Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Mon, 27 Apr 2015 23:55:10 +0000 en-US hourly 1 Save us Mon, 27 Apr 2015 22:57:37 +0000 SAVE US modified

Today, as I sat to write this pathetic post about the sea of stupidity we sail upon, Randolph emailed me. “I am ready to overhaul my finances,” he says, “and I’m not sure where to start. Can you help me?”

Randy’s 30, has an unemployed, job-seeking wife with a Masters degree, makes $155,000 and has $20,000 in student debt, a $350,000 mortgage on a 5%-down house and a grand total of $11,800 in liquid assets. In other words, his net worth is about zero.

“I would like to thank you for starting your blog,” he sucks up. “It has been immensely helpful in re-orienting how I view my finances.”

Obviously not helpful enough. Why this couple would want to begin their lives together with almost four hundred thousand in debt, no mobility, property taxes and financial stress is beyond me. But, actually, I do understand – it’s a disease. And here are two more examples of why I am seriously considering dumping this blog and joining the priesthood. Except for celibacy. And the religious part.

“Oh, sweet Jesus,” (just to continue this theme) Mike texted me today. “This just popped up on my Facebook.”

VAN modified

Flip houses in Vancouver for a profit? Without using your own money? What are these people smoking?

Actually Tarek and Christina are reality TV stars, which gives them demi-god status and instant creds with the people who move their lips as they watch Closed Captioning. They appear on an HGTV series called ‘Flip or Flop’ (I will resist). They’re also realtors, but not from the Lower Mainland – where they’re hosting a series of special, limited-seating, flipology seminars this week – but Orange County, in California.

According to their web-approved bio, Tarek and Christina are “the top choice when looking to sell a home in Orange County at a price sellers will truly profit from. With California real estate, design, and construction backgrounds, Tarek and Christina are able to inspect every aspect of your home and advise you on minor changes that may be needed to ensure your luxury North Orange County home stands out above the competition.”

In reality the El Moussas, both 31, crashed and burned in the California real estate bust, crushed by a business failure, a $6,000-per-month mortgage and fat payments on their flash cars. They ended up walking away from their real estate, renting a $700-a-month apartment, then started flipping houses for a living. The first one cost $115,000. In Vancouver that buys time share in a bus shelter.

So there you go. Perfectly appropriate advice-givers for a market where the average detached house now costs $1.4 million, where real estate is peaking, not crashing, and crapola, unrenovated 1970s-era Vancouver Specials are going for seven figures. “Tarek and Christina built their successful house flipping business by building upon a few simple real estate strategies,” their promo says. “Now, Tarek and Christina have turned these strategies into an educational program that has helped people, just like you, start their own real estate business. The Success Path team is coming to present a live training (free to the first 100 to signup). Reserve your free seats now before they are gone.”

Real estate profits flipping houses in North America’s most expensive market, without requiring any money. When you see this, you know it’s over.

But wait, there’s more. Another come-to-Jesus moment, this time just south of Eglinton Avenue in mid-town Toronto. Local realtor Fraser Beach is taking the distasteful strategy of creating a blind auction for a house, and going big – turning it into a spectator sport and competition.

This is his mass email:

One of the most popular games in town these days is watching the real estate market and predicting what a particular piece of real estate might sell for. I’ve heard there are even office pools devoted to such predictions. So we’re joining in. I’ve just listed a desirable home in a demand Toronto neighbourhood. The Seller is receiving offers next Saturday. So our challenge for you is to predict what this property will sell for in the comment area here. We will announce the selling price and the winner of this pseudo contest when the sale of the property is firm.

Seriously. And boatloads of people are piling on, making their predictions for the auction price of this old two-bedroom bungalow on a 30-foot lot. The consensus seems to be well over $1 million which, of course, is why he priced is at $925,000. You can almost smell the coming breathless Toronto Star story, “Bidders boost beauty bung to $1.3 million. Buy now or Perish.”

Well, here is Mr. Beach’s fetching portrayal of his cute little house.

BUNG 1 modified

Meanwhile people actually going to see it will encounter a different reality – a property running along the side of a hulking, low-rent apartment building, one street south of one of Toronto’s busier arterial roads. That’s the house on the far right of the street view below:

BUNGALOW modified

Of course, it has granite counters, a marble backsplash, heated floors and a steam shower. Soon it will have a greater fool. Now, let us pray.

]]> 104
‘I’ll take it.’ Sun, 26 Apr 2015 15:12:19 +0000 FOOD modified

So Mike and Cath went to an open house last Sunday. “Should have left when I got there,” he says. It was a suburban apocalypse in Newmarket, a distant Toronto exurb. “People were lined up at the door to get in,” Mike explains,” because the realtor was running late.”

But here’s the interesting part: the house burned seven years ago. To the ground. All that remained was the garage and a smoky foundation, upon which a new structure was built a year later. Was it compromised in any way?

“Nonetheless, the listing agent told us he wasn’t accepting offers until Tuesday at 7:00 pm – primed for a bidding war.” And that’s what happened. Marketed at $599,000, there were seven offers tabled, and the ‘winner’ walked away having spent $775,000.

“In Newmarket!” says Mike. “Another classic sign of an overheated housing market.”

Not far away is another swath of GTA hinterland called Stouffville. Pat lives there. This is her description of the local high life: “We have a Walmart, two Tim Hortons, a McDonalds, a No Frills, IGA, a community centre and two hockey arenas….oh yes, and we do have a GO Train that conveniently runs right through the middle of town and if you’re lucky enough to live close to the tracks, you hear the trains horns ‘Choo Choo’ as my son says several times a day.”

