An Utterly Serious Warning

[ecosophia]

There's an old Wall Street legend that came to mind today...

"In 1929, at the height of an economic boom in America, Joseph Kennedy Sr. (father of JFK) was working as a stockbroker on Wall Street. As the story goes, Joseph was walking around when he decided to sit down for a shoeshine. While polishing his shoes, the young worker gave Joseph some of his favorite stock picks. When Joseph heard the shoeshine boy giving out stock tips, he figured the party was about to end, and it was time to get out of the market. Joseph proceeded to exit his positions in the market and bought short positions that bet on the market going down. Shortly after that, the stock market entered a free fall." (Source)

The reason this came to mind is that I get therapeutic massage regularly these days, and my massage therapist mentioned today that she is getting into real estate investing. She's an extremely capable massage therapist -- but then I'm sure the shoeshine boy who did old Joe Kennedy's shoes was good at his trade, too. The rule remains the same: when people who have no previous background in investing start piling into some investment vehicle, a speculative bubble is in full swing, and will collapse catastrophically in the not too distant future.

I watched this same thing happen in real estate about a year before the 2008 real estate bust hit. When that arrived, everyone I knew who'd gone piling into real estate ended up in the bankruptcy courts. I also watched it in the stock market about a year and a half before the 2000-2001 internet bust hit, and a lot of people who'd put everything they had into interrnet stocks lost it all.

So, dear readers, if you find you're suddenly thinking about putting a lot of money into real estate investment, may I offer a piece of advice? You'd be better off shredding it all and flushing it down the toilet. Don't let yourself get suckered, because the market will sucker punch you.

Oh, and while you're at it, get ready for a whopping economic crisis, possibly as soon as this fall. The Dow Jones just hit an all time record, btw, and speculative investments are soaring while the productive economy lurches further and further into dysfunction. We're probably going to be in for a world of hurt within a year or so. Brace yourselves...

Comments

[(Anonymous)]

I manage a team and know a women’s salary as she reports into me. A few weeks ago ago she told me she had bought a house in the greater toronto area. 1.3 million. It took all my composure to not say, but how??? She has a good salary, I assume her partner does too, but if they did what most people do here they are easily looking at $6000/month mortgage.

Eventually our converation swung to a point where she was discussing how long they had looked and she joked about needing bigger raises and said, well we are also viewing it as an investment. I know I feel it for a house a fraction of the cost and wonder if it was a mistake.

In my early 30s up in Canada and without doubt a large portion of millenial young “professionals” are in this already house poor boat.

My question for people here is what happens in the case of bubble popping?

[bofur_the_dwarf]

Thanks for the great question and comment.

I marveled at the REQ (real estate question) in this country (Canada) for years. I said circa 2015 that "the bubble can't last much longer".

It used to be that I couldn't grasp how regular people were affording these prices. I am a physician and I wouldn't want to buy a 400k home, let alone... the obscenities they are paying in the major metros.

Eventually, it occurred to me that it comes down to this: people are justifying it to themselves by saying, pshaw, don't worry, yes the price is insane but "real estate always goes up so eventually it will turn out ok". It really is that simple, that is how people are thinking about it.

And the answer to the question: what happens, how does it end? Very, very badly, terribly and tragically for a lot of people, when the bubble finally bursts. Many, many folks will endure financial hardship for the rest of their lives, be underwater, have to declare bankruptcy, etc, etc., with ripple effects on the broader economy, banks, etc.

That really is what is going to happen, unfortunately.

No politician wants to touch the issue because there's no solution.

[(Anonymous)]

I am quite relieved my wife started residency in a Alberta several years ago. Without doubt we would have overextended ourselves to a large degree thinking it will all work out.

Now we are in a home that we thought was a great deal because it was so far below what we would pay in the Toronto area after saving for quite a few years. Turns out it is appropriate enough for what we make but still in hindsight we know we should have gone cheaper. Our hope at the time was that it would stay steady but who knows, just a few more years on her end which will be a huge relief.

[(Anonymous)]

Somebody downtown I know in Toronto died and was quite blue collar hence the 3 br house looked the same as decades earlier when they bought it i.e. no spiral staircases or open concept, etc... I was shocked however to see it going for under a million. Snapped up in under a week.

