Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Tue, 22 Sep 2015 21:39:56 +0000 en-US hourly 1 A little screwed Tue, 22 Sep 2015 21:39:56 +0000 BABY1

Andrew just bought a condo in DT Calgary. Poor Andrew. Unlucky in love, now horny over property.

“A few years ago my life changed and I stopped owning a house (along with a wife and a couple dogs, I really miss the dogs) but with my divorce winnings (I mean home equity buyout) I put down a deposit on a condo. Seemed like a good idea at the time; shortly after I found your blog which I’ve been following ever since,” he says. “The logical side of me regrets buying the condo (since renting is cheaper) but the emotional side is excited for it as its a pretty sweet condo in downtown Calgary (which as a single guy can only help my cause).”

This is a small lesson in delusion. It goes to the federal election coming up in 26 days, because people will make themselves believe just about anything, in the face of overwhelming evidence to the contrary.  For example, Andrew works in the oil sands, a fly-in-fly-out guy who should know that on days like Tuesday (oil lost another 2% of its value) he has the job security of a gnat.

Second, buy in Calgary in the autumn of 2015? What’s he thinking? Sales are way down (off 33.5% this week year/year), prices are starting to slide (the average is now 5% lower) and housing starts are a disaster. Last month new house construction plunged 30%, according to the Conference Board of Canada. In short, the real estate plop has only just started in Alberta as more sellers realize crude ain’t coming back soon, nor the jobs it swept away.

Third, hormonal little Andrew (he’s 28) tells me he’s trading a rented condo costing $1,500 a month all-in for a $370,000 unit that will drain $2,000, not including property tax or utilities – in which he plans to live only 50% of the time when not up in Fort Misery. So there you have it – converting cash into a combination of debt and eroding equity at a time when the economy is sagging and jobs blowing up.

But Andy reads this pathetic blog: “It was always my intent to put down another 10% on the condo to get rid of cmhc fees and lower my monthly payment but with mortgage rates currently so low I’m starting to think I should use that money (37k) to max out my rrsp, beef up my tfsa and pay off my motorcycle.” At least the bike goes fast and vibrates.

I hold up this young dude as today’s example of why we’re a little screwed. Collectively, we’re making risky choices. The house lust continues unabated – in fact it’s picked up speed. The descent into debt is unprecedented – in fact I expect more, now that everyone believes interest rates can never rise. And voting intentions among the sub-35 cohort show a serious tilt to the left, in the belief the country can tax and spend its way forward. After all, this is what they’re being told. Similar happened in Alberta when the NDP won a historic election there.

Against this, lie some ugly facts.

For example, in the Conservatives’ last budget – the one on which all the parties are basing their projections – economic growth was pegged at 2% for 2015. In reality, it will (maybe) be half that. “For this year as a whole, we think the economy will be lucky to grow by 1.0%, possibly falling just short of this,” says economist David Madani.  “What’s more, if our fundamental concerns about the overvalued and overbuilt housing market begin to play out next year, then growth next year won’t be any better.”

What does this mean? Simply, nobody can believe anything in the economic promises of the NDP, the Libs or the Cons. The numbers are outdated.

Thus, if Mr. Harper is reelected and maintains the status quo, there’ll be no surplus unless the economy rebounds, which is doubtful. Instead, the deficit should be about $4 billion per year (including this one). If Mr. Mulcair is elected, promising over $4 billion in additional spending all to be paid for with higher corporate taxes, there will still be a $4 billion deficit, plus pissed-off employers. If Mr. Trudeau is elected, his forecast of a $10 billion annual deficit will be something closer to $15 billion, and he will have increased taxes on companies and higher-income individuals in the process.

But there’s another problem Andy knows all about (or should). Oil. The stuff is currently trading around $45 a barrel and is under pressure as commodity prices sit at 16-year lows. Several credible forecasters say the bottom is somewhere between $20 and $30, with recovery to take years. But the Conservative budget of just six months ago (which all parties are using) predicted crude would soar to $75 a pop in a little over a year. Oops.

So chew on that. Economic growth 50% less than forecast and the price of our major export 40%  under the estimate. What else could go wrong? Oh yeah, a housing correction, with rising mortgages as bond yields swell, plus more layoffs. And did I mention that since last July the number of Albertans collecting employment pogey has increased by 72.2%? Or that a survey of business confidence released Tuesday finds most Albertan entrepreneurs now believe things are getting worse?

If you think this is the time for more tax, well, meet Andy. He’s confused, too.

The ATB Business and Economy Indexes (CNW Group/ATB Financial)

The ATB Business and Economy Indexes (CNW Group/ATB Financial)

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Suck it up, Lisa. Mon, 21 Sep 2015 21:10:17 +0000 JAIL SALE1

Lisa: “Mom, why do we need to move again?”
Mom: “Because Mr. Landlord needs this place.”
Lisa: “But I need it too, I love my room.”
Mom: “I know my dear, but this is not our house, we don’t own it.”
Lisa: “But this IS my home, look, that’s my picture on the wall. This is not fair!”

