Money destruction

How much do houses really cost? Everybody says we have a real estate crisis. Instead, John argues, we have a money disaster.

He’s an engineer who bought his first house 41 years ago. It cost $28,000. That represented 250% of his annual income.

So today the average detached in Toronto is $1.785 million, 21% more than last autumn. In the 905 commutershed the increase is 29%. In Vancouver a detached averages $1.85 million, up 20%. We know from the feds that people buying homes worth seven figures or more carry an average debt equal to 450% of incomes. And the prices themselves range from 8 to 12 times annual household earnings. We also know mortgage debt continues to crest and home loan/equity LOC borrowing is ramping up at more than twice the rate of inflation. Plus interest rates will be rising in 2022.

In short, asset inflation. On an historic scale. And because the asset is housing – not hockey cards, NFTs or Tickle-me-Elmos – it’s become a kind of national emergency. In fact that last federal election campaign was all about affordability – which has worsened since the voting ended. As a result, the feds are about to usher in new plans making debt and home-buying easier, as the CMHC limit zooms to 1.25 million, for example.

But wait, John says. We’re being manipulated. Diverted from reality. “Politicians, whose deficit-spending caused all this currency debasement, are bringing out all the old excuses, which date back to Roman Emperor Diocletian, to the Roosevelt gold confiscation in 1933, to Nixon’s default on gold convertibility in 1971, blaming “Foreigners,” “Speculators,” “Hoarders” and all the usual suspects for nominal house price increases except themselves,” he says.

In support, he offers this chart of US home prices expressed in ounces of gold. As you know, the Americans have suffered far less FOMO than we little beavers and moreover went through a housing crash (2006) that we skirted around. But, still, this is interesting…

House prices expressed in ounces of gold

Source: longtermtrends.net. Click to enlarge.

What does this tell us? No, not to buy gold – which has been a lousy performer for the past decade. Instead it suggests anyone who thinks cash is a storehouse of value better think again.

Says our engineer:

Note that there is little change over the last decade. The recent average US price is 250 ounces of gold. It’s the currency that has gone down a lot. Now houses cost ten times incomes. How things have changed. Now houses are as cheap as ever, going back to 1889, when measured in real money. When will the general public realize what has happened? Then what?

The point is clear. The value of currency is being destroyed over time by asset inflation . It’s all the more painful because income inflation hasn’t kept pace. Recall that government benefits will rise 2.4% in 2022, intended to offset the swelling cost of living, but houses cost 29% more in Mississauga. Not to mention food, insurance premiums or the price of golden retrievers.

Government overspending, overborrowing and the consequent creation of money by central banks has brought us to this point. A third of the currency in circulation did not exist three years ago. Ottawa spent $350 billion more than it earned last year, papering over the rest with the issuance of bonds. In fact deficit financing is now normal. Routine. Society burns though money it does not have, faster than ever. The Bank of Canada for a whole year spent $5 billion a week in newly-created funds to buy up government bonds and artificially suppress rates.

So now we have the result. Inflation is the greatest in three decades – since back when Blondie was still hot. Real estate is out of control. Housing costs eat half, two-thirds or more of the incomes of recent buyers. Forty per cent of people live paycheque-to-paycheque. A majority would be pooched if they missed just one. Measured on the street in any Canadian city, monetary policy has been a fail.

How to keep up?

Don’t save. That would be a start. Invest. Any asset yielding less than inflation or, outside a registered account, less than inflation plus tax, is putting you at risk. A balanced financial portfolio makes sense. Buying a physical asset like a house is an option, but in that case you give up diversification and take on leveraging risk. And there’s no guarantee real estate will not suffer when the cost of money rises.

Also muse on this the next time you’re allowed to vote. If the day when monetary systems like ours implode is to be pushed away, forestalling a collapse in asset values (like your house), then we need better leaders. We might get away with this profligacy for a gen or so, but our kids will eventually wonder what the hell we were thinking.

If they don’t already.

About the picture: “This is my grand dog this week during the heavy rain we experienced,” writes Michelle. “This kind of sums up what we should all be doing instead of buying over priced real estate. Lol.”