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January 20, 2020 | Canard, Part Deux

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.

Yesterday we brought you news that the dude in charge of Canada’s housing agency thinks real estate is a fat canard. We’re obsessed with it, says he. Realtors are drunk on their own excess. Society is nuts for glorifying the SFH. We’ve made renters into second-class citizens. Worse, even. Losers.

Well, here are some interesting numbers. Sixty per cent of Millennials (18 to 37) have no savings. Zippo.  The other 40% have precious little – between zero and $25,000. And yet of those between 26 and 37 more than four in ten own real estate. Of that group about half got help from the Bank of Mom, and 92% have mortgages.

So, obviously, the kids couldn’t care less what some crusty bureaucrat thinks. The obsession continues. And people are willing to do whatever’s necessary – looting their families and indenturing to the bankers – to get it.

Now let’s compare that to the United States where, unlike here, everybody went through Houseageddon a decade ago. Real estate then lost 32% of its value (70% in some places). The mess was precipitated by the serious financial troubles of one in twelve homeowners who defaulted on mortgages they could not service. Mortgage-backed investment assets, stocks and entire banks cascaded soon afterwards. America teetered on the edge of a financial black hole.

That experience altered behaviors. For five years after the event, surveys showed a majority of young adults wanted absolutely nothing to do with mortgages or houses. Renters abounded. It was hip to lease. Smart. Prudent. Real estate values languished. Investment companies moved into cities across the country and scooped up thousands of foreclosures and distressed properties.

Now, as the Mills stare at the big 4-0, married and breeding, things are changing. But the gap between Boomers and this cohort at the same age is stunning. In 1990, at an average age of 30, Baby Boomers owned a third of all real estate in the States. Today’s Millennials (average age 31) own just 4%.\


The outcome of this disparity between moisters in Canada and the US? Simple. Our kids possess way more real estate and owe a ton more debt. Young adults in America have fewer assets but more money. The Canadian savings rate has plunged to 1% while in the Land of Trump it’s jumped from sub-6% in 1996 to plus-8% now. Three-quarters of US mills have a savings account, and a UBS survey found this is the most financially conservative generation since the Great Depression. On average, they’re putting almost $500 a month into retirement savings – while so many moisters here are stretching to service debts.

So what’s the best approach?

The upside of real estate, even when you have to scratch and sacrifice to own, is forced savings. Paying an amortized mortgage slowly builds equity and reduces debt. So long as the capital value of the property doesn’t plop, you build wealth over time. People who build it ultimately spend more of it, which is an economic good. Also, if you’re lucky (and smart) real estate can be liquidated when retirement rolls around. Moreover, if the experience of the last ten years is repeated for another ten, you da man!

This, of course, is how the Boomers made a ton of dough. But it was during a time of expansion, growth and inflating asset values. Today, not so much.

The downside of real estate for the young is debt, entanglement and risk. Buying a property and swallowing a mortgage brings an inherent loss of personal flexibility and mobility. People tend not to chase a better job in another city, for example. With mortgage payments, property taxes, condo fees and insurance premiums to worry about, they may feel trapped in a job or career choice, instead of training for something more appealing.

Sticking all your net worth in one thing at one address in one city means no diversification. So if a market turns down, rates rise or the economy stumbles, you can get whacked far more than with a broad portfolio of assets. For Americans who remember the real estate crisis, this is a burning fear.

What to do?

Rent and invest, if you can stand the shame and possess the discipline. This is, by far, the cheapest way to live.

But if you do buy, be cautious. Buy what you can afford (my Rule of 90) and buy what you can sell later (nobody will want a loft with a creepy concrete ceiling in a few years). Don’t eschew investing – make sure you’re at least topping up your TFSA routinely. Don’t spend stupid money on a house, like adding a hot tub or even a swimming pool. Be very, very careful about condos. They’re turning into insurance timebombs.

Most of all, accept that reward (a house worth more than you paid) comes with risk (a recession could put you underwater fast). Meanwhile politicians have real estate in their tax crosshairs.

Canadian Boomers dodged a bullet. Your canard could end up being a dead duck.

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January 20th, 2020

Posted In: The Greater Fool

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