In the bag

CAT BAG modified

Want to feel superior to all the poor souls who write me? Sure ya do. Let’s dive into this week’s mail bag.

“A co-worker recommended I contact you with regards to what is left over from the sale of our cottage,” says Miranda. “It isn’t a substantial amount, but it does represent an opportunity that I would like to gently nurture into something worthwhile.

“We have choices – pay down the mortgage, a TFSA, major renovations to the house which would be awesome, and/or what we are currently doing is letting it sit in the bank doing nothing. Eventually, enough weekend getaways and small purchases, I know it will be gone. Currently, my husband is not working, and that is making it even harder for him to agree to anything. I believe we can live on one income for the time being and still be able to do the renovations and live well without squandering our hard earned nest egg. Would you be willing to set us in the right direction?”

Sure. This is easy. The fact your husband’s unemployed should be the overriding factor. Your finances are uncertain, and while you can live on one income (for a while) it’s hardly the time to be throwing money at an awesome home reno you obviously don’t need. Forget that.

As for paying down the mortgage, why? It’s won’t reduce monthly payments and will increase equity in an asset that probably constitutes most of your net worth. Nope. Too much concentration risk. Besides, if the home loan has a rate of 3% or less, your money can work harder inside a tax-free account.

So, yeah, that’s the best choice. Between the two of you there’s close to $100,000 in contribution room. Stick the cash in there, invest it according to the balanced-diversified mantra of this blog, and don’t even think about taking it out for home improvement. Job one is finding work.


Here’s Bogdan, 35 years old, with wife and family – an immigrant dude smart enough to start reading this blog four years ago when he came here. And what says ‘Canada’ better than ‘GreaterFool’?

“We live in Vancouver. At the moment me and my wife have our TFSA maxed out (almost 70k invested in ETFs , preffered shares or other stocks) and also opened a RRSP this year for me (aprox 11k). We also have some cash (25k) in our banking account.  We also have a 2y old daughter. Between both of us we make aprox 100k. I am thinking in investing into house as an investment not to live in. One location that I have in mind is Nanaimo. If you could provide an opinion it would be great. I am sure that there are some other people interested in learning how to invest in real estate.”

Bogdan, baby, your total net worth is only about $100,000 and you’re considering blowing it all on a house in Nanaimo? That you won’t live in? You’ve done great since getting here, so don’t blow it now.

For starters, buying a house in Diana Krallville is not an investment. It’s a folly. You’ll never get a positive ROI from rent, and there’s no promise of future capital gains. Moreover, there are closing costs, commissions, insurance, maintenance, property taxes and evil, weird tenants to deal with. Putting all of your net worth into a single asset means no balance, no diversification. And how about your kid? Should you not be responsibly starting an RESP for her instead of subsidizing some biker-renter on the Island?

Finally, have you been to Nanaimo? Best strip clubs on the coast. So I’m told.

By the way, Bogdan, you should check out this note, from Jennifer – also in Vancouver.

“The absolutely insane is absolutely normalized here. It’s scary. Hubby and I (late 30s proper professionals) earn $245k gross, have no debt, won’t buy into Vancouver, and regularly get told we need to buy a detached house in Vancouver now.  All of our colleagues, professionals in their late 30s/early 40s earning $200k+ together, that have bought into Vancouver have only done so with family $ or they bought in over 10 years ago and reaped the rewards. We could be jealous of that, but then again our housing costs all in account for about 8% of our gross income. We sleep at night, save and invest like crazy, and don’t think twice when booking a vacation. Yet we’re considered the crazy ones here. Are we?”

Crazy like foxes, Jen. Keep earning, investing and waiting, debtless. Your day of retribution will come.

Meanwhile in Toronto, Ethyl and Jonnas already have real estate but because it’s rutting season and juices are flowing, they want more.

“Hey Garth, my wife and I (47 & 48)  wondering if you could share some thoughts on a decision we are contemplating….we own a home in Toronto – paid it off a while ago and have built up value in our other various investment accounts nearly equivalent to the value of the home.  We are thinking about a 2nd property in Collingwood….as we love it there on weekends ski/hike etc (it’s  4-season..could likely be a retirement home for us).   Would mean about 100k loan using some cash and other short term investments we have.  But…the market there is nuts too.  Sales in a few days, listings with multiple offers…..we have said repeatedly we will offer only where we feel there is good value.   We don’t expect too much in terms of investment return.  Should we just drop that pursuit entirely and continue to rent when we need to?”

