When I first moved to Calgary to work in the oil and gas industry in early 2006, it was right around the top of the property boom, and affordable housing was next to impossible to find.  Not wanting to shell out half my salary for an apartment, and spending months to fill it up with furniture, I decided to go the room rental route.

Little did we know at the time, but towards the end of 2006, the market was slowly but surely moving from sellers’ to one that favoured buyers.  Ones in the know, i.e. people with family members that dabbled in real estate, already sold in late 2005 or early 2006. But the media and the rest of us general public have always been slow to catch on.  And you wouldn’t know, from the construction buzz around the city, to the countless “For Help” signs hanging haplessly outside shop windows, to stories of McDonald’s and Starbucks paying upward of $14 an hour plus benefits to attract and retain employees.

My second landlord, a sweet spinster in her 60s, believed in the power of real estate as much as she believed in the miracle that is modern medicine.  She credited her various real estate investments for her comfortable lifestyle, despite not having worked out of her home for more than decade.  Her piece of advice to any young-uns that cross her path, is the adage that we should all invest in real estate sooner rather than later.  I can’t blame her or others her generation  for their spectacular confidence in the strength of the housing market.  Their experience of ever-rising property prices facilitated that expectation.  It certainly looked good at the time, with housing prices that doubled within a few years.  Houses that were hardly 1,000 square feet would go for 400,000 to 500,000 dollars in certain parts of the city.  The gains were ludicrous.  And the whole town was drunk on the sudden discovery that, thanks to oil sands in their back yards, a lot of them were paper millionaires!

In early 2007, cracks were already apparent.  One of my bosses bought a yet-to-be-built house on a new lot on a fixed price, while trying to sell her existing dwelling.  Within the span of a couple of months between when her house was valued, and when it went on the market, the price had already dropped by 10,000.  That’s the problem with houses.  You have to live in one. So unless one can capitalize on the gains immediately, and move elsewhere, one only ends up upgrading to an even more over-valued house.  Luckily, the housing boom in Canada, even western Canada, still paled in comparison to what went on in California, the UK, and Spain.  Even the sharpest decline was contained within teen digits.  But for the people that bought into the perpetual rise of property value, is the current market decline a temporary setback, or something that will linger indefinitely?

Jon Carney at Clusterstock seems to favour the latter theory.  From a demographic perspective, this certainly makes sense.

1. Baby-boomers in the US and Europe more or less carried the property markets for the last few decades.  Their continuous demand for housing, whether they be condos, starter-homes, or suburban mansions, drove the market.  As this population ages and trade down, we might se an increase in demand of condos, retirement homes or assisted living complexes, but a drop in market demands for larger homes.

2. Those of us who belong to Gen X or Gen Ys are just not large enough of cohorts to fill the shoes.  There’s the issue of massive student debts, due to the boom and the increasing necessity of acquiring a college education.  Then there’s the shortage of Gen X to move into excess dwellings available on the market.  According to Carney, “only 44 million people were born into Generation X. There are currently 19 million empty homes in the US. That means that if Gen X pairs up through marriages, cohabitation or roommating, they can live in the empty homes without ever buying a new one.”

3. There is compelling evidence that once a bubble bursts, it hardly ever reflates.  The Tulip bubble never came back again, nor did the tech bubble.  So unless the property market can demonstrates and rationalizes rising valuation, it will not climb back to the mid-2000 level.  The public and the media will probably move on to some other new asset class.

4. Inflation or deflation, the property market doesn’t stand a chance.  Should inflation take place from the massive printing job various governments around the world participate in, it can potentially eat up gains made in real estate.  Should deflation becomes the reality, then according to Charles Hugh Smith, “debt grows ever more burdensome as money becomes more valuable and wages and income drop. As a result, assets dependent on debt ( that is, real estate) drop in value. In deflation, real estate become a “capital trap” which loses value as cash gains in value. As incomes plummet, so do rents, i.e. the income stream which real estate earns, further impairing its value.”

5. Low interest lending is gone.  Interest rates will climb higher again, particularly in the US.  The artificial low interest rates can only last as long as the rest of the world had the cash and desire to lend it.  And the spectacular failure that came out of the Democrats’ goodwill to support low-income home ownership will have people questioning the wisdom of policies that justified low interest rates, perhaps even interest deductibility on mortgages that fanned speculation and unaffordable mortgages.  As a side note, Canada does not allow interest deduction, yet home ownership is higher than in the US.  Just saying.

picture source: semideus

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This is the first real recession for many of us. Some are dealing with the uncertainties by crying foul and uploading blames to all the wrong sources, others are blithely unaware of the seismic shifts taking place right under our noses. Which ones of those trends are long-lasting, and which are merely temporary?