If you just threw up a little, you’re normal. Unless you’re Michael Lee. He loves this stuff. It helps fulfill his personal destiny “to retire into the life I desire.” The young Port Coquitlam-based serial entrepreneur is doing that these days by simultaneously flipping $60,000 shacks in Atlanta and Chicago while he runs a little lease-to-own program raking in house-craving Vancouverites who actually can’t afford to buy.

Anyway, here’s the pitch. Don’t you dig the pic? Cue the weeping violins…

Mom, why do we have to move again?


We can’t agree with Lisa more. She is right. This is NOT fair!

When your family moves in, you clean it up, unpack your stuff and spend countless hours here. Happy times, sad times, boring times and exciting times. This place is an empty space between 4 walls; nothing special. All the memorable stories of your lives make this space home. You love it, you take care of it and you do whatever the landlord says, because you don’t want to move . . . again.

Then one day you wake up to a landlord’s E-mail in your inbox. Yes, you need to go. Again. You need to leave your home, and never have a chance to come back. You pack all your stuff, take pictures of this place, hope to keep some memories of your home, but you know, this next place will never be the same anymore.

I know you’ve tried to own your home, but your pay-cheque only grows by 2% when the housing price increases by 12%. Saving up for the down-payment seems like a never ending staircase, the more you climb the further you fall behind. What can you do, you ask yourself?

You are not alone. That’s why Katlan is dedicated to bring the best Rent-To-Own program to the greater Vancouver market. The program is developed by a team of professionals including a Lawyer, Mortgage Specialist, Real Estate Agent and Investors with the goal of enabling you to own your dream home, and make a difference to your family.

Well, I guess we have to expect schemes like this to sprout in a place where the average detached property costs over a million, the average family makes seventy grand and all anybody talks about is house porn. Katlan Consultants seems a tad opaque and obscure, aimed at people with crappy credit scores who’d never qualify for traditional mortgage financing. Lee and his partners tell people like Lisa’s mom that they can still own a house, sort of.  “Our programs are uniquely designed for dedicated individuals who cannot qualify for conventional financing today to achieve homeownership in the near future.”

So, Katlan buys a house, then leases it to Mom. She has to furnish 10% of the downpayment, even though she’s not on title, plus pay an extra amount each month (additional to rent) which will go into repaying Katlan’s deposit. This carries on for “between 2 and 5 years” after which the renter fronts more money for closing costs, and takes over the mortgage payments. If something happens in the intervening time and Mom has to move on, a portion of her downpayment is lost.

Of course, if Mom just took this money she’s handing over so Katland can buy the property she then leases (which Katland owns), plus the additional rent, and invested it inside a TFSA she might do a lot better – with no penalty if the deal never happened. But how could she ever explain “TFSA” to dear little Lisa? Especially when evil Mr. Landlord teams up with the bad Mr. Mulcair and the awful Mr. Trudeau to diddle her tax-free account?

Michael Lee, by the way, lists his formal schooling as “Tigrent Rich Dad Education”. Apparently it didn’t take. His sister company, EPI real estate, tells American wannabe flippers: “With all-time low interest rates, significant house price drops and a weak US currency, this is the perfect time to invest.” Actually rates have shot up in the last year, house prices have gained steadily and the US dollar is at record high levels. But, you know, like, whatever. It’s all about marketing, anyway.

Sorry little Lisa. Your mom’s a wuss being goaded by parental guilt into a financial death spiral that could shatter your future while Mr. Lee will get the one he deserves.

Stop moaning, kid, and pack up the damn toys.

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The rich & the rest Sun, 20 Sep 2015 22:11:06 +0000 TOGETHER modified

During the weekend political slugfest on this pathetic apolitical, slightly horny blog, an interesting divide emerged. Yes, it’s all about money. While over 500 comments were offered, fewer than a dozen didn’t make the cut, mostly because they irritated me. Here’s one of the few:

People should read Garth Turner understanding that he’s part of that 1% Trudeau wants to tax. He’s far from impartial. Maybe to him, gifts to the rich like unlimited TFSAs, income splitting, and rock bottom corporate taxes are very important. But they are not important to the average Canadian, who doesn’t benefit from these things in the slightest.

The Liberal and NDP platforms are both variations of the same sensible thing: we are going to take back these reckless, uncosted, tax giveaways made for short term political expediency, and in their place actually build something useful for the future. The parties differ on what they consider useful, which is a choice to be made.

Or you can choose to hunker down in your basement, clutching your cash, and watch the country crumble. But hey, you got that tax cut…

As you’d expect, I disagree. Rich people usually get that way because they work harder, think smarter, are employers rather than employees, innovate or embrace a profession society rewards. Sure, some are tools who inherited money, but we don’t seem to have a lot of those. In fact, we don’t have that many wealthy people. Period.

