OUR HOUSES OF CARDS
HILLIARD MACBETH, AUTHOR, WHEN THE BUBBLE BURSTS, ON CANADIANS’ UNHEALTHY OBSESSION WITH REAL ESTATE
For more than two years, Hilliard MacBeth has been predicting a Canadian housing market correction. But he didn’t expect the first leg of the decline to transpire in his own backyard. All he has to do is drive around his hometown of Edmonton, or Calgary three hours away, to see what happens when the cracks in an overheated real estate market start to show. “It’s strange,” he says. “I can see it happening.”
MacBeth, the author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash, expects residential values to ultimately fall back 40% to 50% from their peaks. He’s already seen luxury homes in Alberta do that. A Richardson GMP adviser and portfolio manager by day, he has always been fascinated by bubbles. He’s seen several economic cycles since getting his start as a stockbroker with Pitfield, Mackay, Ross in the late 1970s. He says he predicted the dot-com crash in 2000.
MacBeth turned his attention to real estate after a growing number of his clients, mostly high-net-worth baby boomers, began buying second homes and investment properties. “I remember one conservative client whose daughter was going to university and they bought a condo for her,” he says. “I couldn’t figure out why they would buy one for four years instead of getting her to rent.” This scenario has repeated itself over and over. “People were convinced that this was the best investment because real estate always goes up,” he says.
MacBeth does not take this view. Why not? Because consumers are overstretched, they’re paying more than they think, and almost no one makes a profit off their house in the end.
One problem is that banks are approving loans for greater amounts than people can afford, he says. MacBeth knows clients who received a mortgage based on their future, not current, earnings. As well, lending is usually based on two incomes, yet he says it’s rare for both spouses to work full-time until they retire. One person often takes time off to raise kids, which makes it harder to make the payments.
Also, buyers don’t factor in borrowing costs when they set their price range. Sure, interest rates are low, but even at 2.5%, the owner of a $1-million house will end up forking out $344,000 in interest over 25 years.
But the biggest risk around our real estate obsession is the way it breaks the cardinal rule of wealth preservation: diversification. Not only are many of us tying up most of our wealth in one asset, but we’re doing so with an asset closely correlated to our poorly diversified financial markets. A shock to the energy and materials sectors can lead to layoffs that bring down home prices and loan losses that threaten the banks. Just look at Alberta today.
If you already own your home, put any investment dollars in other countries, MacBeth advises. He generally opts for the U.S., though he’s looking more at Europe today. He says the European banks are less expensive than Canadian ones. He’s bullish on Japan, too, in part because it’s an energy importer that will benefit from low oil prices.
MacBeth concedes he’s not selling his own house in anticipation of a crash. He bought it in 2010 and spent a lot of money renovating it. He considers it a lifestyle choice—not part of his financial plan. “No permanent wealth is created in a housing bubble,” he says. “Don’t view a house as an investment. Think of it as a place to live.”