Fallen Assets


So far this year the S&P is ahead almost 14%, the Dow’s added 8% and the Apple-heavy Nasdaq has gained 16%. The laggard Toronto market is up a mere 3%, thanks in large part to oil. But that still beats the poop out of a GIC, especially since capital gains are taxed at half the rate of interest. Savings accounts? Pshaw. They’ve all lost money.


In the same year gold has returned zero. And now real estate is following a sales dive with a price correction. A SFH in Van or 416 is 12% cheaper than it was last Spring. The latest sale in North Toronto was a converted bungalow, which started at $1.379 million two months ago and finished last night at $1.17 million. That’s 15% below original list, whereas eight months it would have sold for 15% above asking. So the actual decline (in the seller’s pocket) is about $415,000. That’s 30%.

Here’s the thing: real assets are falling in value, and will do so in future. Financial assets are rising, and will continue. It’s a roadmap I gave on this blog a couple of years ago, and I sincerely hope you’ve been following it.

This means, simply, all those timorous beasties, doomers, nihilists, metalheads and tinfoilers who post here and sate each other with guns-&-god web sites, are nuts. There will not be another 2008, which should be crystal by now with both employment and housing on the mend in the US and nothing more serious than a miserable recession in Europe. No major American banks will collapse. No Canadian banks will even stagger, let alone fail. No hyper-inflation, because the world is closer to deflation. But no depression, either, thanks to central bank coordination.

If we were going over a looming financial cliff (and Washington’s fiscal cliff is a non-event), it would have happened in 2009. Not now. Monetary policy prevented that. Corporate profits have cemented it. All over the world, but not in Canada, consumers and companies have paid off debt, cut back spending and atoned for past excess.

Meanwhile big gains are being made by emerging markets (India is up 35% this year, for example), plus small companies, while bond yields have started to rise and prices fall. There’s no credit crunch anywhere, unless you’re trying to buy a condo in Calgary without a down payment, while Chinese growth has resumed and Apple plans on building computers in the USA.

Across most of the western world, real estate has careened lower. There are so many houses for sale in Spain that if you buy one you get free residency. UK properties are double-dipping. French housing is recessionary while American values – while starting to recover – are still 30% below 2007 levels.

Everywhere, except here of course, people have done what they felt the times demanded. Pay off debt fast. Get liquid. Become diversified. Learn the lessons of a recent time when borrowed money chased expensive assets. It’s called deleveraging and that – not any inbred economic malaise – is why the US economy was on its knees for four years. As debt is retired, spending and growth resume. This is 2013, and beyond.

All this also means those who believe Canadians can run up record debt buying houses at nosebleed levels while our incomes stagnate and we depend on a world that’s severely deleveraged, are also nuts. As lovely as she is, Adrienne Warren, fetching economist for Scotiabank, falls into this category. This week she correctly noted the American housing renaissance but missed the mark saying we will have a ‘soft landing.’

There was a bumpy landing for the Toronto couple who last night took 30% less for their home than they might have received two seasons ago. And it could be a crash landing for sellers going to market next summer. As I’ve said so many times that it scares me, we don’t need to have a ‘US-style’ housing bust to destroy the personal finances of hundreds of thousands of recent homebuyers, and seriously reduce the equity of most others. All of a sudden that strategy of aggressively paying down a 2.5% mortgage on a house which will devalue, when you could have earned 7% or more investing the money in liquid assets (and trashing the mortgage upon renewal) ain’t so smart.

In the years to come, real estate will morph once again into shelter. It won’t be a financial plan or a tax shelter, an investment trophy or a retirement strategy. Like your car, it’ll be a necessity of life that you address as required. Maybe then houses will be affordable again, and life more predictable.

Maybe we’ll even stop being scared and greedy.

But I doubt it. That’s like meeting a monkey in IKEA.

avatarGarth Turner - The Greater Fool posted Tuesday, December 11th, 2012.

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