Blessed by the Potato

In looking for descriptions of what happened in Japan’s economy, and what lead to the sustained low interest rates there, and why the same things don’t apply to Canada, I relied fairly heavily on some posts by John Hempton of Bronte Capital.

One thing that really struck me was his post on the difference between the banking crises of Japan and Korea. Critical to the story of the Japanese banks and the low rates was the tradition, the deeply held psychology that families (especially women) should have large, cash savings.

“The reason is the different banking structure. Korea started its Chaebol industrialisation later than Japan – and the one multi-generational part of the formula (educating young women that they should save and save and save) was just not done as well. This is a multi-generational process.”

That idea of indoctrination is interesting, because I suspect I see something similar in Canada and the US, except our young women are being indoctrinated not to save, but to buy real estate. Think about all the irrational opposition you face whenever you talk with people about even the possibility of a housing correction (or, if you’re one of the ones who just can’t believe me on that point, think about how viscerally you oppose me!). The same sayings/rules of thumb will get thrown out, and when you hear them enough you realize they’re not just rules of thumb, but mantras. “Safe as houses”, “they’re not making any more land”, “why pay someone else’s mortgage”, “renting is throwing your money away”, “you need to own a house to be secure/raise a family”, “it’s different here, real estate is local”, “investments you can touch/live in”. For most of the time (e.g., 1991 – 2004) they’re perfectly valid, but rules of thumb are just that — quick guidelines that aren’t true in all situations.

So armed with these mantras and innovative financing (0%/5% down, long amortizations, plus the gamut of sub-prime dreck dreamed up in the states), our society appeared to be indoctrinating people, young women especially, into puffing up the real estate market. Indeed, all considerations of bubble-like valuations aside, you know things have gotten ridiculous when single 20-somethings are buying places on their own (often sized for just one person). What happens when they find someone that they want to live with, or want to start a family? Ah, but that was just their way of getting “on the property ladder”. My sister, who can’t even buy a bicycle on her own, wanted to buy a place while she’s at school in Kingston to “get on the property ladder” (thankfully, not even the bank of Dad would lend her money to tilt at that windmill). Worried about how high the costs are getting? Don’t be: “buy now, or be priced out forever”. Not so very long ago it would have been very strange for a young person to buy a house/condo on their own — it was almost an admission of spinsterhood, locking yourself into the single condo lifestyle like that. An additional rule of thumb, that you should want to live in a place for 7+ years to make buying worthwhile, seems to have been lost along the way.

Now though there’s a cult of homeownership. Even after explaining the math to them* many people still give me that look when I say I’m looking for a rental when I move back to Toronto. It took months of repeating the explanations to Wayfare before she finally started to agree with me, and even then I can see it’s a tenuous hold, as the irrational hormonal part of her still wants to build and feather a nest of her very own. I was talking to a friend about the preliminary parts of the search for a rental in Toronto. With some places over $2000 per month, it seemed unfathomably expensive to him (to me as well — that much would pay for a very nice detached home in London, inclusive of utilities). “So why aren’t you just buying then?” he asked. Ah, that was easy: if you remember the very simple (though long-winded*) post earlier about the rent vs. buy decision, $2400 per month costs about as much as a $375k house in the medium term, and the places we were looking at were not selling for anywhere close to $375k. The landlords would basically be subsidizing us by taking on the risk of owning a $500-600k house while we lived there.

“Ah,” he says “well there are a lot of nice places along the Danforth for around $400k.” Of course, those places tend to rent for under $2k, so again, renting makes more sense.

“And that area is going up.” he says.

Ah. I see.

That area is going up.

Now, I don’t want to poke too much fun at my good friend, but here’s the thing when people tell me “that area’s going up/gentrifying/turning around”: if that was certain, it would already be up.

Ok, clearly I don’t believe 100% in efficient markets, but nonetheless, I don’t think my friend has a special knowledge of that area that all the other buyers, real estate agents, and investors lack. Given that the rental yields are really not any better than the rest of Toronto, it looks like some measure of gentrification is already priced into the area — and it’s not like the already packed 14′ wide houses can be torn down with more density built in their place. Plus what part of Toronto haven’t you heard someone say is “going up”? Everywhere is either “an exclusive with great schools that will always be in demand” or “a trendy area that’s finally getting the attention it deserves”.

* – very verbosely I must admit, so there’s always the risk of “TLDR” that the mantras don’t face.

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