Entries from January 2011 ↓

It took merely a week for F to do to the housing market what he said he was avoiding. By announcing 35-year mortgages were kaput – but not for another two months – the little faux bubble-pricker unleashed what seems to be a torrent of kamikaze buying by the HGTV youth corps.

Mortgage brokers tell me they’ve seen a big surge in kiddies getting pre-approved, while realtors dealing in starter homes are watching multiple bids and panic buying. The generation that only cares about monthly carrying costs (because they know the debt will never be repaid) is desperate to rent a huge pile of money before F’s wee reforms take hold.

And as I told you last week, the flames are being fanned by an industry steeped in irresponsibility. For example, here is part of an email blast sent out by GTA-area realtress Michelle Alton. I did not alter her words, by the way:

35 years amortization being removed, Maximum amortization will be 30 years.
This will increase debt service ratios and reducing the maximum a customer is eligible to purchase.

VERY IMPORTANT!
No news on deals currently approved if the rules will apply if the mortgage closes after March 18th, I suggest anyone looking to refinance or purchase to get an application started and completed before March 18th. Existing mortgages approved I recommend getting me all outstanding conditions met so that we can ensure you do not get effective.

If you have been thinking of buying a home, NOW is the time to do it as there will be less people qualifying to buy a home after the March 18th, 2011 expected effective date!

Thinking of selling? NOW is the time to do it as there will be less people qualifying to buy a home! This includes yours! There could be a lot more houses on the market than there are buyers qualified to buy them. This could in turn, decrease the current value of your home after the March 18, 2011 estimated effective date.

It’s unethical, amoral and carnivorous to be egging on inexperienced and naive property virgins if Michelle expects – as she admits – that house prices will likely tumble after March 18th. She’s encouraging maximum borrowing and immediate purchasing, even though the 5/35 newbies could have their equity wiped out and be underwater by June. She, however, will have a commission.

If I were F, and had not engineered this whole thing just to create a robust housing market and the patina of consumer confidence amid hopes for rising home equity and economic recovery just weeks before a federal election was called, I’d be pissed. Poor dude.

In any case, here’s Jeff. I wrote about him a year ago when he contacted me with a hard-luck story as a former property virgin himself. At that time, this is what he told me:

I bought a home in Central Vancouver Island in 2007 for $300K – $10K down – 40 year amort.  (I know, I know – at least now I do) I did this for sheerly personal, intangible reasons, for the most part.  I had a pretty fiancé, I thought I needed forced savings…and I thought we would settle here. She is gone now.

I am renting the house out for a loss of around $500/month after mortgage + taxes. I am *really* bad with money.  At the time I bought I was generating around $100K a year.  I’ve just seen that reduced to $65K.  Still, I should be able to afford my bills, right?  Since 07, through my own stupidity, laziness and immaturity, I’ve managed to accumulate an enormous amount of debt – and recently found that due to my incompetence with managing my finances, I owe around $95K – over $50K of that to CRA. I am 38 years old.  I’ll be lucky to get a consumer proposal approved.  It would be my second bankruptcy, if I have to go that route, and screw me for life.

The tenants called on the weekend.  The house has carpenter ants. It’s in a place that I assumed will attract boomers, and wouldn’t lose a lot of value, but, realistically – it sure hasn’t gone up much, even through the last 2.5 years. What on earth would I do in 2.5 years when I have to renew at a rate of 7% or more, or even better, NOBODY is buying and if they are, it’s for 2/3 of what I paid or less?

I’ll have to walk away from it. I’m a financial idiot, and I’m hoping you aren’t laughing too hard at me…hopefully I’ve finally learned a lesson.

Last night Jeff unexpectedly sent me an update. He did declare bankruptcy. And he walked.

Hi Garth: Today I signed my consumer proposal and was given the option of walking away from my mortgage, or continuing to pay it and remaining on the hook for it with 2 years left before renewal, and all of the uncertainty with recent developments in mortgage rules and the obvious issue of consumer debt.

Is it not slightly obscene that I had the option to hang on to it at all?

Given that by signing the proposal I have next to no extra income for a few years, I am ecstatic that I will avoid the certainty of dealing with tenant issues (the dryer is already making a noise, the fence is rotting, and who knows when the carpenter ants will return), and don’t have to worry about being underwater when the time would have come to sell.

I took about 2 minutes to decide to walk away.  The freedom is indescribable.  I’ve been a fair bit more responsible with money, and now I’ll be forced to, but the upside is clear as a bell, even considering my non preparedness for retirement.  I won’t have to deal with that albatross anymore.

Thanks for your continued commentary and I look forward, in a sort of morbid way, to seeing what the market holds in the next few years.