So saying everything will be cool if we just “tax the rich” is appealing. Just like “tax the corporations” sounds like we’re jackbooting GM, Suncor, RBC or other faceless conglomerates who have CEOs with trophy wives and shiny jets. The Libs and Dippers are going down this road, as you know, and likely finding a lot of traction as they do. You can see from the language above – calling TFSAs or income-splitting “gifts to the rich” and “reckless, uncosted tax giveaways” that this election is turning into a class war.

No wonder. Trudeau and Mulcair are working hard at it. The Liberals’ first plank is to raise taxes on those making $200,000 or over, and the NDP is funding their massive new spending program entirely with higher corporate revenues. Meanwhile both leaders are less than saintly when it comes to contributing their own fair share.

Mr. Trudeau earned $1.3 million in speaking fees around the time he entered federal politics and sheltered it inside a small business corporation instead of paying his allotted share as personal income. By doing so he reduced the tax payable by about half. Mr. Mulcair has been a professional politician for many years, collecting a public pension as a former Quebec member and cabinet minister, as well as pocketing $233,247 in taxpayer money as leader of the opposition. He also gets to live in a mansion in Ottawa, for free, called Stornoway. I’ve been inside it several times. Gorgeous. Here it is:


So, clearly, both of these guys are wealthy by Canadian standards. Yet neither has led by example. Now they’re both campaigning for more taxes on other Canadians, more public spending, more deficits (in the case of the Liberals) and way more government. For Stephen Harper’s part, his record also sucks – almost eight years of deficits, $170 billion more in public debt, an active role in creating unaffordable house prices and a recession. He earns $327,400 as prime minister and calls 24 Sussex Drive home. Also free. I’ve been there, too. Very cool.

Hard to say who’ll be living behind the black fence after October 19th, but there’s a good chance movers will be involved, based on current polling. So this might be a good time to determine if you’re one of the ‘rich’ people that will be in the crosshairs. I might add that my Dipper friends also tell me the NDP would like to introduce a wealth tax if given a majority mandate, plus partially eliminate the capital gains tax break. Maybe they’re just wishing. Beats me.

Anyway, there are two traditional definitions of rich: what you earn and what you have. First, the top 1% of Canadians – only about 312,000 people (a third of them doctors) – have incomes of $200,000 or more. Tax the rich so that the other 34,800,000 people get more? Are we as dumb as Mr. Trudeau believes? Apparently.

As for wealth, “high net worth” means $1 million or more in liquid assets, not including a house. There are 298,000 people in this category, or less than 1%. There’d be a lot more if we could replace house porn with common sense. But in this election all parties have decided the real estate bubble needs to stay dangerously inflated.

Well, there you have it. The vote that’s all about loaves and fishes, in which people are being told a handful can suffer so the multitudes may prosper, championed by two members of the 1% who live on public incomes. At least we dig irony.

Sadly in all of this, most people will lose. TFSA contribution limits pose an important escape hatch from being dependent on a fully-taxable pension – if you’re lucky enough to get one. Income-splitting slightly levels the playing field between families, where one spouse chooses to stay home with kids. Corporate tax rates are no gift to the elite, but ensure in a competitive world that Canada gets its fair share of capital and precious jobs.

One of the first things I was told, upon entering politics, became the most profound. “Just stand up and speak passionately about ‘us’ and ‘them’,” my mentor said. “They buy it every time.”

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The dilemma Fri, 18 Sep 2015 20:58:45 +0000 Harper modified

This is personal. I regret the time spent with Stephen Harper. I’m not bitter. Life’s too short. But nor should I forget.

When I was a member of his caucus, Mr. Harper carefully engineered my ouster and ostracism. He went further then to ensure my political career would be destroyed and that I’d be defeated and eliminated in the next election. In all of these things he was wholly successful. Then he arranged for additional personal and professional embarrassment.

Thus, I was not merely fired in a one-on-one meeting, but my demise came in a public way, complete with a media orgy and live TV coverage. While taking care of the big stuff – throwing me out of the caucus, then banning me for life from the Conservative Party – the PM’s office also paid attention to the smaller details. My seat in the House of Commons was moved into a back corner brushing the curtains, and my office on Parliament Hill was drastically downgraded. I was accompanied out of my old one by three security guards.

Prior to these actions the PMO had tried to oust me from elected office by contesting my riding nomination – unheard of for a sitting member. The other day Dorothy reminded me the only time she’d been to 24 Sussex – to attend a caucus event for spouses – Mr. Harper turned his back on her.

My crimes had included blogging about being an MP, engaging taxpayers in issues coming up for votes in Parliament, interviewing opposition MPs and posting their vids so voters could gain more perspective, plus trying to create what I thought was a good thing – digital democracy.