Last Wednesday the local flyer, the Sun-Tribune, had some stunning news: The average house price in Whitchurch-Stouffville jumped 13.6% in the past year and now sits at $726,900. The average in the entire region (York) is north of $900,000. Says a local realtor, Lesley O’Connor: “It’s amazing how many people can afford a $700,000 home. It’s buyers saying, I’ll buy it. No, here’s more money, I’ll take it.”

An average of six homes listed for more than $1 million have sold in the area every seven days. The typical days-on-market? Just 18. Adds O’Connor: “If we were over-pricing, we wouldn’t be selling,”

By the way, Pat rents one of these houses for $1,600 a month. “We must live in the next San Francisco with these prices! We do like it here, it’s a great community, but $736,900….come on!  People are crazy to pay that kind of money!”

BTW, Stouffville is 50 km from downtown Toronto, via two of the most congested and heavily-traveled highways in North America. The commuter train costs $19.10 a day and requires two hours.

Well, there is actually a point to this blog post, which is the frightening run-up in real estate values in thinly-serviced, expensive, semi-rural, car-dependent areas at a time when the population is aging, about to downsize, and becoming increasingly urban. Were it not for historic low mortgage rates (2.6% now for a five-year fixed) and CHMC insurance wiping away the lender’s risk, house values in areas like this would be halved. Sadly, with the population shift and the inevitable increase in rates, that could be exactly what will happen in the years to come.

Moshe Milevsky’s an interesting dude. He’s a biz prof at York U, author and commentator who applies a thick layer of statistical analysis to stuff most people gloss over. Like where they live, what they spend and the inevitable consequences of same. MM raised a lot of eyebrows last week when he published his analysis of StatasCan’s ‘Survey of Household Spending’ that most people shrugged off.

Here’s a quick summary: There are 3.7 million home-owning families with no mortgage. They still spend 15% of their disposable incomes supporting their houses, but manage to save over 14% of their incomes – which bodes well for future years, despite having a low annual income (under $60,000). There are 4.9 million families with mortgages. They earn more ($74,000), likely because, in general, they’re not retired. They spend 30% of incomes on housing and save just 3.5%.

Now, 1.8 million families have CMHC-insured, high-ratio mortgages and spend an average of more than 43% affording their homes (not counting property taxes, maintenance etc.), while saving nothing. In fact, they have a negative savings rate of 13%, meaning they’re going backwards financially. (Recall that the average savings rate in all of BC, were the silly people live, is negative 8%.)

CHART modified

What are these people, many of whom live in Newmarket and Stouffville, counting on?

Simple. They spent all they have on a house and continue to have no capacity to save or invest, plus slide into more debt, because they’re gambling. They put all of their chips on one outcome – that the capital appreciation of their homes will be great enough to cancel their debt and bail out their future. But as Milevsky points out:

“If you work your way backwards, the amount by which housing prices would have to appreciate over the next 10 to 15 years to justify negative savings rates — and still leave a decent liquid nest egg for retirement – is staggering… And, worst case scenario, if real estate disappoints and/or interest rates swell, just when it comes time to renew your mortgage in three to five years, well, I guess these 1.8 million Canadian families will learn what it’s like to run their house like a hedge fund.”

The greatest misconception in this nation, and the Achilles heel we ignore, is that real estate is riskless.

People like me know better. But, of course, I’m irrelevant. You see, it’s different this time.

]]> 166
Serious money Fri, 24 Apr 2015 22:03:11 +0000 HIGH FIVE modified

By now you should have brimmed your tax-free account with that sexed-up contribution amount. On Tuesday evening, shortly after the federal budget was dropped, this pathetically prescient blog told you to go forth and multiple when the sun rose. Now that you are allowed to plunk down ten grand for 2015, we said, you should do so. Like, immediately.

Lots of people didn’t because they were afraid. The media piled on. So did opposition MPs, some of whom were vexed about the increase itself. The banks wussed out. It took more than three days for reality to dawn on people that it was all perfectly legal.

For the record, when a federal finance minister stands to deliver a budget, which is immediately followed by the tabling of a Ways and Means motion, the sucker’s done. It has the force of law. The reasoning is simple – if governments gave advance notice of specific tax changes then people would scurry around and find ways to thwart them. Se because every citizen must be treated equally (except if you’re in the Senate. Or are Justin Beiber) when the finance minister says something, it is effective that moment.

My advice, of course (as always) was correct. So on Friday the government took the unusual step of actually spelling it out in crayon. “The Canada Revenue Agency (CRA) is allowing individuals to immediately benefit from the proposed increase to the Tax-Free Savings Account (TFSA) annual contribution limit announced in Economic Action Plan 2015,” it said. “Canadians can immediately start contributing to their TFSA up to the proposed $10,000 annual contribution limit. This proposed measure is subject to parliamentary approval. Consistent with its standard practice, the CRA is administering this measure on the basis of the Budget announcement. Financial institutions may immediately allow existing and new account holders to contribute up to the proposed maximum.”

So there ya go. Dig in.

Now, here’s an oft-asked question: if the TFSA is beefed up like this, should I cash in an RRSP to contribute to it? The answer is a clear maybe. If you’re in school, on mat leave, have your ass fired or are taking a sabbatical, then deregistering an RRSP and moving the money to a tax-free account can make great sense. You’ll be in a low tax bracket and so might pay little or nothing on the RRSP funds received. You can then move them into the TFSA, invest in cool stuff like equity ETFs, enjoy taxless growth, and have full access to the money when you wrinkle.