It’s hard to find a more efficient place to flush away money than a cottage. But people continue to do it. Sales are up about 5% in the region year/year while listings are down almost 20% – resulting in quick sales and the occasional bidding war as the males lock antlers.

Cashing in your investment portfolio as well as adding new debt to get a place you might spend 20 weekends in (or 13% of the year) is hardly rational – unless you have a seven-figure portfolio salted away on the side. Trying to justify it as a “likely retirement home” two decades from now is lame. Nobody wants to retire in the rocks outside of Collingwood. Trust me. And once real estate markets turn, it’s the recreational segment that is squished the earliest, and the hardest. You’re far better off from a net worth and risk standpoint to rent.

There is no ‘good value’ among the pines, unless you’re a beaver.

Big news

TRUMP modified

Prince, Bowie and Shandling aside, the Boomers ain’t dead yet. Far from it. The last one doesn’t turn 65 for another 15 years. Besides, sixty-five is the new 45. So suck it up.

The boom lasted two decades, during with 8.2 million babies were popped – about 415,000 a year. That means we now have almost 8,000 people a week becoming seniors, starting to collect their OAS & CPP, and riding public transit to work in their executive positions at half fare. Wo-hoo. Boomers’ moms, on average, had 3.7 kids while today’s moms birth half that number.

So about a third of all the souls alive in this country are part of this cohort (post-WW2 immigration bolstered the numbers to 9.2 million), which means by the time they are all old farts, a quarter of the population will be over 65. Currently it’s 12%. That’s big news.

Millennials should be aware of two things. First, taxes are going up. Like, a lot. Your guy Justin will be adding $125 billion in debt over the next four years, which will ensure a tax increase down the road, plus all these Boomers constitute a health care hurricane. With 1,600 more people hitting retirement age every working day of the week (and only 1,040 new babies being born), get ready. Your parents are about to become your worst nightmare. Inheritance? You wish. (By the way, didja hear about poor Alberta?)

Second, Boomers have more houses than anybody and (generally speaking) not enough money to last for two or three decades. Thus, real estate equity will have to be crystallized in order to provide monthly cash flow. Already this is starting to show. (Seventy per cent of us own houses but 90% of Boomers have property.)

A new Re/Max poll conducted by Leger Research found that among Boomers aged 55 to 64, a whopping 56% are thinking about selling in order to muster a retirement nest egg. Smart, of course. Real estate markets in a few places (GTA and YVR) are utterly bloated, while in others (Victoria, 905, Montreal) they’re near peak levels and still others (Calgary, Edmonton, Winnipeg and that flat province) are slow but not yet cratering. So hardly a better time to cash out.

But most won’t do so. People in Toronto or Vancouver worry about downsizing into a market with a deficit of houses and a surfeit of horny buyers. Plus, so long as prices rise, human nature (greed) prevents a majority from doing the rational thing, and bailing. All that will change, once markets start to decline as mortgage rates swell. Trust me. It’s coming.

Meanwhile the stats on liquid wealth accumulation in Canada are truly sad. RRSP contributions have been withering annually, while 80% of tax-free accounts are in pay-nothing, interest-bearing savings products. Forty per cent of families live paycheque-to-paycheque and half of us say we’d be screwed missing one paycheque. Household debt, famously, is at the highest level in recorded history, and substantially above the point at which the US middle class blew up. The economy may have started to turn upwards in the last few months, but so has personal borrowing. It’s now running four times the rate of increase in incomes.

In short, every day more net worth in this country becomes concentrated in residential real estate. And because the Boomers own more of it than anyone else, now headed as a herd into their thirsty undies and plastic-hip-sex-pill years, you should expect a big housing sell-off ahead. Some of them will cash out, invest the money and live off the proceeds. Some will downsize and consume the extra capital. Some (poor fools) will believe what they hear on TV and get a reverse mortgage. Others will give their houses to their kids, and move into the basement.

There are some lessons here.

Parents with questionable retirement resources giving their adult kids money for down payments need their heads read. Most can’t afford the largesse and this is absolutely the wrong time to be pushing your offspring into housing. Every indication is that our property bubble will end, and when it does a demographic tsunami may well commence. Why not wait?

Boomers must get far more serious about the financial path ahead. Life’s long. The greatest risk around is running out of money. Houses cost a lot to own, and the equity in them won’t buy the groceries. Unless you have a juicy government pension or a seven-figure retirement fund, you’d be wise to sell, invest and rent. Given the historic collapse in interest rates (which will eventually end) how could there be a better time to capitalize on real estate excess?

The fact 56% of Boomers are starting to think this way should tell you something. Don’t wait.

Has there ever been a better time to sell?