I mention all of this because my relationship with Mr. Harper was a low point in my life. I’ve been elected an MP twice in my career, the first term serving harmoniously under two prime ministers who may have looked at me sideways, but respected my efforts. The second time – when he was party leader – it was quickly apparent things would end badly. And they did. He demanded complete subservience, but I was unable.

As I said, it’s personal. I’m motivated to never support Mr. Harper again, believing he would have been wiser to embrace a more open government and even an irritating little pecker like me. I’m also dismayed that during his time as leader of Canada, he increased the national debt by $170 billion, run a deficit almost every year and worked tirelessly, with 40-year mortgages, home reno tax credits and other tools to inflate houses and indebt citizens. I’m not happy we put so many eggs in the oil patch basket and will have to suffer the consequences of a commodity bust. The GST should never have been cut. Duffy never appointed. Or science muzzled.

You may feel you have reason to hate Mr. Harper and wish to punish him. Trust me, I have more.

Thus the election, his final one, poses a dilemma. Do we vote against, regardless of what we’re voting for?

The leaders debate on economic issues this week helped clarify things, if you happened to catch it. Harper was cool and robotic. Trudeau wanted to be Trump. Mulcair tried to look like grandpa. Not scary. The differences in policy and potential outcome are dramatic, however, and outweigh the personalities of all three men (I know them).

Both the Liberals and the NDP propose more tax, more spending and more government. At a volatile time when the economy is staggering along in technical recession, with record debt and unhappy job prospects, that’s a dubious premise. Mr. Trudeau says the rich will pay and the rest will benefit, which is a fairy tale. There are but 300,000 one-percenters in the land to soak, many of them with the ability to leave or shift income, and who already pay a ton. Both he and Mr. Mulcair say corporations will hand over billions more a year in levies – another fable. Corporations can easily restructure or relocate. Besides, with job insecurity, do you really want to drain your employer?

Personally, the NDP would see you contributing a lot more to the public pension plan, reducing take-home pay. Both the Libs and Dippers would trash the $10,000 contribution limit to the TFSA, while members of Mr. Mulcair’s party have been calling for a lifetime limit on tax-free savings and an end to the break investors receive through capital gains tax. In other words, this is a move against personal wealth and independence, in favour of the collective.

All three parties, sadly, are catering to house lust and anxious to promote even more household debt. But at least the Cons understand that additional tax – on workers or the wealthy or employers – is regressive. That includes the NDP’s carbon tax and all your taxable assets in years ahead that could have been sheltered within a TFSA. I guess if you trust the government more than yourself, then Mr. Trudeau and Mr. Mulcair are your guys.

The polls are tight and the outcome uncertain. Comments here show a visceral dislike of Mr. Harper. Seems a lot of people will, as in Alberta recently, vote to punish.

That may feel good for a day or two.

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The head fake Thu, 17 Sep 2015 18:01:41 +0000 BLONDE 1 modified

Close, but no cigar. The geniuses running the US central bank have erred on the side of caution, delaying that inevitable first interest rate hike in a decade for another month. The new D-date is now Wednesday, October 28th. We got all hormonal for nothing.

The howling skeptics who say rates will never rise again feel vindicated. But the Fed says… not so fast. This is still a done deal and nobody should expecting otherwise. In order to head off inflationary urges and bigger asset bubbles, the US will still be jacking the cost of money. But chief central banker Janet Yellen has turned out to be one cautious woman.

Remember – when the Fed starts this process, it will be an extended one. There’s never been this long a period of rate stability, of zero interest costs or such central banker patience. So when the tightening begins, it will carry on for at least a couple of years – until 0% now turns into something north of 3% in 2017.

The last time US rates started to hike (the summer of 2004) inflation was almost 3% and 66% of the population was working or looking for work. Today inflation is less than half a percentage point and 63% of Americans are employed. Obviously it’s take a lot longer than anyone expected to clear away the rubble from the financial meltdown and credit crisis of 2008-9.

Nonetheless, we’re almost there. The US is growing robustly and employment is swelling fast. The contrast with Canada, now leaning dangerously left politically, is stark. Some tough days lie ahead for the dollar, the oil patch, and anyone who doesn’t use the next four weeks to lock in their mortgage.

So, go ahead and be smug for a while. I can take it.

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Special Wed, 16 Sep 2015 20:56:00 +0000 CROWN modified

Will interest rates begin their ascent Thursday at 2 pm Eastern?

Beats me. But it’s really a moot point. If not tomorrow, it will be next month. Have no doubt. It’s coming. Pulling the trigger will be the US central bank, known as the Fed. It’s been waiting for months for the right moment when the economy is strong enough to withstand money getting a little more expensive. This may be it.

Now, most importantly, how can you benefit?

Well, not buying a beater house on a crappy street in downtown Toronto or Vancouver would be a fine start. This first rate hike will be one of many (the Fed usually increases about a dozen times during a tightening cycle), so you can count on higher mortgages and lower real estate. As I mentioned earlier this week, there’s a 93% chance Canadian rates will follow those in the US, albeit after a lag. If you want to battle  those odds, knock yourself out.

