Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Thu, 05 Mar 2015 01:10:07 +0000 en-US hourly 1 The bottom Wed, 04 Mar 2015 22:55:00 +0000 GOOD modified

As forecast, the Bank of Canada didn’t drop its key rate this week. In fact, I’d be surprised if it went down in April, or any other month this year. This is it. The bottom. That will be confirmed with the Fed moves higher – looks like June.

The impact of six years of historic low rates is everywhere. Savings and investments are down. Real estate is bloated. Debt’s off the chart. And people are getting truly weird.

In the last week or so have you noticed the number of people here who actually believe making mortgage payments is giving them a return on their investment? They justify not investing in anything else, because shelling out for their home loan is ‘a guaranteed return’ whereas all other assets are riddled with risk.

There is no guarantee you will earn 8%+ on your investments this year but you are guaranteed an after tax return of 3%+ by paying down your mortgage. — Blog comment

Yikes. Where do they learn such things? Brad Lamb U?

Repeat after me: paying interest costs money. Investing makes money. You can’t suck and blow at the same time. And even in an era of ridiculously-cheap loans, these rules don’t change.

For example a $300,000 mortgage at 3% will nick you about $1,400 a month. Over 25 years – assuming interest rates never rise (and they will), the cost of the mortgage (interest) is $126,000. By the time your house is paid off, you’ve shelled out $426,000 to repay something worth $300,000. So, the premium is 41%. That’s a loss, not a gain.

Of course, inflation will diminish the impact of payments over time, but so will interest rates rise with virtually every five-year renewal. And the cost of the house could rise. Or it could fall. You have absolutely no control over rates or the market. But the fact remains that paying the mortgage is not making you anything, only gradually decreasing your liability. Worse, residential mortgage interest isn’t tax-deductible, so it must be paid in wages which have already been reduced by a third to a half.

Compare that with an investment loan. You can get one at prime (if you’re good, or it’s secured by home equity), which is 2.85%. Typically this is set up as a line of credit with interest-only payments – on a $300,000 borrowing that would be $712 a month. But in this case all interest is deductible from income for tax purposes. So if you’re paying 35% tax, for example, you’d get $250 of that back. That makes the actual loan cost a little over $460 a month. If your investments rise 7%, you’ve earned $21,000 in a year and the cost was a deductible $8,550.

What happens if you lose money after borrowing? Well, losses on your house aren’t deductible. You have to eat them. Investment losses can be deducted from gains, and carried forward indefinitely. As for growing net worth, the track record for financial markets – like a balanced, middle-of-the-road, no-stocks, no-mutuals, no-cowboy portfolio – has exceeded that of real estate over the past decade, even in YVR or GTA, and even taking the 2008 crash into account.

Anyway, this won’t convince your mom. She still thinks people go through puberty just so they can buy a condo. The cult of property is unassailable.

But look at where it’s taken us.

In 1982, when rates were high and houses cheap, Canadians saved 19.2% of their incomes. Today, with low rates and inflated homes, we’re saving just 3.6% of what we make. The savings rate, says StatsCan, has been going down for a year, concurrent with the slide in mortgage costs. In fact, debt’s increasing again now by a whopping 7% annually, and households already have an average debt-to-income ratio of 162%. If anything goes wrong (like job loss) the technical term for this is ‘screwed.’

Most worrisome is that we’re saving less at a time when mortgages have never been cheaper to carry, and after gas prices fell by half. Yet people are dipping into their savings just to get by. In other words, it doesn’t get any better than now. Only worse. If people can’t save when home loans are 2.6%, imagine what happens when they return to 5%. The housing debt people take on now will be lingering for decades, and poses a long-term structural negative for the entire economy.

But, as I said, most folks could care less. This email from the mortgage department at Vancity is of way more interest:

From: William Fu <>
Date: 3 March 2015 at 13:38
Subject: Vancity Spring Mortgage Promotions – Effective March 3, 2015

I just wanted to let you know that Vancity now has the following mortgage promotions below that would be of value to you or someone you may know. Feel free to forward this email to your friends or family as I would be more than happy to discuss mortgage options with them.

1)      Vancity will provide up to 2.5% (as a 0.01% low interest rate loan) of the 5% downpayment for any purchase price up to $500,000 (some exceptions can be made up to $1 million purchase price).
2)      Save up to $250 in appraisal fees and receive up to $750 for you to put towards your closing costs in obtaining a mortgage

Yep, buy a house in Vancouver up to $1 million and you need only $25,000. The rest – 97.5% – is debt. Now do you understand why the Bank of Canada held the line on rates today? And why the reduction in January was an amateur mistake?

In a nation where people lack discipline, where loans are considered assets, where banks dish out downpayments, where savings plunge and average house prices in two cities top a million, this is death by debt. Assisted by stupidity.

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Hopeless Tue, 03 Mar 2015 22:54:34 +0000 WASH CHILD modified

Breaking: BoC holds rates. (Of course.)

“Stop it,” she said.

I looked up and saw a dour woman with a gray jacket, gray hair and a gray face daggering me. “Stop what?” I asked, interrupting my call.

“Stop talking on your cellphone and walking in the hallway. It’s not allowed because it disturbs people.”

