Oil at 48 bucks. Ouch. President Donald Trump proven to be a Twittering liar. Yikes. One more sleep until T2 slaps around investors. Mercy. And meanwhile the FBI’s probing if Russia threw the US election while that North Korean dipstick builds rocket capable of reaching Surrey plus Britain begins amputating from Europe.
And what do people in Canada care about? You bet. How much their house is worth this week.
(EDITOR’S NOTE: I thought you were going to tell people how to invest in this post, after you led them on yesterday. Patience. It’s coming. Go play with a pencil. – Garth)
There’s been mucho talk about whether a Van-style foreign buyer’s tax should be smothered over smouldering Toronto. The realtors argue against it, saying they see on 4.9% of deals involving offshore cash. But most everyone agrees now that “something” has to be done to geld a market where 20% annual gains are routine and nobody can actually afford to move.
Finally, this pathetic blog can report some good news – recognition of one of the true reasons (not a fake reason, like Chinese dudes) why real estate’s unaffordable in a market of six million people. It’s speculation, aka house lust. Also known as greed. Look around. It’s everywhere. Over 50% of all condo sales are to speculators, investors and amateur landlords. Houses are bought and then sold within months, sometimes with multiple closings on the same day. That hasn’t happened in Toronto since the late 1980s. And as prices ratchet higher, the fever grows – people desperate to buy in at historic levels, because they can feel in their groin it’s going higher.
So what can be done?
Simple, slap the speckers with a new tax. After all, there are far more of them than there are foreign buyers – and the damage they’re doing to prices is more acute. So, Ontario’s now asking federal finance minister Bill Morneau to increase the level of capital gains on residential real estate. “My primary focus is to address the concerns of middle class Canadians who are worried about buying their first home,” he tells the feds. “It is important that the housing market remains stable, meaning that borrowers and lenders are resilient and able to withstand economic shocks.”
Currently someone flipping a house after a period of ownership must include 50% of the profits in his/her taxable income (that percentage could rise for all forms of capital gains in the budget tomorrow). But if the CRA thinks you never intended to move in but bought and sold only to make money in a rising market, then 100% of the profit will be added to your income – taxed at your marginal rate. The only escape from capital gains is to actually have dwelled in the property as your principal residence (not just for a few months, but years), then claim the exemption on your annual tax return.
Meanwhile one of the big banks is also honking up this tree. Says Scotiabank: “The idea, simply, would be to raise the cost of speculation, without excessively interfering with the market mechanism. Stricter enforcement of property owners paying a capital gains tax if the home is not a principal residence will begin to address speculation but more specifically targeted measures are needed. A number of possibilities exist to do this, such as introducing a tax on sellers who flip a property within a certain period of time.”
For all you xenophobes, the bank also says a Chinese Dudes tax in Ontario would have no effect because there aren’t enough foreign buyers. It also says Vancouver’s market did not flop because of a FB tax, but simply because houses got too expensive for people to buy. Hence, sales plunged.
So there. Let’s see what tomorrow brings.
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Regarding the balanced and globally-diversified portfolio mentioned here yesterday, this blog has offered the ideal breakdown on a few occasions. I hope you took notes.
In general, the 40% fixed-income allocation should be half bonds and half preferreds. Bonds are included not because they pay much, but to dampen volatility as they usually move in the opposite direction of equities. A government bond ETF might be only 6-7% of the portfolio, with more in corporate bonds (three times the yield), some provincials, plus a little slice of high-yield debt (paying about 7%). The preferreds are obvious – dividend close to 5%, tax-friendly, relatively stable, quarterly income stream and the rising potential for capital gains as interest rates bump higher.
On the 60% growth side, 21% in Canada (including 5% in REITs), an equal weight in the US and 18% international works (only 3% of that in emerging markets). Keep 20% of the overall portfolio is US$ – and the total exposure to the S&P (big US companies) would be about 13%.
The number of ETF positions (large cap, medium cap, small cap etc.) should be dictated by the portfolio size. If you have $50,000, then buying a dozen securities is foolish. If you have a million, it’s not. Establish the correct weightings and then rebalance one or twice a year. The rest of the time, play with your dog.