Saying the Quiet Part Out Loud

Well, this week we finally heard it. In a press conference this week, the Prime Minister of Canada said the quiet part out loud!! During a press conference on housing, Justin Trudeau announced that basically if housing goes down in value, it will be a problem. I am not going to quote him here, but we all know what was said. Now, this is not a bash of Trudeau, or his politics at all. Anyone who reads me regularly knows I am not a fan of JT, but this has nothing to do with my dislike of the man.

On the contrary what yesterday’s press conference proved was what we all knew – housing will basically be propped up at any cost. Yesterday confirmed what we had all kind of known for a while – Canadians are relying on home equity to fund their retirement. We all kind of knew it, but know it has been confirmed.

So why does this matter? Well it matters for a few reasons:

First and foremost it confirmed that the government is heavily involved with the direction of the housing market. Never before have I seen or heard more pissed off Canadians. It really started in earnest when interest rates went up, and housing values started to go down. So long as the property values kept increasing, people were kept at bay. Now people are getting pissed off. With an election coming up next year, the governing party cannot really afford to have a pissed off electorate. In keeping with politicians and their bullshit, we were also told that housing needs to become affordable for the younger voters – I mean people, to be able to afford a home. If any doubt existed that governments were able to control price action in housing it was removed yesterday. Governments have a lot of levers they can pull to influence policy, interest rates, supply, and ultimate pricing. Which lever they decide to pull – and when will be the big question.

But we all kind of knew that governments can manipulate prices of almost anything to their liking, but what a lot of people maybe didn’t know was that if housing goes down it hurts Canadians retirement plans. This was a shocker to even me. You may be thinking that is right, but let’s take a bit of a dive in, and see why that is wrong.

So, according to yesterday, if housing drops, it hurts peoples retirement plans. Never before have I heard anything so far off base in my life. Let’s say you worked hard for 40 years, and you are ready to retire? Okay, fine. You have your last day at work, and get your little party in the staff room at lunch, and then you go home. Maybe you were lucky and the staff that remained took up a collection and got you a gift card for dinner out, and one of those fancy cards with some sayings on it. After you are done work you file for your CPP, and maybe your OAS, and you tell your investment manager you need to convert some of your RRSP over to a RRIF, and start taking some monthly income from your investments. Sounds about right. What in the fuck does your house value have to do with any of that? Seriously, what kind of crack are they smoking in Ottawa these days?

Your home’s value should have absolutely zero to do with your plans. I don’t care if your house is worth 1 dollar, or 10 million dollars. So what? Even if you still have a mortgage on it – which, let’s face it too many people entering their golden years do, the value of the house doesn’t matter to your day to day living.

But of course, herein lies the problem – the economy has become so fucked up,that the only way people can afford to retire is to refinance. That is really the only time the value of your home matters, right? We have basically destroyed the cost of living so that people now need to rely on refinancing to get money out to pay for their lifestyle. Because, a home is not like an RRSP – you can’t take a shingle off the house and go to the store and trade it for food. You can’t ‘ redeem’ 10% of your home’s value and buy a new car. You either have to sell the whole thing, or none at all. This is where things got all messed up.

For years people told me housing was an ‘ investment’. Okay sure. People told me buying a rental property was their ‘ nest egg’. Fine. Then, it was such a great fucking idea, that we bought a house we couldn’t afford, 2 shit ass rental to be slumlords, and we bought 2 pre cons for the hell of it. We were all going to be fucking millionaires!!!. Yeah, well, shit changes in a hurry. The problem with housing as an ‘ investment’ is that housing doesn’t work like any other ‘ investment’.

