Greater Fool: The Troubled Future of Real Estate

He writes that a reckoning is imminent because we've been as greedy as Americans, who are enduring their worst real estate deflation since the 1930s. He takes issue with claims that our banks are prudent, arguing that zero-down mortgages and 40-year amortizations are useful only to speculators and people who can't really afford to be in the game.


He also cites recent reports that personal debt levels in Canada are at record highs and savings rates at record lows, leaving many short on options should hard times hit.


"An anti-real estate mood has swept America. Within months it will be here," he declares. He claims that suburban trophy houses in some areas of the GTA are lingering on the market and falling in value. He says the collapse will be widespread and long-lasting, in part because boomers will flood the market with houses to finance their retirements – especially since so few employees outside the public sector have much in the way of pension prospects.


His scenario gets scarier, if you fear that manufacturing jobs are in danger due to the strong Canadian dollar and the likelihood the U.S. will slip into recession. The logic is that it won't take many deeply indebted, freshly unemployed people to trigger a wave of desperation selling. That, in turn, would drag down property values for entire neighbourhoods, leaving many people with mortgages worth substantially more than their homes.


It's that situation that caused an estimated 1 million Americans to walk away from their homes last year, with predictions that twice that number will follow in 2008.
Frightened enough yet?


Well, unless you're already struggling to carry a huge mortgage with a long amortization on a large house on some car-dependent patch of suburbia, you can almost certainly relax. But you might want to include a read of Greater Fool as part of that relaxation – no matter what your circumstances are.


Wise investors diversify their portfolios, but by some estimates, most Canadian households have more than 80 per cent of their wealth tied up in real estate. And Turner is correct to point out that many, if not most, people are deluded by real estate mythology. Many believe it's always better to own than rent. Many think prices always rise. Many see real estate as a foolproof route to financial freedom, even though history has shown that at times real estate can be a great destroyer of wealth.


Turner is also correct to point out that economists employed by large real estate firms, banks and mortgage insurers tend to be quoted uncritically in Canadian media.

But try to find a respected Canadian economist who buys into Turner's pessimism. People at the University of Toronto's economics department, the Ivey School of Business at the University of Western Ontario and University of British Columbia's Centre for Urban Economics and Real Estate couldn't find one for us.


While most seem to think a gradual softening is likely after 10 years of constant price increases, a U.S.-style meltdown doesn't appear to be on anyone's radar.


"I think you will have a very tough time finding any economists who agree with Turner on this," says Tsur Somerville of UBC.



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