. Climate crisis. Unfortunately, we’re closer to this now than a year ago.

The Bank of Canada knows. No coincidence that while holding interest rates steady last week and removing the possibility of any hike for a long time, it dropped a real estate report with a shocking conclusion. The bubble that’s made housing so damned expensive and dangerous to people like Viv, the bank says, was not caused by foreign money. Not by speculators, either. Or the mortgage stress test.

Nope, it was us. Just as this pathetic blog has yammered about for years. The above may have been contributing factors, but it was FOMO and greed which shot values to unsustainable levels, just as fear and debt are bringing them back down.

Because so many people believed Chinese dudes and rich 1%ers were snapping up all the houses and driving prices to the sky, they rushed in to purchase even when (like Vivian) they could ill afford it, taking on huge debt. Then when foreign buyer and anti-speculator taxes hit, people panicked thinking real estate would tank. So it did. When emotion rules, wise decisions vanish.

“Overall,” says the bank’s report, “the evidence presented in this section suggests that the unexplained strength in resales reflects extrapolative expectations, which drove up speculative demand and caused some households to pull forward purchases in fear of later being priced out of the market. Importantly, the provincial housing measures appear to have played the dominant role in eliminating these sources of demand. This is mainly because the measures, while directly targeted at the relatively small portion of home purchases by non-residents, altered the expectations of residents and generated an outsized response in the housing market.”

“The largest impact of the policies,” it concludes, “came through shocks to expectations of domestic homebuyers.”

And what next? No rebound. Too late for that. Prices are still too high. Household debt has exploded to untested levels. The jobs boom is likely over. The economy has done nothing for six months and that is exactly why the Bank of Canada’s jumped on the brakes. The housing market, it says, “is in uncharted territory.”

So, Viv, give it up You cannot afford a house and shouldn’t try. Even if you had funds, this is a poor time to buy. If you don’t like your neighbours, move. And please try to behave in the bath.

About the picture...

Drew in Stoney Creek ON writes: “Kodiak (the dad) is a 6-year-old 140lb purebred  and Tamaya (mom) is a 7-year-old 140lb English Mastiff / St Bernard. They had one litter of 13 pups. Mom had a terrible labour taking the better part of 36 hours to deal with all of them. Due to the birth being so hard on her (and us), that was the first and last litter. Sadly she lost 5 during the birth. The pup here has gone to live in Bowmanville. Thank you for all you do. Give Bandit a tummy rub.”

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April 28th, 2019

Posted In: The Greater Fool

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