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Get a grip
Two weeks ago – the last time this blog was overrun with doomers, hairshirters, desperados and milquetoasts telling you a stock market correction was actually the Apocalypse – I said chill. Corrections are just that; opportunities for markets to reset, blow off steam and avoid turning into bubbles. Nine times out of ten, they do not lead to long-term declines.
So the Dow and the S&P shed about 10%, the TSX plunged 16% from its high earlier this year, bank stocks sank along with oil, newspapers hauled out their trader-facepalm pictures and your mom strutted around the house feeling cocky about the condo she just bought you. Sigh. Some stuff is so predictable.
Since then, stock markets hit the wall and bounced off. US equities gained the better part of 10% in just six sessions. Oil’s been advancing faster than Tom Mulcair isn’t. Bank stocks have broken out of their funk and surged higher. Of course there will be more down sessions, but it’s hard to make the case that we’re not still in the midst of a bull market that has miles to go. Those who argue the US is in recession, debt will swamp the world or China implode aren’t paying attention. Even the dreary IMF says the global economy will grow over 3% this year, China by more than 6% and the US by 2.5%.
Where there’s growth, money’s being made. The trip from the depths of 2009 to this point has been long and tortuous, but it’s a safe bet central bankers and national governments won’t be tolerating a reversal after spending all that time and dough. In short, the positives (integration of monetary policy, coordinated stimulus programs, cheap money, trade liberalization, technological advance and cheapo commodity prices) all point to the next five years being like the last five. Or better.
Over that half-decade, by the way, a balanced (60/40), globally-diversified portfolio grew by just over 8% a year. In comparison, the price of real estate in the GTA increased by an average of 6% (from an average of $465,369 in the autumn of 20111 to $627,395 today). Hmm. Tell mom that.
As you know, with a financial portfolio, there are no closing costs, no land transfer charges and no property taxes to pay. There is no 5% non-deductible commission when you sell it, and no HST to shell out on that. Money you borrow to invest has tax-deductible interest, while a mortgage is paid from after-tax bucks. You don’t need to insure a portfolio, shovel it or clean its eavestroughs. There is no water bill, and no capital gains taxes if you invest inside a TFSA or an RRSP. No dork can move in beside you or let his dog crap on your ETFs. You can liquidate your portfolio in five minutes or less, while houses take days, weeks, months or sometimes years to sell.
You can’t live in a portfolio, of course, but it can certainly pay your rent. Or your mortgage, if you want. And it gives you what everyone actually needs their whole life, which is cash flow. Houses suck money while portfolios are designed to give it. Both can yield tax-free capital gains, but direct comparisons between these two asset classes are specious. You should actually have both, in proper balance. But if you only have enough capital to acquire one, make it the portfolio first. After all, houses are anchors. They mentally, emotionally, physically and financially weigh you down, robbing a person of mobility and flexibility.
So, being a cowboy, I’ve a tough time understanding why any young person would choose to embrace real estate and debt, which go hand-in-hand. This is even a bigger question when you consider that in 416 or YVR the kid is probably ending up with a seriously-inflated concrete box in a building over which she has zero control. Strata fees, common spaces, neighbours and property taxes are out of your control, and there’s little you can do to improve the property or add value above market forces. Overarching, though, is the fact condo buyers get no dirt. No land. No essence of real estate – only the right to live in a building that’s owned by many, that will age and deteriorate, require hideously expensive repairs and face constant competition from newer, sexier structures.
Finally, (although nobody believes it) your chances of renewing a 2.5% mortgage at the same rate in five years are similar to those of seeing Stephen Harper in a cute niqab.
So why do 85% of Millennials think real estate is a great idea and will embrace it regardless of what some grumpy, pathetic, curmudgeonly irrelevant blogging guy says?
There are six reasons. None of them pretty. Tomorrow. Bring your folks.
Source: http://www.greaterfool.ca/2015/10/07/get-a-grip-2/