Glancing around I saw a giant, long, resplendent marble-encrusted passageway, devoid of life. Nobody. Not even a bug.

“There’s no one here, besides I’m a guest.” I entered blog mode. “So please get lost.”

As she sprinted off to find security, I made my way back to the safety of the conference room, happy I decided not to write a $53,000 cheque for the Granite Club initiation fee (annual dues of five grand are extra). My joy was fleeting. Brad Lamb was lying in wait.

So, yeah, I gave in to repeated requests and joined a panel discussion on Tuesday focussed on the future of real estate in Toronto and lesser regions of the universe. Condo King Lamb (he’s currently shopping for a house “in the $5 to $7 million range”) was joined by former BeeMo chief economist Sherry Cooper, who has a new hairdo and a gig with Dominion Lending Centres. Three big builders were at the table, one of them bragging about his current 40,000 square foot, $35-million house project for a Chinese client. A realtor-to-the-stars was present, who just sold her home for seven mill and complained about having to reduce the price (“then it sold in three days!”), along with a former Toronto mayoralty candidate, a developer dude about to join the CBC Dragons thing and a half-dozen swirling photogs.

Well, it was brutal. Cooper and Lamb tag-teamed me, arguing real estate is the only asset Canadians need, that dorks like me (actually just me) are responsible for “all those people missing all that growth” and that this blog, “is like assisted suicide.” Of course I bleated away about most people’s rising debt being proof they were buying beyond their means, that most Canadians have houses but no money or financial plan of any kind, and that Boomers like them were literally shoving property down the throats of their malleable millennials. I also referenced Calgary, where a year ago nobody knew real estate would collapse into an ocean of listings, as evidence of the risk inherent in a one-asset strategy.

It was hopeless, of course. In fact, it was designed that way. I watched an evil smirk snake across the lips of the organizer, publisher of a chain of high-end magazines chock-a-block with glossy condo and mansion ads. I felt like a nubile, helpless virgin stretched across the sacrificial alter, which was briefly arousing. Then I was pummeled some more. After three hours, Club staff had to collect me with spoons.

Of course, all the people in that room, save the mischievous host and the techies, live or die based on the property market. They’re millionaires, move in elevated social circles, profit immensely from society’s house-lusty fetish and are direct beneficiaries of cheap-rate policies and the web of incentives promoting home ownership. The more the sheeple borrow and spend (did you see the latest debt numbers? Yikes.) the more they profit. Nothing to begrudge about that, but they epitomize an economy built on hormones and entitlement. Hard to understand how it will end well when each day the disconnect between real estate and the economy grows wider.

Bleeding now from each orifice, I checked my email and found this note, from Mark and Anne in Toronto:

So, it finally happened yesterday. A couple that we are friends with – for the longest time our buddies in holding out and staying strong – collapsed and bought a ramshackle $600k bung with pink bathrooms within earshot of two of Ontario’s busiest highways. I now have to face up to the inevitable lying through my teeth with the fake congratulations and admiration of their rotting wood-panelled basement while secretly weeping on the inside for them.

Our resolve remains firm, yet we can’t help but wonder if there is any return from this madness. People are apparently showing no sign of fear as prices escalate to beyond ridiculous levels – if anything it has this bizarre opposite effect of making them want to jump in harder and faster. Between us we are pulling in $190k/yr. Our rent is 9% of that. We are debt-free and have a six-figure balanced investment portfolio. At current levels we are not willing to sacrifice our future by going all-in on a house.

The more we think about it, the more it seems we’re trying to beat the system and have no chance. We make decent money, have decent savings, live in one of the largest countries by land mass in the world – and yet we cannot afford to buy a house without severely risking our retirement. Absolute insanity.

Can you comment on your blog for those in our position; steadfast in our resolve to not throw ourselves into this madness, yet thoroughly depressed at government policy and societal lemmingness that shows no end to the status quo? Please show us there is light at the end of this tunnel and good things come to those with patience.

Of course. I’ll go one better. There’s light at the end of the urinal.

“Hey Brad,” I said cautiously as I limped into the upscale men’s room after the event. He paused. Looked over at me. “I want you to know,” he said, “that I respect your view. It makes sense. But this is all about mind share.” It’s just marketing.

Update: The day after the Granite Club encounter, Brad Lamb sent out this tweet:

Garth Turner blatantly lying about bathroom conversation. I said “I understand your point of view, but don’t agree with it. It’s nothing personal, I’m fighting for minds.”

Memory is complex thing.

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Balance Mon, 02 Mar 2015 22:42:43 +0000 MATTRESS modified

No rate decrease this week. The Bank of Canada now understands the reduction in January was bozo. It sent the wrong signal, tanking the dollar, driving up inflation and flooding the streets with moist Millennials, their loins stirred, their eyes glassy and their house money pre-approved.

The move was alarmist and unnecessary. Pure Vespa. It pandered to realtors, but spooked investors. This year 80% of people who qualify will contribute zip to their RRSPs. Those who do will commit to only about four thousand. And three-quarters of Canadians say they don’t have the money to put away for retirement just now. Guess why?

Right, it’s all going into mortgage repayment.

