Real Estate: The good and the bad
I could more than likely provide you with many reasons why now is an excellent time to realize some of your real estate profits, but you probably won't listen. It is a shame because it is an incredible opportunity to diversify your wealth if you did and opened your eyes to the reality of where we are heading and what that means for real estate prices.
Caveat- I'm not your financial planner or advisor, nor do I pretend to be. I am a precious metals expert, and more specifically, I am an expert in "physical" precious metals, like gold, silver, platinum and palladium.
But as an expert, I have realized that no matter what evidence gets placed before you in the proverbial wonderous sloshing pit of headlines, we seem to be perpetually focused on the fear of missing out (FOMO), exhibiting the worse case of recency bias. Buying real estate in Canada, specifically in the extended GTA of Ontario, is like literally buying into a ticking time bomb waiting to happen.
We are currently ranked 1st in the G20 for the most overpriced real estate. We are presently 2nd worse in the G7 for actual units, primarily due to poorly planned bylaw infrastructure, which has stifled development. We are also a part of a North American continent that is buying up all of this real estate at a time when interest rates have nowhere to go but higher. (Okay, your thinking lower is better than higher, right?)
Get ready because, over the next month plus, the adolescents currently running the country will be pointing to some good economic news and soaking it for every little squeeze of juice they can get out of it. However, behind the scenes, I also believe now is the time to prepare for change.
It is an extraordinary moment in time. Home values have risen radically since 2020. Why not sell off some profitable real estate? If you were to do this, you could strengthen your wealth strategy with physical gold and silver while having less exposure to assets that are nearing a top at the moment.
Physical gold and silver are NO FUSS assets. By no fuss, I mean no admin, lawyers, real estate fees, upgrades, rebuilds, whiny tenants, or taxes, just to name a few. Gold and silver are hard assets that have OUTPERFORMED REAL ESTATE over the long term. Let's review the good and the bad moving forward.
The Canadian economy is growing again. A big jump in June after an excruciating squeeze in May. It's all about the reopening trade and will continue if Covid phase 4 doesn't crack the mortar.
The US border is open once again, albeit for now only for those who are vaccinated. I was downtown this past week, and I eavesdropped on several doorpeople and hotel staff talking about reopening and what it means to travel and tourism in Toronto. Inside the hotel, I often ate at before Covid, the maître D said opening the restaurant once again last weekend, after 16 months off, was a lifesaver. "My savings are gone," he added, delivering our lunch.
Almost 230,000+ jobs returned in June. July, August and beyond are projected to be even better. The jobless percentage is 7.8%, and last year it was nearly 15%. Almost three million positions were lost to Covid, and 2.7 million have come back.
We're getting vaccinated at an impressive rate right now, among the best on the planet. Almost 86% have one dose for those over twelve, and nearly 80% have had two. The fully dosed number contrasts with 65% in the UK and 54% in the United States. Only a few places (Gibraltar, Israel, Malta, UAE,) are better.
The TSX is above 20,000 and has gained 17% year to date, and bank profitability is off the charts.
Interest rates are low, dropping debt payments and allowing mortgages to be plentiful at 2% or less. The long-term average is 6%.
Inflation is reported to be 4.1% and running higher. Inflation does not appear to be "transitory," as suggested by our Government, and how could it be. Expect prolonged higher gas prices. Expect fewer shipments of goods coming in from overseas but continued robust demand, post-Covid, for consumables. You know where I stand on the year-over-year 30%+ increase in real estate. Even car prices, both new and used, have risen dramatically, contributing to the inflation story. All of it is happening as we try to reopen businesses and infrastructure, which means little to no real wage increases. But I digress.
Nine out of ten people without a house cannot afford one. Real estate prices have increased 32% in 12 months amid government indecision and pandemic FOMO. This home out of whack home buying has led to an eruption in household debt.
Main Street's business infrastructure is all but shattered at present. I took a walk this weekend through the Path underground passageways in downtown Toronto where $5.1+ billion in sales were recorded in 2019. Completely overwhelming carnage. There are, literally, kilometers of empty storefronts—a massive underground retail void.
Public finances have been devastated. Historic deficits. A trillion in federal debt. No plan to balance the books. The certainty of higher taxes. Rampant and record government spending.
People are reliant on the Government like never before. Pandemic benefits have helped increase inflation (some say as high as 7% at street level or higher), push home prices higher and harm small businesses desperate for workers. Some economists contend the Liberal Covid response was 'overkill.'
And now, a possible Covid 4th wave has highlighted the federal Government's hesitancy over a vaccine passport, allowing millions of non-vaccinated to circulate in society unhindered.
The timing of this election is deliberate and in very poor taste. Still, it won't likely matter as Liberal voters will vote to a fault when the handouts are potentially necessary versus a possible Conservative government that will more than likely curtail where possible to prevent the death of future generations.
That means the good news is snatching the headlines. The bad news is systemic and does not get the time of day unless you are diligent and reading behind the headlines, as we always suggest on Hard Money. If you are reading behind the headlines and observing the data, and have profitable real estate, consider what it means to be further diversified. Imagine what it would be like to have a few thousand, a few hundred thousand, or even a few million in some very liquid, very transportable physical gold or silver bars.
While the federal Liberals continue to give away heaps of cash every week (about $12 billion in new spending revealed just a couple of weeks ago, for example), there are serious concerns. My thoughts are that we are about to find a less than giving Trudeau do an about-face.
Next spring, we will watch Ms. Freeland bring down a budget that raises taxes and starts to pay for this mess, and it is going to hurt the poorly positioned amongst us. I doubt much will be done to curb housing speculation; suffice it to say interest rates MUST go up from here.
Whatever promises Trudeau made campaigning, because, let's face it, we have to pay for all of this, will more than likely also fail to be carried out. He is excellent at not keeping promises. After all, you didn't think this gratuitous overdone Covid spending spree was free, did you?
The economic priorities of the young are houses, jobs, and family support, while the economic priorities of the old are taxes and stability. And did I mention taxes?
If you believe that investing in a detached GTA home at an average of $1.1 million is going to be the best investment for your long term, go for it. Put your money down, do not over-finance and keep your mortgage as low as possible, but what do I know.
I suppose saying that a $1.1 million home is not going to double anytime soon is probably not a very popular opinion; it won't even reach a 30% climb up to 1.3-1.4 million in the next 2 years I bet. But again, I am just reading the data and the tea leaves. It's suggestive, but if I was going to risk it, I want diversification. I want a bit of everything so that I am never left holding worthless paper, like in 2008.
At an average of 10% gain per year, cumulatively, since 2004, gold represents wealth, real money, status, ROI, liquidity as good as it gets, privacy, and oh, did I mention privacy?
The choice is always yours, but don't get caught up in FOMO or recency bias. The worse is yet to come in real estate, economic news, and personal finances.
Yours to the penny,
Darren V. Long