Expectations

It was the best of time. It was the worst of times.

You’ve heard that quote before. Dickens wrote it. Smart dude. But take a minute to read the rest of the passage, and think about 2021:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

People have always lived in times of contradiction. No difference today. Some would argue in a world where one guy has greater wealth than a few billion others that humanity’s more messed up than usual. But, maybe not. Kings and serfs. Overlords and underlings. Twas ever thus. Perhaps it’s just our expectations that got out of control.

In any case, here we are. It’s the age of rights. Society tells us we have the right to a basic, livable income plus the right to shelter, for example. Reasonable people know that’s utopian, and we can see what happens when government attempts the impossible. Deficits and debt spiral. Taxes follow. And we still have deep inequities in society.

Well, they’re at it again. Days ago we parsed BC’s lame-brain idea of breaking real estate contracts, which will reduce listings, raise prices and make lawyers happy. The feds are about to unveil the FHSA, a new age-based tax shelter destined to reduce affordability. Nova Scotia just announced a withering tax of 2% of assessed value annually on properties owned by anyone from “away.” Ottawa has a national anti-foreign-owner tax coming and is mulling its own empty house tax. Toronto launches one of those in January. And now Ontario has unveiled a task force to deal with the real estate ‘crisis’ in a province where the citizenry is addicted to house porn.

Regulations and taxes. Incentives and gifts. Brake-accelerator-brake-accelerator. The best. The worst. Clearly the people running this place have no clear idea on what to do next. Meanwhile the two reasons real estate are out of control remain. First, buyers can use extreme leverage with loans backstopped by taxpayers. In other words, lenders have little reason not to lend. Debt explodes. Second, while almost all investment gains are taxed, house profits are free.

So until 5% down payments and the PR exemption are gone, nothing much will change. Houses will escalate further, until market forces take over. When might that happen?

Beats me. But rising inflation, interest rates, debt, taxes and government interference are negatives. Any society that tries to condone rights on people that used to be privileges, and uses borrowed capital to do so – Hoovering wealth from the future – is destined to falter. People are now paying $1.7 million for a detached house in big cities. Will they be able to pay $3 million in five years without incomes doubling? How will that possibly happen?

The expectations are unrealistic, especially when the cost of money will rise and governments sink deeper into their morass of red ink. This matters if you are, say, 35 or 45 years old with the bulk of your net worth in one thing. Ask yourself how society can make housing accessible to people as a right without destroying its value to the privileged who now own it.

In practical terms, does this not mean an eventual wealth tax to find the money the majority demands be spent on affordable homes? Like Jagmeet campaigned on, but broader? Like the American Democrats are now proposing for the rich? Taxing unrealized capital gains, instead of income? Like your house?

Owning real estate has been a bonanza for many. The ride isn’t over yet. But this is an unsustainable aberration. Million-dollar garbage heaps. Concrete boxes selling for $1,200 a foot. Trillions in personal borrowing. FOMO and debt-desire everywhere with elected people desperate to fix a crisis former elected people gave birth to.

People like me have lived through a lot of business and economic cycles. We’ve seen assets rise and fall. Markets that give and take away. Nothing goes up forever. Consider where your finances will be if this asset class corrects. Because it will.

About the picture: “Long time readers over here in Edmonton!” writes Kathryn. “Thought we would send along a fall picture of our Mocha. She is a 5 month old German shepherd that saved our spirits. As we had to say goodbye to our old shepherd of 17 years last spring, friends couldn’t take our sadness and linked us up with a new litter of pups in Vegas. My husband drove 21 hours one way to pick her up (he’s a dual citizen so could cross both ways during Covid). Here she is, a new Canadian, happily playing hide and seek in the leaves (and ignoring me!) Thanks for all that you do for us blog dogs! We just crossed the one million net worth mark and that’s all because of you dear sir!”