All the wrinklies, thirsty underwear aficionados, and generally old farts who read this pathetic blog hate central bankers. No wonder. Bonds pay diddly. High-interest savings accounts aren’t. GICs are a joke. And when you add in Canada’s punitive taxation of interest (100% of it is added to your income and pillaged), plus inflation, saving’s a bust. A generation ago retirees clipped coupons and wintered in Florida or Arizona. Now they stay home and moan. (What do you call three crusty boomers in the basement? A whine cellar.)
But the same central bankers who’ve forced rates into the ditch have pushed mortgage costs down with them. It looks like the Millennials are net beneficiaries, gobbling real estate, onboarding debt and in the process inflating houses as never before.
Despite all the moister-bashing that takes place on this site, it’s not hard to understand why house porn has become such a fav of the selfie set. Unschooled in finance, ignorant of most liquid assets (except beer) and deeply suspicious of the markets, they’ve opted for the one thing that worked for mom & dad. They also look around and see house prices marching higher, debt costs barely above inflation, and figure what’s gone up has a good chance of going up more. So they bite.
Media excess helps. Like the story of a Van ‘student’ who made a $1.6 million profit flipping a Westside mansion. The rewards are exaggerated, and the risks diminished. The result is a concentration of wealth in residential real estate as we have never seen it before. At the same time, we have record levels of debt (now 170% of disposable income, on average). Starter semis in Toronto cost a mill.
(By the way, the common practice now for any new offering in Toronto is for the listing agent to hold off offers until a certain day and time, at which a blind auction occurs among bidders. Nobody can submit an offer without a certified cheque being attached – usually for $100,000 or so. Once offers are opened the top bidders are sent back to their waiting cars to ‘do their best’ without knowing what they are competing against, while the salivating vendors wait inside at the kitchen table. It’s all nauseating, and all too common.)
Back to the central bankers, for a minute, who are encouraging this highly speculative, risk-drenched behaviour. Having failed at stimulating sustainable, robust economic growth, monetary policy is now focused on slashing rates to the point of actually being negative, while stimulating economies through direct payments. Governments are also into the act, plying taxpayers with their own cash in hopes of a revival. That’s exactly why the T2 gang has started sending out unheard amounts of cash to people with kids, tax-free. It’s a wild gamble that debt can turn into growth.
Given that attitude, how can you blame the damp ones for aping it? And this is what many people find so worrisome. There are many reasons why having so much concentrated in one thing, so susceptible to change, constitutes danger. Besides, if owning real estate was such a great way to make money, why are Canadians (with 70% home ownership) in such dismal shape?
Our debt-to-income ratio (170%) is significantly higher than that of American households (132%) and has even shot higher than theirs was just before real estate crashed and burned (160%). We’re now snorfling new debt at a rate four times faster than the growth in incomes.
And did you see that survey this week? It found 56% of Canadians are $200 or less per month away from being unable to meet their debt. Half of us actually don’t care. And also a third of people are currently not paying their bills on time, making them technically insolvent. Add that to all of the other shocking factoids you’re read here – half of people unable to survive a single paycheque being late a single week, for example – and you can see the problem.
If anything goes wrong, we’re screwed. And at the top of the screwee list are the kids with big debts, little equity and nascent careers. Says the outfit behind these latest stats: “Many households have come to rely on cheap credit in order to cover expenses but we can’t continue to be comfortable taking on more credit to finance a lifestyle we can’t afford…“With so many already feeling unable to cover their bills and debts, there is tremendous vulnerability to any kind of economic shock – the loss of a job, an emergency, a divorce, even things like a reduction in overtime pay or bonuses – and especially an increase in interest rates.”
But not a day goes by without the Illuminati coming here to tell us rates will never rise. At least not until December 14th.
Well, the OPEC deal this week boosted oil, fueled the loonie and helps ensure the Bank of Canada is done with its rate cutting. This is the bottom. Which probably means houses are at the top.
If you see your daughter with an Agreement of Purchase and Sale sticking out of her bag, get her a pony instead.