There is no good ending to what we are now doing with the commodity that used to be called shelter. No soft landing. No gentle descent to earth and affordability. No escape for the kids that cougars like Michelle will be feasting upon.

But it will be morbid, speckled with ants.

Hey, there’s the CEO of CIBC on my TV. Gerry McCaughey looks about as comfortable as me at a baby shower as he smiles weakly into the lens and tries to look human. And here’s the “Richer than You Think’ gang flogging Scotia mutual funds to some customers who clearly have mental issues. Over here’s a typical retired couple – he’s tanned, fit, lean, peppered hair, holding a curvy hottish babe as they lounge in front of an azure ocean – well, typical if you believe TD Canada Trust.

Uh-huh. It’s RRSP season again – that silly 60-day window the government gives us to make a retirement contribution that was due a year ago. It ends five weeks from now and in that time these television spots will push us, guilt us, prod us and bamboozle us into giving banks money which will become registered with the federal government.

Of course, there’s never been a TV spot done which explains what an RRSP is, or why you should have one. We certainly understand what probiotic yoghurt does to our plumbing, how Canadian Tire Motomaster windshield wipers work and how much blue liquid… never mind. The point is, whole cities of Canadians haven’t the foggiest of what they’re doing other than ‘saving on their taxes.’

Well, that might be changing. To wit:

Hello Garth: My Gen-X husband and I are having a “lively discussion” about whether to put any more money in RSPs. Maybe other blog dogs are wondering about this same question.

If taxes are going to go higher and higher over the next 10-20 years, then why should we put money in an RSP now just so that it will be taxed under those higher rates when we convert to a RIFF?  Wouldn’t we be better off paying today’s taxes and investing outside the RSP?

Also, in a few years, the amount people have in RSPs might be used to justify clawbacks. Maybe the lower the RSP, the better. There would be some peace of mind knowing that our income taxes have already been paid on our life savings. We’re just wondering what your Hamlet-esque musings on the “to RSP or not to RSP” question might be. The bank ads make it sound so straightforward.

In a few words, RRSPs have two advantages. Money inside grows free of tax until it;s removed, plus by contributing you get a refund equal to taxes you have already paid on that money. And those are both cool. Tax-free growth is awesome, but only if you have assets inside your plan that actually swell – which rules out the billions Canadians have vegging in GICs. As for the tax refund, this is money you should use to put inside your TFSA, but most people just need it to get by,

And this brings me to the disadvantages. First and foremost, this is a tax deferral plan, not (like the TFSA) tax avoidance. All you’re doing is kicking your obligations down the road, where they can hurt worse later.

Second, all money coming out of an RRSP, now or when you’re a wrinkly, disgusting, crusty, undersexed old wheeze, is taxed as income. So you might have made wonderful gains in low-taxed capital gains or dividends inside your plan, but when you cash out, it’s all taxed at your marginal rate.

Third, RRSPs are a form of gambling. You roll the dice that your tax rate in retirement will be lower than when you’re working – which was true for most people in decades past. But how can income taxes in Canada possibly stay at current levels, now that our national debt has erupted and the deficit made structural? Is it reasonable for a 35-year-old to assume that the top tax rate in thirty years will be as it is now – between 39% (Alberta) and 50% (Nova Scotia)?

Fat chance. This puppy will soon be on the move.

Fourth, remember you don’t get a choice about cashing registered retirement plans out. Once you hit 71 you’re forced to dump them, or convert into a RRIF, which means you have to suck off at least 7% per year. On a fat RRSP nestegg, this could be enough income to drive you into a higher tax bracket, claw back your government benefits and make your impoverished children hate you. More.

So, to RSP or not RSP? No easy answer. But the first ten grand a couple can find every year should go into the TFSA – self-directed and in growth assets. For those whose main goal is slicing current taxes, don’t do this end-of-year RRSP thingy. Instead use this vehicle to increase the money in every paycheque – then contribute that to your non-registered portfolio of sexy ETFs.

As I explain it in my book, here’s how:

• Set up a monthly contribution plan with your advisor or your bank so money is transferred automatically to your RRSP.
• Go to the CRA web site (www.cra.gc.ca), click on ‘Forms and publications’ then download Form T1213, ‘Request to reduce tax deductions at source.’
• Fill it out and submit it to the ‘Client Services Division’ of your local tax office. Once approved, you’ll be notified and so will your employer, who can then reduce the amount of tax being sucked off each paycheque to reflect the RRSP contribution. This means instead of getting a tax refund once a year, you get one every month
• Your after-tax income is greater, which means you have more money for probitics and wipers.
• Not only will this plump your after-tax cash flow, but your monthly contributions greatly increase your ability to compound gains within your RRSP. Make sure the cash is not put into some brain-dead bank GIC.

Or, you can do what the TV says. You may be thicker than you think.