Just remember to take the money out of the RRSP in small amounts of $5,000 or less to keep the withholding tax at 10%. Except in Quebec, where you pay more (of course).

Another common question: my spouse stays home and looks after the kids and has no real income. Can I contribute money to his/her TFSA?

No, you can’t. But you can gift money to your significant other, and then he or she can make that contribution. The money you give will earn returns inside the TFSA, and none of those will be attributed back to you. So, obviously, this is a great way to shift income and increase the tax-free earning power of your partnership. With the new limit, a couple can sock away $82,000, and that will now increase by $20,000 a year.

Yes, this is starting to be serious money. If you max out today, put in the twenty grand for ten years and earn an investment return of 7%, a decade from now you’ll have $437,635, of which $155,635 is tax-free growth. Now imagine if you were 20 years from retirement and did the same. You’d have $1.14 million – which could generate about $79,000 a year in tax-free income without diminishing the principal, and none of that would be reportable. So, conceivably, millionaire couples could be collecting their full CPP and OAS benefits, have the taxable income of a golden retriever, and live a happy life. All because of the TFSA.

By the way, if you’re an old fart and have to convert your existing RRSP into an income-spewing RRIF (the minimum withdrawal amounts just fell), you can still contribute fully to a TFSA. So while the RRIF money needs to be included in your taxable income, you can just invest it inside the TFSA and continue to grow it – with the returns never to be taxed again. Unlike RRSP contributions, which end at 71 (unless you marry a young babe and do a spousal), the TFSA contributions are eternal.

Another question I hear: can I open TFSAs for my kids and load them up?

Same answer. No. But you can gift them the money and nothing will be attributed back to you for tax purposes. Kids with social insurance numbers who are full-time Canadian residents get to open a TFSA at age 18, unless they live in places where maturity is delayed, like BC. But even though they have to wait a year, annual contribution room of $10,000 starts accumulating in the year in which they turn 18.

Obviously having five TFSAs in a family with three over-18 kidults means you can take $50,000 a year in taxable investment assets and move them over into tax-free accounts. At that rate it won’t take long to shelter hundreds of thousands, which is exactly why anti-TFSA critics are beside themselves. This is the ultimate dodge, allowing families to turn fully-taxed investment portfolios into deep pools of money that can grow rapidly, attract no tax ever, provide non-reportable income and allow all government pogey.

You may have come here to read about real estate. But don’t dare blow this.

]]> 269
Mommy-to-Market Thu, 23 Apr 2015 22:26:24 +0000 ASSHOLE modified

Around this confused planet, people look at horny little Canada and shake their heads. The World Bank thinks we’re nuts. So does the International Monetary Fund. And The Economist, and US ratings agencies Fitch, Moody’s and S&P. Private and government-agency economists look at two or three ratios, and flip out.

But they have yet to discover the scariest numbers of all.

The standard measures of how insanely house-lusty a granite-humping and brick-licking nation ranks, include the house price-to-rent ratio, which shows if assets are overvalued compared to their investment value. Check that – tenants here are massively subsidized. Then there’s the price-to-income level, which calculates whether real estate is accurately reflective of economic growth. We fail, of course. Finally the price-to-disposable income ratio measures whether citizens can actually afford the houses they own, based on what they have after taxes and other debt payments. We suck epically.

The conclusion is houses are overvalued by at least 10%, and possibly up to 89%, depending on the analysis. None of this, by the way, factors in higher mortgage rates, and we all know those will be here by the time home loans taken today are renewed. That should be fun.

But these academic and economic measures miss the ugliest secret of the Canadian housing market, and the one true marker of its bloated excess: the Mommy-to-Market Ratio.

This measures the extent to which Moms (and Dads, to be fair) are messing with market forces and subverting supply and demand by shoveling their offspring into real estate ownership when they actually cannot afford it. A massive amount of money is being sucked out of inflated real estate and retirement accounts to be inserted back into the housing market in what could be the ultimate Ponzi of risk.

We’ve all marvelled at the rise of the Bank of Mom & Dad, but the latest numbers show it’s not only flooding the market with first-time buyers who shouldn’t be there (thus inflating prices), but also impacting the move-up market (inflating them more). Thanks to BMO’s ‘Home buying Report’ and the survey it did of a few thousand people we now (shudder) know this:

Almost half (42%) of all the moist Millennials and unsuspecting virgins aroused by the thought of a new mortgage expect Mom to fork over the down payment. That gift will be about $60,000 on a property costing an average of almost $315,000. The impact of this is awesome. For starters, the kids are nuts. They behave the way you’d expect others to when they’re given money for nothing. The bank found a stunning 48% are happily willing to enter a bidding war – up sharply from in the past.

Meanwhile 40% of the kids say that without this cash they wouldn’t even be considering buying. So what is the impact on the market overall?

Well, last year 481,162 resale houses changed hands. Almost 35% (according to the mortgage industry) of those deals were done by first-time buyers. So if 2015 is the same, and the bank numbers are solid, then 42% of the 168,400 first-time buyers will use the Bank of Mom. That’s 70,730 buyers snorfling an average of $60,000 – for a total of $4,243,800,000, or $4.2 billion. Generally speaking, that’s money which in normal circumstances (ie – young people not buying stuff they can’t afford) would not be spent on houses, and is swelling the cost of real estate for everyone.

Well done, Mon & Dad. Bigger mortgages everywhere.

