Parabolic

Spring, 2017. Ah, rutting season. The saps are flowing. Molting and moaning everywhere. Twenty-one degrees in the Big Smoke. Warm zephyrs virtually coast-to-coast. House lust is on the rise along with the temps and the collective anxiety of our leaders. And the next two or three months may prove to be critical times for you and your real estate wealth.

First, we’re entering the horniest time of the year in an already-aroused state – at least in the one remaining puddle of froth in the nation. GTA prices are ridiculous, according to the local realtor stats. In real, on-the-street terms, they’re insane. Raymond told me yesterday about his $540,000 house (bought in 2009) which sold last week for $2.1 million. “Ugly, 1980s subdivision thing with a garage stuck on the front,” he says. “I did nothing to it for years.” Typical. Values have suddenly gone parabolic. A house bought 20 months ago in the northern burbs for $1.7 million was just sold for $2.8 million – by people who ended up sitting across from me, giggling.

“Talk about your greater fool,” Luigi said. “We just met him. And his fool wife.”

This is reminiscent of Vancouver exactly a year ago when, in the final stages of the orgiastic eruption of hormonal and speculative excess, the market went vertical before it croaked. Within months, sales of detached homes were plunging, buyers recoiling from fanciful prices and conditions set up for the coup de grace – the Chinese Dudes tax.

Could the pattern be repeating in the GTA (and now, all of southern Ontario), or is it different there? Silly question. It’s never different. People just believe it to be so, until it isn’t.

Supporting this pathetic blog’s oft-trashed position (do not put all your eggs in the RE basket) is Sun Life chief investment officer Sadiq Adatia who this week told the hated BNN network: “If you look at Vancouver, we’ve already seen the bubble burst there. A lot of people think it’s just the foreign players and that tax that came through, but it actually started before the tax actually got implemented. So, what we’re seeing is probably a further extension of that downturn as result of the foreign tax.”

As for Toronto, same story. Only a matter of time, says Adatia – echoing virtually all major economists. Off a cliff, baby…

“Eventually we are going to see this market kind of stop and then come off a cliff,” he said. “The longer we stay in this run-up, the bigger the downturn is going to be. Toronto for many years had been an under-valued real estate market. The difference is, though, that we’ve moved up so significantly in a short amount of time. And so, what will likely happen is that we’ll start seeing selling pressure down the road, we’ll see sales coming off. Right now demand is still there but demand is slowly coming off.”

What could be the catalyst?

A foreign buyer tax, maybe. While TPTB have so far dismissed the idea (along with the realtors, of course) it keeps bubbling up, with widespread support among Toronto city council members. This is still a definite possibility after the shocking price appreciation of late. Also possible are further actions from Ottawa, driven by Wild Bill Morneau (who lives in a $5 million house just off Bayview), the man who last October tried to slow down the train with a series of reforms, including the Moister Stress Test. Apparently, they didn’t work.

Then we have the Fed to worry about. While another rate hike in a couple of weeks at the March meeting is still a long shot, the odds of central bank action in the US are growing weekly. Count on at least two increases in 2017, and potentially three. Then three more in 2018. And, yes, the Bank of Canada will be unable to resist for too long. There’s no viable economic scenario now being floated in which the cost of money does not rise, for which you can heap thanks on the shoulders of the new Inflation President. His pro-business, pro-growth, trade-restricting policies are guaranteed to increase wages, prices, the US$, markets and rates.

Finally, real estate rutters should also be a tad worried about our own glorious leader. The Trudeau assault on rich people – already manifested in a special tax bracket – has apparently just started. By upping capital gains, diddling with dividends and bringing in a corporation-bashing Doctor Tax, Ottawa is ramming it to the very people who are out there buying $2-5 million houses, and keeping the market juices flowing.

Or, maybe it’s just a subtle combination of some of these factors, combined with the fact nervous bankers have started to pull back credit in a country with $2 trillion in outstanding personal debt, stagnant incomes, and more house porn than the rest of the planet combined.

We won’t know until it’s happened. But I don’t think Luigi cares. There’s no wiping the smile off that dude’s face.

Squandered

Now that tax-free accounts have room for $52,000 – and a couple can shelter $104,000 – they deserve your respect. TFSAs are not glorified savings accounts. They’re not for dicking around with a few loser stocks your BIL pumped. They have nothing to do with your next vacation. They should form the cornerstone of a decades-long financial plan. So if you can find a hundred bucks a week, do the right thing.

