TINA

Turner, Barrett, and Fey are all famous Tina’s, but the TINA I reference is an acronym for THERE IS NO ALTERNATIVE. Canadian housing has TINA to thank for a lot of its run up. Let’s look.

I get a lot of guff in my comments about how much I talk about investing, investments, and the like on my housing blog. First off, if you think the 2 aren’t related you should turn in your mortgage license now, and move on to another career. But, the main reason I talk a lot about investment principles on here is because that is what Canadian housing has become. Canadian housing long ago left the station of simply providing shelter over a family’s head. The days of buying a nice starter home, spending some time, pouring in the sweat equity, and raising a family in said house are about as relevant as vinyl music. And yes, I know vinyl is making a comeback, and here is to hoping that my scenario does too!

Canadian housing has been, to coin Ron Butler ” Bat Shit Crazy!!”. We all know this. We are live this every day. But very seldom do we step back and ask ourselves why. Well, the simple answer is that housing went from a very basic means of shelter to a super charged, nitro powered investment scheme. In late 2021 and very early 2022, it was almost as bad as musical chairs where you had to find a new house to move into before you listed your current house because if the music stopped – you would be homeless. But then March 2022 came around, and everything started to change. And the things kept changing, and are still changing to this day.

When interest rates fell after the global financial crisis, savers were forced into a problem. They had nowhere to generate a decent return on their hard earned savings. Stocks had been wiped out in 2008 and 2009, and cash was paying almost zero, so they had to look for an alternative – enter housing. Housing caught a bid, and with rates being low, it started to climb, and climb, and climb. The problem was that rates stayed low, and stayed low, and stayed low, but housing kept going up. This attracted new interest. Somewhat like a ponzi scheme you need the existing investors to do well so it attracts new interest. As more and more people started doing well, and started to spread their new found wealth around in the areas of cottages, 4 wheelers, boats, campers, vacations, and fancy cars, it attracted more attention. The more attraction it got, the more it lifted values of the existing ponzi holders, and round and round we go. Housing started to trade more and more like an investment than it did as a source of shelter. So, when you change the core principles of anything, you have to re evaluate the metric on which you value something.

Housing had a few things going for it in the mid 2010 decade:

In the last decade it was generally a subscribed theory that housing would go up a solid 2 to 3% a year. So, over the course of 10 years, 15, years, 25 years etc. it was a safe bet to say that your asset would slowly increase in value. This was looked at as a retirement nest egg basically. If I bought a house for $250,000.00, and held it for 25 years, it should be worth at least $500,000.00, and of course have no mortgage on it. Of course, if that house was a cottage, rental, secondary property etc. it would receive preferential tax treatment in the forms of the capital gains tax, so it was also a way to pay less tax. Paying less tax is almost as popular as hockey in Canada, so it had some appeal.

Secondly, with interest rates declining, it allowed for the property to be turned into a rental, and generate some monthly income. I mean who the hell doesn’t love a little extra money in the budget every month? The further rates went down, the more money I could put in my pocket every month. On top of this, rents generally increase every year, so at the same time the property was increasing, the rental income stream I would receive would also increase and help to ward off inflation on my income. Win win so far. Of course, tenants have a lot of rights ( especially in Ontario and BC ) so that was a bit of a drawback.

Then we saw the internet super highway transform the hotel industry with the arrival of Airbnb and the like. Now I could turbo charge my rental income and compete with the Marriott. Now I had all the upside of high rental income, without the downside of tenants and all their pesky rights.

The problem with good ideas, is that there is always people who deem to exploit those good things and ruin it for everyone else. Housing was no exception. Why settle for a nice little rental property, make a few extra dollars in the budget, and have an extra house to sell for a nest egg, when you can buy 8 pre cons, turn them into Airbnb’s, become a professional landlord, and refinance the thing time after time after time to provide a lifestyle you could not otherwise afford?

The problem with investments that do well is that the people who gain cannot shut the hell up about it. They talk. They talk a lot, and they tell everyone. All of a sudden it is the ‘ cool ‘ thing, the ‘ it ‘ thing, and the investment du jour. Well of course, as more and more people exploited real estate gains, it became harder and harder for housing to be just a shelter. Housing now had an investment bounty on its head, so people who were trying to buy a house to live in – imagine that, were priced out. This led to a lot of pissed off people.