Most of the people you know have no idea what risk is. So they stumble into houses and GICs. The real estate cartel feeds that, highlighting volatility on financial markets. The result is what I referenced above – a nation of people with property assets, and without cash. Hard to imagine a greater risk these days, given the growing gap between home prices and incomes. Lots of folks in Calgary are learning that one.

That financial assets pose a greater risk than real estate is a myth. Over time, there’s no evidence to support it. Investors who snooze through corrections and crashes with well-built portfolios, come out just fine. People who have houses make money, too. But at the end of the day, we all need cash flow more than a roof. Never concentrate on one, at the total expense of the other.

Rich people get that way by staying invested. They hire advisors, forget about market timing, and concentrate on generating income. They don’t buy a condo to rent out, park money in a GIC at some Ukrainian online credit union in Saskatchewan or pay off a 2.25% mortgage. Mostly, they seem to have confidence, which the huddled masses do not. Successful folks think the future is pretty cool. Your indebted brother-in-law fears it.

A year ago this pathetic blog was overrun (as usual) by those warning the US was a failed state, financial markets are rigged and stocks were dangerously bubbly at record levels. So, let’s have a little review.

In the US, equity investors have scored big. The Dow is 14.5% higher now than it was then, with the S&P 500 gaining about 16%. (So far in 2015, both have added 3%.) A year ago the Fed was still pumping out stimulus dollars, which are now entirely gone. Unemployment has tumbled, profits have been robust and now the central bank is just four or five months from its first rate increase in six years. Looks like markets have years of gains ahead, despite the inevitable corrections.

In Canada, even with the oil price collapse, a federal government too chicken to bring in a budget, the Poloz poodles, the world’s biggest condo economy and a populace pickled in debt, most banks have just delivered higher dividends and record earnings. The TSX is ahead 4.5% in the last two months, and has risen 10.5% in the last twelve months.

In Europe, despite deflation, the piteous Greeks, the dork leading Russia, structural unemployment and Sam Smith, investors are doing just fine. Germany’s DAX has surged 16% so far in 2015 and has added 17% in a year. The FTSE in London is ahead 6% over the past twelve, and the European Central Bank is in the middle of a trillion-euro stimulus program that even has the lefties in Athens wanting in.

Hey, look at what some ETFs in a balanced portfolio have delivered. XIU contains the biggest sixty companies on the Toronto market and its one-year advance is 9.6%. The real estate trust index fund called XRE has jumped 7%, plus giving investors a 4.74% distribution. Preferred shares have also benefited from the low-rate environment, with XPF up almost 6% while pumping out a 4.6% yield. Even bonds have continued to race ahead. The fund called XGB holds riskless government debt, and has advanced 7% since last March, plus its modest 2.6% distribution.

In other words, that balanced and diversified portfolio I keep yakking about works. Why would you pay down a 2.25% mortgage when your money makes 8%? How can you rationally expect to retire with only the government pogey and a paid-off house? And with a whack of this stuck inside a taxless TSFA, the outcome is even better.

By the way, here are 10 reasons (from Bloomberg) US quant strategist Savita Subramanian says the current equity market bull has many years yet to run:

1. Wall Street sentiment is still bearish. Strategists are only recommending 52% stock allocation.
2. Fund managers still have a lot of cash they haven’t put into stocks.
3. We still haven’t seen a great rotation from bonds to stocks.
4. S&P companies are much less leveraged than they were at the last peak.
5. U.S. companies have tons of cash.
6. Lots of S&P companies are paying a dividend that beats returns on bonds.
7. On many measures, stock valuations look normal (though p-e ratios are getting high)
8. The U.S. is still the world’s biggest innovator.
9. S&P 500 stocks are the world’s “best-in-breed.”
10. Plunging oil and easy monetary policy around the world are good news for companies.

Nothing goes up forever. That includes your house. Maybe it’s time you stopped being obsessed with paying off the mortgage, and started to invest. It’s about money, not stuff.

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Muzzled Sun, 01 Mar 2015 17:18:59 +0000 MUZZLED modified

Some words on the freedom to speak. The weekend discussion proved it’s important to many who come here. As it should be. The world is less free daily.

Governments want online policing, as Ottawa’s new anti-terrorism bill underscores. Some lawyers and academics are outraged at limits placed on expression. Others say anyone using web sites to promote numbnuts groups like ISIS deserves arrest. It’s a serious debate, since more regulation may protect people, but it makes free societies less so. Legislation such as C-51 here or the Patriot Act in the States is jingoistic and worrisome. But we should never forget that the bad guys love free speech, too. For a reason.

A few people have been thrown off this blog. This has resulted (mainly) for two reasons: they’ve posted racist, ignorant or hateful comments about groups. Or they’ve engaged in personal attacks on individuals, including me. Mostly, me, actually.

Of those who come here daily, about 1% (on average) leave a comment. Of those, less than 1% are trashed. People who disagree with me, others or the entire premise of this pathetic blog are routinely published. And, by design, this site carries no advertising, stripping out any monetary reason we should bob freedom of expression.

But why delete anybody?

