B of M

KIDS modified

Scaring the kids is one of my favourite things. Like little suburban Sean. “I recently came across your blog,” he writes, “and you have sufficiently scared the crap out of me.”

I am so proud.

“The very first post I read of yours was the one of the 24-year-old male living at home, this hit me like a ton of bricks because this happens to be my current circumstance. After going through your posts for the last few weeks, you have me reconsidering my entire financial plan for the foreseeable future.”

Sean continues: “Currently I’m making $45,000 annually. I’ve already built an emergency savings for myself, and now am putting aside 75% of my net pay to my TFSA for a deposit on a home. After maxing out my TFSA the plan was to max out my RRSP, and start non-registered savings with equity heavy funds. Then when I have enough to put 30-40% down as a deposit for new condo somewhere in suburbia (likely Milton or Oakville) cash out my TFSA and non-registered savings, and use the Home Buyer’s plan to withdraw from my RRSP.

“This was the plan, until reading your freaking blog.

“Now I feel like I should be moving out immediately, re-positioning my funds to have more balance, finding a nice cheap place to rent while building up my savings, and waiting and hoping that the housing market has hit rock bottom by the time I have enough saved to pay cash for a new home. I don’t suspect you give out free financial help to random e-mailers, but if you do, any guidance would be greatly appreciated. If not, thank you for the insight you’ve already provided through your posts, and the help you’ve provided me with trying to figure out the best path forward.”

Atta boy, Sean. You’re learning fast. Savings three-quarters of your wages, investing inside a TFSA, wisely deciding to eschew the generational house lust lapping all around you and deciding to be a renter instead of a parental moocher. All worthy choices. Don’t let Mom talk you out of any.

In fact, speaking of her, kids far less prescient (and well-read) than Sean are these days making way bigger withdrawals from the Bank of Mom. A BMO survey shows 43% of moist, virginal house-hunters (and 57% in 416) have found they must cough up a lot more than they were expecting for a home – about $83,000 more. Why? Because demand among the little fools has resulted in crazy urban warfare for listings priced under that magic million-mark.

While sales among move-up buyers have hit a wall in many areas (explaining why the reno business is at a fevered pitch), first-timers continue to do everything possible to burden themselves with unfathomable debt, property taxes and future illiquidity. The survey also shows 76% are now thinking condo values will probably blow up, hence the burning interest in getting slanty, bug-infused semis on dodgy streets, or brand new towns made of pressed corn flakes and glue facing treeless suburban streets.

So, first-time buyer budgets, says the bank, have risen by 21%. Of course, incomes haven’t – but the amount of money parents are willing to throw into dowpayments for their offspring is exploding. It’s estimated up to 40% of all the kids now engaged in bidding wars and bully bids are backed by parental cash. It’s such a factor CMHC is currently engaged in a study to find out how much this is skewing prices and inflating the market.

For example in Toronto, the BeeMo study shows, new buyers have added 20% to their budgets, or about $107,000 more than they first planned on spending. It’s a staggering amount, and helps explain the top end of the market being in decline while the middle burns.

It’s also instructive to see how house-horny Canadian parents contrast with those south of the border. In the US, says the National Association of Realtors, 27% of first-timers receive a cash gift from their families – far less than here (but the highest number thus far recorded). And while new buyers have been gobbling 50% of all the sales in Canada, in the US that number is just 29% – down substantially from the historic norm of 40%.

Why the big difference? Don’t American moms love their daughters enough to keep them in their own granite, stainless and Miele cocoons?

Two explanations: First Canadian mothers can fork over as much money as they want to their kids with no tax consequences to anyone. In the States, IRS rules stipulate any cash gift to a child cannot exceed $14,000 from each spouse, or tax will apply. Second, unlike Canadians, people living in the US know they’re not immune to the laws of economics. They partied through a real estate boom, and then crawled through the subsequent bust. Trillions in middle-class equity was erased when average prices collapsed 32%, so they’re in no hurry to see their kids take on housing risk.

