Entries from February 2017 ↓

The divide

Residential real estate’s a commodity now. And nobody seems happy about it. The serious lack of listings, principally responsible for ridiculous prices in most major cities – as well as bidding wars and financial suicide in the GTA – seems destined to squeeze home values higher this Spring, even if sales plunge.

The winners are those with houses and windfall equity. But they’re not capitalizing because they’re not selling – afraid of where to move. The losers are those priced out of the hot markets and unable to reconcile waiting. The wretched are the ones staggering from auction to blind auction, making rash offers on crap houses, only to be bested by a greater fool.

Bankers know we have a debt crisis looming and are battening the hatches. Politicians understand the economic danger, but can’t find the courage to act. Now households owe $2 trillion, an amount bigger than the whole economy. Ninety per cent of houses in Vancouver are assessed for more than seven figures. The average detached in 905 is a million. And yet nobody’s at peace. This is an indication of significant social upheaval ahead.

Today I present two letters received Monday. One ‘s from a young medical professional and 1%er. The other was penned by a dude I banned from this blog last week. First the doc:

“Dear Garth: Should we get out? Is this the peak of the bubble? We purchased our Toronto home in 2009 for $540,000. We have spent approximately $100,000 in renos over the years. The house is now worth $1 million and paid off.

“I am an anesthesiologist earning approximately $600,000 per year but I took 5 months off in 2016 for a maternity leave. I’ll be taking another maternity leave for 6 months beginning in April of this year as our second child is due.

“My husband has given up his full time job to take care of our children. He previously earned about $100,000 per year. He has been working part time from home at his own small business earning $35,000 per year net profit.  We have saved and invested since I started working in 2013. I have a medical corporation where I invest my retained earnings (in a balanced, diversified, low cost portfolio as per your guidance). It has a current value of $1.3 million. We have another $200,000 invested similarly across our RRSPs and TFSAs.

“I am 34 years old and my husband is 36. Does it make sense for us to sell our primary residence and rent until the market cools off? We could rent a comparable home in a better neighborhood for less than $4000 per month. But I can feel the looks of disgust from our parents about being renters.

“We do love our current home, it’s big enough for our family and renovated to our taste. There is also the hassle factor of moving with 2 small children. We would hope to purchase our dream home in the future. Currently knockdowns in our target area are on the market for $2 million. Re-builds are going for $3.5 million. This seems unobtainable now and we are worried about never being able to afford our dream home.”

Seriously? You’re 34 with a net worth of $2.5 million, a $600,000 income, living in a house you fancy, with no debt and a four-year work history. Plus another infant coming. Have you been bringing home the Diazepam and Amytal for recreational use? You’re losing it, girl.

Selling your million-dollar to buy one that costs three-and-a-half times as much at a time when the market is insane, interest rates are starting a long-term ascent, political real estate action is certain and prices have apexed is nuts. You will pour that precious liquid wealth into a single asset at the worst time possible, tossing out balance and diversification. And if you sell and rent, your mom will never talk to you, since obviously you’ll be a social failure and family disappointment. Stay where you are, doc. And keep your head down.

Now for Ron, the banned and banished reprobate:

“Below is a solution to one of Canada’s biggest problems, Garth. You probably won’t like it.

“Given that the national average house price is so extreme if one applies the 3 years pay rule one would need a minimum wage of around $80 per hour and full employment.  Workers would be fired en masse in a heartbeat.  Employers cannot afford the luxury of paying their employees to live in Canada.

“The solution is to regulate home prices by capping residential properties to 3 years pay or less at minimum wage everywhere in Canada.

“The dissenters and the disobedient could be charged with genocide under article 2 sections c&d of the genocide convention.  Those who co-operate with home price abatement could receive mercy and have their debt expunged by fiat.  Real estate must go from being an investment to being a place to live for anyone with a job.

“Don’t worry about the rich and the elite employees who pose as the average Canadian, Garth.  They will always be able to look after number one. The common good needs to be protected from the genocidal greed of those who speculate in the necessities of life and that is a job for government.  If people are no longer being financially bled white by real estate they may have funds for other things that are socially and economically beneficial.”

A lunatic position, of course. But somewhere between the craving, needy doctor and the raving, seedy blogger, sits the vast sea of public opinion. Like I said, nobody’s happy about this real estate market, which has turned houses into futures contracts, burdened families with debt that will crush without constant market advances, legitimized greed and envy, widened the wealth chasm and fueled a war between moister and Boomer, native and newcomer.

These are dangerous days. Stay liquid. Tackle debt. Expect surprises.

Yes, Ron. You’re still banned. Avoid surgery.

The ‘anti-Trump’

La Revolución . She comes. You ready?