This is a moderated thing. I read every comment, then hit a button. My name’s at the top of the home page, so all that is published here reflects on my judgment. The Internet brims with sites chock full of ugly words and thoughts, unreasoned rants, and the endless display of the prejudice, intolerance, vulgarity and unbridled ignorance of anyone who can type. In those places you can quickly find the lowest common denominator of our society. Worse, like award-winning movies packed with gratuitous sex and F-bombs, they normalize the aberrant. Before long, the shocking is routine. Everybody’s shell hardens.

Other than Bandit, I don’t control much in life. But I do control this.

Google Analytics tells me 614,286 visits occurred here last month, with 1.179 million pageviews. About seven million times a year somebody logs on, and they spend an average of three minutes and 52 seconds. That suggests most visitors don’t actually read all the comments, which I know is bitter news to some of the twisted souls who can’t stop typing.

Still, it shows me a majority don’t mind being spared the drivel of those who blame high house prices on immigrants, who can’t make a point without being profane or come here only to trash the flawless but humble host.

Everyone’s free to speak. But it’s not all about you.

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Loving to hate Fri, 27 Feb 2015 23:03:57 +0000 CHIMNEY modified

Yesterday I threw a frequent and articulate poster off this blog. In response to a comment from someone proud that their immigrant parents had produced three doctors and two pharmacists who were helping Canadians’ lives, he wrote:

Born and raised Canadian kids could have been trained for those jobs, so don’t get too full of yourself. And doctors and pharmacists mostly are public servants, rather than net taxpayers. With most of their compensation derived from payments from government.

The implication was clear: immigrants steal jobs. The kids of immigrants are not ‘Canadian kids.’ Besides, the government subsidizes them.

Xenophobic, anti-immigrant sentiment is a sad, dark and persistent theme in the comment section of this site. That mirrors social prejudice, but it’s concentrated here because we often talk about real estate. Since houses cost so much – usually more than average people can afford without pickling themselves in debt – the hunt is always on for someone to blame. Rich foreigners are easy game. Especially in Vancouver. Especially now.

Last month the average detached home price in YVR jumped back into record territory, at $1,303,256. In Toronto it has also restored to a peak level, now $1,056,238. The average household income in Van is under $73,000, and in 416 about thirty grand more. It’s easy to see why mortgage borrowing is rising so quickly or the national debt-to-income is a record 164%.

My thesis has been that real estate values have been mostly impacted by the advent of cheap money and the legacy of 2008. When people who had unbalanced, equity-heavy mutual fund RRSPs and investment accounts were whacked in the financial crisis, they sold, took losses and vowed never to repeat. Even those who lost no money still lost their nerve. The aversion to perceived risk was then stoked by the real estate industry at the same time desperate governments were slashing interest rates to encourage borrowing.

So the cheaper money got, the more people borrowed and the higher house prices traveled. Before long 70% of families owned, and most net worth was being concentrated in one asset. As prices rose, more wanted in. Up she went.

But the thesis of many others, including those who cannot afford the house they feel entitled to, is that they’ve been denied a birthright by a foreigner who stole it. Thus, the myth of all of those thousands of Chinese millionaires beating down our doors, snapping up properties and through their sheer influence driving values skyward.

Standing by to fuel the panic are professional realtors and marketers. They’ve hired helicopters to have Chinese agents buzz the Lower Mainland. They’ve hired chicks of Asian heritage to pose as fake Chinese buyers. They’ve fed the ‘buy-now-or-buy-never’ meme a whole generation of virgin buyers now believes. They encouraged flawed surveys showing HAM is everywhere. And now they’re telling us a cheap Canadian dollar (in part because the economy sucks) is going to unleash the next wave for foreign buying.

“With the loonie falling about 10% against the U.S. dollar in the last six months,” said the Financial Post yesterday, “foreigners who have their money parked in greenbacks or in currencies pegged to the American dollar are likely to ramp up their interest in the Canadian marketplace, say industry experts.”

See what I mean? It’s a relentless and consistent message, yet one which is supported by no authoritative data. And any empirical attempt to counter it – as CMHC did recently with a survey showing only 2% of condos in 416 or 604 are foreign-owned – is instantly attacked.

So, what are we to think? If a massive doubling of mortgage debt on the part of Canadian citizens is not enough to make it clear who the buyers are, what is?

Well, here’s a glimpse.

The Victoria Real Estate Board tracks exactly who buys real estate in that market, BC’s second-largest. Yeah, I know. Victoria is not Vancouver, 115 watery km away. Maybe there are twice as many foreign buyers in Van. Maybe it’s five times. But at least this is a good starting point in understanding who is buying houses in one of the priciest cities in the country, and a provincial capital. The numbers below were just released privately to members of the Victoria Real Estate Board:


By the way, of the 1.64% of Victoria buyers who were foreigners, 50% were from the US.

Of course, such stats won’t change the minds of those who hate without thinking, or blame others for their shortcomings. That’s the nature of prejudice. We all have some.

But it’s a fair assumption all real estate board have similar numbers. Guess why they’re not published?

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Polozonomics Thu, 26 Feb 2015 23:17:35 +0000 SUPERDOG modified

Does Stephen Poloz know what he’s doing? The Bank of Canada head dude shocked markets last month when he dropped the bank’s key rate a quarter point. “Insurance,” he called it. “Poison” is more like it.

