The cure

COW1

The Doctor is in. Here, read this TIME issue from 1975 and shut up. Nurse practitioner Amy Zon will be with you shortly.

First up, Louise. Spill it, colleague.

Hello, Garth. I discovered your blog a few months ago, and I don’t know what I’d do without my daily dose of The Greater Fool. I would love to be featured on the blog. I’m a 29-year old physician, with an annual income in the mid six-figure range. On the personal side, I have ~30K in a TFSA (index funds) and no RRSP.  I also have personal debt in a line of credit (mostly from medical school), a significant amount in the low six figures.

I purchased a 1-bedroom + den condo in the GTA almost exactly 4 years ago, and I don’t think the value has increased much.  I estimate that I could sell for around 220K.  Mortgage debt hovers around 155K.  I am terrified of the future possibility of a special assessment, and there’s rumours of another condo going up right beside the current building.  The latter would greatly affect my property value (current view from my unit is completely unobstructed).

I’m single, no kids, no pets, but would love more space.  I’m considering selling, using the equity I have in the condo to pay off a significant portion of the LOC, and start renting a townhouse instead.

My current costs for housing are around $1350 per month.  This includes mortgage payments, maintenance fees (most utilities included), property taxes, and hydro.  For the properties I’ve been looking at to rent, the average price is 1650-1850 per month, excluding utilities.  That would make total costs around 1800-2000 per month.

Because I am currently single, but my situation could change in the next 5 years or so, I don’t think it would be a smart idea/time to buy; my needs could easily be different in the near future.

Is it a better idea to continue owning the condo, slowly increasing the equity but running the aforementioned risks of a special assessment/value drop, or bite the bullet, sell, and start renting but at significantly higher monthly cost?

This is easy. Sell and rent. First, you’ve been sitting on seventy grand in equity for four years which has provided a zero return. In fact, with the potential of a special assessment and a new building about to suck the view and lower your equity, there’s too much added risk. Even if you sell now, paying the realtor commission, you’ll likely sustain a loss – non-deductible.

Thus, renting lowers the risk, adds marginally to your overhead, frees up dollars to invest, allows you to move into a larger unit and unencumbers your sorry life. And it must be a sad existence of unzipped cabana boys at Club Med and too much blow. After all, you’re an MD earning “mid six-figures” with over a hundred grand in debt, a cruddy suburban condo and just $30,000 in a TFSA. Where’s the cash going? Louise, please tell us you’re not a psychiatrist.

Next!

My name is Carson and I’m a long time reader of the blog and I’ve recently been thinking about doing some leveraged investing, and had some tax interpretation questions I was wondering if you could help me with.

I’m 29, an engineer making $85k, don’t own a home, and have $40k in investment savings (between RRSP & TFSA). I’ve been preapproved for a 2.99% LOC for 1 year (which goes up to Prime + 2.99% after the year) and I figured this was a decent rate to use in leveraged investing. I don’t have a home (and therefore no HELOC), so I don’t think I’ll be able to find a much better rate than this to use in the short term.

I understand that the interest on money borrowed to invest is tax deductible, but I am wondering if this is still the case if I invest within a TFSA. I get the sense this would not be allowed, but have not been able to find a definitive answer.  I have room in my TFSA to hold this entire amount, so I figure this will be the better place for it regardless of my question.

Forget it, Carson. Bad idea. Sure, leveraging (borrowing money) to invest can be a great strategy if the funds come cheap, you have a long-term horizon, enough experience as an investor to understand and swallow the risks and do it in a non-registered account. No, interest on a loan taken to fill your TFSA is not deductible from income.

And this is a bad rate deal. Sure, 2.99% is nice if you can invest for a 7-8% long-term annual return, but when it pops to 6% in a year, even with tax-deductible interest, it’s way too tight a spread. There’s no guarantee any portfolio will advance predictably year after year, and if 2016 turns out to be a 0% period while you are forking over 6%, odds are you’ll despair and fold.

A young, single guy making your money should be able to save consistently. Do it. And direct every dollar into the tax-free account, in the assets and weightings I have outlined. I don’t care how cute TNL@TB is. Stay away.

Next!

I’m Amil. We recently had a new addition to our family and I’ve heard of RESP’s, how do they work?

What would be the best way to save for his education and to save for my son in general?  Also I’m not sure whether there are other things that we should be considering such as life insurance, a will and anything else that would be important to set up if anything were to happen to my wife or me.

Ah yes, a new parent. Swimming in hormones and endorphins. Plus a sudden gush of obligation and protectiveness. It’s why the Baby Vultures who circle maternity wards with their RESP brochures do so well. It’s red meat time for all the insurance salesguys who swoop in and sell you policies which 90% of the time are cash-sucking, life-long albatrosses. So, be careful.