Beyond that, you should consider loading up on some preferred shares. Two reasons: (a) they’ll benefit from rising rates and (b) they’re cheap. Like Kias, but actually worth buying.

Just so you’re clear – preferreds are kinda like stocks and sorta like bonds. They’re considered ‘fixed income’ like bonds and are far less volatile than common stocks, but they pay dividends instead of interest. That’s great because interest is taxed to the max while dividends come with a tax credit – so the after-tax return is much higher. Also while bonds pay extremely little these days (about as exciting as a savings account with the jam people), preferreds have been returning yields in the 5% range. Sweet.

Also preferreds are called ‘preferred’ because they’re, well, preferred. Special. Companies issuing them must pay the dividends on preferreds before they pay out on common stock, so the income stream is safer. (Not that this matters if you buy the prefs of stable companies like banks, insurers or utilities.)

All good. But, like bonds, the capital value of preferreds is influenced by interest rates. So when the dingalings at the Bank of Canada cut the key rate there in January and again in July, preferred share prices went down along with bond yields. This was despite the fact these puppies keep churning out that 5% tax-advantaged yield. So in terms of valuations, preferreds have sucked in 2015, losing about 17% of their value.

Why would you buy them?

Simple. This cheapness will not last, and preferreds are poised to be among the significant winners as interest rates start the long trip back to normal. A bunch of smart people believe the values of prefs will rise by at least 10% in 2016, possibly more, making them star assets just a year after being dogs.

Most preferred shares are called “rate reset”, which means they’re tied to the five-year Government of Canada bond – the one which our central bank bombed with its rate cuts. Now that the US Fed’s changing the game, and because our market almost always follows theirs, you can expect Canadian bond yields will be plumping for months to come. In fact, yields have already crept higher, with big moves possible after Thursday’s announcement.

Higher bond yields are positive for preferred share prices, so given the fact these cost almost 20% less than a year ago and have big upside it begs the question: why would you not have some? Especially when they pay a 5% return just for owning them and that money’s not sucked off in tax like interest from a dead-end GIC?

Prefs aren’t popular because TNL@TB doesn’t sell them at the corner branch. No worries. There are a bunch of good ETFs around that contain a basket of high-quality Canadian preferreds issued by big, stable companies – including the same banks that won’t sell them to you over the counter.

Preferred shares, in short, offer one of the best protections around against rising interest rates – which stand to do serious damage to real estate and may also usher in more equity market gyrations. So, you can moan, cringe and deny like most of the people who come to this pathetic blog to say rates will never, ever go up. Or, you can get ready for reality, and let central banks grow your net worth a little.

Now, how hard was that?

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Fresh thinking Tue, 15 Sep 2015 20:38:03 +0000 BONELESS1

Over the last few days, because reading this blog is easier than doing research, the mainstream media has discovered (a) this election could really screw up investing with a TFSA gut and (b) the political parties all want a housing bubble. Now that it seems certain interest rates will be higher in the months and years ahead, and Canadians’ personal finances suck, these are big issues.

As you know, the Cons will bring in a permanent home reno tax credit so every residence in the country eventually has a hot tub. They’ll also jack the amount kids can steal from an RRSP for a downpayment. The Libs will diddle with RRSPs, too, making it legal to move money to buy a house whenever you have a ‘life event.’ The Big Dipper has caved to CREA demands and will let amateur landlords escape capital gains tax, and Trudeau says he’ll give them $125 million for renovations. It just never ends.

On top of this, we have CMHC now allowing 100% of the rent from your mouldy basement suite as allowable income for a mortgage (double the old amount), and no political leader has thus far had the stones to stand up and tell people they’re borrowing too much. You can only assume air will continue to be pumped into the property gas bag until it rips.

Of course, there’s one other important issue when it comes to politics and housing – appealing to the lowest common denominator of xenophobia. We all know they really meant ‘Chinese’ when Harper and Trudeau pledged to study the impact of ‘foreign buyers’ on markets like Vancouver. It’s what the locals want. This is how you get elected. It’s called followership.

By the way, a new survey finds 69% of YVR dwellers think stupid high prices are the result of offshore (Chinese) buyers while 60% want to see limits put on foreign ownership. This despite the fact the real estate industry itself pegs the number of buyers at 5% of total deals, and the Victoria board (the only one which counts) reports non-Canadian buyers at 1.6% of the market.

Naturally, facts don’t matter when you have Twitter and Global television. So expect this to be a meme that carries through to e-day.