But it gets worse. The bank also found that sucking on the parental teat doesn’t end with a first house purchase. An astonishing (to me) 42% of current homeowners who want to graduate to a better trophy home are expecting Mom to step up to the plate once again. This time the kids (who should know better) expect her to provide 20% of the cost of a house averaging $474,000 – or almost $95,000. Half of these people say that without family dole they would not be moving.

Hmm. So 42% of 312,800 move-up buyers is 131,400 couples, who expect a total gift of $12.4 billion. That gives us a grand total of over $16 billion in a year pouring into an inflated real estate market, turning it into more of a speculative gasbag. The scary part is that most of this money is coming from the equity of already-overvalued houses, or from the savings and investments of people steaming towards retirement, who are obviously counting on real estate to fund their final decades.

And, as we already know from a Genworth survey, about a third of all the kids getting pushed by Mom into real estate say they can’t make ends meet. Just imagine what happens when mortgage rates creep.

So there you go. A nation of the horny borrowing against houses they have puffed up so their lusty kids can buy more houses at inflated values after going through bidding wars, ensuring everybody pays greater than market price. And they think this is an act of love.

If they only knew.

]]> 210
The quick & the dead Wed, 22 Apr 2015 21:32:17 +0000 POOCH modified

If you ever need evidence of how pooched Canadians are, consider what happened yesterday.

The feds gave you a gift, saying each year you can shelter $10,000 worth of investments from tax. Forever. If you have a main squeeze, it’s twenty grand between you. Do this annually for two decades at an average investment return, and you have a million dollars. This would be equivalent to $1.4 million in taxable RRSPs. Like I said, a gift.

Even before the budget, people were able to shelter $36,500 worth of investments in a tax-free account, and what’s been the result? Well, about one in three people have opened a TFSA – that’s 11,000,000 Canadians. Of those only 17% have contributed the max. More significantly, 70% of those people are over 55.

Finally, as I have told you before, 80% of all the money in TFSAs is in cash savings or brain-dead GICs generating less than 2%. In other words, the vast majority of contribution room in TFSAs is being squandered, and mostly by the people who need help the most – the young and pensionless.

What are they thinking? That this is a glorified bank account that will ‘save’ them $35 a year on a $10,000 balance? Incredibly, most are using this as a way of saving for (a) a vacation, (b) renovations, (c) a house down payment or (d) an emergency. In so doing they are wasting the most flexible and effective investment vehicle of their lifetime.

As I said. Pooched. By their own ignorance. So let’s change that.

Can I put $10,000 in my account today? Is it legal?

Yes, go for it. Tax measures contained in federal budgets routinely take effect the moment they are announced. If that were not the case, people would have time to restructure their affairs to thwart the government’s intentions. So while the budget has not passed Parliament nor received Royal Assent, it’s a done deal as far as the CRA is concerned

So why is this important enough to write a whole blog post about?

Because not only does it give me a chance to avoid the word ‘horny’ (oops), but because TFSAs will soon become the most important tax shelter in the land. RRSPs are so yesterday. Traditional strategies are changing. For example, you might now benefit from collapsing some RRSPs and moving funds to TFSAs, thus averaging out the tax hit on RRSPs over a longer time frame. Certainly everybody with taxable assets in a non-registered account should be sliding those over to soak up TFSA room. You might trigger some capital gains tax doing so, but if you plan on holding these things for a long time the sooner you get them into a taxless vehicle, the better

Are you saying not to have RRSPs, but only tax-free accounts?

Not exactly. At least, not for everyone. RRSPs are still great for tax-shifting – for example, to invest in when you’re working (and get a refund) then cash in when you take time off (and pay less tax). Or to fund a maternity leave. Or income-split with a less-taxed spouse. But as time goes by and TFSA room grows, this is the vehicle of choice because all distributions will be free of tax and will not reduce government benefits, as they are non-reportable. So imagine today’s 30-year-olds ending up with a million in TFSA accounts which can churn out $70,000 a year in income – not even included on the tax return. Sweet.

But if the feds can hand this over, can’t they take it away?

Sure. They are unregulated gods. Can do anything. But the odds are the TFSA is here to stay – with a wrinkle or two. One of them came yesterday when the government eliminated indexing of TFSA contributions, so they will not automatically increase. Any jumps will have to be legislated, the way this one was. It’s also possible, because the wrinklies are clearly benefitting the most, that pressure will mount for a cap to be put on TFSAs, maybe of $250,000 or so, in years to come. That would suck, but in no way does it mean you shouldn’t fill yours up now, as fast as possible. Actually, the opposite. Get the money in there. Get it growing. No matter how big the gains, they will always be yours.

Gains? What gains. My TFSA is in the marmalade dude’s shorts.

Well, you lose then. Interest rates will be rising, but in a glacial way and consistently below cost of living increases. In other words, you’ll never earn enough, even inside a TFSA, to build net worth sufficiently to keep you from off the KD and Alpo several decades from now. Especially women, who live longer and seem more conservative. The risk they must fight is running out of money, and the best weapon is now the TFSA. Get growth assets in there, preferable equity-based exchange-traded funds, and forget about them for years.

Or you can empty your TFSA account and vacation in Cuba. Then plan on staying there.

]]> 221
Revenge Tue, 21 Apr 2015 22:01:08 +0000 REVENGE modified

We’ll get to the budget in a moment, but you already read the news here yesterday. Yes, this blog is just that wonderful, besides pathetic.

First, some danger signals regarding a real estate market now going completely off the rails in YVR and the GTA, even as it staggers along in most other major centres. How much risk is there when the average detached home in a city soars past the $1 million mark when the people who live there see no wage gains and the cost of living is on the rise?

