Mainstream!

There was a great article that ran on msn.ca today.  We’ll discuss it in a moment.  Before we do, let’s be reminded that one of the important drivers of any correction is a change in investor psychology.  As I’ve said many times, the greatest difference between Canada and the US in terms of our real estate is not our prudent banks or conservative consumers, but rather the fact that we still have confidence in real estate and the broader economy, while they don’t.  It’s inevitable that articles like this will become more commonplace as the correction becomes obvious.  The associated change in consumer psychology is also fairly predictable.

Our economy is now largely dependent on debt expansion for continued ‘growth’.  This is problematic when consumers are carrying record debt levels, while the slow dawning realization of our current economic climate is starting to creep into consumer consciousness.  Scared consumers don’t buy.  And nothing scares consumers more than the thought of their real estate holding, by far the largest asset most people ‘own’, declining in value.  This golden goose of the Canadian economic miracle is sick.  Ebola sick.  And people are starting to realize it.

To wit:

How to protect yourself if home prices fall

“House prices in Canada have officially fallen — and they could fall for some time.”

That’s the first line of the article.  How’s that for a bucket of ice water to the face?

“It’s a dangerous time to be in real estate. Home prices have risen to record levels, and mortgage rates and housing inventory are creeping up. After years of marvelling at the surge that just won’t quit, newspapers are changing their tone. Gone is the euphoria of earlier this year when buyers rushed in before the introduction of the harmonized sales tax in B.C. and Ontario. Now unfamiliar phrases such as “cooling market” and “slowing sales” are being dusted off for headlines.”

“Real estate in Canada appears to have reached the tipping point. According to the Canadian Real Estate Association, sales activity was down by a whopping 30 per cent…Insiders are warning that plunge could continue in the months and years to come.

I’ve never considered myself an ‘insider’, but hey, thanks for the props!

“Historically, one of the greatest allures of home ownership was that it represented a great way to build wealth. If you bought a house and hung on to it for 15 years, you could sell it for a huge profit. But now, in many parts of the world, instead of making money on their homes, people are losing a bundle.”

This is an important point and should not be glossed over.  Virtually the entire Western world just experienced a bursting debt bubble back in 2008 and 2009.  The dam has been temporarily fixed by the largest peacetime deficit spending in history, but that’s not a permanent solution. The bottom line is that virtually the entire Western world has been enjoying an artificially high standard of living made possible by rampant debt accumulation at all levels of society.  That now has to be repaid.  This exerts deflationary pressures on leveraged assets, particularly real estate.

What people miss in the whole “we’re more prudent that Americans” tag line is that this is not solely an American phenomenon.  It’s a symptom of an international credit system that is now on life support.  Canada is not different.  We just don’t realize it yet, which has enabled the charade to continue for a bit longer.

Remain a renter for now. The best thing you can do if you are considering buying a home right now is wait.”

This is possibly the best line from the entire article.  That advice has to be like fingernails on a chalkboard to realtors.  I’ve said many times that the great contrarian indicator that will indicate that a bottom in house prices is near will be when statements like this become generally accepted as wisdom.  Right now 90% of our population believes that real estate is a great investment.  When that pendulum swings, and people began to reject this assertion as a collective, a bottom is near.  In the US, over half the population looks at real estate as a wealth trap.  What a difference!  The idea of using overwhelming majorities as a contrarian indicator is discussed in one of the primers

From the article- Advice to sellers: “Lower your price. Now is not the time to test the waters with a high price. It’s a competitive market and home values are falling. If you must sell, and you live in one of the cities where prices are softening, don’t waste precious time by listing your home at a price that’s so high it won’t be supported.”

Ah yes, the beggar-thy-neighbour approach.  If you have to sell, don’t screw around!  Get it sold!  Price it aggressively, as in below what your neighbour is selling it for.  I love it.

Apparently some people are following the advice:

I expect to see more of these types of articles as well as more of these types of ads in the coming months and years ahead.  We’re in for a multi-year decline for all the reasons outlined ad nauseam on this blog.  Keep an eye out for articles like this.  Also keep an ear out for anecdotal evidence of shifting attitudes.  They are one of the great indicators of what is to come.

Cheers,

Ben

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3 Responses to Mainstream!

  1. Toronto says:

    just curious Ben…do you rent or own …and where do you have your networth..stocks,bonds, GIC’s..etc.

    • Great questions. I’m going to post on asset allocation later today, so I won’t answer that question just yet. I currently rent a fully updated 4 bedroom 3 bath house on 5 manicured acres for about half the current market rate for similar homes. I’ll also explain how I managed this in the post later today.
      Cheers

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