Now, let’s look at the real reason real estate in Vancouver or the GTA is a self-propelling, risk-laden phenom. Last month sales slowed in Toronto, but detached 416 prices jumped year/year by more than 12%. In YVR the benchmark price for a detached home is higher on an annual basis by 17.5%. This is the stuff of nosebleeds, at a time when our largest export industry is crippled, household incomes have stalled and the country’s in technical recession. How on earth could this be? What do the leaders have to say about cities average people can’t live in anymore?

You bet. Nothing. Except find new ways to shovel more buyers in, further augment values while building extra consumer debt. And ignore the elephant in the room.

Back to the survey, conducted by industry magazine REW. This is all about the Bank of Mom.

  • 75% of the Millennials surveyed say they will need (and expect) a loan from their parents in order to make a downpayment.
  • Another 33% said they are looking forward to an inheritance in order to buy.
  • Among those ‘adult children’ between the ages of 41 and 50, a stunning 64% state they will be asking family for money in order to upsize their house.
  • Over half the buyers under 30 years old earn less than $70,000 but are buying houses averaging $400,000.
  • 74% think houses are overvalued, but…
  • 77% believe this is a good time to buy.

Well, there ya go. The real estate illusion. Boomer parents see a windfall increase in their equity so they borrow against it to give cash to their children to buy into the same market, creating more demand and putting further upward pressure on property values. The word ‘ponzi’ floats to mind. If this thing ever stops rolling, and starts reversing (it will), illusory equity will have turned into real debt.

It’s a mystery how smart, uber-educated kids who generally believe their parents are fossilized, if lovable, dorks can fall for this. How can 77% accept that buying something when it has never before cost this much, and involves unrepayable debt, be wise? Can’t they Google? After all, every boom in history has ended in a bust. Where there is an expansion, there is a contraction. The greater the increase, the more painful the decrease. And it’s always exacerbated by debt.

So, stop worrying about the Chinese and reflect more on the irresponsibility of parents. It’s also worth remembering that government policies – from 5% down insured mortgages which strip away lender risk to first-time buyer tax credits to free capital gains on houses – have created a nation steeped in house porn and now pickled in debt.

Somebody said this election was about change. Funny.

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The blind date Mon, 14 Sep 2015 20:34:52 +0000 YOGA1

Like most babes, Michelle knows the way to my heart. “I’ve been reading your blog for a few years now and really appreciate your efforts to demystify some very important financial information,” she coos. “I’ve really come to appreciate how little the average Canadian understands about markets and investing, how simple it really can be if you take the time to learn the basics, and how much risk is involved in buying what should just be a place to live.

“Now that I’ve buttered you up, I’m hoping you will post some further information for us ignorant masses about interest rates.”

Ah, Michelle. You’ve picked a sweet week to open up a discussion on the cost of money. Come Thursday afternoon, there will be little else to yak about. History is about to happen.

“Recently, I had a conversation with my mom about–what else?–real estate, prices,” Michelle continues, “and what will happen if this party doesn’t end. Or it does end.

“Rates are staying low,” my mom said. “The BOC can’t raise them now.”

“That doesn’t mean mortgage rates won’t go up,” I said smugly, “Fixed-terms will go up when the US Fed raises interest rates, because fixed rates are set by the bond market.”

Did I sound smart? Because I have no idea what any of that means. How exactly does the bond market figure in? And had no answer to her question, “Then why do fixed rates go down every time the BOC lowers rates?”

Can you please explain? So I can feel smug again?

Yes, Michelle, you did good – right up to the ‘no answer’ part. Your mom is wrong, because while Canadian interest rates may stay in the ditch for a while, the era of awesomely cheap money is definitely coming to an end. More on that in a moment.

First, an answer to your smartass parent’s second question: fixed-rate mortgages fall (usually but not always) when our central bank lowers rates because the benchmark 5-year Government of Canada bond also falls. That happened back in January, but to a lesser extent in July. So a fiver mortgage dipped to an historic low point at the end of last winter, and has since swelled a little.

The reason this won’t hold for the future? Regardless of what the Bank of Canada does, what the Fed does matters more. History proves it. The Canadian bond market has followed the US debt market in close correlation 93% of the time over the past 25 years. And our central bankers, poodles that they are, have followed the lead of their American counterparts also more than 90% of the time over the same period.

Here, show this to Mom. Fed rate in dots, Bank of Canada in solid:


Since December of 2008 US interest rates have been at low tide – in a range between zero and a  quarter point. This was an emergency situation created to mitigate a credit crisis by flooding the economy with cheap money. It was augmented by an aggressive Fed policy called ‘quantitative easing’ which saw Washington spend trillions buying government bonds and then shovel all that money into chartered banks with a mandate to lend like little wizards.

It worked. The US has created 13 million jobs in the past five years, corporations have recovered, deficits fallen and the economy repaired. All that stimulus was no longer needed, so the Fed ended QE last year (the macroeconomists who read this blog moaned it would never happen), and is now about to start raising rates.