Heaps, says housing consultant and ex-realtor Ross Kay. In fact he seems to be the first guy to actually try to quantify and chart that risk. And it ain’t pretty:

HERI modified

What does this mean? Well, the “Home Equity Risk Index” chart measures the percentage of equity the average Canadian homeowner could reasonably expect to lose, “when the next correction takes hold.” As you can see, the needle is currently sitting around 39%, which is a devastating amount of wealth to lose. Direct comparisons with the US are impossible, but it’s useful to remember the American middle class was financially Hoovered when house prices (nationally) declined by 32%. Six years later those families are still struggling to rebuild their net worth, and housing prices are still sharply below their pre-crash highs.

Ross Kay is not a globally-recognized brand, but The Economist magazine is. This week it said pretty much the same thing, warning that our housing market is anywhere from 35% to 89% more expensive than it should be, based on what we poor locals earn and possess. (By comparison, the Bank of Canada has suggested an over-valuation of between 10% and 30%, and warned last week that 416 and 604 are dangerous places to own in.)

The Economist (and others) comes to this conclusion by looking at the ratio of silly real estate prices to rent – in other words, what income the asset can actually generate (a good measure of how tenants today are wildly subsidized), plus the ratio of prices to after-tax incomes.

Not everybody is buying it. National Bank Financial’s chief economist today pointed out that he has “serious issues” with this conclusion, and that we should feel better about real estate valuations when we compare Canadian cities to others around the world.

Here is his chart (right side) intended to counter the hysteria of The Economist chart (left):

HOUSE CHART 1 modified

And here is the explanation:
“Despite the massive increase in Canadian home prices in recent years, a comparison between large metropolitan areas of similar characteristics shows that things are really not that bad. The ratio of median home prices relative to household income may be the highest in Vancouver (10.6), but even that is not outsized when compared to San Francisco (9.2). Ditto for Toronto (6.5) which is in line with New-York (6.1). Other major Canadian cities are all still cheaper than Boston. Unfortunately, The Economist again fails to mention that population growth for people aged 20-44 in Canada is one of the fastest in the OECD due to an aggressive immigration policy that is spurring demand for housing in major cities.”

So there you go. Nothing to see here, folks. If you think Vancouver is equal to San Francisco (the tech capital of the planet) or that Toronto is equal to New York (financial capital of the planet), then you should feel only slightly unhappy that you pay more to live there. Besides, we have all these #HornyKids willing to take on eternal debt so they can bail the wrinklies out.

What could possibly go wrong? Other than a 39% equity loss, I mean.

OK, so now the boring stuff (because you already know it):

TFSA contribution limits have been doubled, almost. The new number is $10,000, not the eleven grand we figured would be handed to us. But the biggest (and most unexpected) gift comes with the timing – instead of taking effect next January, it became law now. So the 2015 limit is goosed from $5,500 to ten thousand, and to $20,000 for a couple. Yahoo.

Move that money from your taxable non-registered account into your TFSA tomorrow morning, kids, and then invest the heck out of it.

Meanwhile good news for people with RRSPs that they have to turn into RRIFs because they’ve finally moved out of puberty and turned 71. The minimum amount you must withdraw and add to taxable income in the first year has been dropped from 7.38% of a plan’s total value, to 5.28%. The minimum amount required for subsequent years is also similarly adjusted. This means you can shelter more money for longer, avoid paying tax on it, and irritate your grandchildren who, because of the TFSA and RRIF changes, will certainly pay more tax later.

Boomer revenge. Deal with it.

]]> 265
Boomer dole Mon, 20 Apr 2015 21:44:44 +0000 AG modified

Well, after all that moist Millennial angst of the last few days, I hate to bring up this topic. But it appears the feds are set to bring in a Baby Boomer Budget tomorrow afternoon.

That’s right, wrinklies. Break out a fresh oxygen canister. Stick some skull decals on your walker. Take extra Viagra and have the defib machine handy. Find the bellbottoms and the tie-tied headbands. It’s party time, like only a 74-year-old hipster finance minister can deliver, dudes!

So it looks like there are two things you can expect, both designed to help the decrepit ones retain and grow their wealth plus, of course, reduce their tax bill. This is raw politics, even if it’s lousy social policy. The Conservatives know who their loyal fan base is made up of, who gets out to vote consistently, and what they want. Being Boomers, of course, they want it all. Joe Owe is set to deliver.

First, the biggest tax dodge we’ve got is about to be extended. RRSPs favour the rich, of course. The more you earn the greater the benefit. This year you can contribute $24,930 to an RRSP, if you have the money and earn at least $135,000. That will reduce your tax bill by more than ten grand.

Guess who has the most RRSPs? Bingo. The people Mick Jagger begat. There are about eight million RRSPs in Canada which are sheltering almost a trillion dollars from tax (a thousand billion). Until now the day of reckoning was put off until age 71, when RRSPs must be cashed in or converted into in income stream, normally through a RRIF. That stands for ‘registered retirement income fund’ with a minimum annual withdrawal set at just over 7%, rising to 20% by the time you can’t find your teeth and don’t care.

Given the fact people are living a lot longer, that 71 is the new 52, that forcing people to take income can kick them into a higher tax bracket and lose their federal pogey and that people with RRSPs want all the money for themselves, the feds have been under pressure to change this. Thus, it appears the rules will be relaxed. The wrinklies may continue to amass RRSP-sheltered wealth for a longer period of time instead of having it forced into income.