First and foremost, I know of no investment out there that requires taxes every single year ( property ) AND also requires insurance ( you know to replace the ‘investment’ if something happens to it ) AND requires maintenance and upkeep so your investment is still worth something, AND also requires you to trim and mow it every week in the summer. The only way that housing is an investment is if it goes up double digits EVERY year for infinity. And yes, it has to go up double digits to make sense…. Property taxes are around 1 to 1.5% of the homes value every year. Repairs and maintenance should be budgeted at 2% to 3% of the value a year, insurance is easily .50% a year, inflation ( your money losing purchasing power ) is around, well, that is its own blog post, but let’s say 3% a year. That toals 8% a year. However, chances are you have a mortgage on said ‘ investment’ , and let’s say you got a smoking deal, and only pay 3% a year interest. Now we are at 11%. So, if your house value doesn’t go up by 11% a year, your ‘ investment’ lost money in real return terms. Now, I was a financial advisor for years, and I am here to tell you that an investment that goes up every year by at least 11% is tough to find.

But, here is the real problem with housing as an investment. Let’s say I bought some stocks. Let’s say I bought the best stock there is right now – NVIDIA. NVIDIA has been on an absolute tear. In fact, the market cap of NVIDIA – 1 single stock, is larger than the ENTIRE Canadian stock market – but I digress. So I bought my NVIDIA and I made my 1500% return in 12 months. Okay, I don’t want to be greedy, so I sell my stock and lock in my gains. First and foremost, It doesn’t cost me 5% of my value to sell my stocks like a house would. In fact, a lot of brokerages will allow you to sell your NVIDIA stock for pennies a share, and some have no cost at all. So I can get out of my investment for no cost. Second of all, the NVIDIA stock I sell is sold and settled in a matter of hours, not days, or weeks, or months. As housing takes longer and longer to sell with more and more listings coming on line daily, this is a real consideration.

But wait – there’s more!! The last difference, and the largest difference is this: Once I sell my NVIDIA stock, I can take the proceeds of my sale, and put it in a high interest savings account, GIC, you name it. If I think I sold my stock at the right time, and things are overheated, I can choose to sit on the sidelines and wait for the price of stocks to come down to re invest. I can literally pick my entry point. Housing does not work the same. If I owned a home, and decided the market is insane and I want to sell, and I do, I have to live somewhere, so I am forced to go back into the market to buy a place to live. Now people will tell me they could rent, but even rent prices are insane because property prices are insane. With housing, you are a forced participant regardless of the price. This is why housing is not an ‘ investment’. Housing is a place to live, a place to hang your hat, a place to watch your kids grow up, and a place to grow old with your spouse. How many times have we heard clients say ” I made a fortune on that house”? Maybe, but you also paid a fortune to buy the next house to replace the one you sold. You simply traded property addresses.

Housing was never meant to be an ‘ investment’ and was not supposed to fund your retirement. Housing was something you had, and maybe when you got to old to live on your own, you sold the house to pay for a nursing home, or handed the proceeds down to the next generation. But now we are told that your retirement depends on home value remaining high.

It really bothers me that this generation has royally fucked the next generation so bad. Our job as a society is to leave the next generation better off than we were. If the next generation cannot find safe, reliable, affordable housing, there is zero chance they will be better off. Our greed made sure we royally screwed our kids chances at a decent life. We had lifestyles we couldn’t afford, we allowed politicians of all stripes to get away with policies that hurt supply, and we kept treating our homes life a damn bank machine.

Just because Justin said the quiet part out loud, doesn’t mean we all didn’t know the truth, it is just refreshing to hear truth for once. But how is this going to work exactly? How will home prices staying high help our retirement? Well, the only way I can think of is if reverse mortgages become the best selling product in the market. Reverse mortgages are the only way we can access the equity without giving up the roof over our heads. The problem with the reverse mortgage is that not only have we cranked real estate prices to the moon, but now there will be nothing left to pass down to the next generation. You will know if the answer is reverse mortgages though – simply watch for the big 6 banks to start issuing them. When the big banks start issuing reverse mortgages as a regular everyday product you will know that the plan going forward is for people to live off of their equity in retirement. We also know that banks don’t do anything that doesn’t benefit their bottom line.

House prices are likely going to remain elevated. Not that they can’t drop, and maybe quite a bit on some instances, but politicians will ensure the price decline doesn’t get out of control. Too many votes now depend on it. Housing is just another commodity controlled and regulated by Ottawa. While we all kind of, sort of knew it – it has now been confirmed.