But TFSAs are also flexible, malleable, twisty vehicles that can be bent to serve many purposes. Blog dog John has an example.

“Long time reader!   My question is regarding my parents, recently retired, no savings to speak of… CPP/OAS/GIS… some calculations still being finalized… I am helping them out financially.

Assuming I have a good relationship with them, does it make sense to put $100K from checking into their own TFSA – with the trust and understanding that the money eventually gets back to me? I know you cannot comment on the trust factor, but what about the idea? Tiny risk, assuming they do not go crazy and burn all the money somehow, but otherwise is it a sound strategy? Would CRA complain because how can you be on GIS if you have TFSA?  Thanks, John.”

First, John, learn from thine parents. You can be young and poor and happy. Nobody can be old, broke and content. If your folks own real estate, it should be sold and the money invested for cash flow. If recently retired, these people are likely in their 60s, with twenty or thirty years left to finance. Your hundred grand won’t do much to help them in the long run. It’s always a sad thing when, after six decades on this earth, a couple cannot look after themselves. Learn, John. Prepare.

As for the TFSA strategy, it works. You can gift parents (or a spouse, or adult children) money to stuff into a tax-free account. There it can generate income for your folks which will not impact their OAS pogey since it’s uncounted as taxable income. Win.

And unlike RRSP contributions, which hit a wall at age 71, money can go into TFSAs every year they are alive. In fact, for most wrinklies, it makes great sense to transfer assets owned in a non-registered account annually into the TFSA, where taxless growth can occur and income flow out. And no need to ever convert into a RRIF. (In fact, all retirees should be taking the mandatory RRIF payments and plunking them inside a TFSA to mitigate the tax bite.)

But there is a wrinkle. So long as your folks keep the assets you financed inside the TFSA, things are cool. If they withdraw then any future growth or income will be attributed back to you (assuming the CRA knows where the cash came from).

The big question: do you trust your parents? If not (and recall they’ve saved nothing to date, and apparently lack financial discipline) then set this up as a POA account (power of attorney), and give them an allowance. Tough love. Badly required.

And speaking of TFSAs, there are almost 12 million of the little suckers opened in Canada, still with 80% of the assets idling in interest-bearing assets like HISAs (the jumbo shrimp of the investing world) plus comatose GICs. Most people with these accounts think of them as a place to temporarily store shoe money or save for new hardwood. And when T2 sliced the contribution limit in half, the nation let out a giant collective yawn. Most folks have absolutely no idea what money machines these can become, and a major reason is the banks. Like Pete learned.

“Garth – I’ve taken a ton of your advice over the years. I’ve had an iTrade account since Scotia purchased Etrade so many years ago. For the first time I was cornered by [email protected] when moving some assets back into Scotia and opening another investment account.

“Long story short – I’ve had a TFSA sitting with cash in it with them for a while. So [email protected] all smiles and cheeks telling me I should look at a laddered GIC with them.  Little did I know the bank would set you up with a laddered system – NEVER promising a return but instead talking about 33% re-investment plans “COMPOUNDING” returns. [email protected] – “very common practice these days among TFSA account holders, Mr. Smith”

“I did the backstroke out of there Olympic style, however felt the need to share the sell tactic with you.  I can see how people end up in these dead end situations with investments.  Cheers and bless you for changing my views on investing.  You are a man among boys and a dog lover so you win. Blog is amazing and….Hazel also thanks you.  (2 year old rescue Dober – Sharpei mix).”

For the record, a laddered GIC is just that – a string of interest-bearing deposits strung together with modestly appreciating rates where the interest earned on one is dumped into the principal for the next. Hence the ‘compounding.’ Money is divided into equal hunks, with each put into GICs with maturity dates ranging from one to five years – that means each year a piece of your dough matures and becomes available as cash, to be dumped into a new 5-year GIC. The idea is to earn more than you would with a one-year deposit, but not to lock all the money up for half a decade.

And what do GICs pay these days at the bank? A one-year deposit yields 1.35%, and the five-year model returns 2.01%. The inflation rate is about 1.6%, which means just about every stage of a laddered GIC is guaranteed to lose you money, even inside a TFSA where you’re shielded from paying tax on that asset. So a GIC held outside a tax-free account may be a sign you may have recently died. Have a trusted friend check.

The point of today’s post?

Simple. This vehicle is flexible, effective yet squandered. If you max it, invest for growth and do so for 25 years, you’ll have about $325,000. If you buy GICs then empty it and buy a floor you’ll have, well, a floor.