The needy (2)

The Doctor is IN. No income sprinkling in this practice. Open 7/24. Never a vacation. Relationship counselling a specialty. We also do canines. Who’s first?

“Best blog ever,” says Jason, straining credulity. “Now will stop the ass kissing. Been resisting to write, partly of fear to be made an example of, but heck all your answers are awesome. So…

“Married with children under 5, us, just under 40. Household income $350K, split $250/100K approx. I own the business that pays me, it is “illiquid” in equity/shares, worth a few million on paper in family trust. We have saved in diversified financial/liquid investments about $650K. No house, just rent for $3200.

“Now my landlord wants to sell. Offering us to buy for $1.1MM. Doesn’t make sense to me. My landlord even admitted he is selling cause he is financing me to live there. Maintenance is about $700+ alone. Found another comparable rental, but obviously not guaranteed for long term with family. So there is risk of convenience to have to move again. I don’t want to buy… yet…as I don’t factor in illiquid assets into rule of 90 I assume either, think market is still frothy if anything, and plus taking on a whole lot of debt/risk, when I already have tied up illiquid equity in my company isn’t responsible.

“Just waiting to build up more net worth in liquidity by saving before buying a house, which in Toronto will be close to $3MM based on location/size I’d expect. Are we thinking about this the right way? Anything I’m missing here?!”

Let’s recap. Earn $350,000. Have saved $650,000. Own a business worth millions. Married. Kids. Rent for $3,200 a month in Toronto, presumably in a  place which suits you. And mortgages are now available at 2.8% or less.

Just a thought, but you may have drunk too deeply of the GreaterFool Kool-Aid. In other words, buying may not be such a bad idea. Do the math. First, talk the LL down to a better price. If he’d take $1.1 million, then he’ll probably take $950,000 with no conditions and a short close. Put 20% down, so with closing costs this eats $200,000 – still leaving you a fat, liquid nestegg.

Basic carrying costs will be $3,500 (mortgage) plus $700 (insurance and property taxes), for a total of $4,300. Yes, that a grand more than you’re paying now, plus any renos you’re considering, but you are buying into one of the most stable markets (Kingdom of 416) in the land. More importantly, you can afford it. Maybe you can even divert some of that trust fund cash to help swing the deal. And waiting for a price collapse in the heart of the GTA would be a bad strategy. As this blog’s often said, SFHs in demand hoods within T.O. won’t be losing half their value. Or a quarter. Unlike poor Markham or Mississauga.

So buy this place, build more equity, then move into the $3 million house. You deserve it. We’ll bring the beer.

Now, here’s Niall & squeeze – two young people, rich with time and love, poor with treasure. But trying.

“I can’t think of any way to compliment you and be clever so I will opt for sincerity and just tell you that I very much enjoy your blog. I used one of your recent posts to (mostly) convince my wife that we should continue to rent in the GTA. Thanks for your insights.

“Here’s the question. We don’t have much saved after a long time in school but starting to see the rewards after all the hard work. I am looking to invest money in both registered and nonregistered accounts and have heard a great deal of good about so-called portfolio ETFs (like VBAL). To my naive POV they seem tolerably similar to your proposed ‘Millennial ETF Portfolio’. What are your thoughts? I’m not afraid of rebalancing ETFs, although I would have to work out exactly how to buy a preferred share if I did things myself. Thanks in advance. Sadly no dogs in my condo yet.

The first place to start is your TFSAs. Fill them to brimming before you dump money into a non-registered account. As for RRSPs, consider your income levels. Remember that RRSP room accumulates – you earn it and own it forever, ’til used. So why not save it until you and she are making bigger bucks, then pull the trigger for a bigger tax bang?

As for a one-size-fits all, balanced-portfolio ETF,  it’s an okay option when your accounts are relatively small, when you lack the time to rebalance routinely, or just don’t have the skill , knowledge and steely emotional demeanour necessary. The downside of depending on a single asset, no matter how diversified, is that besides being wedded to one provider you’re surrendering the ability to tailor the portfolio. Also the weightings may not be quite appropriate.  VBAL, for example, is made up of 7 individual ETFs and holds 40% in bonds – too much. No prefs. No REITs.

But, hey, this is a big step up from the fee-drenched mutual funds or a brain-dead GIC the [email protected] will stick you with. As you gain more wealth, grab more flexibility.

Now, Meg. “I hope this email finds you doing well and that you’re not too exhausted from dealing with moisters asking for “permission” to buy homes they can’t afford ;) ,” she says.

“My question relates to retirement. You speak a lot about not putting most of your eggs into a one asset strategy, and having a diversified liquid portfolio – and you even have spoken about the breakdown of how much to approximately have in fixed vs. liquid assets based upon your age. However, what about those of us who are trying to follow your Gospel and want to think about retirement…how does an early 30 yo couple figure out how much they actually need to save for retirement? And when trying to figure that out, would you EVER recommend building in any conservative assumptions for inheritances? Perhaps this type of question is too open ended, or reserved for clients, but I figured I’d ask anyway.”

Why not? Clients of fee-based advisors have this kind of discussion when they first sign up. Incomes, assets, marriages, real estate, kids, siblings, parents, jobs and pensions – all of this at some point has to fit into a plan for the future. Without one, life’s a total gamble. Wow, look at the damage one divorce can bring.