The signal he sent was unmistakeable. The guy had the patina of desperation about him. Immediately the dollar plunged, and has been barely above 80 cents US since. When it happened, I told you there’d be consequences.

The nation imports $45 billion worth of stuff every month, mostly machinery and equipment, motor vehicles and parts, electronics, chemicals, electricity and durable consumer goods. Yes, plus food. And Harleys. The bulk of this comes from the US, and we’re paying 20% more than we used to.

So thank Allah for cheap oil. Without a big drop in gas and energy costs, consumers would be shanked. As it is, families are still squeezed. Thanks to Poloz, it’s just started. I mean, have you bought lettuce lately?

Despite a massive 12% drop in energy prices in January, inflation was up 1%. Core inflation (after volatile energy is stripped out) is double that, at 2.2%. That number hasn’t changed in a long time, and sits within the central bank’s own target range. It would be lower, and living would be cheaper, if our central bankers had not sacrificed the dollar. As a consequence, seven of the eight categories of stuff StatsCan tracks cost more last month. Food alone was up 4.6%. Clothing shot ahead as well, along with all the crap from China that Wal-Mart sells.

Meanwhile, if you live in the GTA or YVR, you know what that quarter point cut did to housing. As predicted, it stirred the loins of moist Millennials, sending them into the streets to start bidding wars and force prices higher – even though mortgage rates were basically unchanged. Just as Poloz had telegraphed fear to the currency markets, he fed expectations that cheaper money would mean pricier houses. And so, it came to be.

In the first two weeks of February, say the realtors, sales in Toronto jumped 14% year/year, while prices were up 10.3%. The average detached house sprinted ahead to $1,056,238, the highest in almost a year, after trending lower through the second half of 2014. A similar story happened in Vancouver. Recall the photo I showed you the other day of a near-riot to buy 300-foot micro-boxes in unbuilt suburban towers.

POLOZ modified  So that’s Polozonomics. A rate cut. Collapse of the dollar. More expensive imports. Sustained inflation. Higher living costs. Real estate speculation. More consumer debt. All at the same time our export base is falling and jobs erasing, thanks to oil. What a combination.

How would it have been worse to leave interest rates alone, let the dollar down gradually, curtail inflation and suck some air out of the housing gasbag, giving hope to those priced out?

Clearly the bank was spooked about oil and deflation, plus what’s been happening in the prime minister’s home province. As you know, Alberta real estate is cratering. January sales crashed 45% in Llyodminster, 41% in Fort Mac, 35% in Calgary and 23% in Edmonton. This month to date, Calgary deals are down 34% and average prices have dipped 4%, with the expectation the decline will deepen significantly in the coming months. Once again we see human nature at play – when listings bloat, sellers sweat and values decline, the buyers disappear. When real estate is topping out and irrational, as in YVR, there are lineups to make offers. Nothing ever changes.

What happens now?

The betting is Poloz panics and reverses course. He already signaled that in a speech this week, saying the January cut was enough. Now he can see the immediate impact of his loonie-crushing move. With inflation rekindled even as a sagging economy punishes citizens, it’s highly unlikely another cut is in the cards – at least not next Wednesday, when the next rate announcement is scheduled.

Meanwhile we all know the US Fed will be raising its rate – likely June 17th, or July 29th. If that happens on the heels of another Bank of Canada rate reduction, just imagine where our currency is headed.

Well, now, aren’t you happy you took my advice years ago to put together a balanced portfolio with lots of diversification? More US, less Canada. A whack of fixed income and REITs. Bank preferreds. Inflation-indexed bonds. No stocks, no mutuals. Lots of love and a secret sauce.

Given what’s coming, you’ll be happier still.

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The illusion Wed, 25 Feb 2015 22:28:43 +0000 FLOWERS modified

Sadly, Tim’s dad just passed. Happily, he was a smart guy. “He bequeathed my mother, in her 70s, with his RRSP savings totaling almost $700,000,” says the son. “It’s growing rapidly and my frugal mother can’t take money out fast enough to touch the principal.”

So what’s the problem?

“When she passes on this RRSP money to her kids, the whole lump sum become instantly,” says Tim, “fully taxable (at the max possible rate). To avoid having the estate effectively cut in half we are looking for ways you can help “rescue” money from this ticking time bomb as quickly as possible. Are there ways of shifting RRSP money between non-spouse family members? Things other than the HBP which allow RRSP money to be extracted without penalty?

“No, this is not a greedy child counting his inheritance early. The whole family (Mother, son, daughter) just don’t want to see the government take half of my father’s hard-earned money in one foul swoop.”

I post Tim’s letter for a couple of reasons. Sure, it’s possible to move some of the money around and ‘rescue’ it from being fully taxed on mom’s demise – but the process is complicated and involves leverage. If mom borrows a big pile of cash, invests it, then takes RRIF income to pay the loan interest, over time capital will be moved from the shelter. (The RRSP income is taxable but the loan interest is tax-deductible.)

However, lenders aren’t keen on handing over big wads of leveraged cash to seventy-somethings with weensy incomes. So scratch that.

The real reason Tim is on this blog is to demonstrate the fallacy of RRSPs. They don’t eliminate tax. They defer it. Yet people come to think of all the money in a retirement plan as theirs. In this case the family – widowed spouse and kids – see the $700,000 pot as a family asset – their father’s ‘hard-earned money.’ But it’s not. It’s an illusion.