Besides, Boomers in America seem to be a different breed. While here the generation is wedded to bricks and GICs, to the south more retirement plans are stuffed with stocks. As a Bloomberg report noted this week: “The boomers have seen their retirement savings almost double since the end of the recession. They had an average $147,700 in their 401(k) accounts in June, up from $76,500 five years earlier when the economic slump ended, according to data compiled by Fidelity Investments.”

So there ya go, Sean. Some context for your wise choices. You’re on the right track, while so many of your friends – aided and abetted by their myopic helo, property-obsessed parents – have no idea of the turmoil that lies ahead.

You know better. Real men rent.

The good stuff

ATTENTION modified

It’s a fact we fear loss more than we relish gains. No wonder most investment decisions are made because people occasionally have the crap scared out of them. That’s why your co-workers and questionable in-laws own houses and GICs and think investment advisors sport a blood-sucking proboscis. Actually with a good tie, most are attractively hidden.

As I’ve told you before, the greatest risk for most people (especially women) is not losing money, but running out of it. So, we make bad and emotional choices, motivated more to preserve capital than make it grow. As a consequence, Canadians have a dismal amount of liquid assets, fear capital markets and will probably have sucky retirements. Too bad.

Truth is, we haven’t had a good stock market fright since about this time three years ago. That was during the 2011 debt ceiling debate in the US, with the deficit exploding, politicians at each others throats and the prospect of the world’s biggest economy defaulting on its debt. Then markets dropped more than 10%, with daily gyrations of 500 points.

At the time this pathetic blog urged the metalheads to dump their bullion at a silly $1,900 an ounce (it’s now $1,226), and for everyone else to get invested because America was not going down. Since then the Dow has added 34%, the Toronto market is up 28%, the S&P 500 has swelled 78% and gold has plunged 35.5%.

More importantly, in the past three years the US deficit has dropped to the lowest level in eight years, and corporate profits have increased more than 25%. Now 200,000 jobs are being churned out each month, inflation is moribund and housing prices have gained a third of the ground they lost in the GFC. In other words, no US real estate bubble despite 3% mortgages and a resurgence in unemployment.

Meanwhile the US central bank – the Fed – has taken back almost all of its massive stimulus spending, and the economy has held. Wow. A lot of people who came here a year ago – when the idea of tapering was first floated (dropping the price of bonds, REITs and preferreds) – forecast economic disaster and stock market collapse if the $85 billion-per-month was curtailed. Well, now it’s almost gone and guess what? No impact. In fact the US grew at a fat 4% rate in the last quarter.

So what does this macroeconomic stuff mean?

In the past twelve months, while the stimulus was systematically scraped away, the S&P gained 19% and stocks in Toronto romped 23% higher. Bond yields basically behaved because inflation was tepid, and balanced portfolios have delivered double-digit returns – around 11%. Fixed-income stuff, like preferred shares, and rate-sensitive assets like REITs, have recovered from last summer. ETFs mirroring the equity indices have been Beyoncé-hot.

And it continues.

Yesterday markets hit record highs, even as bombs flew over Syria, the Scotch were revolting and Ebola turned into a global threat. Investors looked at the latest data showing a drop in US jobless claims, plus the Fed news that interest rates won’t rise until July, and kept on buying. Also at play was the news American inflation has dropped the most significantly in four years – which means you can get the good stuff (jobs and profits) without having to swallow the bad (higher prices and rates).

Stock markets may have a high and scary number attached to them (both the Dow and S&P are at a record index level), but expressed as a multiple of corporate earnings, things are way more serene. Because corps have been plumping their bottom lines for the past few years, we’re nowhere near the sleazy multiples of the dot-com era or the pre-crash of 2008-9. In fact, sustained high unemployment numbers are a kind of proof companies are more efficient and leaner than they used to be. Thus, it’s a better time to be an investor than an employee.

This makes Canadian real estate far riskier than equities. At least stock prices are supported by the moolah being generated by member companies. House prices in 416 or 604 by comparison, are completely divorced from the incomes of people buying them or the rents paid by those leasing them. These valuations are supported by a mountainous pile of debt and the tulip-bulb mentality of the masses.

Rich people seem to know this. They have far less net worth in a house than your cousin does. They love liquidity, and have a lot of fun buying stuff when people who read the Huffington Post are changing their shorts.

Maybe you should, too.