Joe is likely to (a) increase the age at which RRSPs need to be collapsed, perhaps all the way up to 75 and/or (b) reduce the sliding amounts that must be withdrawn annually. This will be widely cheered by all those who don’t want their RRSPs messed with, because they don’t need the money. So you can see the voter appeal. Fortunately for the hippies, all those Millennial kids are too busy Tweeting about not having enough money to notice why!

The second change we’ve already discussed. As boldly forecast on this pathetic blog months ago, tomorrow Ottawa will double the TFSA contribution, effective the first of January. That will blast this thing to $11,000 per year, or $22,000 for a couple. And while TFSAs can be established by every resident, with no special benefits for wealthy people (like RRSPs provide), guess who stands to benefit the most? Right again. The groovy people who are making thirsty underwear mainstream.

A little less than half of Canadians have opened TFSAs, but the vast majority have peanuts in there and use them as glorified savings accounts. In fact a recent BMO survey had shocking results: 80% of all the money put into tax-free accounts has ended up in cash or brain-dead GICs. What are these people thinking, when the gains are sheltered and no tax is payable, ever? They’re not, obviously. A fifth are using TFSAs for holidays and another quarter for saving up a down payment while 40% keep a TFSA for emergency cash.

Oh yeah, and only 18% of people last year made the maximum contribution, which was $5,500. So with 82% of people not taking advantage of what they’ve already got, and sticking most of their money in the bankers’ shorts, why would the feds double it?

Simple. Because this has turned into one sweet tax shelter for Boomers and the wealthy who have maxed out RRSP contributions. They’ll be able to move substantial sums from taxable non-registered accounts into TFSAs, stick them into growth securities, and never pay a cent when collecting the income or be forced into a higher tax bracket. Moreover, since the proceeds are not reportable as income they do not count when it comes to clawing back benefits like the Old Age Pension.

And this is a money machine. A couple putting $22,000 a year into their TFSAs, starting in January and keeping it up for 20 years with a 7% annual return will have $1 million – of which $525,000 is untaxed growth they can spend while still collecting their government cheques. The kids can do the same, of course, save for one problem. No extra twenty-two grand a year.

So, please, whatever you do, prevent the young from knowing this. Or we’ll all be dead by sunup.

]]> 218
Trust Sun, 19 Apr 2015 17:15:43 +0000 TRUST modified

So what did we learn from the #DontHave1Million slugfest here on the weekend?

Simple. If the kids had lots of money they wouldn’t be Tweeting. They’d be buying houses. For the aggrieved it’s not actually about the wealth disparity, or the stupid price of real estate. It’s that they deserve more, because they’re better educated (so, smarter) than the wrinklies. Hence the unfairness.

This useless social media campaign does underscore some valid points, however. First, the gap between The Few and The Most is yawning larger every day. Wealthy people in Canada (with over $2 million in investible assets, outside of real estate) make up about 1% of the population. They own stuff – businesses, financial assets and a relatively small amount of property. The rest of the people hold debt, with the bulk of their net worth in a house. It’s a self-inflicted penury.

Second, the bulk of the population is crippled by financial illiteracy (thus the fetish over real estate, “At least I can see it”) and riddled with mistrust. Read the comment section of this pathetic blog for a few days (have a few scotches first) and see what I mean. People don’t trust banks, realtors, CEOs, immigrants with nice cars, stock markets, central banks, politicians or financial advisors.

Because The Most are so indebted and mistrustful, and their kids have such unfulfilled expectations, don’t expect much to change. The gap will grow wider. Best decide which side you wish to be on.

After thirty years of writing financial books, giving financial lectures, doing financial journalism, creating financial TV shows, and trying financial politics, I started a financial advisory practice, to help people make it. Some do. A 29-year-old couple who wrote me three years ago (I published their cynical letter here) brought a bottle of champagne to my office a month ago, on the week they became millionaires. Not because they own a $1.1 million house with an $850,000 mortgage, but because they now have seven figures in their investment account, and no debt. They’ve ‘retired’, after tripling their net worth in 40 months – by saving and obsessively investing.

As I’ve said so often, real estate brings debt, obligation and immobility. In the future it could also bring large losses and illiquidity. Reasonable people should strive for diversity and balance in their financial lives, keeping taxes low, investing in growth assets and seeking out useful advice. This is why the #DontHave1Million movement is puerile and pouty. If you can’t afford a house in Vancouver, screw it. Concentrate on what you can do – like building your wealth, and your options.

Justin wrote me last week: “Hey Garth, I am looking for an investment advisor/manager and know there are pitfalls within the investing industry. I am looking to be steered in the right direction to start investing but have no idea where to start. Any recommendations or advice would be incredibly appreciated as to where to find a fiduciary advisor or to start a portfolio. PS thanks for getting rid of my house horniness.”

It’s a question I’m asked a lot, but seldom answer, for obvious reasons. This blog isn’t a commercial for my day job. But here are a few points to keep in mind when looking for an advisor for those of you who don’t come here for news about mortgage rates or hormones.

  • Don’t pick a salesman when you really want an advisor.

People who get paid by selling you stuff may have a hard time putting your interests in front of their own. That includes your best-friend high school bud who now sells mutual funds, the sweet lady with the RESP folder after you had a baby, the insurance guy you met recently or TNL@TB. They all get paid commission on things you buy, so how do you actually know the decisions they make are in your best interests?

Best seek out a fee-based advisor who refuses to sell anything and collects zero commission. The relationship should be as with your lawyer or accountant – you pay a management fee equal to a small percentage of your assets in return for unconflicted help.

  • No hidden commissions or fees. No backend sales charges. Don’t pay more than 1%.