Dad got a tax break for putting money into the plan. He was allowed to grow it in a tax-free environment. He was even permitted to pass it on to his wife without being taxed. It was always intended to be withdrawn to pay for his or her retirement years, not to establish a tax-free legacy for hungry offspring. And a big whack of it was always the property of the government, which must be repaid.

It’s the covenant you make with the devil when you open an RRSP. In return for refunding the tax on your contributions now, you pledge to return it later, plus tax on the growth. You also agree to it being taxed as income (100%), not capital gains or dividends (50%). And if you die before this happens, the whole shebang is taxable – as if cashed in on the day of your passing.

This is the reality for every self-directed RRSP. Every group defined-contribution plan that your employer matches. Every registered pension plan. It’s all taxable. Same as money extracted from an RRSP for a condo down payment or to go back to school. In the end you’ve just kicked the tax can down the road. Better tell the kids now.

This is why TFSAs will come to be the retirement vehicle of choice. No, there’s not a tax refund when you contribute, but neither is there tax payable when you withdraw. All of the growth (like an RRSP) is not taxed. But that growth (unlike an RRSP) also flows into your hands in a taxless state. And TFSA money (on death) flows to a spouse or beneficiaries without triggering tax.

So, remember what I said yesterday about taxation on stupidity?

Here’s what I mean: these days only 15% of people make their full TFSA contribution – which would amount to a lousy hundred bucks a week. The participation rate has plunged dramatically since the thing was introduced back in 2009. That year two-thirds of people with a TFSA put in the max, but that was apparently because they just shifted their bank account into the next vehicle. Since then the savings rate has fallen off the map.

Worse (as I keep yelling ya) 60% of this money is in cash and another 20% is in GICs. People treat TFSAs like glorified savings accounts for Cuban holidays, new taps or liposuction. Even the government has produced ads telling you the tax-free account is a great way to finance a kitchen reno. (It’s in politicians’ interest to keep you stupid, by the way. The more growth a TFSA creates, the less tax that’s paid.)

No wonder the lefties are mobilizing to stop the doubling of the TFSA contribution limit. When 85% of the benefit is being squandered by the masses, they’re loath to see the rich (who all read this blog, of course) get even more of a break. Sure, they could participate. But it’s easier to buy a house they can’t afford, then moan about unfairness.

This is akin to thinking your father’s RRSP belongs to you, and asking Garth to rescue it.

What a waste that is.

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Tax this Tue, 24 Feb 2015 23:22:30 +0000 CHIPPER modified

In case you hadn’t noticed, this is a nation designed for rich people.

If I earn $180,000, am single and live in BC, I’ll pay $39,848 in federal tax and $19,419 to the province. The tax bill totals $59,267. The leaves me with $120,733, and on every extra dollar earned, I’ll be taxed at the rate of 45.8%. Ouch.

But if I have an investment portfolio of $2,600,000 and earn 7% in capital gains in a year, then of the $182,000 received I’ll pay only $21,436, and end up with more than $160,000. So, I keep an extra forty grand. Because I’m wealthy.


This happens since capital gains are taxed at only half the rate of earned income. Ditto for dividends, because by claiming the dividend tax credit rich people reduce their government bill by approximately 50%. Or sometimes, 100%. Somebody with a portfolio of $1.2 million in bank stock kicking out about $48,000 in annual dividends (an average of 4%) would end up paying zero tax. That’s right. Nothing. But if you earned $48,000 in Ontario working as the personal masseuse to a Re/Max broker, you’d pay just over $8,000 in tax.

See? Totally unfair. That’s why rich people invest money instead of earning it doing tawdry things like working. Employees are sitting ducks for government Hoovering, and the top marginal tax rate now exceeds 50% in Ontario. But for business owners taking their income as dividends or capital gains, it’s party time.

Now, employees do get a few breaks. Money put into an RRSP allows you to defer the tax on it until a year in which you make less and your marginal rate drops, for example. Plus the growth compounds without annual taxation. But RRSPs only defer tax. They do not eat it. And this brings us to the TFSA, which is suddenly in the news – for good reason.

As this pathetic blog has shown you in the past, a simple TFSA can be a money machine, so long as you use it to hold cool stuff like ETFs, and not brain-dead flotsam such as GICs. If a 30-year-old put in a hundred bucks a week until age 65, getting an average annual 7% in taxless growth, she’d end up with $848,776. Unlike an RRSP, this is completely non-taxable.

Now imagine if the annual contribution limit was $11,000. Then this same person, at retirement, would have $1,783,919. That’s enough to generate an annual cash flow of $125,000 (without diminishing the principle), which you can take as non-reportable income. That means you still get to collect your government pogie, no clawback.

This is what drives the 99% crazy. It’s inherently unfair.

If you buy a condo and lease it out, the rent is fully taxed as income – on top of any other money earned, at your full marginal rate. Interest earned on a GIC, bond or savings account gets equal treatment. Investors in ETFs, stocks or preferred shares, on the other hand, pay half. And guess where most TFSA money sits? You bet – in interest-earning cash or investment certificates.

