Entries from January 2010 ↓

A bank survey out Monday shows 58% of us are worried about our debt. And no wonder. We owe more than dumb American families. We’re screwed.

Another bank survey just found 90% of all money in tax-free accounts are in savings. Average yield: one third of one per cent. Time required to double your money: 696 years.

And a bank economist commenting on the real estate market says, “We are stealing or borrowing activity from the future,” (especially in the housing market where many consumers have felt that if they didn’t act now they’d miss the boat). “It means that borrowing and real estate activity will not be as strong in 2011, and that’s the price we pay for today’s activity.”

What draws these three things together should be clear. It’s advice. Knowledge. It’s all about where most people get the information on which they act – to borrow, to invest and finance houses. Sadly, that comes from bankers (who profit from selling products, like loans and GICs), or salesguys (who score with commissions on houses or assets).

That’s why I wrote Money Road. We desperately need an independent path. Strategies that work for you, not them.

But let me give you a small example of the knowledge sinkhole. Jacquie and Len live in BC and read here a few weeks ago about how it’s possible to put your own mortgage inside your own RRSP, thereby making payments into your retirement plan instead of a bank’s coffers. I laid out the process for making this happen, and the reasons it’s worth exploring.

Jacquie contacted her financial advisor, the guy who sold them the mutual funds their RRSP now holds. He works for a national firm you’ve all heard of. Bad idea, he said. Besides, we don’t do it so you’re out of luck.

To ‘prove’ his argument he attached an article written for Business in Vancouver before his recent death by a guy billed as a ‘vice president and investment advisor with CIBC Wood Gundy, a division of CIBC World Markets Inc.’ Impressive.  But misleading.

The banker disses an RRSP mortgage because it takes some effort to set up (legals and appraisal). Fair enough, just like a regular mortgage. But then he claims if you were ever to stop making mortgage payments to your savings plan, “your RRSP must ultimately foreclose and sell the property to get its money back.”

Actually an RRSP mortgage requires CHMC insurance, which protects your RRSP if you don’t pay. Then the taxpayers pony up. But nice try.

The article also says an RRSP makes no sense because you have to charge yourself a rate no lower than the banks charge (so what’s the point?), and this…

“…moves us to the heart of why it doesn’t make sense to have your mortgage in your RRSP. The problem is that you and your RRSP have completely different goals. Your goal as a borrower is to pay the lowest possible interest rate. Your RRSP’s goal is to get the highest return possible. Those two goal sets simply cannot be reconciled if you are on both sides of the transaction as the payer of the mortgage and the owner of the RRSP.

“So what do you end up with if you hold your own mortgage in your RRSP? No flexibility, no rate breaks, no payment concessions. Just a mortgage that costs somewhat more to setup and maintain than a regular mortgage, and an RRSP investment that pays a very small return.”

If bankers understood an RRSP mortgage as I explain it in the book, they’d know it’s in your favour to have as high a mortgage rate as possible, so you shovel big payments into your RRSP – enough to exceed the annual contribution limits (the only way of doing so legally). They’d also understand (and likely do) if you gave yourself a 6% mortgage, you’d be earning 300% more than banks currently pay on the GICs they recommend for RRSPs.

They’d know holding a mortgage on your own home is a stable, secure, no-surprises way for your retirement plan to realize a pile of money, and also that you’re able to give yourself a fixed or variable rate, prepayment options, monthly or weekly payments and any other features currently available from the banks. But most important, they would know (and do) this is all about achieving financial security and independence, without incurring debt or lining someone’s pocket.

Now, this move ain’t for everybody. Far from it.

It costs money to set up. It’s unconventional and takes courage. And it requires the help of an advisor who cares more about his clients than his next Mercedes.

If yours is incapable or unwilling, it’s time to roll.

Watch Garth here.

Exciting opportunity in Toronto!

‘Exciting opportunity to live in fast-growing and popular Riverdale! Attention renovators and contractors! Large propoerty with open pallette for your own design! No showings until Feb 1st!’

Lot 21 feet wide by 60. Three kitchens. Semi-detached. See it tomorrow. Bring your chequebook and prayer beads. $328,500. More info.

Hear Garth in Nanaimo Feb. 13, Conf Ctr 12 pm

In the news: Higher rates 'sooner than later.' 

Always instructive to watch others, don’t you think? You just never know when someone else’s experience will end up being yours.

Take the folks in Cape Coral, Florida, for example – a modest but overbuilt community where the average house price a few years ago was $325,000. Last month it was $89,000. And that was after a sales increase in 2009 of about 90%. The trouble was, half those sales were of bank-owned foreclosures and another third were ‘short sales’, or distressed deals by owners in negative equity.

Why did this market in the desirable sunny south collapse? Simple. Too many homes built, then sold to too many people who bought with little or nothing down, at ever-higher prices. So when interest rates rose and equity stopped building, sales stuttered and lots of people found they owed more than they owned. They walked.

So much for a key state in the world’s biggest economy. Not let’s go to the second-biggest economy.

We just heard housing construction in Japan has fallen to the lowest level since 1964. Yeah, the Beatles. Jay and the Americans. The Animals. The reason: falling household incomes and sustained deflation, despite an $80 billion government real estate stimulus package.

The biggest apartment builder’s gone bust, and building is down 16% over last year. Since the real estate bubble burst in 1991, house prices are off 40% and surveys show people expect them to fall further – so why buy? Condos in Tokyo fell another 5% last year.

Why did the Japanese real estate market collapse? Rampant speculation forced prices beyond the ability of average families to buy, while banks took huge positions in real estate loans. When the market eventually turned (it always does) it plunged the country into a financial chasm it’s been unable to climb out of for 18 years.

Now, Canada is not the USA and it’s not Japan. But neither are Canadians inherently smarter than Americans or Japanese. If those guys – who built the No. 1 and No. 2 economies in the world – can screw up on real estate so monumentally, why can’t we?

Answer: we are.

The reasons the current bubble will not endure are obvious. I know recent buyers don’t much care, and I also realize tens of thousands of house-lusting young couples will be desperate to take the plunge between now and Canada Day – when we get the HST and higher mortgage rates. They’ll think they’re so smart for scoring a cheap mortgage, oblivious to the face they bought an asset at its most expensive and will have to refinance it at vastly higher costs in a few years when it’s worth less. Duh.

In other words, somebody should tell them about Florida.

But it strikes me that experienced homeowners should know better, and be doing something about it. Those who have more than half of their net worth in their homes, or who have experience windfall capital profits due to the 2009 popular delusion over real estate, now have a small window in which to act.

I highly doubt we’ll face a deflationary threat again in the next few years, given the hysterical reaction of governments to the last one. But this much is clear: The end of government stimulus, starting now in the US and in one year in Canada, higher interest rates next summer here and next year in the States, record household and government debt in both countries, and higher taxes in the period 2011-5, means a torpid economy.

With barely no real GDP growth, there’s little chance for a gain in disposable incomes. Without that, and with family budgets sucked drier by higher taxes, rates and gas prices, you can welcome an old acquaintance – stagflation. It’s interesting to note the last time it was with us, real estate flatlined.

In Tokyo, that would be heaven.

Daily this blog is rife with informed speculation on what comes next. Some people agree with me. Some ride me. But there’s overwhelming evidence this most beloved of assets is an unstable place for your wealth.

American fools learned it. Japanese, too. And the fool who follows is the greater fool.