Crystal

Four kids, one income, no savings, two houses and a rented condo. Jennifer wrote me yesterday from BC asking for help (I get a lot of that lately). They bought a place for $550,000 a year ago, put $60,000 into renos, and are about to list for $800,000, with $600,000 in debt.

“We are getting ready to sell our house and have moved into a rental property that should work out long term for us if all goes well (if the house sells),” she says. “We also have a condo that we own outright and we wonder if we should borrow against that equity to diversify ourselves even further? We are definitely “contrarian thinkers” and most of our friends think that we are nuts for getting out of real estate. I have no doubts in my mind that we need to take our money and run…”

You bet, Jen. Run, run away from those friends. While you can.

I’m sure if you called Jen and Ron ‘speculators’ they’d be offended. If you accused them of helping make homes more unaffordable and families more stressed, they’d scold. And if you called them emblematic of a self-destructive societal herd mentality (even when they think they’re cooly contrarian), they’d protest. After all, somebody gave them all that money to dick around with, right? And what’s safer than a house?

Being totally unaware of Jennifer, but worried about her, Mark Carney pushed aside his untouched crusty bun and took the podium. This week’s speech to The Economic Club of Canada uncharacteristically attracted a bunch of reporters and cameras. After all, there’s a whiff of blood on the new snow.

Hours earlier Ottawa announced that families in Canada – the prudent, conservative, cautious, boy scout-weenie half of this continent – now have more debt than Americans. That might be okay if we were earning more, but forget that. Debts are rising far faster than incomes. In fact, our borrowings have jumped while disposable income’s dropped.

That alone may have economists birthing kittens, but there’s more:  A new survey by a big accounting firm shows, despite record debt, almost 70% of us are comfortable with what we owe. Incredibly 78% think they have the capacity (and the stones) to borrow more. Maybe to reno and flip a house with cheap money.

Cue Mark.

“Experience suggests that prolonged periods of unusually low rates can cloud assessments of financial risks. Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: The greater the complacency, the more brutal the reckoning.”

Then the Bank of Canada governor said this:

“Owing to the declining affordability of housing and the increasingly stretched financial positions of households, the probability of a negative shock to property prices has risen as well. Don’t assume that things can go on forever.”

About this time, during a speech in Quebec, Stephen Harper was asked about the latest household debt numbers. It is, the prime minister said, “a matter of concern for the government” and Ottawa’s looking at ways to “encourage better decision-making.”

Also about this time bank economists Derek Holt and Gorica Djeric were issuing their own warning. Home ownership in Canada, at 70%, has surpassed that of the US before the real estate market collapse, they pointed out. Home prices are at a record high, and are overvalued (like in the States). The ratio of household debt to family assets is the highest in the G7. In fact our debt-to-income ratio is “not terribly lower” than pre-crash America. We may not exactly repeat the US crash, “but we still subscribe to the view that house prices face downside risk although the exact timing is uncertain.”

What’s not uncertain is the next federal budget, some 60 days off. It’s now an open secret that worried bankers watching the real estate gas bag inflate, even as it swells their profits, are stunned Canadians could borrow so much, so carelessly, so thoughtless to consequences. Kill the 35-year mortgage, they whisper. Raise down payments. For they know not what they do.

Indeed. They do not.

If there was a day it became more crystal what will happen, I have yet to live it. Rates will surely rise. Lending will tighten. Carney’s “negative shock” will hit indebted families living the HGTV high life like a rifle shot. Stunned and wounded they’ll stagger out and ask, where the hell did that come from?

Run Jen. Run.