June 20, 2021 | Get Over It

ean and his squeeze have six university degrees between them. Investible assets total $900,000 and household income is three hundred grand. Plus two government DB pensions. And they’re so unhappy. Bitter. “We cannot find a house to raise our two children in that is commensurate with what we think we have earned,” he says.

From Victoria he wrote a 1,600-word email (six degrees, remember?). The blame for their massive misfortune is heaped somewhat upon politicians, a bit on non-citizen investors and mostly on people like me. Boomers. Wrinklies. Selfish oldsters standing between young people (who have six degrees plus needs) and what they deserve.

First, there’s fiscal irresponsibility. Boomer fault.

Young families like mine are going to be left holding the bag.  Who, exactly, is going to pay for the heart surgeries, joint replacements, chemotherapy, and expensive drugs when healthcare, the biggest expenditure amongst governments, is financed by current tax dollars?  Hint: it isn’t the person paying little tax in retirement!

Second, undeserving old people won the housing lottery. Otherwise they’d be total losers.

Canada has become a Potemkin economy where selling real estate to one another isn’t just the real national sport, it’s the basis for our economy, and where working people, whether in the trades or professional classes, are getting shafted to keep the old, who had a lifetime to prepare for retirement, living in a style they otherwise would never have access to.  The notion that your house is a retirement plan basically says you’re going to make your kids pay for your own inability to plan and make good decisions.

Finally, Sean is being screwed because his elders are selfishly sucking off his gen’s future.

I have worked hard, created value, and been successful.  If that’s not enough to warrant being able to afford a decent home, then what is?  It seems the only troubled future for real estate in this country affects those who don’t own any.  Everyone else takes on massive risk trying to get a place to live to raise their family and gets to finance the idiotic decisions of oldsters who get to live in a style they can only enjoy due to the next generation taking on massive debt.  How is this not a massive natural Ponzi scheme scheme?

Now, let’s check the latest numbers. As mentioned here a few days ago Canadians took on $17 billion in extra mortgage debt in one month, April. We owe $1.69 trillion on real estate (a trillion is a thousand times a billion). New mortgages surged 41% in the first 90 days of this year. The average amount borrowed has swelled to a record high. Sean’s right. It’s “massive risk.”

Even the lending guys agree. “Too many people are panic-buying and getting in over their heads,” says high-profile mortgage broker Rob McLister. All it would take, he says, is a 10% price correction for a lot of recent 5%-down buyers to be wiped out. “In fact, they’d owe roughly 6.3% more than their home is worth in that scenario. If they tried to sell and got their asking price (doubtful in a falling market), they’d be left with almost 11% less than they owe on their mortgage. If they didn’t have other resources to pay that difference, they couldn’t sell. It’s that simple. They’d be stuck in a home they don’t want.”

Could this occur? Of course. Any increase in interest rates would hasten it, or an economy slowdown, or a fourth Covid wave. Then, “a meaningful percentage of underwater borrowers is within the realm of possibility.”

New buyers have blindly swallowed this mounting and historic level of risk by telling themselves, ‘the government won’t let real estate fall’ with artificially low rates, 40-year mortgages or maybe even a debt jubilee. All false. We’re in a classic asset bubble which will, like every other one in history, end. In tears. Prices can certainly inflate more, but without massive gains in household income (not happening), a tumble in borrowing costs (impossible from here) or big tax cuts (ha!) the outcome is obvious. When over 90% of people cannot afford real estate at current values, it is completely irrational to expect sustained gains.

As this pathetic blog detailed last week, more and more wise owners are selling, as the myopic kids keep buying. It’s classic mania behaviour. In time the decline will arrive. Then, as in the US in 2006, housing values will fall precipitously and few will have the guts to jump in. We want what goes up and eschew what goes down. Understand human nature and you will invest with brilliance. Succumb to it, and become Sean.

Only in Canada, a rich and privileged land, would a young couple with high incomes, almost a million in savings and fat, life-long, government-sponsored pensions whine and moan about being denied and victimized. If you ever doubt we have lost our way, or poisoned our children, behold this.

Garth Turner June 20th, 2021

Posted In: The Greater Fool

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