In terms of RESP, yes, you should start one. But not one of the BV variety. Ensure yours is a self-directed plan, which you can open through an online brokerage, at the bank or with an advisor. Fill it with good, diversified, growth-focused ETFs, since the time horizon is long. Apply for the government grant, which adds 20% annually to a $2,500 contribution from you. The funds grow tax-free and can be taken out by the kid once he/she starts post-secondary schooling. If they fail you miserably and become a teenage rock god worth $1 billion, a good chunk of the money can be rolled into your RRSP if you have room.

As for insurance, stick with term. It’s cheap, flexible and all you need in the case of an emergency. Compare rates online, and remember the cardinal rule: never buy coverage from your cousin who failed the community college Hot Tub Maintenance Technician course and is now an insurance expert.

Next!

Missing F

CROOKED HOUSES modified

Crooked semis listed on Shaw Street in Toronto: $688,000 each

________________________________________________________________

Ever wonder why the federal finance minister is such a wuss?

“We do not see the need for major changes at this time,” Joe Owe told a realtors’ convention recently “We will continue to monitor the market and make adjustments, if needed, although none are being actively considered right now.”

And, hey, how could there possibly be a problem? Average single-home prices in 416 and YVR blew through $1 million some time ago, new mortgage debt is piling up at five times the inflation rate, real estate values have detached from the economy, lenders are sucking in buyers with 1.99% quick-reset loans, the subprime market is bloating at an historic rate and buying a median-priced house in Vancouver (even at the cheapest-ever rates) eats 65% of family income.

What would F think?

Two years ago, before his untimely demise, the elfin deity was issuing warnings like this: “My expectation is that banks will engage in prudent lending — not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” As one political staffer put it (as reported by the Financial Post):

“Flaherty spoke to bank CEOs all the time. I would think he had moral-suasion-type conversations with them on many occasions. And he also intervened in the market dramatically four times. He felt quite strongly that, as finance minister, he did have a fair bit of moral suasion at his disposal that he could use. Much of the time that was done quietly behind closed doors. But it was effective.”

OTTAWA- For national stories- Federal Finance Minister, Jim Flaherty, holds a news briefing for media held in the traditional "lock-up" prior to releasing the 2007 budget.  -Photo by Wayne Cuddington, Ottawa Citizen, CanWest News.  Assign#-82676--Federal Budget 2007

In stark contrast, Oliver says this: “Our long-term objective is to gradually reduce the government’s involvement in the residential mortgages.” And that means, ultimately, privatizing Canada Housing and Mortgage Corporation – if Joe and his party survive the coming federal election.

Now why such a dramatic difference between F and his heir, even as it becomes more evident the housing market is a towering, hulking pillar of risk that could collapse on the Canadian middle class as it did in the States? Simple. Letting people pickle themselves in debt, succumb to their hormones, spend far beyond their means and pull economic activity from the future is a cheap, quick and desperate way to try and rescue an economy in trouble by a government struggling in the polls.

And they’re still at it. This week CMHC made a bombshell announcement which – more than the bank rate cut – is designed to throw Lava Hot Scorpion BBQ Sauce all over the real estate market, especially in YVR. Simply put, CMHC will now count as “income” 100% of the money you received, or might possibly get, from a tenant renting your furnace room or garden shed. Until now only 50% of rental income was added to a mortgage applicant’s total income, which is then used to calculate how much debt can be carried.

What does this mean? Lots, actually.

A couple earning $100,000 between them with $50,000 to put down can qualify for a mortgage of about $420,000. But add in $12,000 a year from a basement suite (based on a rental agreement, not actual cash), and – presto – they qualify for a mortgage of $520,000. That’s seventy thousand more than using only half the potential rental income.

The mortgage guys are eatin’ it up. “The ability to utilize 100% of the rental income to qualify for the mortgage…can certainly make the difference for many homeowners and may move a larger number of homebuyers from condo purchases to a single family home with a mortgage helper,” a broker from Vancouver tells the trade mag Canadian Mortgage Trends – which itself gushes, “CMHC deserves applause for trying to boost the stock of affordable rentals and allowing young homebuyers an alternative to condo living.”

Yes, excellent social policy. Just when prices inflate the most, rates descend the furthest and debt hits new, epic levels, the feds encourage more borrowing and over-spending, making it all worse. Moreover, this throws the door wide open to abuse. The definition of a ‘legal suite’ is hazy, and income from new units (with no rental history) will be accepted at ‘market rates.’

And let’s remember the context in which all of this is happening. Oil’s crashed. The economy has stalled. Jobs are being scrubbed. And the central bank’s rate drop is the ultimate admission of trouble. Is this really the time you want your government loosening up mortgage regs to allow more debt, higher prices and enhanced risk?

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada,” economist David Madani warns. “But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer-term, they won’t defy gravity for much longer.” The guy is now forecasting a 30% price plop for these two Bubble Republics.

That equals the US crash. Ouch. By the way, homeownership in the States has plunged to 1967 levels. Some people learn lessons. Some people just sell out.

JOE modified