Wednesday, August 29, 2012

Garth Turner's advice - Worth what it costs?

Its been a while since I blogged on Canada's housing bubble, which might seem odd given that there are finally obvious cracks showing in this nation's real estate market.  If those predicting a significant correction in house prices prove right, (guilty) its certainly been a long time coming.

That's the thing with bubble markets, even though a particular asset class might be grossly overvalued, so long as people keeping pumping money in, the balloon will keep stretching.  In the case of Canadian homes there's been plenty of incentive to push prices even higher over the past three or four years.  Thanks to government securitized loans (CMHC) our supposedly conservative banks have been forking over billions in mortgages at super low interest rates and stretching  amortizations out as long as forty years.

Government backed CMHC insurance eliminated risk for the banks, so they've based mortgages on 'stated income' and haven't even been bothering to inspect the homes they're financing, a simple postal code check has been the preferred method.

You probably know a few geniuses who boast about how many properties they own, I do.  These amateur part time landlords are convinced they can't lose, nothing different from what happened in the US during the housing boom down south.

I've said all this before of course, as has Garth Turner on his very popular blog Greater Fool.  I've mentioned both him and his website many times, suggesting its very much worth taking a look at.  I now somewhat regret the suggestion.

I say 'somewhat' because I'm still reading it and still enjoying it.  The writing style is very engaging and often hilarious, the pictures he posts on each entry alone are often worth the visit.  But I now want to qualify my suggestion of visiting Greater Fool with some advice of my own.

Be wary of any advice offered free of charge, often times you get what you pay for.

I've worked in the financial industry before, and while I wouldn't say the problem is rampant, there is a degree of sleaze out there and one should always be cautious.  There are always shills out and about flogging their products as the nextest and bestest investment vehicle with promises of returns that will outperform the overall market.

I don't think I've ever done that here myself.  While I have agreed that housing has been significantly overvalued over the past three years, I haven't ever suggested where one might invest their money after realizing significant gains from selling or borrowing against the equity in a home.

Garth, well that's his stock and trade it seems.  His favorites for the last while have been banks and REITs (Real Estate Investment Trusts).

Thanks to the incredible run Canadian real estate has had, there are a lot of Canadians sitting on a lot of capital, capital that's tied up a house.  In other words is isn't liquid.  And this is where Mr. Turner comes in.  Not only does he typically suggest crystallizing those windfall tax-free capital gains by selling, he is then full of advice on where to invest the money.

Right now he's on a Canada wide tour, packing them in for free seminars in hotel conference rooms.

I'm not suggesting to someone planning to attend to take a pass, absolutely not.  There's nothing wrong with arming yourself with as much information as possible, even if the advice is seemingly free.  I say seemingly because I'm one of those cynics who believes there is precious little in this life that is truly free.

Promotion of investment vehicles is a big industry, and there are a lot of people out there with significant net worth who are anxious about the overall economy, not just the value of their home.  Its easy to fall prey to promoters who sound genuine but are really nothing more than commissioned sales people, no different from the real estate agents Mr. Turner so often derides.

Its a jungle out there, beware of strangers bearing gifts and free advice, even when they're hip and ride into town on a motorcycle.

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