Glory Days

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Weather forecasters are calling it the Frankenstorm. “We don’t want to hype this thing too much,” one of them said a few hours ago, “but it has the potential to be the worst in a century.” That would mean $5 billion or so in damage from New York to (maybe) Toronto.

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Hurricane Sandy is a handy metaphor. It’s gigantic, natural, ugly, unstoppable and you know misery will be left in its wake. What else would so perfectly describes the Boomers? These wrinkly isotopes have blasted their way through the economy for the past six decades and the biggest blow could be yet to come. The implications for real estate – and their adult children – are huge.

First, remember that it was the Boomers, all nine million of them (a third of the population), who created a demand wave in the Seventies and Eighties, creating inflation, stupid housing prices and Cindy Lauper. Today you’d think they’d be rich, since they sucked up all the best jobs, binged on real estate and lived their working lives amid constant income gains and economic expansion.

But, sadly, just the opposite now seems true. Boomers are broke. Or damn close. Consider this:

Over 70% of Boomers have no corporate pension. And yet over half of people aged 50 to 59 have accumulated less than $100,000. What the hell do they think they’ll live on?

Almost 75% of people did not contribute to an RRSP last year. The average savings rate was 20% in 1982. Thirty years later it’s barely over 3%.

Over 60% admit they’ve failed when it comes to retirement preparedness.

Over 50% of folks in their 60s will be retiring with a mortgage to pay. Almost 30% expect to still have one at age 70.

The average income for retired Boomer families now (over 65) is a measly $37,400. The average CPP payment for retirement is a mere $529.09 a month. The average OAS is $514.74 monthly. Who actually believes they can live on this, and say they are enjoying life?

And yet 70% of Canadians, and closer to 90% of Boomers, own real estate.

Which brings us to the stat which should terrify their children (and every homeowner): A third of all Boomers say they’ve only one way to fund their retirements, which is by selling off their real estate. I suspect the number who will be cashing out is far higher, but this alone amounts to about a million houses hitting the market – when housing’s already going into a funk. By way of comparison, the total number of homes sold in Canada last year was 456,749.

Of course, all those houses won’t get listed at once. It’ll take a decade or so for the wave to sweep through, but it will likely happen as interest rates edge higher and house prices continue to be impacted by a slow economy, swampy incomes, tighter credit and off-the-chart levels of household debt. I’ve said before on this blog that demographics is the elephant in the room everybody’s ignoring, including the government. Yesterday’s news that plans to pay off the national debt have been pushed back by at least 20 years (and even that is a fantasy) should give you an idea of what lies ahead.

Of course the burning question is who’s going to be buying these million Boomer houses, and at what price? Will the wrinklies today with fat houses but scant savings and no pension be able to raise enough to stagger through until their eighties and beyond? And what about the 52% of Baby Boomers who say they’ve put zero away for long-term medical care? Do they all think they’ll just keel over?

Eighteen years ago I wrote a book pegging 2015 as the start of a retirement crisis based entirely on demographics and a Boomer love affair with real estate. Little did I know that in 2012 we’d have record home ownership and record debt at the same time. I never imagined the savings rate would collapse or half the people hitting 60 would have less than a hundred grand invested plus a mortgage in retirement. In other words, nobody listened. Or, not enough.

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Obviously if you’re a Boomer with most of your net worth in a house, waiting to sell means you might have to develop a taste for Alpo. Five years from now you could be shocked at what somebody’s willing to pay for that particleboard palace in the burbs. If I’m right, we’re in for a long stretch of asset deflation and price inflation. In a world like that you need income and liquidity.

At the event in Toronto on Monday I told twelve hundred people to expect this shift. From the dominance of the middle class to its demise. From the accumulation of stuff to the ascendancy of cash. From real commodities, be it houses or metals, to financial assets.

The Frankenstorm may miss us. Boomageddon won’t.

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avatarGarth Turner - The Greater Fool posted Thursday, October 25th, 2012.

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