Why? Because if rates stay this low inflation could roar back as wages and prices rise, plus asset bubbles emerge (real estate’s a good example). People like your mom think the cost of money will never rise, so why not borrow and spend? The solution to inflation, of course, is w-a-y higher interest rates, and nobody wants to go there.

Now once the US central bank starts to raise rates, it won’t stop – at least not for a couple of years. The expectation is that current level of under one quarter will end up being about 3% by the time this ‘tightening’ cycle is complete. The Fed types has indicated everybody should expect about 1% more per year. This could change if the economy heats up a lot (more hikes) or takes a China-induced hit (the hikes stop). In any case, up she goes.

The tricky part is when it might begin. That brings us to Thursday. The Fed may well pull the trigger that afternoon at 2 pm. If not, it will happen towards the end of October.

Lots of people think this week is the go-date because the economic data lately has been strong, the Fed has been patient long enough and more waiting won’t accomplish anything, plus Fed boss Janet Yellin doesn’t want to be seen delaying her decision because stock markets have been roiled. That’s what her predecessors often did, and she wishes to change course. Likely she will.

While everyone knows this is coming, it will nonetheless be a shock, Michelle. The world is drunk on debt after a decade of cheap money, and taking away the punchbowl won’t be easy. The US dollar will go up, commodities, our dollar and emerging market currencies will fall, realtors will quiver, stock markets will flop around like a landed carp and your mother will think the world is run by idiots.

She won’t be entirely wrong.

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Choices Sun, 13 Sep 2015 16:51:12 +0000 RAIN modified

If you’re voting for a better economy and more jobs, good luck. No party can deliver. As the US and China go, so do we.

If this election is about financial security for you and your family, well, that’s another dog. Your choice could have big long-term consequences. For example, the Liberals want to drop taxes by 7% for people earning between $45,000 and $89,000, which would yield a tax cut (they state) of about $650 per person per year. To finance that they’d raise taxes by 13% on the paltry 313,000 people in Canada who earn more than $200,000. They’d pay an extra $9,600 each, which means over 50% of wages would be removed in tax.

By the way, about one-third of all those higher-income earners are doctors, who make an average of $328,000. If your community is lacking in medical care, don’t expect that taxing them more will make it a whole lot better. (An orthopedic surgeon in the US earns $440,000, compared to $208,000 in Canada and $324,000 in Britain – all in US$.)

The NDP is not planning to diddle with tax brackets, except for corporations. They propose lowering the small business tax rate and hiking the one for big businesses, in order to raise about $3 billion. Of course, large companies have no national allegiance, so tightening the screws on profits too much could lead to a factory or head office crossing the border where costs are less. So much for jobs.

The Dippers, by the way, would spend all of the $3 billion on cheap day care spaces, leaving nothing additional (except deficits) for infrastructure spending or keeping their promise of $36 billion more for the provinces for health care – to pay all those expensive doctors. This is NDP math. Like taking a new mortgage on the same house 11 times.

The Libs would also give families more money than the Cons for each kid, while both the opposition parties would nix the current Harper plan to extend income-splitting to all families with stay-at-home moms.

There is no doubt, in other words, that both the Liberals and NDP would have to sustain deficits for a long period of time in order to pay for the spending proposed, since tax increases alone cannot do the trick – and will exacerbate our existing tax load. Trudeau has already said that, if elected, he would continue Mr. Harper’s legacy of spending more than is raised. By the way, since coming to office in late 2005, the Conservatives have added $135 billion in new debt (check this out). More to come. Tell your grandkids!

What’s likely the defining financial issue for your family, your finances and your personal economic future is the TFSA. As you know, the Cons did what they promised and jacked the annual contribution limit to $10,000 this year. That means you can take up to ten grand in after-tax savings, invest it through this vehicle and the money you accumulate will not be taxed when you remove it – presumably to finance your retirement. The Liberals and NDP, if elected, would reverse this. Trudeau would roll the annual limit back to $5,000, and Mulcair to $5,500.

Both argue this is somehow unfair because most Canadians cannot invest to the limit since they lack the money. They neglect to mention TFSA contributions are made from income that’s already been taxed and, unlike RRSPs, there is no reduction in tax or loss of direct federal revenue when the plan is used.

Also unlike RRSPs, the benefit for which rises dramatically for rich people, the TFSA limit is egalitarian and uniform. Everybody gets the same chance, regardless of income or wealth. Additionally, it is cumulative. A 25-year-old might not be able to use it now, but when she’s 40 all that room will be there to benefit from. Finally, encouraging private savings is massively cheaper for society than trying to create and administer a public income support system, especially with an aging population. This is why I first proposed the TFSA to that elfin deity known as F.

As you mull this, it might be useful to have some facts.