In other words, the system taxes financial illiteracy. Employees and savers are squished. Owners and investors are favoured. Concurrent with this, the 99% carry most of the debt in Canada, largely because they’ve drunk the real estate Kool-Aid. All that borrowing eats disposable income, leaving little left to invest.

Well, you can see now how emotionally-charged the debate about doubling the TFSA contribution limit can become. The federal Conservatives promised this back in the election of 2011, and Joe Owe was all primed to deliver it until oil swept away his winter budget. It’s still the big middle class carrot the government would like to toss out before the October election campaign gears up.

Opposition is growing. The Parliamentary Budget Officer weighed in this week, saying the action would end up costing the feds almost $15 billion in lost tax revenue by 2060 – when this blog will finally hits its prime. Moreover, it would favour the rich. “By 2060, gains for high wealth households project to be twice the median and ten times that of low-wealth households,” he said. This was reinforced by SFU professor Rhys Kesselman, who claims: “Like a little baby who looks cuddly and cute, this proposed initiative would grow up to be the hulking teenager who eats everyone out of house and home.”

This is all correct. Smart, wealthy people milking the TFSA can save a fortune in tax over their lifetimes. But the same has been true of RRSPs for years, since contribution room is based on income – the more you make, the more you can contribute and the greater the savings because of the higher tax rate you pay.

So what’ll happen?

Beats me. But if the feds can eke out a balanced budget this year, the TFSA bloats. As it should. The more we allow people to create and shelter wealth, the more that precious public resources can be targeted to those who need them. (Which is why the OAS should not be universal.)

Besides, people are victims of their own fear or ignorance. The nation gives them RRSPs, and they use them for house down payments. They get TFSAs, and they turn them into growthless savings accounts. They’re offered half-tax on investments, but they buy GICs. They get a huge gift on dividends, and they want a rental condo. The country drops rates, and they cannot borrow enough.

It’s not about fairness any longer. It’s about taxing stupid.

See why I’m no longer elected?

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The shorts Mon, 23 Feb 2015 23:28:40 +0000 GREEN modified

Mighty BeeMo will be the first bank to report quarterly earnings. That happens Tuesday. The stock is trading about where is was eight years ago at $77. In the financial crisis, when the world was ending, it plunged to $24 during a wave of moaning, gnashing and selling – almost exactly six years ago.

Any investor smart to buy on that dip has made 220%, and collected plump dividends every ninety days (the bank pays 4.14%). It was a spectacular play, as was buying into the TSX, the Dow or the S&P back when the gold nuts, doomers, nihilists and pantywaists were telling you to invest in ammo and tuna. Now they’re at it again.

I’ve noticed a bunch of people, mostly American investors, shorting the Canadian banks. (Shorting means borrowing a security and selling it, so you can buy it back later – you hope – for less. You make money by pocketing the difference. Or, if you get it wrong, you take a loss.)

This shorting has been going on for a year or so as the Canadian economy gets weaker. It’s picked up momentum as oil plunged and serious doubts were raised about the sustainability of our hormonal crush on the real estate market. At the same time, manufacturing activity slowed, the Bank of Canada blinked and the dollar tanked. Then, in November, the economy actually shrank. The shorts came in with a vengeance.

On Friday a US brokerage cut its recommended weightings in the Big Six, and said this: “We believe consensus estimates for the banks are too high and the shares will be pressured during the year as the Street moves its estimates down. While we admit that the strong dividend yields for these banks may help to provide some downside support, we do not see a positive catalyst for the group this year.”

By the way, Beemo stock topped out at eighty-four bucks last autumn, so you can see there’s been some erosion from that all-time high, because of $49 oil, blood flowing in Calgary gutters and events like Shell’s decision Monday to pull the plug on a major project outside Fort Mac. The banking sector as a whole has lost about 5% in the last three months. The shorts now point to slowing volumes for new loans and mortgages, thin margins – especially after the central bank poodles cut their key rate a quarter point – and the growing concern Alberta’s housing markets will crash.

So, what’s happening? The big six banks, obviously, form a kind of proxy for the entire Canadian economy, since they have their fingers everywhere. And the shorts are getting bolder. The Bank of Canada will cut its key rate again, they say. Maybe March. Or perhaps April. But it will come. The dollar is mired under eighty cents again, and oil has retreated below fifty bucks. Oil patch layoffs are turning into a quiet tsunami and the announcements by majors like Shell and Suncor are unnerving.

The shorts are also watching Calgary, where a year ago luxury house sales were setting new records and realtors were cocky. My, what a difference a few months make, as you can tell from this chart:


Calgary sales are currently 35% behind last year, while active listings hover in the 5,500 range. So far in February there have been only 880 sales, with the average house price starting to nose down – off about 4% to date. As local reator-statsfreak Mike Fotiou points out, the issue now is not so much new listings (they are levelling off), but rather the shocking exodus of buyers.

“The main concern now is that buyers have gone AWOL.  Home sales month-to-date are down -35% from a year ago and 1/4 lower than the 5 year average. This gives rise to the question:  are buyers simply being cautious and waiting on the sidelines or have they been directly affected by the economy and can’t buy?   If the answer is the former then there’s a chance the market can turn around later in the year, the latter means it’s going to get worse.

