The divide

STUDENT modified

Shot yesterday at the CIBC Branch in Waterloo University at  the Student Life Centre, by Blog Dog Deippak.


A few days after saying housing affordability on the West Coast was being “crushed,” the country’s largest bank reported elephantine profits. On Wednesday RBC revealed it’s been making about $1 billion a month, up 17% from last year, and enough to once again increase the dividend it hands over to stockholders every three months.

It was the second bank in as many days to shrug off energy, housing and slow-growth issues and announce boffo earnings – and happened at the same time oil prices were being creamed on world markets. The profit romp also comes as the country’s showcase real estate market slides precipitously, shot through its horny little heart by an ill-advised, politically-motivated, dumbass tax.

The point of this contrast?

Simple. The world’s dividing neatly into two camps. Those who have exchanged all their money and taken on epic debt to invest in stuff. And those who have chosen to stay liquid. For the past eight years the Stuff People have chortled about their windfall gains and how their giant leverage play paid off. For the next few years, the Liquids may turn smug, watching those pickled in debt slide under the waves as equity tanks.

The Stuffers think financial markets are risky, volatile, dangerous and, if not rigged, certainly stacked against the little guy. The Liquids believe stuffing all your net worth into one asset on one street in one city for which there is no capital market is insanely speculative. Plus you have to clean eavestroughs. Of course, as this pathetic blog keeps pointing out, balanced people try to bridge the extremes. They love owning real estate. And they adore having liquidity. Always a Plan B.

What’s happening in Vancouver these days is pale fire to what we might expect in Victoria, the GTA, Hamilton and other markets in the coming months. Residential real estate was already cracking under its own bloated weight even before the BC crazies decided to slap a stamp tax on the Chinese. Now the market’s frozen. “As American politics are currently at that forefront I offer a tag line borrowed from the Democrats who claim that Together we are Stronger,” says Van realtor and blogger Larry Yatkowsky. “The 15% Property Purchase tax like the Mexican wall proposed by Trump is untenable at its most base level.”

As with Trump (or Brexit, or the rise of the nutbar right in Europe) there are always economic consequences when people vote in a tribal fashion, or cause their local government to think that way to retain power. The evidence is now before us in spades in BC. It’s not so much that foreigners have stopped buying (they have) but that locals who do over 90% of all deals have retreated out of sheer uncertainty. Since real estate runs on emotion and debt, not corporate profits or growth, when greed turns to fear, everything changes.

So here we are. In the first two weeks in August sales dropped 66%, which came after plops of 18% and 31% in June and July respectively. The evidence of decline has been well documented here, and there’s no bottom in sight yet. First sales plunge, then values ricochet lower, always stickier on the way down than the trip up. But the move lower is inevitable.

The cost of houses in Vancouver, Toronto and a few other wannabe cities has detached from the local economy. Borrowers have heroically over-extended, gorging on cheap money handed over by smiling RBC mortgage specialists (and others). As a result of increased demand and reduced supply (listings drop in torrid markets and swell in cooling ones), prices have bloated. Everybody knows it. This is all people talk about. The media is obsessed. Have you seen a single day go by without the Globe and Mail running a housing headline? Me neither.

In an environment like this – where we all know houses are hot and people are horny – it doesn’t take a whole lot to burst the bubble. A rate hike. A few plant closures. Lending restrictions. Or a tax.

So now the real risk contained in residential real estate is exposed. With a wall keeping the Chinese dudes out and the locals on the sidelines, the housing market is suddenly far more exposed to traditional forces – like the ability of people to afford mortgages, based on household income. Oops. The Canadian economy has shed 110,000 full-time jobs in a mere two months. Our trade deficit is massive – at a record level. The whole economy has just contracted. And a candidate for US president wants to tear up our free trade agreement.

I’ll admit it. Those who eschewed my advice to seek balance and instead snorfled the biggest mortgage they could get, snapping up inflated real estate have lucked out. It was a once-in-a-generation and localized opportunity. I sure hope you took the profit. In the year ahead you can count on higher US interest rates, higher Canadian taxes and a struggling economy. The potential for correction in many places is profound.

