Working Off the Bezzle

To most of you, the term ‘ bezzle’ is a word you have probably not heard of. If you have heard of it, you may think I am referring to a part of a watch called the bezzle, but I assure you I have little interest in keeping time.

Bezzle is a very interesting concept, and one that most people are ignorant to. It is a concept that explains exactly where Canadian real estate is right at this very moment. Once I explain what exactly it is, we will look at how to fix it, or more appropriately – work it off.

Bezzle is a term used to describe some differences in finance. Specifically the actual value of something, and what something is worth. The technical definition is “the temporary gap between the perceived value of a portfolio of assets and its long-term economic value.” This is best explained using stocks, and the stock market. Almost everyone is familiar with a company called Bre X Minerals from back in the late 90’s. It is a lesson in due diligence if there ever was one. For those that are not familiar, Bre X was a mining company that was founded in Alberta in 1989. Bre X was a gold exploration company, and in 1993 bought a large swath of land in Indonesia. Magically, in 1994 there was a large gold deposit found on this land. Over the next 4 years, every single test hole that they drilled came up better than the last, and at one point, Bre X claimed to be sitting on the world’s 2nd largest gold deposit in their Indonesian property. Initially upon buying the property, geologists claimed that approx. 2 million ounces of gold could be mined from the property. By 1993 that number had jumped to 30 million ounces, in 1994 the number was 60 million ounces, and by 1997 the number had reached 70 million ounces. Now of course the stock of Bre X increased every single time they announced more gold deposits. What was initially a penny stock in 1989 was worth close to $280.00 a share by Spring of 1997. The problem though was that there was virtually no mineable gold on the property. Bre X Minerals went bankrupt mid 1997 when the fraud was discovered, and the value of the stock become worthless. Now, the day before the fraud was discovered, the stock was worth $280.00, but the company was still worthless. This is bezzle.

Bezzle is used to describe the difference between the ACTUAL value of something, and the current market value. In investing we call it value investing, but in the real world it is bezzle.  The technical definition once again is “the temporary gap between the perceived value of a portfolio of assets and its long-term economic value.” Bernie Madoff is probably one of the best examples of a modern day bezzle in action. While his investors THOUGHT they had billions of dollars ( and that was the market value ) in reality they had pennies on the dollar.

I think you see where I am going with this, so let’s turn our focus to the housing market. I think we would all agree that in late 2021, and early 2022 housing was overvalued. We can say that with hindsight, but some of us called in in the moment. As we have witnessed prices correct from Mar 2022 to current, we have witnessed some incredible price drops. It is not uncommon to see house prices down by 25% in a lot of markets. Of course not in all markets,( so you don’t need to email me the one house in North West Manitoba that has actually gone up by 2% ), but where we saw the absolutely stupidest fucking prices ( here’s looking at you T.O. and Vancouver ) we have witnessed some pretty precipitous falls.

It would also appear that a lot of homeowners were not aware prices went both ways. It also appears the ones that treated their home like an ATM machine on the way up, are the most surprised on the way down. However, the fact remains that we have witnessed what will probably be one of, if not thee largest destruction of wealth in at least this generation. We are talking billions and billions and billions of dollars in market value losses. This is the bezzle. The market value of housing has fallen, even though the actual price of the underlying asset never really moved. Look at all the pre con flips and assignments. Builders were able to build housing for the same price, it is just the market value that went up.

If you, or a client of yours bought a house in the late winter of 2022, and paid 1 million dollars, there is a very good chance that the same home today is valued by Mr. Market around $750,000.00. The house is the same, the neighbourhood is probably the same, but the market value decreased. The long term economic value of a house is beginning to be realized all across the country, and the perceived value of a pre con / flip / rehab / rental has dropped.  There now exists a $250,000.00 bezzle on this one house that needs to be worked off. So, how do we work it off?

Working off the bezzle is what has me so down on the prospects of Canada for the foreseeable future. There is really on 3 things that we can do:

1. Write off the bezzle. When we write it off think consumer proposal, bankruptcy, write down etc. While this solves the bezzle for the owner of the home, in actuality it only moves the bezzle onto the banks balance sheet. Now the bank or lender has to deal with it. We saw this with CEBA loans in the Spring of 2020. The Canadian Government loaned every business $40,000.00. Great, the people had the money to pay off their debts and bills, but the liability now is guaranteed by the federal government. You just changed who co signed. A lot of people are working on the process of writing off the bezel on their mortgage, car loans, credit cards, line of credit and the like. While it may relieve the borrower, the financial system must now absorb those losses. When banks and insurance companies lose money – they increase fees, interest etc to help cover off the losses.
2. Pay down the bezzle. This sounds like a mature thing to do. The main problem with this solution is that it will take a decade to even make headway. The average Canadian income simply does not allow enough disposable income to quickly pay down a quarter of a million dollars of bezzle in debt. Of course, slow and steady can win the race, but that means every single dollar going to reducing the bezzle is money not spent in the economy, thereby reducing demand, reducing GDP, and leading to a decade of less funds spent on productive items in the real world.
3. Hope for prices to go back to their days of being valued far over their current economic value. Basically hoping for bat shit crazy house prices again. If the value of the home can go back to being stupid, then for every dollar the market price goes up, the bezzle goes down. Of course that solution is well outside the control of the individual homeowner. 

In reality though it is usually a combination of all 3 that help to reduce, and eventually eliminate the bezzle. You pay down a bit of the principle, the market value creeps up bit by bit, and maybe you are able to write off a credit card balance here, or a small debt over there. No matter how you do it though, it is a long slog, and a tough uphill battle. This is the battle that a lot of Canadian homeowners and families are in for in the coming years.

After the housing apocalypse of 2008 in the United States, it took until 2018 for house prices to reach the levels they were at leading into 2007. 11 years it took to regain those prices. It took 11 years for pricing to help reduce the bezel. We know tens of millions of homeowners wrote the debt off, went bankrupt, and had short sales on their homes. It took years and years for those people to be confident enough to dip their toe into real estate again. The US government is still dealing with the debt from the bailouts of the financial institutions from 2008. That part of the bezzle still exists, it is just now on the government ledger instead of the individual.

Canada will have hundreds of billions of dollars in bezzle to work off in an economy that is currently flatlining. Employment is dropping per capita, GDP per capita is lower than in was in 2015 ( Something else happened around 2015 ) , and interest rates are choking off any green shoots of economic hope right now. Working off the bezzle is tough, but working it off with all of that going against you is a task that is not easily accomplished. 

I am sure there will be politicians looking to gain votes that will tell you they have the magic bullet, the answer, and the quick solution. Politicians are full of shit, and only care about your vote in the next election. There is no quick and easy fix to work off the amount of bezzle Canada currently has. No political easy answer, no one size fits policy, and certainly nothing that can be done overnight. Bezzle takes years to work off, and that is why I think it will be a pretty dim decade in the Canadian economy. Of course there will be fits and starts, but it will fizzle out as the entire population spends their funds paying down debt.

Of course, for the seasoned professionals who understand concepts like this, you can get out and help your clients. You have the ability to restructure their bezzle, and show them how to pay it down quicker. Be the coach of their financial team. Help them re structure their budget, help them pay down debt quicker, etc. etc. The brokers and agents that can help their clients work off the bezzle the fastest will be rewarded the quickest.