Insecurity

Tough numbers. The price of houses fell in 70% of the cities surveyed. In the four largest, sales crashed by two-thirds last month. America? Nah, try China.

Now this might be relevant to Iris for two reasons. First, the exodus from real estate and into liquidity is a global trend. America, Britain, Spain, Ireland, Portugal, France, Australia – smart people on a few continents have figured out that in a volatile world the last two things you need are non-portable wealth, and a fat mortgage. Second, as rich people in China lose money on real estate (and only the rich own there) they’ll probably get a lot less horny about gobbling property in cold Canada.

“I have just run across your website and found it really interesting,” Iris says (better late than never). “At the age of 50, I am a recently separated and thus starting over with half of what I had.  I have $150,000 in a GIC and continue to look at homes in case I find one I would like.  Currently rent a comfortable house for $1500/month for which I have for another 16 months if I want. Currently I live cheque to cheque.  In 5 years, I will be eligible for pension ($1200) as well as will continue to work.”

Hmm. Fifty years old, $150K in a GIC, small pension, single, living hand-to-mouth, no other assets. Conclusion: screwed.

But wait. She’s also delusional: “Frankly, I am not opposed to renting, but my concern is how to retire with such a large housing overhead.  This is why I feel the necessity to buy a house to pay down so that my retirement housing cost may be less. At this late point, I believe it would be difficult to totally pay off a house by the time I am 60-65, but a small mortgage may be cheaper than rent.    The high house prices (Victoria, BC) have dipped a bit but perhaps like you predict… may slide more.  Of course, the real estate industry predicts a leveling and perhaps a 5% rise.   Our real estate prices are fueled by offshore buyers as well as retirees from back east (Ontario etc) seeking a warmer climate in the winter. What do you think?”

This is the thinking which destroys lives. Too many people around this country (especially women, I sadly say) equate owning real estate with financial stability, even when it involves being retired and indebted. It’s why four in ten people now heading into their mushy years are doing so with a mortgage. Never before have the wrinkled been so indentured. And with interest rates destined to rise over the coming years – while they remain on fixed incomes – it’s a bloodbath in the making.

If Iris takes her $150,000 a buys a cheap house in Victoria ($500,000 maybe), her $350,000 mortgage, even at just 3%, will cost the same as her rent – $1,600. But after adding property taxes, insurances and maintenance, it will be closer to $2,000. Bummer. Fifteen years later, at age 65, she’ll have spent $260,835 on mortgage payments and still owe $220,095.

That’s an investment of $410,000, with a remaining debt of $220,000, which will cost her $1,500 a month at age 65 (loan plus taxes), on a pension of $1,200, plus government assistance. But wait. Interest rates won’t stay at 3% for the next decade and a half, rising instead to normalize at a level at least twice that high. And as they jump, houses in Victoria will cheapen, as is always the case when affordability slips.

How about the horny Chinese and the warmth-seeking Boomers from Mississauga? Oh, Iris. The local real estate board’s own survey of buyers shows less than 10% coming from outside the province last year. In a monthly tabulation, 83% of buyers moved within Victoria, 9.7% came from outside BC and 1% from beyond Canada. So what do we have? A bunch of local fools watching Global TV, listening to real estate agents pontificating, and selling each other houses, while chanting “everybody wants to move here.” Actually, everybody doesn’t.

Now with China’s property boom unwinding, our economy slowing and the Canadian real estate gasbag leaking heavily, can Mississauga be far behind?

So if Iris grew a set, invested in a properly diversified and managed portfolio (ETFs, preferreds, REITs, various bonds) and achieved 7% for a decade and a half, that $150,000 dead-meat GIC would turn into about $450,000. If it continued to churn out that return (but it’ll likely be higher as rates rise and economies recover), she could expect an investment income of $31,500, or $2,600 a month. Add in the pension, and that’s $3,800 monthly income, plus the government handout. Oh yeah, and she still has $450,000 – which is handy since women live forever.

What a choice. Own a home, live on KD and Iams and pay off the debt by death, maybe. Or have a half-million invested, rent the same place and enjoy three times the income.

Iris personifies the greatest financial STD of our time. Death by house.

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By the way, did you hear fewer homes just sold on Salt Spring Island than at any time in 10 years? Or that the daily paper in Fort Wayne, Indiana, just ran a piece on the Canadian housing crash-to-come? Or that Seeking Alpha did the same (again)? Or that new Toronto condos costing $950,000 to $1.5 million are 95% sold?

We’re screwed, Iris. Run.