Folks buying houses today are fools. Not all of them. Just most of them.

Among the fools are those who can only afford to buy if they take a mortgage for 90%, 95% or 100% of the value of the house. They’re fools if they spread that mortgage over more than 25 years. And they’re fools if that single piece of real estate represents more than half their net worth.

This is because the housing market is at its zenith. Sales activity rebounding. Mortgage brokers bustling. Highest prices ever. That’s not my assessment. It’s coming from the lips of LePage boss Phil Soper, from condo king Brad Lamb, from the Canadian Real Estate Association and real estate boards in Toronto, Calgary and Vancouver. They all think buying at the peak is cool, because tomorrow there will be a new peak.

This has also inspired several people a day (mostly emailing from real estate offices) to aggressively seek me out so they can call me irrelevant. I guess they were sick the day ‘irony’ was taught.

Sadly, I am not. I’m right. Let me tell you why.

It is impossible for the economy to rebound, family incomes to advance or lost jobs to be created soon enough or strongly enough for the current housing market to survive. Today’s action comes from demand, mostly by newbie buyers, built up in the last quarter of 2008 and the first few months of this year. A collapse in the cost of money has allowed affordability to be maintained without prices falling.

That demand will be satisfied soon enough, then interest rates will rise. This will be the story by winter, I’d say, and it will be headline news by next Spring.

But that’s just part of the story. Rising energy costs are another. So’s the climate change war Obama will start. But not the main event.

More important is what governments are doing to public finances right now, and what this will breed. As you know, Washington has just passed the $1 trillion deficit mark. The consequences will include moribund economic growth, higher taxes and decades of future inflation.

In Canada, a new report underscores what I’ve warned about. Our budget deficit will top $50 billion for at least a couple of years, and then Ottawa’s finances will be in the red for a decade. This, says economist Dale Orr, will add $200 billion to the federal debt, wiping away 15 years of getting this sucker under control.

So what, you say?

So, do you remember the last deficit nightmare we had? The one that spawned the GST, double-digit interest rates and slashed government spending? I hope so, because that’s exactly what’s coming again.

Orr’s argument is solid. Runaway spending increases by government now will give us higher interest rates as government borrowing competes for money. Higher rates make the mushrooming debt far more expensive to finance – which means economic growth alone (if there is much) can’t balance the books. So, governments have to raise taxes – since spending cuts in a post-recessionary world would be suicidal. (So are taxes, but what the hell…)

And all this happens between 2010 and 2019, just as the Boomers are retiring, dumping their houses and looking for their government entitlement payments.

These are some of the reasons real estate has a troubled future. Why the bubblette we’re in cannot last. Why anyone buying at the peak – thinking these assets can only go up – is a fool.

I’ve seen this newsclip.

Have you?

http://www.greaterfool.ca/2009/07/16/enjoy-the-flight/

reviewed by Moishe Alexander, CFC  canadian funding corp CEO