[(Anonymous)]

Canadian resident here. Been a homeowner since 2008, and only due to a generous gift of land from my parents and putting in sweat equity into my first home. I was certain the housing market was going to crash in 2012, as Canadian real estate never really went down even after 2008. Sold my house and moved into an apartment in 2012... real estate prices stayed afloat while our neighbours south of the border saw home prices drop out from underneath them. Never really understood how Canada dodged that bullet.

Fast forward to 2015. Prices slowly climbing. Bought another modest house in a small town, value stayed steady over the four years I owned it. Paid $209,000 for a four bedroom home on a one acre lot, carrying a $100,000 mortgage. Rates were really low then, maybe 2.5%? Sold it, then moved to BC.

Bought a home in 2019 just before the 'rona hit. Bought an acreage for $375,000 in another small town. We live with my father-in-law, so that helps spread the financial burden. Just after we bought it, prices went berserk. We're selling our home now for $575,000 as that's the going market value! Completely nuts, and not sure when prices will correct. I can't see Canada avoiding paying the piper again like in 2008, but I think one factor that's driving rural property prices up is the cities disgorging many people out to the country.

[(Anonymous)]

Another Canadian here. At my job I also know a few people getting on the property ladder. One colleague I know spends his free time renovating his current house in order to turn it into apartments, he is planning on getting a second mortgage for another house for his own family.

Maybe this is the received wisdom, but it does look like, from what I see around me in my area, that the Canadian real estate bubble is dependent on too much demand, from both residents and immigrants, chasing too few houses. The lack of supply comes partly from a lack of labour for housing construction and the use of housing for Airbnbs and the like, and the demand comes from residents trying to buy in order to rent out to either short-term and long-term tenants, and migrants moving here (I have nothing against immigrants, see my note below on this).

I'm not an expert in this, but I saw news recently about how Canada's GDP per person is shrinking in comparison to the other "developed" countries, which implies that overall the economy is getting worse. So my guess is that people here are trying to treat housing as a source of income, and setting rent accordingly (not to mention as a response to inflation), which in a way would seem to be part of a feedback loop with the GDP per capita metric, because overall people are worse off as housing costs increase. To beat inflation, some get into housing, and find they need (or simply get greedy and want) to set rents higher, which in turn fuels inflation. This also says something about the overall job market if this is the way many people are choosing to "make it". I'd be curious if someone with more knowledge on these things would confirm whether this is indeed the case.

So the bet many people look to be making involves the assumption that, even with a recession or worse, housing demand will be stable, because construction lacks enough labour to turn things around quickly, there will be enough tourism to fuel incomes and rents for those areas dependent on it, and that the population will continue to increase.

What would need to happen in order to shift this picture unfavorably for would-be landlords? One way of course is that an economic crisis in Canada and elsewhere could drop the demand for tourism, potentially expanding housing supply as people try to get out. Another would be a drop in the number of people trying to come into Canada. This brings me to my note about immigration. Like I said, I have nothing against immigrants; I was an immigrant elsewhere for many years and so I got a taste of what that means. I sympathize with the situation immigrants often find themselves in when they come to Canada. They are often sold a picture where there is demand for their skills; yet many professional bodies won't accept their credentials. So Canada says it desperately needs medical professionals, for example, but often immigrants are told they need to pay to go to university here (which is extremely expensive) to get those credentials in order to practice. This shows up in situations such as, for example, trained dentists having to work for close to minimum wage in Tim Hortons (a chain of coffee shops) because their credentials aren't recognized.

A few months ago, I saw articles talking about how potential immigrants were wising up to this. In India, for example, there were a few influencers making videos warning potential emigrants about what life in Canada was really like, from their perspective, along with stories of other recent migrants leaving Canada. If that trends catches, and I'm not certain if it will, then you could see a drop-off in demand for housing as a result.

If I knew more about the mechanics behind it, I would also comment on the effects on all this of the falling Canadian dollar, too. But my guess is that Canada's housing bubble will stay a bubble until these things change in a significant way, but for my part, due to the size of the bubble, I am staying well clear of it.