Juggling Dynamite

As shown below, the average US saving rate fell from 13% of disposable income in 1981 to 2% by 2005, as US housing prices peaked (and people naively bet everything they could borrow on home prices perpetually leaping faster than the rate of inflation). As the US realty bubble burst and prices fell in 2006 (followed by the stock and corporate debt bubble implosion in 2007-09), the household saving rate moved higher, before stalling around 6% since 2013 even with cyclcial highs in employment and income.

Today, 69% of American adults report less than 1k in liquid savings as shown here.

And Canadian stats are not better. As shown below, Canadian savings rates also fell from near 20% of disposable income in 1981 to about 2% by 2005, and remain less than 5% today as Canadians have also naively bet every dime they could muster on perpetually leaping property prices.

Unaffordable housing along with record household debt and muted wage growth over the last decade, have left little disposable income to accumulate as retirement savings or education savings for our children. Hence why young people have become increasingly indebted before they even enter the workforce, making it harder for them to start businesses, buy assets (from downsizing boomers) and start families (future consumption units) of their own.

The gamble-our-way-to-prosperity mentality is self-defeating and the deficits continue to mount.  The solution is to focus on lowering debt, risk exposure, and expenses so that we can increase net savings, productive investment and financial stability.  A drop in present personal consumption and speculation is necessary in order to enable future spending ability.

Some insightful stats are highlighted in the below segment:

As of January 2017, the average retiree receives $1,360 a month from Social Security. That’s $16,320 a year. About one-third of adults over 65 also collects a pension, but it’s not a large amount of money. The median private pension was only $9,376 a year, according to the Pension Rights Center (state, local and federal pensions were higher).

And those are the lucky ones. Anyone looking to collect more is going to need to rely on their personal savings. That gets me back to the 401(k) and IRAs. That 65-year-old with a median $64,811 in his 401(k) would pull out a little more than $3,000 a year assuming he or she will live at least 20 years more.

Even with stocks at new highs, there’s still a lot to be done on retirement savings, says Pisani from CNBC.

As sales continue to slow in Canada’s property markets, the hottest spots in the greater Toronto (GTA) and Vancouver areas are, so far, still considered ‘sellers’ markets’ even as some 28% of the GTA’s listed properties are now sitting vacant– a 17% year-over-year increase in vacant homes for sale.

Reasons for the mounting unsold inventory include higher interest rates and the foreign buyers’ tax, but also households that are tapped out on debt-to-income ratios, and asking prices that are too high.

In general, sellers are evidently not yet willing to admit that the world-infamous Canadian realty bubble is finally deflating.  Notional gains are now eroding, and for those who overpaid in the boom and need to sell, the capital losses will be hard to take. See More than a quarter of the homes for sale in Toronto are empty:

 “there are a fair number of stubborn sellers holding out for an unrealistic price for their home, though they’ve already moved on to another home or downsized.

…many sellers are still expecting to see the kind of price increase and frantic action we saw back in 2017. The reasons for holding out could be an unrealistic or unreasonable expectation or it could be because these sellers are too financially tied to the property. If many home flippers accepted today’s market prices, they would experience a significant financial loss after considering any rehab and construction costs incurred after purchasing properties in 2017 prices.

Thanks to a reader for sending this clip along.  Different countries, same financial behaviors and mean reversion cycles likely.  The components are well articulated in this segment.  A key point to all ‘investors’: “This is a very extended property bubble, that has been funded by the banks…Don’t you know what happens to property bubbles?”

International investment manager Bill Strong talks about Canada and Australia’s crazy credit fueled housing bubble and what he thinks may be the biggest short opportunity he’s seen in his career. Here is a direct video link.

From a long-term historical average of 62%, Canadian homeownership rates approached 70% in 2011 and are now rolling over as shown in the chart below.

A very similar peak at 69% and then mean reversion to 62% occurred in US homeownership rates between 2005 and 2016 as shown here.

The cure for unaffordable home prices–like 5-11x household income–has always been unaffordable home prices. Eventually, they are forced to recouple with reasonable multiples (more like 3x their occupants’ income), so that families can afford to live, eat, save and have a roof over their heads! All very important for social stability and future economic strength.

Bottom line:  mean reversion in home prices is finally moving in the right direction because it must.  We should expect down-pressure to continue on pricing (and overly reliant sectors and economies) for an extended period before long-term, sustainable norms can be re-established.  A wise plan is to approach present conditions with as little debt and as much cash reserves as possible.  For those holding negative-carry real estate and high-priced corporate securities (stocks and bonds), it is still not too late to reduce risk-exposure and raise cash for future investment.