Karma, part deux:
Let’s recap, shall we? The Fed is widely expected to signal the end of Cheap Money in three weeks. Already fixed-rate mortgages are getting more expensive. Banks, led by TD this week, are launching an awareness campaign so the house-horny zombies we live among will be schooled on what’s coming. And out shiny new finance minister, Bill Morneau – having told us last week the Cons left his cupboard bare – has nothing to say about what could be the greatest threat to our economy.
Let’s face it. We’re on our own. There’s no life preserver Ottawa can throw to homeowners about to go underwater. There’ll be no 40-year amortizations, interest buy-downs, foreclosure moratorium, reduced downpayments or rate holiday. The very politicians who aided and abetted this mess are unable to fix it – since the Bank of Canada has already slashed the cost of money and the feds are broke.
That’s Karma One.
The second part is equally bleak so, for God’s sake, do not let your kids read this.
Turns out at least four of the ten people you hang with or are related to, are idiots. Sadly, this might include you. So not only are 70% of Canadian real estate markets now slagging or falling with the cost of mortgages about to rise in the next few months (by almost 1%, according to the bank), but a huge number of us are already screwed. Thus, the combination of falling equity and rising rates for those with a one-asset strategy could become insurmountable.
New evidence comes via a big survey of people making $50,000 or more done by Manulife. When it comes to personal finances, many are hooped. Why?
- Half of Canadians ‘struggle’ to maintain a balance of $1,000 in savings. A thousand bucks. Seriously.
- Almost 40%, at least once in the past year, had to borrow money from family, tap credit cards or sell something to pay their usual bills.
- One in six had to cash in taxable RRSPs or visit a payday loan vulture to make ends meet.
These are fresh stats. Add them to the file telling us over 90% of people have not maxed out their TFSAs, that RRSP contributions have dropped off a cliff and half of everybody believes they couldn’t survive one missed paycheque. Meanwhile new mortgage debt topped $75 billion in the last year and we just hit another debt-to-income record.
Manulife’s CEO Rick Lunny (I know the guy and he’s cool) doesn’t mince words when it comes to an explanation. The cause is houses, he says. “It does appear there are a lot of people living on the edge,” because homeownership has turned into a cult, and insane prices have saddled families with more debt – and overhead – than ever in the past. Meanwhile the real estate bubble has been unsupported by economic fundamentals, which means we’ve spent more without earning more. So we borrowed the difference.
This might make some sense when rates are low and falling and you’re job’s secure. But Elvis has left the building. We’re decidedly on the path to higher interest rates. Meanwhile the commodity rout ripples out across the country from poor Alberta – where a socialist government decided to raise taxes on individuals, corporations and now carbon. Now every day seems to bring news of more job losses, as much in Ontario and BC as the oil patch.
Well, the 1%ers who hang around here probably think they’re fine. But Karma being the bitch she is, this will end up biting everyone. The events above (higher rates, slow growth, job stress) pretty much assure a real estate correction. Given that vast numbers of people are unprepared, and have made such dumbass decisions, we should expect economic consequences – and then political ones.
Some simple actions will help. Hedge against the dollar by keeping about 20% of your investment assets in US$-denominated securities. We’re going lower. Hedge against the economy by having two-thirds of your growth assets in US or international stuff. Hedge against company risk by investing through index ETFs, and not individual stocks. Hedge against higher personal tax rates by maxing out both your RRSP and TFSA, remembering that the former is for tax-shifting, not retirement funding. Hedge against voracious politicians with family income-splitting, funding kids’ tax-free accounts, a spousal RRSP or joint investment account. Hedge against volatility with a balanced and globally-diversified portfolio, keeping 40% in fixed-income. And hedge against Canada by reducing your real estate exposure.
Or, don’t. Spend everything. Save nothing. Borrow big. You’ll be in great company.