Common Sense

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On Saturday morning hundreds of people lined up in blackness before the sun rose to buy condos in outer-suburban Vancouver. Burnaby to be exact. This happened at the same time condo sales in Vancouver collapsed by 26.7% last month. In fact in the entire region last month only 676 condos changed hands. But on Saturday alone, in just one 35-storey building, 269 were sold.

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How could this happen when the prospects for real estate are dimming fast in Van, especially for condos there and in Toronto?

Two factors jump out. The first is speculation. The people desperate to get into the sales centre were not actually snapping up apartments, but rather futures contracts. The first hunk of the new Station Square development won’t be finished for at least three years. The deposit was just 10%, with another 10% not fully due for more than a year. That takes the sting out of forking over $600 a square foot to live in Commuterville.

Second, the developers’ marketing was culturally targeted. The main thrust was to the Asian community through ethnic television, print and on the web. Without a doubt, a strong bias towards real estate remains among that group of people. Whether it pays big dividends by closing day in 2015 remains to be seen. Maybe so. But I highly doubt it. Whether it’s Burnaby or downtown Toronto, the economic fundamentals simply don’t support what happened on Saturday morning. It was a classic example of group-think. The poor judgement of crowds.

There’s no doubt the economy is slowing in a profound way. We have a deficit of demand across the world. After years of cheap money, debt binging and over-expansion, there’s now overcapacity, and the years ahead will be marked by deleveraging and more brakes on the velocity of money.

Simply put, families are more likely to dump money into paying off fat mortgages and LOCs in the years ahead than in buying cars and vacations. Their dollars won’t get recycled into new economic activity – so the cash has no velocity. In a nation where (as I told you on Friday) 52% of people would now be screwed if their paycheque was a week late, it’s hard to be optimistic about the masses. Or their decisions.

If things deteriorate, real estate will be in the crosshairs. Diversified and balanced, liquid portfolios will still perform, and can be rebalanced or retooled in a few minutes if the skies darken. Residential real estate on the other hand or, worse, a condos futures contract, can turn illiquid while it deteriorates in value. I sure hope Saturday’s pilgrims realized that. But doubt it.

Now I’d like you to meet Stan, whom I do not know. But he has written me, thus:

I’d like to share my story with you, Mr. Turner. Nothing more.

My name is Stan. I live in Vancouver, BC. I’m 30. I rent and plan on doing so for as far into the future as my eye can see. I carry no debt. Have enough diversified savings to last about 2 years if I happen to lose my $65K / year job. I’m the sole bread winner in my 3 member family, which may become 4-member family if my mother doesn’t find a job soon.

I keep hearing about boomerang kids and those that live in their parents’ basements into their 30s. To me, a fall back option such as this, would be a luxury. I face the possibility of housing “boomerang parents”. Each time the media mentions someone returning to someone else’s house, I cringe. Quite often there is no house to go back to.

Despite being told all my life that renting meant throwing money away, I could never bring myself to invest in a mortgage. Signing a contract that amounted to a promise to remain in good health and financially stable for 30+ years never made sense (regardless of the premise). Not knowing what the next year might bring, how could I commit to anything forcing such obligation?

My previous place of employment shared the building with a realtor firm. Their parking lot was always full of top of the line BMW’s and Porsche’s. My young friends were all starting families and jumping into mortgages at that point. They thought they could afford the $1 mil homes they were going for (while earning roughly less or as much as I did).

I used to go to the parking lot with my co-workers, point at the realtor section and say: “See these cars? They’re bought though fees and commissions you paid when you took out the mortgage. When you buy property, you purchase a BMW as a gift for somebody else.” My friends laughed, but they’re not laughing now… neither are they my friends anymore.

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Yet with many of my, now underwater, former friends no change has taken place. They still occupy the properties, having missed out on the blessing of a faux recovery. Not everyone gets a second chance to get out of the market and they totally blew it. I still cannot understand what pushed most of them into “ownership”. I had no data, no projections when making my decisions, just a simple set of observations. The parking lot and my own clunker told me more about the state of the housing market than all of the mainstream economists, university professors, and TV newscasters combined.

There are those who think independently, and those who follow society. This is a time when common sense is no longer common. When the obvious is concealed, when parents fail the young and the goal of life’s become the pursuit of stuff.

Who among us would call Stan a failure? Other than everyone lined up in Burnaby’s darkness.

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avatarGarth Turner - The Greater Fool posted Sunday, October 21st, 2012.

1 Comment for “Common Sense”

  1. Stan was the wise one among his friends. Alas, the masses are always wrong. Living without debt, especially a lifelong debt like a mortgage, is freedom.
    Dan

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