The heartbroken

chimney modified

Ruben admits he was surprised to read about heartbroken hipsters littering the housing landscape, when I referenced them a few days ago. Then he and his wife went to some open houses on the weekend.

“Of the 3 houses we went to, all of the other potential buyers were hipsters! Each had that neatly shaven ‘beard’, short sides, and hair combed neatly to the side, or with a baby in one of those baby carriers,” he says.

“I was wondering, how did you know that hipsters were driving a good part of the market, and many were heart-broken? I completely believe it after this weekend.”

Well, RBC knows it too. And BeeMo. Plus all the other lenders that are slavishly targeting the Millennials, that innumerate, over-educated, under-experienced clot of people whose life goal is to become helplessly mortgaged.

These are the ones turning trash listings into almost-million-dollar homes. The net effect of Ottawa cutting off seven-figure houses from CHMC insurance, in a market short of listings, has been to morph $750,000 properties into $900,000 ones. And why not? When you’re only plopping down 5% of the purchase price, and extra $150,000 amounts to a lousy seventy-five hundred bucks. Mom’s good for that. As for a bigger mortgage, who cares? Millennials never expect to pay it off. Houses always go up, so you just roll it over until you die, then it’s the bank’s problemo.

And you wondered how the average SFH price in Toronto just passed $900,000. Silly you. Hipsters.

Well, this crotchety old blog has only two things to say, as it sits rocking on the front porch in a cardigan, cradling a Remington. First, more evidence we have reached a peak in real estate values. The Teranet-National Bank price index has stalled. For the first time in 15 years it failed to register an increase between February and March. If I were buying with 95% financing, that would toss my cookies.

Second, do these kids actually know what they are purchasing? Especially when it comes to decades-old semis in ‘emerging’ neighbourhoods when former owners were too busy surviving to maintain their dumps?

Roger thinks not. He’s a home inspector who would like his Ontario company kept out of this blog because, “I can’t afford to slap the hand that feeds.” I think you might want to hold down a hipster, and read her this:

I get a ring side seat to the house horny in all of their glory.

First question I ask my clients is this: “Do you have any concerns regarding this home that you wish to address today?”  With younger clients, the answer is, “Yes – we want to be sure that there is nothing here that will cost us money to fix.  We won’t have a lot of cash kicking around after we purchase this home.”  At this point my radar goes up.  Why?  Because these nice people, try as they may, have scrimped and saved but they just don’t have a lot of money – but what they can afford with their modest down payment is what I’d call a sock burner. They’re often older, dirty and unkempt houses, so after I’ve been in them I don’t bother washing my socks – you’re better off just to burn them.  Sure, they have some fresh paint over the cracked plaster and maybe someone slapped in a Home Depot special kitchen, but at their heart they are disasters. Rotten structure, failing masonry work, asbestos, knob and tube wiring, galvanized plumbing, mould and water leakage, old HVAC components and roof coverings as well as a host of other items that are expensive to correct and insure and may make the home difficult to resell in the future.

Once I’m done with my assessment, this is where the realtor’s really need to turn it up to 11.  We’ve now determined that this “cozy, move in ready” home will likely require between $40-50,000 in work.  This is due to the fact that prior owners have not looked after or updated the home.  The realtor takes the clients aside and tells them that my estimates are for worst case scenario, I’m embellishing a bit, I’m ultra conservative and the realtor really thinks that they can do this – they know their clients! Plus, they know “a guy” who can help them with the renos – for cash!  They (the agent) have the paperwork right here (waiver) and they need to get this baby firmed up so the clients can become proud, new home owners. Remember too, the vendor’s going to continue showing the home and the next person might swoop in with a clean offer  And if all that was not reason enough to just rush in and sign, if they don’t take this home, it’ll mean another 3 weeknights traveling around and looking at houses.  That’s a crazy waste of time!!!  Just sign here…

Everyone is horny now – agent, buyers, sellers.  Everyone.

Then I get a phone call a couple months down the road.  Same couple. They now have some concerns.  They were firming up the terms of the insurance and their insurer has insisted that within 90 days of close, the galvanized plumbing and all knob and tube wiring need be replaced, or the policy will be deemed void.  They are facing the potential of having no insurance, which means no mortgage.  They’d like to know how I missed this.  I subsequently direct them to pages 46 and 63 of their lengthy report (which I take enormous efforts to write and no one ever reads), where it indicates that such materials are present and they are advised to seek the services of a qualified plumbing/electrical contractor to further investigate to determine the extent of such materials and systems installed, evaluate their condition and correct and/or replace as required, based on the contractor’s further evaluation.  I suggested they budget for significant cost associated with the replacement of such systems as required and also indicate that their presence may inhibit their ability to insure the home.  Other end of the phone – silence.  Once the nice couple can begin to form words again, they tell me that their agent said I was being “very conservative in my assessment” of the home and they figured they’d be able to spread the costs out over the next 10 years.  They never expected this.  Now they are facing $10,000 in repairs in the first 3 months.  The couple is no longer horny.