First, consider a couple of fortysomethings deciding to max their TFSAs as the primary retirement vehicles. If they start in 2015, contribute the limit thereafter and invest in a balanced portfolio earning a long-term average of 7% (consistent with the last thirty years), here’s how much tax-free money they will have accumulated in 25 years, under these political plans…

Conservative ($20,000 max between them): $1,373,529, of which $853,000 is growth.
NDP ($11,000 max between them): $755,441, of which $469,000 is growth
Liberal ($10,000 max between them): $686,764, of which $426,000 is growth.

Now, for a 25-year old single person who decides to focus only on her TFSA, and is able to make the maximum contribution annually (no inflation adjustment), earning a 7% average investment return over 40 years, here is the scorecard:

Conservative ($10,000 max): $2,146,095 (growth is $1.7 million)
NDP ($5,500 max): $1,180,320 (growth is $954,000)
Liberal ($5,000 max): $1,073,047 (growth is $868,000).

If you trust politicians more than you trust yourself, if you think wealthy people should pay dearly for their success, if you believe employers will embrace lower profits and doctors less compensation and you’ll never be an investor, you have two great choices. If you just want change, without more tax or more government, you have a problem.

Isn’t democracy wicked?

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The irreconcilable Fri, 11 Sep 2015 22:46:04 +0000 SEAL modified

Six sleeps only now until we know if the Americans will be raising rates. The current betting? About one in three that the hike will come on Thursday, two in three that it will be in October and three in three that it will be by the end of the year.

This is called “tightening of monetary policy,” in case your boyfriend happens to ask. It’s also referred to as “the removal of stimulus,” which might equally interest him. The US central bank wants to throttle back on cheap money since the economy there is growing smartly and (as with your mate) too much stimulus could lead to explosive consequences. So better to reduce the incentive to borrow and spend too much now before inflation jumps and pesky workers start demanding more raises.

The contrast between them and us is stark. While the Bank of Canada opted this week not to drop its key rate for a third time in 2015, lots of people still think another chop is inevitable. “The Bank of Canada’s decision to leave its key policy rate unchanged at 0.5% last week was largely as expected in light of the recent news that the real economy returned to growth in June,” says economist David Madani. “Nevertheless, we expect GDP growth to be pretty underwhelming in the second half of this year and, as a result, we still anticipate that the Bank will be forced to cut rates for a third time to only 0.25% soon.”

That would be a big deal – a rate cut in Canada happening just as the US moves rates higher for the first time in a decade. You can just imagine where that would leave the loonie. By the way, the next possible date for a Canadian rate change would be Wednesday, October 21st – just two days after the federal election, which will also be consequential. After all, if the tax-and-spend Dippers or the we-love-deficits Libs gain power, expect the dollar to already be wobbling. Should be one heck of a week.

Now, let’s talk about you.

The discussion here yesterday on whether or not it’s fair or insane to rein in TFSA contributions (as Mulcair and Trudeau have promised) nicely illustrates what’s going on in our society. On one side there are the bulk of people who have saved little, if anything, and believe anyone better off than them must be crooked, parasitic, exploitative, privileged or an evil, wealth-sucking ‘rentier’. On the other are those who have money or aspire to be affluent, and think the first group are commies.

Collectively, there’s no mistaking the fact we’re in serious crap. The gap between these two groups is growing wider by the day. There are only about 250,000 wealthy people in Canada (investible assets of over a million), even though 70% of us own property which is more inflated in value than ever. The trouble is, that real estate comes with massive debt, the extent of which we learned on Friday.

StatsCan says it’s hit a new high of just under 165% of after-tax income. Given the fact lots of people have no debt, the ones who do are shouldering massive amounts of it – mostly related to real estate. Mortgages and secured lines of credit are romping ahead about 6% a year. Overall credit growth was just under 2% in the second quarter of 2015, at which time income grew by 0.8%. So, yeah, debt is increasing more than twice as quickly as wages. If interest rates were not at historic low level, this would be an economic disaster.

That, of course, is why we obsess on this pathetic blog about the future direction of rates. Most people, including almost everyone under 35, believe rates will never rise again. Older people, in general, understand what a jump in the cost of money can do. They’ve lived it. Given the fact older people tend to have more assets and income than younger ones, this just adds to the fun we’re all heading for over the next two years.

By the way, if you think voting for the NDP or the Liberals will delay the inevitable Bank of Canada, mortgage fate and LOC increases, think again. Our central bank and bond markets have followed the US ones almost 95% of the time over the last quarter century, and there’s no reason to expect a change now. The federal government does not dictate interest rates, which have only one long-term direction in which to travel.

Well, after the discussion here yesterday there’s little more to be said. The divisions between us are stark and economic in nature. Irresponsible election candidates are making them worse. Telling people their lives will be improved if the affluent and corporations are dinged is a lie. Plain and simple. You could screw over every one of the 254,000 rich people in Canada and average families would see no benefit. Besides, you can be sure a bunch will leave. Wouldn’t you?

Maybe this weekend we should look at this through the eyes of a homeless Syrian family running from the cops down a railway line in central Europe. Let’s try it.

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