Entries Tagged 'Book Updates' ↓

Days ago I called retired people living in trailers on CPP, ‘losers’. Many blog dogs took offense. Which tells you how screwed we are. One of our myths is that the government will look after you when you wrinkle and shrivel and grow hair in the awful places. In reality, public pensions may keep you alive, but barely.

Worse, the system of income support we have now will soon be under attack, which should scare the crap out of every forty-something with a fat mortgage, two kids and 90% of net worth in a house. In case you had any illusions, the average amount of Canada Pension paid to people at age 65 is just $512 (you can double that if you contribute for a lifetime, but most don’t). And also at 65, everybody gets the Old Age Supplement. The average here is $504 (the max is $540).

So, that’s a grand a month – $12,000 a year. For a couple who both worked the average number of years, income is double that. Now name a single Canadian city where two people can afford rent, food, a car (or transit), cable, insurance, clothes, meds and a few simple Victoria’s Secret cherry red teddys with embroidered transparent organza bodice inset, on twenty-four large? Can’t be done.

And yet an apparently huge number of Boomers (and their house horny kids) are headed in precisely that direction. More people are retiring with a mortgage than ever before. Over 70% have no other pensions. Half the population have no savings. Debt is rampant and third of all households can’t pay their monthly bills.

And yet seven in ten Canadians have the most costly single possession of our society – a house. What’s wrong with this picture? Why would a blogger – whose parents (68 and 65) sold a $400,000 in Toronto, ended up broke after paying down debt, and face living in a buggy Muskoka trailer on the public stipend – defend them? There’s no justification for blowing through six decades of life and having nothing to show for it but a defensive 39-year-old.

CPP and OAS were never intended to finance anyone’s life, and never will. They exist as retirement supplements to money you’re expected to save and invest – skimpy little safety nets to round up the income that RRSPs and TFSAs and non-registered investments provide.

So what’s gone wrong? Sure, interest rates have tanked, so Canadians’ fav investment – GICs – pay next to nothing (that isn’t going to change). Yeah, financial markets have been scary for a few years and many people got creamed buying high and selling low (Nortel). Few employers offer pensions now, and even plump public-sector plans are under-funded and uncertain. But mostly, it’s been the historic concentration of wealth in real estate that’s truly messed with our heads.

Gone are the days when people waited until they had 20% or 25% for a house down payment. Now they buy with 5% down which means zero equity after closing costs and a new deck plus 60-inch flat screen. They have a baby or two, move up, spend more and borrow more. By age 40 millions of them have all kinds of stuff and obligations, but no actual money and precious little equity. It’s a financial death spiral.

The stuff I hear is sad. I sit with way too many couples on the path to nowhere. Their laser focus is on getting a hunk of real estate, and nothing else comes close. They can recite the current table of fixed and variable mortgage rates, but have no idea a TFSA is not a savings account or an RRSP is not a thing. I see middle-aged couples with zero savings frantically trying to pay down mortgages with rates less than inflation. It never occurs to them they have no diversification, way more risk and are paying back a 2.5% loan with money that could be earning 6%.

And daily on this pathetic blog we hear from house-heavy Boomers who simply can’t sell their properties. Too late they realized real estate can turn cold and illiquid. It’s an experience vast numbers of retiring homeowners are about to discover. So if you think a house is a financial strategy any more, think again. The coming tidal wave of wrinkly sellers will change your mind fast.

But here’s the news: Public pensions, as piddly as they are, will soon be under attack.

Over the next two decades the number of old retired farts will double. The cost of OAS alone will go from $36 billion a year to $108 billion. The bulbous generation will suck off $2.8 trillion more in retirement benefits than the taxes collected to support it.

So, expect the CPP age to eventually rise from 65 to 67, as is happening in the US and the UK. Expect to receive OAS only if you need it, not just because your sperm count falls. Expect the feds to again drop the age at which retirement plans turn into taxable income. Expect to lose the ability to take the public pension early, even discounted. Expect marginal tax rates to rise.

And expect Boomers to do to real estate what they did for saving.

Except for trailers.

A year ago it sat like a blemish on a silken face. Its broken and boarded windows beckoning yet more vandals. A dab of inner-city badass in a manicured land. This non-descript 4-bedroom, garage-pasted-on-the-front, face-brick home in a respectable tract of Mississauga was abandoned and decaying last March when a blog dog snapped the picture below (left) and neighbours gossiped about a foreclosure.

Of course, there are literally thousands of identical houses here, in a land of undulating streets devoid of stores or culture, where minivans swim upstram to breed. It also yields a nice insight into the real estate mess we’ve created, thanks to flippers, speckers and unbridled HGTV house lust.

5304 Glen Erin Drive is now for sale, spruced up with shiny hardwood and granite. Asking price: $834,800. Which begs the question – is an utterly unremarkable house on a street of clones in a burb 40 minutes from downtown Toronto worth most of a million dollars?

Increasingly, the world says no.

So far this week the alarm has sounded in many quarters. CMHC running up against its allowable lending ceiling, threatening the entire market. The second-largest mortgage lender cutting off commission salesguys and business owners, plus capping loans. The federal bank regulator warning of Canadian subprimes and a dangerous condo market. F muttering about all this being a ‘matter of concern.’ And now the banks (led by TD) moving to further protect themselves from potential losses by massive increasing rates on unsecured variable LOCs, from 5.5% to 8.5%.

The IMF has warned. So has the Bank of Canada. Plus analysts like Capital Economics (“We’re  not confident we can dodge the bullet and that there won’t be a correction in the Canadian housing market in the not too distant future.”). Bloomberg moved a worrisome piece on the Canadian housing bubble three days ago. And now The Economist, also read globally, has a column headlined: “After years of lecturing America about loose lending, Canada must now confront a bubble of its own.”

As the mag reminds us, there are 173 condo towers being built in Toronto. In New York (population 8,008,000), only 96. Worse, condo insiders estimated up to 80% of all new units in the GTA are gobbled by speculators, convinced prices will rise without end, regardless of supply overwhelming demand.

House prices have doubled since 2002. Household debt has swollen 40% in a decade. Regulators, economists, central bankers and politicians are worried. Lenders are moving quickly to cover their assets. Some markets are already showing signs of severe stress, like Vancouver – as I detailed yesterday, with sales down a sharp 16% and listings popping. And look at this chart of home prices in Victoria – one of the most expensive places in the country to live – at least for now.

So, what comes next? More real estate angst, even as mortgage rates stay at historic lows in the middle of a non-existent winter with the Spring market beckoning. I hear it’s unlikely CMHC will be granted an increase in its already-obese mortgage default insurance activities, once it hits the $600 billion ceiling.

The consequences: A rationing of mortgages to all those horny young couples swimming in hormones rather than cash. Expect fewer loans and higher rates on high-ratio borrowings. This is how Ron Swift, CEO of Pacific Mortgage, puts it to Canadian Mortgage Trends this week: “The result of these restrictions ultimately means there will be an impact on liquidity in the market place. I think this will first impact products that have the higher insurance costs, such as stated income and self-employed. They will either be stopped or the rates charged to these clients will have to be significantly increased. Either way, tightening liquidity, reducing mortgage options or increasing the costs will take some buyers out of the market, which will affect all of us.”

Now, tell me you didn’t see this coming.

When houses here cost twice as much in the US, when Vancouver’s the second least-affordable place on the planet, when icy Toronto becomes the condo capital of the world, when growth in debt swamps gains in income, when lenders get scared, and a flipper wants $834,800 for a Mississauga rescue, how is this a surprise?

Tomorrow: Pity the wrinkled ones.