As for RBC and the rest of the banking cabal, they’ll sail through it. The citizens of Maple have no history of big mortgage defaults, and are unlikely to start now. They’ll keep paying even as equity leaves town. Besides, such an overwhelming amount of mortgage debt is taxpayer-insured that bank exposure here is a fraction of what it was when the US housing gasbag exploded.

Investors don’t have a lot to worry about. Others have much.

“It’s not just that there’s less buyers in the real estate market: you’ve got all these people whose jobs are dependent on the over-exaggerated real estate market. They’re taking a hit, too,” Van academic Tsur Somerville said this week. “Whether they be realtors or people in construction or stores that sell granite countertops or Maserati dealerships, they’re going to see an effect from it.”

Meanwhile the bankers handing out mortgages like candy, no proof of income, continue to goose their dividends. What days these are.


Losing it


The easiest money you make is what you don’t send to the government. It’s called tax avoidance. It’s legal and is the antithesis of the ‘shared society’ concept T2-loving Millennials have embraced. So if you have cowboy tendencies and are of dubious social value (like me), it’s useful to know how taxation happens. Or, you can just trust everyone and hand over your income. That should work out well.

When you work for it:

Poor schmucks who toil working for employers are sitting ducks for taxation. Your boss, by law, has to record what you make, withhold taxes at source, remit them (monthly) then issue verification to you and the feds. The more you make, the more you pay under our ‘progressive’ system, with the only serious relief coming from RRSP contributions. (But every time you put money into an RRSP it becomes taxable again.)

In you earn a hundred grand in Ontario, for example, the basic tax is 25% of your paycheque, leaving you with just under $75,000. But while the ‘average tax rate’ is 25.2%, the ‘marginal tax rate’ is 43.4%. That means of every extra dollar earned above this income, you’ll lose forty-three cents. Ouch. This is a really good reason not to buy a rental property, because…

When you collect rent:

Rent’s taxed the same as employment income. So if you earn $100,000 and shell out 25% in tax, then collect $12,000 in rent, the bite is huge – about $5,000 in tax on the rental income alone. This is something most amateur landlords usually discover the hard way.

When you earn interest:

Ditto for interest. It’s also 100% taxed since every dollar in piteously-low returns from braindead GICs or flaccid HISAs is heaped on top of your employment income and hit by that marginal rate. Yes, it’s bad enough when a GIC yields 2% and barely keeps its nose above inflation, but having to pay serious tax on it – often on returns you haven’t yet received – is nuts. And silly people think this is ‘risk-free’. Ha.

When you invest for a gain:

Let’s contrast that with the money you might make owning an ETF instead which, over time, rises in value. The profit here is called a ‘capital gain’ and half of it is not subject to tax. Seriously. Unlike rent or interest, which is 100% taxable at your marginal rate, a capital gain is only 50% subject to pillage. So, someone with a two million-dollar portfolio who harvests a $100,000 gain in higher asset values gets to keep half of it, while paying tax on the other half at a rate determined by their income. The maximum that would amount to (for someone making more than $230,000) would be 26%.

That’s right. The dude with two mill and an income of almost a quarter million pays tax at the same rate on his investment income as the guy working for a $100,000 salary. That’s why rich people stay that way, and don’t have GICs.

When you get investment income:

The same principle – that people with investments have better sex lives than employees – holds true when it comes to taking an income stream from your portfolio. Many investments (such as preferred shares, stocks or some ETFs) pay through dividends, which come with the dividend tax credit. This complicated little break results in a lower tax rate, and can result in a $50,000 tax-free income. How cool is that? It’s also possible to take an income stream in the form of ‘return of capital’ from a portfolio, which is non-reportable. Thus a retiree could have monthly cash flow but stay in a subterranean tax bracket, with no clawback in the government pogey. Moe reasons for Millennials to hate us.

When you work for yourself:

Finally, self-employed people have the greatest flexibility. They can set their own salary level, thereby managing the amount of RRSP contribution room created and the level of withholding tax. They might also pay themselves through dividends, splitting the tax load with their businesses. They can often invest through the corp, enjoying the lower business tax rate. They can repay themselves any personal investment in the business, tax-free. Plus, legitimate deductions abound for everyday expenses, while putting spouses or kids on the payroll, splitting income. Sweet.

Don’t focus on what you make. Obsess about what you keep.