September 25, 2020 | Suck & Blow

One problem with running a free blog is that anyone can come in, use the washroom, make a mess, rifle through the fridge, write on the wall and leave, smirking. So far there have been 686,200 comments published here. A whack more were deleted – too combative, disgusting, shanky, horny or dodgy to post.

Free speech is important. Abuse is too frequent. But these days, more than ever, we need debate. The world’s highly abnormal. More disruption and change on the way. There’s no black-and-white solution to anything.

Here’s a recent controversial topic: if massive government and CB stimulus are causing danger by inflating real estate, why isn’t a puffed-up stock market just as bad?

Answer: people buy houses with 10x and 20x leverage, usually for emotional reasons, often when they can’t really afford it, and despite the fact renting is almost universally cheaper. Today we owe over a trillion in mortgage debt which is guaranteed to cost more to carry in the years ahead. People willfully ignore the inverse relationship between rates and real estate prices. So when the cost of money starts to restore, mortgage debt grows more expensive, houses lose some value and personal finances wither.

That’s the risk. The naysayers counter by stating rates will never rise again in their lifetimes. But they will. No question of that, unless the economy remains in recession for decades – in which case, real estate will be a death trap. This is the mistake Mr. Socks made on TV Wednesday night, saying Canada can add excessively to its deficit/debt because of low rates. But when they double – from 2% to 4% (it’s coming with economic recovery) – it will add $20 billion a year to the cost of carrying $1,000,000,000,000 in existing debt. That’s twenty billion less for health care transfers, child care, seniors or renovating 24 Sussex.

Finally, lots of residential real estate transactions are non-productive. Aside from realtors, lender dudes, lawyers and movers, nobody gains. No new jobs are created. No products produced for export or domestic sale. No factories built, stores opened or offices launched. It’s hard to understand how a nation of people continuously selling each other houses and condos at ever-rising prices with larger whacks of debt expect a higher standard of living.

All that debt, by the way, is expensive to maintain – even at these rates. It sucks off disposable income that might otherwise buy cars, iPhones, clothes, vacations and stuff which actually creates products and jobs. Plus, look what Covid did. Almost a million families stopped making mortgage payments – a quarter of all the indebted households in the nation – because they couldn’t carry that $180 billion in borrowings. Now they are madly adding to them.

Is this not a warning we have taken the real estate, the one-asset strategy, too far?

What about financial assets?

Yup, also benefitting from government fiscal stimulus and central bank monetary diddling. Low rates have shoved down bond yields (along with bank savings and GICs) so more money flows into growth assets like equities. Cheap rates help corporations by lowering their borrowing costs. Govy handouts such as CERB keep people buying food, kibble and Internet connectivity, which helps Loblaws, Shaw, Purina, Sobeys, Rogers and Bell. There have been small business loans (partially forgivable) and payroll subsidies, as well as sectoral bailouts (more coming for the airlines).

As a result, people with financial portfolios have flown through the dogawful 2020 largely intact. Those 15% gains in 2019 have been retained. Now investors look forward to a recovery and post-election euphoria in 2021.

Meanwhile real estate buyers in 2020 have paid more for a house than ever before in history, taking on greater debt when the jobless rate is above 10% – the highest in the OECD – and the country is in recession with four million people worried about CERB cheques ending next Thursday (they won’t, of course).

In short, pretty much all of the assets in a financial portfolio end up in the economy, productively feeding corporations, employers and jobs or financing government debt. Most critically, people with RRSPs, TFSAs, RESPs, non-registered accounts and RRIFs do not have government insurance backing their portfolios and did not use leverage to buy them. They have assets which are not layered on debt. So when Covid hit, there were no deferrals. Besides, people always require income, especially in retirement. They don’t need houses. You can rent nice accommodation when you’re seventy. You cannot rent cash flow.

Apples, oranges. Bananas and Buicks. Simple comparisons are meaningless. Stop trying to make them. There’s no competition between real estate and financials. You should probably have both.

Despite the above, nothing will change.

A survey out today from BMO found 40% of first-time homebuyers think this is a swell time to make a house purchase – with record-high prices, greedy sellers, low inventory, steep unemployment, a deep recession and a global pandemic. Thanks to the sick economy, the bank says, many of the kids have had to dig into their savings and will require larger mortgages. “Even with a global pandemic as our backdrop, we’re encouraged to see Canadians maintaining their optimism on our housing market,” says the head of personal lending. Smiling.

But it’s not just optimism. It’s delusion.

Now get out of my bathroom.

Garth Turner September 25th, 2020

Posted In: The Greater Fool

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