Now, as most of you know, but for anyone that doesn’t – I hate politicians. I don’t care what party, what flavour, or what style – I hate them all equally. Politicians only care about what is good for politicians. Well, people not being able to afford housing bitch at politicians. Politicians need to get voted back in to enjoy their big fat pension, so they promise to make changes. All of a sudden you had a landfall of changes coming out all geared at housing. Just to name a few we had the stress test roll out, we had a beneficial owner registry talk, we had a flipper tax, we had a ban in a lot of areas on short term rentals, we have a vacancy tax now, we have an under utilized housing tax, everyone has to report their principal residence sale on their income tax return, the list goes on and on. Politicians at the local, Provincial, and Federal level have tried to throw everything they can to slow down housing – but to not much avail…….until…..

Ah yes, there is always a but, and the large but here is the change we saw in late Q1 and early Q2 of 2022. It wasn’t a political change, it was more of a sea change. 3 things have really changed in the last 24 months that have taken the shine of housing:

1.Interest rates went up ( In case you weren’t aware ). This started to raise the monthly servicing costs, thus reducing the cashflow for the property owner. If my investment starts to pay me less every month, I am not that interested in it, and will look to sell it.

2. The age old belief that ” housing only goes up “, started to change. All of a sudden my 2% to 3% ‘guaranteed’ gain became about as solid as a drunk wondering the streets after the bar closed. If I am not generating monthly income, and my capital gains are starting to erode, is it really an investment?

3. In April of this year the capital gains tax was raised to 66.6% on investments, including non primary homes.

In the span of 24 months we had 3 large advantages of a particular asset class that vanished. This has had the intended effect, and we are seeing housing deflate and outright drop in a lot of areas. Yes, yes, I am sure your area is the exception, so no need to email me, but for the other 99.9% of us, real estate values are coming down. This is normal for an asset class that is losing its status as an ‘investment’.

But we also had another large knock on housing over the last couple of years that a lot of people miss. Interest rates. And no, I don’t mean mortgage rates, I mean interest rates. From 2008 until 2022 you couldn’t get enough interest to make it worth saving money in a savings account. You had to look to another asset class – enter housing. But, now housing has some competition from the very people brokers hate – banks. All of a sudden, I can park my money in a bank and generate 5% +. If I have $1,000,000.00 that is about $50,000.00+ a year in income. And yes, I know that interest is taxed as regular income, but it is better to have earned the money and pay tax, than to have lost the money in housing. All of a sudden housing has some pretty stiff competition.

After all, why would I deal with rental housing, and tenants, and realtors and lawyers, and be subject to the whim of a politician, and pay property taxes, and have to fill in another form on my income tax ( schedule of real estate rentals ) when I can simply walk into my local bank and make a deposit, and oh by the way, they will waive my service charges for a year, and send me a nice little slip at the end of the year to give to my tax preparer. Easy, peasy, lemon squeezy.

Much like housing went up as it was re classed by Canadians as an investment, we will now start to see housing drop as it gets reclassified back to, well, plain old housing. I am not saying it falls off a cliff, but it will slip and slide, and go lower as it now has to find its level, and a price. Canadian housing is going to be akin to water. A bottle of water at the grocery store is $.50, but that same bottle of water on an airplane is like $5.00. It has different value at different times. Canadian housing will now have to adjust to prices where it makes sense to be just that – housing.

For the foreseeable future housing will not be a turbo charged investment scheme full of ballers, and big hitters. No, no, just the contrary. Housing will go back to being a place to raise a family. It will be a place where 2 young people will begin their journey through life, maybe have a couple kids, and mark their heights on the kitchen doorway. It will be a place where they will pour sweat equity into, where they will worry if they can provide, where they will have some of their worst times, but also some of their best times. It will be a place where the kids toys are strewn about the living room, where their is shoes all over the front entry way, and where the laundry is not yet put away. Since we won’t be listing this house every 16 months to sell to the next ponzi bidder, we don’t have to keep it in showroom condition – we can keep it in lived condition. Canadian housing will become exactly that – housing, shelter, a place to call home. Canadian housing will lose it’s moniker as an investment asset, and just become a family’s asset.

For a solid 15 years there is no alternative drove Canadian housing beyond where it should have been. Investment markets always have a way of exploiting every possible dollar out of something. Tech stocks in the 90’s, housing stocks in the mid 2000’s, oil stocks in 2008, the list goes on and on. Around the globe Canada’s real estate market is referred to as ‘ Canadian Housing ‘ like it is some stock to trade. Of course we treated it as such ourselves, so we cannot get mad at the world for calling it. As we re calculate the investment value of housing, and start to align it with the values of families and shelter, it will be a bumpy ride, but a ride that is worth it for future generations. I am looking forward to Canadian housing simply being referred to as ‘Homes’ .