Won’t End Well

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In the last year gold has lost 9% of its value, and a detached home in Vancouver has declined 6%. Condos in Toronto are about 3% less, and falling. Median home prices in Victoria are down 8%. Silver has tumbled 14% in the twelve months. Of course real estate sales in most cities have fallen substantially recently, suggesting more price weakness ahead.

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Meanwhile, the Dow is up 8% in a year, the S&P 500 has gained 11.6% and the laggard TSX is ahead 2%. Spot a trend here? Hope so. It’s what I told you more than a year ago to expect, as we enter a new era your mom never warned you about.

Real assets are flatlining or, in many cases, declining. Financial assets are going in the opposite direction. In simple terms this means you’re better to have more of your net worth in a nice rotund little portfolio, and less in your house. Yup, those days of buying a home, just paying down the mortgage and feeling smug are over. It’s a shifting of the financial tectonic plates most people will not even feel or realize until then end up like Vince. Poor Vince.

“I bought this house for $895,000 five years ago,” he says, when everybody thought it was different in Victoria. Not long ago he got his assessment notice, for $810,000. Not that it matters much. Five months on the market now, and two price reductions. “If I could get an offer for eight, I’d be delirious.” After commission and moving costs, and repaying a $585,000 mortgage, he’d walk with $265,000, which is $30,000 less than his down payment was in 2008.

And in those five years he made $170,000 in mortgage payments, paid $38,000 in property taxes and insurance and put in a new main floor washroom. The cost of owning, then, was $208,000 plus the asset loss, or $238,000. That’s $4,000 a month. Houses similar to his rent for about a grand less, which means the whole thing just drained his net worth (not even including closing costs when he bought or the expense of the new john). Not something a 58-year-old yearning for retirement can easily swallow.

The days of houses inflating all on their own are over. With a slowing economy and an aging population the demand for income will far outstrip the demand for real estate. Already billions of dollars sitting on the sidelines or idling inside properties is finding its way back into growth assets. And why not? It’s patently clear the doomers were wrong. There is no 2008 on the horizon. The greatest risk is not losing money, but once again running out of it.

How obvious is this? Even Mark Carney gets it. In a weekend interview the departing Bank of Canada czar warned a moist, cold nation that houses will continue to correct (for two more years) and people should stop confusing their homes with a financial plan.

“Real wealth is built through innovation, and it’s gained through hard work. It’s not through some magical asset inflation.”

This is crushing news to all those young hornies who bought condos and GTA townhouses made of pressed corn flakes with 5% down, thinking profits were guaranteed. It’s misery for thousands of sad Vancouverites who shoulder massive mortgages and suffer pale, blinking people living in their basements. It’s especially brutal on the wrinklies. Scores of house-rich, portfolio-poor Boomers thought paying off a mortgage was all they needed to worry about, prior to selling their energy-sucking, suburban McMansions to dumb thirtysomethings for an obscene capital gain.

But the shift spells an end to that. With mortgages available for about the inflation rate and diversified, balanced portfolios turning out predictable returns, why would you pay off a 2.8% debt on a depreciating asset when you can get three times more elsewhere? How does it make any sense shoveling cash into your home’s equity when, like Vince, you end up poorer than when you started? And why it’s such a bad thing to “throw your money away on rent” when you throw more away owning?

The realization of this is spreading, despite the realtor misinformation and marketing deception you’ve read about on this pathetic blog. But most people won’t get it.

So we have a spectacle ahead. This won’t end well.

But the way, I sure hope you voted for this blog. The last time I looked, the potatoes and jar people were gaining on me.

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avatarGarth Turner - The Greater Fool posted Sunday, February 17th, 2013.

1 Comment for “Won’t End Well”

  1. Silver spot proce $33 a year ago, – $29.82 today (slightly more than yesterday when article penned) = $3.18 / 33 = 9.6% no? Do you just round up to 14% when it’s a 9?

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