Flirting with frugality

For months, the media has been obsessive in its coverage of America’s new favourite past-time: extreme frugality. It’s one thing to have a subculture of cheapskates planning to save another ten bucks a week in some dark corner of the blogosphere (I know because I am one of those). But it’s entirely another matter to have the Wall Street Journal persuading me from buying a bottle of Evian, so I can save a buck.

With countless individuals and families dealing with foreclosure, many grappling with unemployment, and the millions suffering in silence from a vast amount of their wealth wiped out from a drop in housing prices and stock portfolios, some say that a focus on savings may not be an entirely terrible pursuit.

Certainly, if you are head over heels in debt, and threatened by lay-offs and a drastic change in income, then lifestyle changes must follow. Some consumers are so shell-shocked over the drastic drop in their perceived wealth that they may never recover to join the consumerist party again.

Indeed, America may move away from its previously rampantly materialistic culture of years past to become a more moderate consumerist group. On second thought, I’m not sure I can even believe that. The American Dream of rags to riches will not die. The passionate measures that some Americans have taken to protect and preserve their wealth (of which frugality is a tactic) can only accentuates, instead of diminishing the very American practice of linking success to material possessions. The pursuit of wealth and subsequent accumulation of wealth may be temporarily halted, but centuries of ideals and beliefs do not get erased from the collective psyche just like that.

So to foretell a future peppered with penny-pinching and miser American population is unrealistic. Those trends come in waves. A period of tightening must be followed with a period of letting lose. Once the feelings of desperation become distant memories, debt levels abate, and investment portfolios recuperate to a bearable level, Americans have little reasons to hold back.

The one exception I see in this case is a particular group of baby boomers that are neither nearing retirement, or have already retired. In their cases, massive losses of retirement savings are next to impossible to recover, leading to the next two permanent trends in both the job market and the recreational/travel industries.

Baby boomers holding the fort

If you are a baby boomer nearing retirement, but suddenly finding your nest egg much smaller than you had anticipated, and the value of your number one asset – your property, dropping more than you ever thought possible, what would you do? Instead of sailing into the sunset, you’d probably stick around for a while longer.

It is sad that some members of my parents’ generation cannot proceed according to schedule to enjoy his or her golden years. But the overall ramifications for the wider society might not be all bad. Just a couple of years ago, sociologists and demographers were bemoaning the imminent shortage of workers as waves of baby boomers leave the workforce. This recession has tamed that tide for the time being.

The temporary pause in the mass exodus of medical professionals, and those in the teaching profession, has no doubt allowed alleviated some anxieties. A more measured departure in those seasoned workers may also allow more hand-holding for those taking over the torch. The young ones may want more responsibilities all at once. But from the look of the ongoing debacles, were we really prepared to face it alone?

Business catered to baby boomers: outlook down

During the past few decades, business developers had all but worked themselves into a frenzy to meet the demand from the flood of baby boomers going into retirement. They were supposed to live out their remaining years in beach properties, complete with sun and fun. That meant high-end cruises all around the world, and lots and lots of golf.

Many may still go on to live out this pretty picture. But for the many that had entrusted their retirement portfolio to the wisdom of the buy-and-hold long-term philosophy, the plan is coming up empty. It may take a while yet to see the long-term fallout of such a devastating destruction of wealth for a segment of the population that may never recover. Therefore, those recreational and travel industries catered solely to the baby boomers may want to make slight adjustments to their previously water-tight business models.

Of all the age and demographic groups, I doubt any had suffered a loss as irreparable as the boomers. Knowing this, I find whines and whimpers from the younger generations ignorant and narcissistic. The X and Ys still have many years to build up their damaged portfolios or repair their damaged credit ratings. Because of our later starting points, we should be thankful that a crisis this scale happened this early in our lives and careers. Our career trajectory may be stunted in the short term, but this is hardly an insurmountable barrier.

Alternative career options open up for the young

For the last few decades, banking and finance was king. It still is, in some ways. But the overwhelming pull of the banking industry has undoubtedly waned. Demand for junior bankers are down, and what a favour they are doing for the many burgeoning industries desperately in need of talent!

To some, this is nothing short of emancipation. Previously bound to the competition for the highest post-graduate signing bonuses and compensation packages, many are seeking riches, glory, and satisfaction elsewhere.

Pitting the effect of this new wave of highly ambitious and competitive youngsters (freshly redirected from the financial field) against the larger number of baby boomers holding on to their reigns for longer than previously expected, will a corporate culture clash or bottleneck emerge? Combined with a renewed corporate conservatism getting ready to cloak the business world, are we going to witness a larger number of younger workers turning away from the system not with protests and efforts to steer changes, but with quitting?

There is no shortage of industries in need of innovation. Alternative energy, bio-technology and pharmaceuticals, medical products and services, network and web technologies, are just some of fields always ready for new ideas. Some old ones need help too, newspapers, anybody? The future is hardly bleak for most of us.

picture source: ~FreakyDarlingx