This week the date of the looming federal budget is to be announced. If you ever for a fleeting moment doubted what the theme will be, I hope you caught T2’s lecture to Europeans a few days ago. It was really directed at us. The Canadian deplorables and their weasely overlords.

“It’s time to pay a living wage, to pay your taxes, and to give your workers the benefits – and peace of mind – that come with stable, full-time contracts,” said the prime minister who has never run a business. “Increasing inequality has made citizens distrust their governments. Distrust their employers. And we’re watching that anxiety transform into anger on an almost daily basis… it’s time for us, as leaders in politics and business, to step up.”

In our case, stepping up means taxing the rich – or the perceived rich. (For Trudeau, by the way, it also means scrapping electoral reform, a change which would have ensured the Liberals lose the next election and a Trumpian movement win seats in Parliament.) The German press labeled our guy the “anti-Trump” (and sexy) since The Donald wants to lower taxes and unshackle business while we’ll get more taxes and a war on entrepreneurs.

Last week we detailed some of the changes being contemplated, then had a big argument between the lefties and the capitalists. Under consideration in this budget are higher capital gains taxes, a lower dividend tax credit, a small business retained earnings tax, perhaps a windfall housing gain tax and new regs forcing business owners and operators to act more like employees plus end income-splitting with family members. This comes atop creation of a new tax bracket in the last budget which boosted the marginal tax rate on the 1%ers (over $225,000 income) to a withering 54%.

Tax, tax, tax and more tax. And an insatiable government which will still spend $100 billion more than it takes in during a four-year term. Yes, he’s the anti-Trump. But since (a) he has a majority and (b) his support base of moisters is rife with anti-Boomer sentiment, plus riddled with house lust and disentitlement, la revolución está aquí.

Here are a few things to contemplate in your defence:

♠ Aggressively avoid taxation. It’s not illegal (evasion is) and there are many obvious ways to reduce your tax exposure or grow money free of it. The top choice is still the RRSP, and next Wednesday’s the deadline (March 1) to seriously reduce your 2016 tax bill. These are of the greatest benefit to rich people, who can stuff up to $25,000 in a plan (per year) and wipe away more than $12,000 in taxes. They also let you split income with a spouse, finance a maternity leave, shift taxes into lower-income years, buy a house, create a mortgage, or simply take taxable assets you now own and make them non-taxed.

♠ Other vehicles include TFSAs (tax-free portfolio growth, income-splitting with children or a spouse, retirement income without reducing pensions), RESPs (tax-shelter all growth in your kids’ education plan, plus get tax-free annual grants), and RRIFs (convert RRSPs into a long-lasting income stream during TU years, while still growing assets tax-free). How can you afford not to take advantage of this stuff?

♠ Regarding capital gains, count on T2 upping the inclusion rate, which could raise taxes a significant 40%. In no way should this deter you from investing or building a proper portfolio. But it’ll make more sense to delay crystallizing a capital gain, to eschew frequent trading and focus on long-term buy-and-hold strategies. The last thing you want is a ‘tactical’ financial advisor who says he can beat the market by flipping stocks around.

♥ Don’t pig out on maple. If US rates rise and taxes fall, the loonie will erode and our economy struggle – especially given the swelling tax load. Remain twice as exposed to American and international growth assets as to those here. And recall the advice given often about hedging against our currency. Keeping about a fifth of your portfolio in US$-denominated stuff (at all times) is wise.

♠ If you have a bundle in your house and not so much in financial assets, then diversify at the same time you create a tax deduction. A home equity LOC will unlock up to 65% of real estate value and should come at prime plus a half (3.2%). Invest that in a nice stable balanced and diversified portfolio giving a six or seven per cent return over the long term, and wealth will grow more predictably. Besides, with interest-only payments, 100% of them are deductible from taxable income. Win, win.

♠ If you operate through a small business, consider taking salary instead of dividends. Not only will you earn RRSP room but you’ll escape some of the potential nastiness Ottawa has in store. In any case, remember that there’s no advantage to taking income as dividends since the tax you and your company pay together equals the tax you’d fork over personally. And you earn RRSP room. Plus, your company escapes tax by deducting the salary.

♠ Stick with a low-turnover portfolio to avoid triggering capital gains (or wait until there’s a new government). A good advisor will rebalance your portfolio only when necessary, often triggering some losses at the same time gains are realized – mitigating the cost. And always remember – you can enjoy all the capital gains you want inside your TFSA and Ottawa won’t Hoover one dime of it.

♠ Finally, never invest just to avoid, escape or evade tax. Sure it sucks, but paying up is a fact of life. Stick with the plan and manage assets to accomplish your life’s goals. Besides, if you’re obedient and supportive, Justin could make you a Senator! No tax worries then.