If they did their due diligence and really thought it out they probably would have concluded this wasn’t the place for them and kept looking or sat on the sidelines for a bit and continued to rent.  Instead, they are going to need to get second jobs to pay for electrical and plumbing systems that really won’t add any value to their home.  No saving for retirement.  The idea of starting a family, the reason they wanted bigger digs, is pushed out indefinitely for the time being.

Agent’s happy though.  They have their cash in hand and like Teflon, nothing will stick to them. Rinse, wash and repeat.  See the same thing over and over.  Agents rushing clients into quick sales and wiping their hands clean after the fact.  Lives destroyed or at least significantly interrupted.

I’d be the first one to tell you that very, very, very few realtors actually have their client’s best interest at heart.  So many are in it for the quick money, the “prestige”, their face on the back of buses. Especially the younger ones.  They show up in their $75,000 car, dressed in fine clothes and looking every bit the successful realtor.  A rock star really.  Fact is they’ve never sold a home before and couldn’t tell the difference between their ass and a hole in the ground.  The industry as a whole needs to be cleaned up and some oversight with teeth put in place.  Until that happens, I’ll continue to watch nice people struggle through significant hardship because they were deceived by the one person they thought they could trust.

Treats

TREATS modified

Thanks in no small part to the swollen river of cash that gushes into this blog monthly, I have the mother of all tax remittances to make, come two weeks Wednesday. Some days I wish I were just an NBA star. Or Leonardo DiCaprio. Or Justin Beaver. Then I could merely TurboTax.

For a lot of people, April’s when you wish you’d been on the ball in February, making a honking big RRSP contribution and thereby avoiding a tax bill. As you know, up to $23,800 a year can go into one of these (or 18% of your earned income), with that amount deductible from taxable income. Better still, every dollar you ever missed contributing can be squirreled, then used to offset taxes in a fat year. You end up paying less tax – from a third to a half of what you set aside.

But RRSPs are out of favour. Makes sense. All the money put in there eventually becomes taxable. Unlike the cheap rates you get with capital gains or dividends, here the money’s taxed as heavily as income. Lots of people have decided the odds of taxes being higher in the future offset current benefits.

But what if you could take money out of an RRSP twenty years from now and be tax-neutral – in other words, not lose a third of it to the voracious burghers in Ottawa? Could be a game-changer.

Well, there are ways. A complicated one: when you hit retirement, borrow a mess of money and put it into an investment portfolio. Then withdraw RRSP to cover the interest-only payments on the line of credit that financed the account. All of the RRSP withdrawal is taxable, of course, but all of your interest is tax-deductible. So, if you orchestrate things right, you get to slowly collapse the retirement plan and transfer the money to the non-registered portfolio.

But here’s an easier one. Use your TFSA to offset the tax you’ll face down the road when you blow up your RRSP. As you know, they both do the same thing – grow money in a taxless environment so it multiples faster. But while an RRSP contribution nets a substantial tax reduction, putting money into the TFSA does not. Conversely, withdrawing funds from the tax-free account is (of course) tax free.

Here’s an example. Let’s say you make $95,000 a year working in the Spell Check Department of this blog. Your average tax rate on your entire income is 25.3%, and you end up taking home $70,500.  If you make a $10,000 RRSP contribution (of the maximum $17,200 allowed), you’ll get a tax break of $2,570 and a refund cheque in that amount.

Over twenty years of doing this (ten grand into the RRSP), and earning an average of 7% within the retirement plan (what a balanced portfolio did over the last decade, which included the ‘08 crash), then in two decades you have $448,600. Taxable.

Given a tax rate of 30% (assuming a few increases along the way), that means you actually have $314,000 to spend on babes and knee replacements, while losing $125,000 to the feds.

Now if you were smart enough to put the annual $2,570 tax refund into your TFSA for twenty years and invest it for the same return, the problem might be largely solved. In two decades that little sucker would bloat to $115,300, and all of it would be available to you without any deductions. In other words, almost enough to entirely offset the tax payable on the RRSP.

As you anarchistic, government-loathing iconoclasts will note, this is a simple and effective way to use a shelter to permanently reduce your taxes and mitigate the tax-deferral on retirement funds. You use money the feds give you to fund an investment vehicle that eliminates the taxes Ottawa let you postpone. You didn’t even have to earn it.

Revenge is so underrated.