How much do you need to retire? The answer’s simple: enough to live on during the entire period after you quit working. Maybe 30 years. The trouble is future economic conditions, including inflation, are unknown. Plus, corporate pension plans are withering and being steadily converted into market-based assets. Relying on your CPP, OAS and a corporate group RRSP is probably a bad idea.

Meg, the Internet is bristling with ‘retirement calculators’, and some of them are actually worthy. As stated, though, it’s your spending that matters most. If you have a family income of $200,000 at age 65, then you’ll be desperately unhappy trying to live on $80,000. So supplement government pogey and private pensions with your own nestegg. Ten times your salary at retirement makes sense to me. Let’s review this at, say, 60.  I’ll be here. Sheesh.

How desperate?

Tim Hudak is, well, terrifying. The former hard-con, right-hand dude of legendary hack-‘n-slash premier Mike Harris of Ontario was largely credited as having handed an election to his Lib opponents, who plunged the hapless province into a morass of spending and debt. And that begat weird Doug Ford. Tim scared people by saying he’d fire a hundred thousand civil servants, corral teachers and be a general badass. Voters recoiled. Hudak lost his job in politics, then found the perfect spot for a hardcore capitalist: real estate.

He’s boss of the Ontario realtors’ association these days and has become a leading voice in trashing the mortgage stress test. Hudak’s not alone. The mortgage brokers all hate it. Real estate boards nation-wide have been lobbying against it. CREA’s all fussed. Even some big-name bank economists (like CIBC’s Benny Tal) have told Ottawa to gut it. The logic is that by forcing people to quality for a mortgage at 5.19% when they can get one for 2.8% (or less) is overkill. With a slowing economy the threat of a rate pop has, they argue, dissipated.

Says the former politician: “The test is disastrously flawed and is an urgent issue that needs to be addressed. Only the federal government can address these harsh one-size-fits-all mortgage restrictions.” So, with a big election coming in October, Hudak and all these other interests are beating on Justin to tell the bank regulator to back off.

Will he? Unlikely. But maybe. Depends on how desperate the federal Libs are for re-election. After all, a powerful force in making T2 the PM were moisters – now in their horniest of house-lusty years. It’s lost on nobody that they form the single-largest demographic (how did that happen?).

As you know, all real estate’s local. BC is a mess. The flat bits are comatose, Ontario is variegated. The GTA’s stable but low-energy. Montreal and Halifax are hot. The rest of the nation is at the beach. But the stats are telling. Mortgage rates are near historic lows and yet mortgage lending is the worst in over two decades. Up to 80% of real estate agents in major markets have not made a single sale in 2019. Prices are lower than 2017 levels in Toronto and Vancouver but still average families are far from being able to afford the average home. High prices mean high rents. It takes an income of almost $58,000 to lease a one-bedder in Toronto, and that’s higher than the median wage.

So, yeah, it’s a political issue.

Now, a reality check. Because we all know Justin reads this blog (bonjour!), let’s flip over to the always-helpful site called ‘Visual Capitalist’ which has just done an update on how humans love to commit death-by-real-estate.  Following up on a study by economist Niraj Shah, the VC dove into four key metrics which are warning signs of a housing bubble. “Ranking high on just one of these metrics is a warning sign for a country’s housing market,” we are told, “while ranking high on multiple measures signals even greater fragility.”

And guess what? We ace all four.

Source: Visual Capitalist. Click to enlarge.

In terms of the House-Price Ratio, House Price-to-Income Ratio, Real House Prices and Credit-to-Household Ratio, Canada sucks. So does New Zealand, but that country has about as many people as Montreal (sheep excluded).

Housing bubbles are destructive events. They never end well. ‘Soft landings’ are the Holy Grail of policymakers, but the normal conclusion is a deep hole with a smoldering fuselage sticking out of it. The stress test has slowed sales, tempered buying, reduced credit demand and erased FOMO. This is exactly why Hudak wants it gone. As does friendly barbarian-premier, Jason Kenney.

Soon we will see what spine the government has.

$     $     $

  So, these are Steve’s two dogs. He sent the picture along just to bribe me into answering his question. Apparently it’s working.

Hi there Garth. Great blog. I love it and regularly send the articles to my friends living in Toronto. I live in the great white North (well Sudbury…more like the grey North) and I have a house that I am renting to a friend. I am tired of renting and want to sell it. Likely I will sell it to them and do privately, but I was wondering how I figure out a good price. If I ask a real estate agent to assess it, they will probably assume they are going to get the listing and they’ll give me either a low ball (so they can sell it fast) or a high ball (so they can make a bigger commission). I was thinking of using a ‘real estate appraisal’ company, but will they give me a real value based on the sales in the area or what? A lot of the house’s value is in the yard and the neighborhood and if they just go by the stats, then I’m afraid it will get appraised very low. How do I get an honest, true value?

The simple, and vaguely unethical, way of doing this is to call three realtors (not one) who work for various brokerages and have experience selling in your area. Ask them to do a market assessment, and back up their opinions with research – which should involve an analysis of the comparables (recent ‘solds’ in the hood). Average out these three opinions for a pretty good ballpark of current value.

But like I said, it’s unfair to expect anyone to work for nothing (except me, on this blog), so best to declare your intention upfront and offer to pay for this process. Or, yes, you can engage a licensed real estate appraiser who will do essentially the same thing, providing data on similar properties’ sale prices and estimating the worth of yours. If your property’s in the city, a SFH and not on the water, this will cost about $400 plus tax.

What’s it really worth? Simple. What your buddy will pay.