Entries from July 2009 ↓

“You think I’m kidding about the End of the Recession!
Pull my Finger… and you’ll find out!!!!”
-- Grantmi, posted @ 11:33 am

Here’s a memo that mortgage lenders hope you never read:

Our 1 and 2 year rates are very competitive, and  it appears as though rates will remain fairly low for more than another year.  With us paying 50bps on a 1 year and 65bps on a  2 year, you can give your client an excellent rate right now,  you get paid quite well for such a short term,  they won’t be tied to a 5 year product, rates will likely still be good at the end of 1 or 2  years, and you can then get paid again by placing them in a new product!  Over the long term, you will earn more money…

This is the actual pitch one mortgage company is making to mortgage brokers.

Here’s the translation: Hey, these low mortgage rates are a drag for making money and Mark Carney says he’ll keep them in the dirt for another year. Sure, this is a sweet deal for borrowers who lock up the cheapest rates they’ll ever see, but if you talk them into a short loan we’ll pay you a nice fat fee. And the best part is, you’ll get another fat one in a year or two when the suckers come back for a renewal! You get paid twice for selling them two mortgages. Isn’t this great? And when they renew they’ll be so freaked out that rates are shooting higher you can sell them a five-year loan at way higher interest and r-e-a-l-l-y score…

Welcome to Mark’s World. Here the dream lives. Every citizen can, with the right policy and a press release, be made into an indebted, frenzied little consumer on whose straining back the economy will be lifted.

Homebuilders will build new McMansions. Realtors will sell at rising prices. Home Depot will be stuffed with renovators. Mortgage companies will loan without end. Car dealers and auto workers will be rescued. Banks will be made whole. And the entire country will feel better because the central bank says the recession thingy is paws-up.

Well, you have to admit. It’s a plan.

Governments in Canada and the United States have spent more money than God has to stimulate the economy, and it hasn’t worked. After trillions of dollars, the number of jobless people is a lot higher, the number of functioning factories is a lot lower and the economy is still contracting. Any number of things could happen to send us into the second dip – the swine flu pandemic, another Katrina, a run on the greenback, a spike or dive in oil prices, chaos in Pakistan, whatever.

The political elite have ushered in an unprecedented amount of fiscal stimulus which, in the US, is more than was used after the Great Depression. This has shot public budgets to hell, created record deficits, is driving up the national debt and will ensure higher taxes and less opportunity down the road. At the same time, interest rates have been artificially reduced to lure consumers into new debt and fatter mortgages as they become horny for big-ticket items.

Tax incentives for more spending have been created (like the home reno tax credit); banks have been allowed to offer long amortizations and zero-down payment deals; and soon people will be paid money to trade in their cars. Against this background, the Bank of Canada has been having nonstop pressers to tell people everything is looking peachy. And this week, Mr. Carney showed he has stones rivaling those on Parliament Hill as he declared the recession over.

The message could not be more clear: Borrow. Spend. Sha-na-na, baby. Live for today.

As I said, it’s a plan. It may work. I’m sure the headline writers will oblige, just as we all wish prosperity would return so easily. But it’s hard to be convinced when you’re out of work, under-employed, trying to keep your business afloat or selling to the world with a 92-cent dollar.

But the fact remains it was a credit bubble which got us all into this mess. It wasn’t that we borrowed and spent too little – just the opposite, we blew up. Fact is, we also coming off decades of over-spending and over-consumption by Baby Boomers which created the worst case of asset inflation in history. And the fact is negligent governments allowed and abetted excesses leading to a housing bubble, dodgy financial practices, toxic loans and a savings rate of zero with a consumption rate of 100%.

So, maybe in Mark Carney’s economy this will all work out. Perhaps we’ll see GDP growth, leading to substantial stock market gains (another 240 points on Bay Street Thursday), enhanced productivity and a return to normalcy.

But, for how long?

The wise among us will know not to take on new debt at low levels to buy assets at inflated ones, because while the price of a house may fall, the borrowing does not. They’ll know if you do borrow, don’t gamble. Smart people will realize cash is once again king. Geniuses will scramble to pay down debt just as neighbours are desperate to get more of it. Survivors will prepare for the unexpected shock, as well as the inevitable consequences of today’s actions.

In the real world, you cannot borrow your way to wealth.

In Mark’s World, ya just party.

Home Depot is a big part of my day. Where else can I special order bullet-proof kitchen windows, an auto-overflow pump mechanism for the moat or two kilometres of Cat 5 cable?

But then, I’m building a bunker. All the other annoying people in my way are just sucking up the home reno tax credit.

Retail sales numbers this week, heralded by our sycophantic media as more evidence we’re whole again, suggest the HRTC has caught on in a big way. Building and home supplies sales rose a percentage point in May, apparently a big deal after crappy results for the six months prior.

Good thing, too. New home starts have collapsed by 60% from their peak of last year, and things were looking grim indeed for the trades shortly after Christmas. Now the crews working on my project tell me they are booked for the entire summer, and all of them – the plumbers, electricians, woodworkers, stonemasons and ordnance guys – say this tax thingy is the reason.

So, is the tax break enough of a gift to get us all streaming into big orange? Let’s review.

First the good news.

The credit is 15% of what you spend, to a maximum of $1,350, which means you need to fork out ten grand in renos to get the whole benefit. You are supposed to retain your receipts, but what the hell? They’re not required with your tax return, and the chances of being audited (since 4.6 million tax filers are expected to claim this) are about nil. Still, receipts are always good.

The credit covers basically anything done to your principal residence or cottage or even your kid’s condo, until the end of January. Lay sod, do a roof, add a room, put sticky black stuff on your driveway, replace the furnace or the water heater – it all qualifies. Repairs don’t. No plasma TVs, either.

The bad news.

This is a tax credit, which is non-refundable. That means all the come-on ads for building suppliers saying “earn up to $1,350” or  “get the $1,350 tax rebate” are misleading.  The government will not cut you a cheque for this or any other amount, since the credit can only be used to reduce a tax liability you already incur.

The credit is applied at the lowest provincial tax rate to achieve the amount deducted from tax payable. Unlike an RRSP contribution, which slices the actual income on which your tax bill is calculated, the credit is used to diminish the amount already owed.

Still, a break is a break. Just don’t assume you can kick back in that new hot tub with the babes, and expect a cheque to arrive.  Better tell them, too.

The worse news is this: If you have $10,000 sitting around and the HRTC has convinced you to spend it on changing your mortgaged house, you’re a fool. The money would be far more wisely spent making a lump sum prepayment on your mortgage. The reasons are twofold.

First, knocking ten grand off your principal can save you several times that amount in interest over the life of your loan. Better still, when these teaser interest rates are history next Christmas and beyond, and you have to renew at double or triple the cost, having a lower principal amount will make you feel like a genius.

Second, it’s hard to imagine what kind of $10,000 renovation would actually add $10,000 to the value of a home. That will drywall and wire your basement (maybe), landscape the backyard, buy you new toilets and a counter top or replace a modest roof.

But even in this frothy, bubbly, hormonal housing market, that’s not the stuff that counts. Now, a $100,000 kitchen or maybe some observation towers connected by high-voltage fence lines and trip wires – that’s an entirely different story. It’s all good.