Don’t hire someone who is paid on a transactional basis – making money per trade. That’s just an incentive to churn your account with needless activity. Never buy a mutual fund with a DSC (deferred sales charge) which diminishes over time. This is nothing but a mutual fund prison. Face it – if the asset was good, then they wouldn’t need a tawdry gimmick to keep you invested in it. And any fee-based advisor charging more than 1% is too expensive or needs a new Porsche.

  • It’s not all about performance. Don’t hire a hero.

Amateur investors think the only thing that matters is how fat the annual returns are. Wrong. The first goal of an advisor is capital preservation, and a stock-flipping cowboy who made 28% last year could end up losing 28% of your money next year. Find somebody with a balanced and diversified approach, who is happy to get you a predictable annual return (7% is reasonable these days), and who doesn’t throw around performance numbers when you first meet.

  • The best approach is a holistic one.

An advisor should take the time to know all about you, your job, kids, house, pension, parents, spouse, health, dog, siblings and goals. It’s the only way to come up with a plan (and you should have a written investment plan given to you before you start). Saving money through tax avoidance can be more effective and less risky than trying to score on investments, for example. Knowing what the future demands might be from growing children or aging parents will help guide the strategy now. If the guy doesn’t ask when you first meet, walk.

  • Trust, or you’re wasting everyone’s time.

Yeah, this is the hardest thing. Human nature tells you nobody cares about your money as much as you, which is true. But most people know little about investing, tax law or macroeconomics. So, you can follow the herd, spend all your money and get a mortgage, or you can get some help and aim for 1% status. Maybe you’ll make it. Maybe you’ll buy a house. But the odds are you’ll have more choices and find greater financial security.

This also makes you far sexier. So there.

]]> 179
The entitled Fri, 17 Apr 2015 22:05:19 +0000 PUPPIES modified

Yesterday #DontHave1Million flitted through the Twittersphere one day after a 29-year-old named Eveline created it. Suddenly all kinds of people were posting selfies holding signs saying things like, “DontHave1Million, Manager, 30” and “DontHave1Million, Sprinkler Fitter, College Diploma, 33” and “DontHave1Million, Double Major Sociology/Visual Arts, Film Worker. Plus my Landlord just sold House for $1.86 million. Now I have to Move.”

You get the drift.

It took about forty seconds for the Tweet barrage to turn into a mainstream media headline and story, with a nice pic of Eveline (who says she is an ‘environmental professional’) which helped shove the whole thing to the next level. “Don’t have $1 million for a home,” it said, “Join the club.”


Of course it took about 30 seconds more for an enterprising realtor from Prince George, where open metrosexuality is a crime, to Tweet that PG is affordable. So come on up! The odds are this will all die out in a few days, and the uber-educated kids will go back to behaving properly as baristas and child care workers.

Nonetheless, this is an interesting Canadian thing. Kinda like the #Occupy movement, but in reverse. The 99% crowd who stormed Wall Street and other financial capitals around the world wanted to Eat the Rich and railed against the growing income disparity around us. The #DontHave1Million kids actually want to be rich, and think they’re entitled to buy a $1,000,000 house. The overriding reason for this seems to be (a) they went to school a long time and (b) they’re clearly special. Mom said so.

MILLION 2 modified

On Friday I spoke with a couple who have $72,000 in liquid assets, most of it in RRSPs, a combined income of $125,000, are in their mid-30s with two kids (five and three) and have just been approved by a major bank for a mortgage of $800,000. They were moaning. “Do you understand how few houses there are for sale for $900,000,” she asked? “This is simply not fair. There is nothing decent or in a neighbourhood I’d let my kids run around.”

I patiently explained that putting all of their net worth into a house, plus taking on mountainous debt, was completely irresponsible. In 15 years when the kids need gobs of money for schooling, and they’re both over 50, they’ll still be struggling with a mortgage so fat it prevented them from saving. Of course by then rates will have normalized and house prices likely retreated. Hard to imagine a worse potential situation – all to get a house they feel entitled to.

So on Friday we got the latest cost-of-living numbers. Core inflation surged higher in Canada, largely because of a weak dollar. This is what I told you would happen after that central bank rate cut in January. The core inflation rate is now 2.4%, right in the 1%-to-3% zone established by the Bank of Canada.

So what?

So no more rate cuts here, unless things really hit the fan. But with oilsitting above $55, the dollar recovering to 81 cents and the latest jobs report showing surprising gains, the worst might just be behind us. That also means you’re currently enjoying the lowest mortgage rates of your lifetime.

Meanwhile US inflation has risen for a third month, along with consumer confidence. In fact, more jobs have led to wage pressures, which could be behind an increase in consumer prices. Core inflation is 1.8%, on its way to the 2% target set by central bankers.

So what?

So the odds are still overwhelming the Fed will raise rates for the first time in six years in a few months. That was one reason the Dow shed 280 points on Friday, since markets don’t like tighter monetary policy, which raises the cost of doing business and eats into profits. Higher rates for bonds (they’re coming) also creates competition with stocks, since investors can get a better yield with no risk.

Now what does this have to do with #DontHave1Million?


All the self-serving bodies (Vancity, Re/Max, Royal LePage) forecasting prices will bloat far more in the next few years are wrong. Ditto for the realtors who have been trying to scare people over an invasion of horny Chinese or panting Americans. Ain’t gonna happen. Same goes for those who tell us central bankers will never raise interest rates, and soon banks will be paying people to buy houses. Nuts.

You’d think 30-year-olds who spent more than two-thirds of their lives in school would have figured this out. But I guess they skipped that bit in sociology and films arts classes. Truth is, mortgages will cost more next year and houses will cost less – pretty much everywhere. Those who take on massive debt now to buy at the top of the cycle will long regret it.

