When I asked the thirtysomething woman why she had her entire fortune of forty-six thousand dollars in GICs, the answer was immediate. “My father got burned on Nortel,” she said. And that was enough for her. A 59-year-old gambling his RSP on a bloated tech stock equated in her young mind with never taking a risk in her own life. Ever.
Why do people do what they do? Live where they live? Buy minivans and yoga mats? Give money to the orange guy?
After too much reflection I’ve concluded it’s because most are insecure, lack confidence to make independent decisions, and end up aping others. It explains a lot. Buying condos. Fearing stocks. Trusting the bank. Pitying renters.
Herd instinct has a lot to do with markets and how much things costs. Houses, for example, are now unaffordable without sacrifice because demand inflated prices. That demand came from parents, mortgage lenders, realtors, peers and the media. As the cacophony grew louder with chants of ‘buy now or buy never’ nobody complained. Global TV covered it. Politicians pandered. A few years later 70% of people had bought in and debt was out of control.
Now we have a bubble and are entering a correction. Sales have been wounded. It’s just logic that prices come next. After a borrowing binge, families need time to boost incomes (unlikely) or deleverage (noticed how many people on this blog are suddenly worried about their mortgage?). This is good, normal and required. The last people into the market will be hurt the most, but that’s why we call them greater fools. Those who did extreme borrowing will be wiped out for years. And hopefully real estate will be attainable once more.
This is a lengthy, amazingly boring introduction to today’s topic, which is fear and loathing.
The meme is now spreading that there’d be no dip in real estate values if everybody would just shut up and go back to listening to their moms. “One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one,” mused a columnist in the Globe and Mail this week. He pointed to a paper done on the US housing crash claiming negative stories about real estate in 2006 created “a turning point in the public mind” which directly caused Armageddon. “There are reasons to suspect that the price changes are related to public swings in opinions rather than fundamentals,” it said.
This is exactly the point being made this week by long-time Toronto housing promoter Andy Brethour. He’s just blanketed the industry with a report saying the GTA new housing market, “is back to normal,” because the only thing negative about it is media coverage.
Says he: “There has been a media frenzy lately around the Toronto Market’s potential crash and burn… the media loves a car wreck and they are doing their utmost best to create one…
“Will it be self fulfilling… absolutely not !! The Toronto Real Estate scene is adjusting BACK TO MORE NORMAL LEVELS of absorption. The pace of absorption over the past decade could not be sustained forever! As the market drivers… employment growth, immigration and affordability subsided so too would the rate of sales. BUT A CRASH IT IS NOT!”
Of course, when you have to type in caps, you’ve already lost it.
But Brethour makes the bold claim that housing economics are just peachy. He asserts that rising employment, immigration and value will bring back the buyers and goose prices, while the Globe guy cites the Royal Bank’s affordability indexes as only “exceeding their long-term averages modestly, although the national figures are exaggerated by extremely poor affordability in Vancouver.”
Wow. The jobless rate in Toronto at 8.4% is higher than that of the US. Immigration has just been dealt a body blow with suspension of the investor-class program. And RBC says it takes 52% of a family’s pre-tax income, plus a massive 25% downpayment, to afford a GTA house. That’s about 70% of take-home money. In Vancouver, it’s 90%.
And how about debt? We’ve never had mortgages this big, owed so much, or had a debt-to-income ratio so high – and all at historically low interest rates which will be higher by Thanksgiving.
So ask yourself. Are media salvos like this week’s issues of Macleans or Canadian Business, forecasting a housing crunch, enough to override the influence of the granite-loving girls at the office or your Italian, house-worshipping uncle? Does this pathetic blog with its 482,872 visits a month have the power to cancel out a nation of moms?
Hardly. We are but dust.
Mr. Market did this all by himself.