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El predicto

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If you knew an asset was going to careen lower in value, what would you do? Chances are if you didn’t own it, you sure wouldn’t buy it. And if you did, you’d dump it. If this were a stock, you might short it (that means borrowing the security and selling it at current value, so you can buy it later at a cheaper price before returning to the lender. You keep the difference).

But how do you short real estate?

Not so easy. But it sure makes sense to try.

The Canadian residential real estate is in for some tough years, as this pathetic blog has predicted with enough boring repetition to lobotomize an entire generation. Not only have we borrowed our little brains out buying houses just because money’s cheap and HGTV told us to, but we’ve done it at a time when wages and salaries actually fell below inflation. Not smart. The country has now achieved 70% home ownership, which is roughly the level at which the US real estate market fell to pieces. In other words, demand is largely sated. Next we’ll be flogging condos to eight-year-olds.

The feds have declared war on houses, because if they don’t prick this bubble then pricks will keep bubbling. And that’s poor public policy. Better the gasbag deflates than explodes, as happened in the States, blowing up the middle class. Killing off 30-year mortgages was just the start. But bank changes will now click in by the end of October.

All this means prices will correct, then flatline or melt in a process you should expect to take several years. Some markets will be creamed. Others grazed. Everywhere people will lose equity.

Some actions are obvious. First, if you have been thinking about selling, do it. Now. Especially if you’re a wrinkly, oxygen-sucking Boomer with the bulk of your net worth in a particle board McMansion in suburbia. If you can get your hooks into a greater fool who still thinks Tubetop Sandra is hot, do so.

Second, if you’re house lusty, then wait a year, or four. Anybody buying property almost anywhere in the country in the next year, who plans on owning it for less than half a decade (or possibly much longer) will lose money. If you don’t care, go ahead. But don’t come round here bitching in 2016.

Third, rent. Right now most landlords subsidize tenants. It’s virtually impossible to lease out a condo or single home in any major centre and not be in negative cash flow, unless you have a massive amount of equity – and then you’re only robbing yourself. Without capital appreciation, owners lose. And it will be liquid assets, not real ones, which will be doing the appreciating for years to come.

Fourth, you can short the stocks of companies that a real estate collapse might nail, like publicly-traded second-tier mortgage lenders, real estate marketers, developers and furniture chains. But forget the banks. They saw this coming long ago and have massively diversified sources of revenue. Besides, F bought all their dicey mortgages three years ago.

Fifth, buy an apartment building. I’ve done the math on this for you in the past, and if you’re into coin-op laundromats and toilet engineering, this is probably the safest real estate in the nation. Just watch the cap rate, and if you don’t know what that means, buy a REIT instead.

Real estate investment trusts could be the ultimate way to have exposure to the property market, and still giggle when it collapses. Commercially-based REITs buy office towers, malls and industrial buildings, then pass on rents to unitholders. They have zero exposure to residential houses, and have given investors outstanding returns since I started suggesting this to you three years ago.

And residential REITs – those which build, buy and own apartment complexes – are an even sweeter choice. With housing bloated and unaffordable, these REITS are seeing record occupancy levels and rising rents – along with soaring share values. Once the housing market’s deterioration is evident to everyone, the demand for rental accommodation will only increase.

What’s going to happen is no longer the question. What you’re going to do about it, is.

Garth live in Vancouver

A reminder that I will be speaking in Vancouver tonight (Monday). Admission is free, however I’ll be happy if you bring squirrel brownies or spare Hummer parts. The gig’s at the Marriott Pinnacle Hotel, on West Hastings, and the doors open at 6 pm.

If you signed up here and received a confirmation email, perfect. If you’re just coming to harass me, I truly hope you can deal with a wet Amazon.



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