The bully

It’s just an ugly half-century-old bung on 55 feet of uninspired dirt in the worky East End. But when it went up for sale eleven months ago, realtor Dan was surprised.

“So I sold the place with a bully offer,” he says. (That’s when a purchaser disregards the seller’s desire to accept offers on a certain date and ponies up an extreme bid to bully everyone else out of the way.) “In this case the seller was wanting to wait until the listing came out. That didn’t happen. The house had no improvements for 20 years, and even had just 60-amp service. So I sold it to him. It was all I could do to make him see the light.”

Thus did the place on Applefield, Toronto, change hands. It had been listed for $849,900, and sold for $890,000. With double land transfer tax the bully bidder shelled out almost $920,000. Yes, peak house.

Two weeks later the Ontario government lowered the boom with a go-home tax, universal rent controls and more. Then interest rates started to snake higher. News of the B20 mortgage stress test spread. And suddenly the bubble was gone. No more 30% year/year increases. Instead, the beginning of the great unwind.

Well, an identical house across the street is for sale, and realtor Dan is shaking his head. The ask is $748,800. If it sells for full coin, the net after commission will be $711,360 for a real-world, one-year loss of equity on this street of 22.6%. Ouch.

Ignore the real estate board stats, because this is what’s actually happening to detached homes in most hoods, in most markets, most of the time. The buyers are gone. Sellers who waited to list are freaking. Prices are tumbling. And it may have just started.

As you know, the US Fed jacked rates again Wednesday. That it would, was a slam-dunk certainty. The cost of money has now jumped five times in little more than a year. As a result bond yields went up, the stock market swallowed it and the US dollar declined. All as expected.

The big question – given a shiny new boss at the American central bank (Jerome Powell) – was what comes next? How aggressive will the bankers be in piling on more interest, based on their view of the Trump economy? Now we know. Very.

Here’s the forecast just received: three increases in 2018. Three more in 2019. At least two additional in 2020. The federal funds rate which sat at zero during the dark, desperate, credit-crisis Obama days will hit almost 3.5% by the time Trump squares off against Oprah. This is happening because the Fed believes modest economic growth will be sustained, almost everybody who wants a job will have one and the Republican tax cuts will fuel it all. As a result, lots of consumer spending and business investment will occur – and higher rates will result, to ensure no wage-price spiral or romping inflation.

Fine. No more doubt. Seven more American rate hikes coming, bringing the total to 13 in this tightening cycle. That’s not far off the historic average, but it must scare the poop out of moisters and real estate bulls who thought (and said so here) that mortgage rates could never rise above 3% without causing the market to crash. “Because everyone is so in debt and has no money,” they whined, “the government wouldn’t dare do it.”

Well, kids, the government isn’t running this show. The CBers are. Get used to it. In this country the mandate of the Bank of Canada is not to worry about your mortgage or even economic growth, but rather to protect the value of the dollar, keep inflation under control and maintain monetary stability. As such, you can be sure rates here will also rise – as they have in the past when 92% of the time the BoC aped the Fed. It may take a few months, but it’s coming.

This is what makes politicians so dangerous. They diddle with housing when natural forces are the best tonic to issues like unaffordability. The risk now is that the universal mortgage stress test overreaches. Or that Toronto will err with a vacant homes tax. Or BC’s provincial politburo will tax a declining market into a dying one. Household debt is extreme, residential real estate is leveraged up the wazoo, the cost of money is plodding higher and now governments – who allowed the bubble to inflate – have chosen the worst moment possible to prove they can push everyone around.

The outcome will be far worse as a result. More proof bullies never win.

(Note: An earlier version of this post incorrectly identified the exact home for sale. That reference has been removed.)

The charade

Yesterday this pathetic column brought you the equally pathetic note of a 21-year-old bank financial advisor. “I’m interested in the field of Advising and Investing,” he said, “but I am working for a company in the industry that only lets you sell what they want and not what’s best for the client which makes it difficult to learn past the bubble they’ve created.”

His employer is one of the Big Five banks. I’ll let you guess which colour.

The point was simple: he’s not an advisor. He’s a salesguy. He lacks training, experience and substance. And yet he’s a front-line rep for an institution in which people place blind trust. Because he’s ethical, he’s troubled.

So are the feds. On Tuesday came news the financial consumer watchdog has decided to crack down on the banks for exactly this kind of devious and self-centred customer service and will be beefing up enforcement, supervision and monitoring. It may also consider the torturing of bank CEOs by making them attend a Pitbull-and-Rocky, real estate and bitcoin wealth expo. Few are expected to survive.

“Banks are in the business of making money, we know that,” says the Financial Consumer Agency of Canada. “But the way they sell financial products and manage employee performance, combined with how they set up their governance frameworks can lead to sales cultures that are not always aligned with consumers’ interests.”

Ya think? Having a 21-year-old sitting behind a desk, advising unknowing people on investments, while having a sales quota for bank mutual funds, is a blatant conflict of interest. A charade. Shame on the bank. Shame on customers whose financial illiteracy put them in that chair.

Well, time to review some of the rules of engagement when it comes to getting help with your money.

Overall, never take advice from someone selling stuff. Especially high-MER mutual funds or incomprehensible insurance products like universal life. Never buy an RESP from some dude who shows up on your doorstep after baby is born and you’re swimming in hormones. Never, ever give your money to an advisor you’re related to, think is hot, went to school with, dated, or who married your cousin.

Don’t invest with anyone who doesn’t give you a comprehensive plan first. Do not agree to the ‘discretionary’ management of your money unless you really, really trust the advisor. Never pay more than 1% annually of what you invest for advice and portfolio management – which should be largely tax-deductible. Refuse to hire anyone who wants to be paid on a transactional basis, making money only when they trade.

Scoff any advisor who tells you they only deal with the rich and requires a minimum of five hundred thousand or a million. That’s code for, ‘I don’t like to work  hard but deserve obscene pay.’ Never robo, unless you require no tax advice, no help with retirement or investment strategies and trust an algo with your savings. Be careful about ‘wealth management’ shops that stick your money into a proprietary client fund they created. Without trading on the open market it may have no liquidity. Eschew mutual funds, of course. Dinos. You’re paying a huge premium to employ some fund manager with a Porsche who thinks he can beat the market. He can’t. And in a crisis a mutual fund company can shut the door and prevent you getting out.

Unless you have seven figures to lay down for a portfolio, forget stocks. To achieve reasonable diversification, you need cash for meaningful positions in six dozen companies, plus enough left over to fund the fixed-income portion. Don’t take advice from [email protected] to go and invest in real estate,  because she just did and it always goes up. She’s actually fronting for an organization that thrives on handing out mortgages which they call “relationship products.”

Know that advisors who sell mutual funds are paid by trailer fees and commission, the worst of which is DSC – a deferred sales charge. This is equivalent to fund prison, designed to mess with your head by charging you to cash out within seven years – so you won’t. Of course every day you stay invested, you pay more. So knock off a couple of guards and vault the wall.

Advisors who work by the hour, draw up a plan and hand it over are called fee-only. Then it’s up to you to build and manage the portfolio, which seldom works. I mean, when was the last time you changed the furnace filter? A fee-based advisor usually does a plan, implements it and is paid by your accounts (as mentioned, 1% a year is enough). S/he should also map out a long-term financial plan, give you valid tax advice, plan for retirement, help you with real estate financing, kids’ education costs or leasing a car. And remember that accountants are not advisors. By law, they work for the government.

Mostly, never take advice from a free blog. Especially one with dogs. How serious can that be?