Nobody, after all, is entitled to a house. Getting a university degree doesn’t guarantee you to a six-figure salary. And maybe these virgins will have to do what so many in the past have done – move to the burbs, find a starter home sans granite or (horrors) get a job in PG.

Better still, get ready for what’s coming, and invest in financial assets. On Sunday I will give you the first lesson. Tweet that.

MILLION 3 modified

]]> 322
Tale of two markets Thu, 16 Apr 2015 22:43:27 +0000 COON modified

Stocks and houses have a lot in common. When someone tells you the TSX has gained 6.06% in the last 100 days (which it has), or 9.6% in the last twelve months, that doesn’t mean every stock has swelled that much. After all, the banks are down and oils have been plastered. But other segments of the markets have done fine. As a result, 2015 is sweet so far for investors who picked the right equities, or just got smart and bought an ETF which tracks the index.

Now when it comes to houses, people get stupid. This week the national realtors’ cartel announced real estate across Canada gained 9.4% in price from this time in 2014. So what do homeowners think? Of course – their own property has jumped in value. By 9.4%. In fact, agents use these average price stats to ‘prove’ this asset is on fire. (This is why real estate boards in Canada do not use median numbers – which would tell a far different story.)

The reality is, we’re in an extraordinary time when housing should be shedding value because of a soggy economy, stagnant wages, record debt, government austerity and home ownership saturation. And it is. With the exception of two markets – and even within those, price gains are nor universal. Many owners are about to learn a grim lesson: sometimes realtors lie.

Uri Kogan apparently isn’t one of them. The Toronto agent sent me an interesting little story yesterday, just as CREA was pumping reporters full of sunshine. “I sold a condo unit for my client three years ago for $270,000,” he says. The buyer felt he got a deal, since the place had been listed for $279,000.

And it seemed like it. Over 550 square feet, balcony with a great view, 24-hour concierge downstairs, luxury amenities, just off Yonge Street, park nearby and walk to a main Toronto subway station. The buyer, as is so typical these days, was an ‘investor’ who then proceeded to invest $20,000 in fluffing and upgrading the unit.

Well, it’s for sale again. “Now the asking price is $280,500,” says Uri, “and it hasn’t sold yet. So, you want to buy a nice condo on the subway for the same price it was at three years ago AND with $20K in renovations? ALSO, listing agent is offering 3% commission, so I would be happy to give you back 0.5%.”

BTW, here’s the description:

“Luxury Condo By Menkes At Yonge/Sheppard.Priced To Sell Quick, Immaculate One Bedroom Unit, Combined Living & Dining Room W/Hrdwd Floors Newly Installed Thru-Out. W/O To Balcony. Kitchen Recently Upgraded W/Granite Counters &Breakfast Bar. 4 Pc Washroom Recently Upgraded. Master Bdrm W/Hrdwd Flrs & Ne View. Recently Reno’ed Lobby, Hallways, And Amenities. 24 Hours Concierge, Steps To Subway, 24 Hr Grocery, Restaurants, Starbucks, & Much More. **** EXTRAS **** Stainless Steel Fridge, Flat-Top Stove, B/I Dishwasher, B/I Microwave Hood Fan & Granite Counters. Washer & Dryer, Elf’s, Vertical Blinds, Granite Counter-Top In Bathroom. Over $20,000Spent In Upgrades!!”


The moral of the story: some stocks are winners. Some are dogs. Same with real estate. But while you can live in a condo you paid too much for, a stock doesn’t have a monthly maintenance fee of $391, plus insurance and property tax. Nor do you need to install granite or a potty with a heated seat. Conclusion: condos are bad investments. And never think real estate always goes up.

After he let a breathless nation know on Wednesday that interest rates would not be budging, central bank boss Stevie Poloz moved on to the housing market, trying to make exactly this point. If you live in Vancouver or Toronto, he suggested, and think your house is riskless, think again.

“The adverse impact of the oil price shock in Alberta and continued robust price growth in Toronto and Vancouver suggest a risk of a correction in these markets,” the Bank of Canada warned. “While historical experience suggests that localized Canadian house price cycles, both in terms of the factors behind the boom as well as the correction, have typically not spilled over to other regions, it would be a major event if it occurred.”

By every measure, despite the hype and realtor arousal in YVR and the GTA, real estate is not healthy. Sales are stagnant or falling in most cities. Outside of the bubble towns, price increases are basically pacing inflation. Prices are falling in resource-affected cities like Regina and St. John’s, while markets like Ottawa and Montreal are going nowhere. Calgary has been a mess since late last year, while Fort Mac is a smoky hole.

Price increases overall have just shown the smallest gain in 15 months. And the gap between single-family homes and condos is exploding – because as detached houses become more and more expensive, the universe of potential buyers shrinks, despite record-low mortgages.

This has all spilled over into the rental market as well. In Toronto a new condo glut is rapidly emerging – something this pathetic blog warned two years ago was in the pipeline. The lease-to-listings ratio is now at the worst level in five years, and rents have started to go down. Since last June over 22,000 new condos have hit the market, many of them bought by poor suckers who thought (a) I can rent it out for at least enough to cover the costs and (b) I’ll be rich when I sell, cuz real estate always goes up.

CONDOS modified

Remember those ads for new condo buildings that developers (like Brad Lamb) told you would shower an 18%-per-year return on lucky buyers of one-bedders? Well, so much for that.

Soon landlords will envy tenants. The world as you knew it is over.

]]> 126