“Whether too many sellers or too few buyers are the root cause for growing inventory, the net effect will be the same: a disproportionate amount of listings to sales which will drag prices down.”

By the way, last year in Cowtown one of every three houses sold at listing price or above. This year it’s about one in every ten – and the aggregate number is far smaller. Meanwhile in Fort Mac, the January sales numbers were so brutal (the locals say) that the real estate board has just disabled the link to their market update. Yikes.

So, are the banks going to wear all of this? Will the earnings numbers suck enough to pull stock values down, say, ten per cent? Is this all as serious as the shorts are making it out to be?

Let’s hope so.

Update (Feb. 24, 8 am EST): Bank of Montreal profit drops 6%.

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Fearless Sun, 22 Feb 2015 18:32:03 +0000 PANTS modified

“In your twisted world,” asks Jeremy, “is there never a good time to buy a house?”

I get that a lot, being the tragic and misunderstood person that I am. Some media weenies call me a ‘housing permabear.’ Others on this pathetic blog accuse me of being a stock market groupie or an America-lover. Realtors nation-wide would enjoy seeing Audi A7 tire tracks etched across my shapely bottom. CREA has a contract out on me.

This is what happens when you write about a balanced life in an unbalanced country. Being misunderstood is an occupational hazard. So many of us, especially the impressionable young, have an unhealthy relationship with money, finances and investments. They don’t get risk.

Here’s my thesis: far less risk exists in financial markets today than the Canadian housing market. In a low-growth, low-inflation, low-rate, almost-deflationary, high-debt world people should expect scant income growth, job insecurity and a high vulnerability to shocks (like oil, terrorism, measles or Beyoncé). Without question, houses here are inflated – 66% more expensive than in the US – while the economy is torpid and stress increasing. How is that not dangerous?

As for financial markets, the US is surging ahead, cheap energy will help Europe, Japan and China, central banks are more stimulating than Dakota Johnson, corporate profits are robust and stock markets are, in general, fairly valued. There will be no bank failures, currency collapse, 2008 rerun, hyperinflation, depression or locusts in North America. In short, there is more balance, diversity and safety in the financial world than that of real estate – which is built on leverage and hormones.

Having said that, owning property is fine. I do. Just be reasonable. As I’ve told you in the past, I rent my Toronto house, paying less than four grand a month for a $2 million pile I could purchase with cash. But with a portfolio making over 8%, why would I? The landlord’s subsidizing me bigtime. So I escape on weekends to my owned property in a bucolic town where houses cost what they should. In fact, you might have noticed that outside of the GTA and YVR, real estate’s fading, no matter how cheap mortgages get.

Keith kind of gets this.

“I know your Rule of 90 by heart,” he says. “I’m 35 and so 55% of my net worth should be in the house, which exactly where we are right now.”

He lives in a city to the east of Toronto, where real estate’s gone comatose. And his house is reasonable – about $350,000 with a $102,000 mortgage at 2.25%. But the father of two (and a border collie) still wrestles with a too-common emotional issue.

“I have ‘declared war’ on my mortgage with a newly devised principle prepayment plan,” he says. “This 18-month plan would bring my balance to $55k at the end the present term, equal to the current sum of our TFSA’s, with idea of using them to pay off the mortgage.  This plan would make us mortgage free in the 10th year of our 25yr am, on our 10th wedding anniversary, well before we are 40.  If we get ‘er done, I promised my wife hot exotic travels, and she in!

“Now I am trying to rationally weigh the emotional benefits of being debt free sooner than I thought possible with the practical financial trade off of keeping the TFSAs invested and pay off the house about 5 years later. As for the opportunity cost on a rate basis, balance or equity investments within my TFSA are quite likely to outperform my mortgage rate but that is not a risk-equivalent, apples-to-apples comparison, right?   Paying down the 2.25% mortgage is guaranteed, and safest investment like a high quality government bond or GIC is paying less interest.  So if we go with risk-equivalent, foregoing higher returns for higher risk, and assuming the market does not tank in 18 months when cashing out, paying down the mortgage comes out on top.  Is my thinking on track?”

Paying off mortgage debt, no matter how cheap it might be, is the Holy Grail for many people, like Keith. But when the cost of borrowing’s roughly equal to prevailing inflation, the money is virtually free. Worse, why pile more of your net worth into an asset that isn’t appreciating and likely to lose value over the years ahead? Would it not benefit the family more to be earning three or four times as much within tax-free investment accounts?

In fact, given 2.25% loans, the only time paying one off might be logical is to then remortgage a property for investment purposes, creating a tax-deductible mortgage.

What do Keith and his four dependents need? Right. Income. Cash flow. Money for the kids’ education in fifteen years. A big pile of dough to create a retirement pension in thirty years when the OAS has been eliminated and corporate pensions are rare. A paid-for house will provide zero income, and may well be worth the same or less. The $102,000 Keith wants to plow into the place over the next 18 months could grow to $800,000 by age 65 if a portfolio yields the same in the future as it has in the tumultuous past.

Only emotion would lead to paying down a loan on a non-performing asset instead of renting the money for 2%. It’s fear of the wrong thing.

I expected more of a guy with a border collie.

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