Risk

risk31

A friend’s husband died of throat cancer a few weeks ago. She asked me to sit with her and sort through his finances, since he’d managed them exclusively. “Jeff took care of it all, like most guys, I guess,” she said. “He provided, and always had two words for me – ‘don’t worry.’”

But she should have. We found that besides the house, Jeff had no insurance policy, no investment portfolio, no RRSPs and $32,000 in Canada Savings Bonds. That was it. Fifty-eight years on this planet had resulted in a paid-for house worth $300,000 and enough cash to live for a year.

She was shocked and, I suspect, pissed. Obviously the house is now for sale, and Tina’s looking for work. Neither is going well.

Canadians have, on average, more than 80% of their net worth in one asset. That makes us incredibly undiversified, and prone to disaster should real estate ever turn ugly and illiquid. More than half have no money put aside for retirement and of those who do, the amount Jeff saved isn’t far off the average. And while my departed friend did one thing right – eschew debt – most people are up to their ears in loans, lines and mortgages.

Which brings us to Lisa:

Hi Garth,
I am fairly new to your blog, but have read enough to know that I will likely get roasted for asking the questions below, but I wanted to get your thoughts nonetheless:

My husband and I are Gen-Xers (just hitting our 40s). We bought our house in 2002 and it’s presently worth in the $500-525K range (and in an older, central urban neighborhood that’s well served by shops and transit). We have been pretty aggressive in our mortgage payments and currently have about $130,000 left to pay off.

I realize that you advocate getting right out of real estate ownership, given the gloomy prospects for the RE market. Before discovering your blog, the thought of selling/moving was not even remotely on our radar screen (we are very happy in our house and neighbourhood and think we could be here quite contently at least until our kids – both just starting school – are grown). Now I am trying to turn the idea of selling and renting over in my mind, but there is precious little to rent in this neck of the woods, so I’m not sure we have the stomach for it.

What I am wondering is whether, given that in the past few years we have diverted a lot of our income into paying down the mortgage, it would be advisable to contemplate going to a less aggressive mortgage payment and then using the freed-up money to take advantage of potentially good investment opportunities available these days, thereby hopefully redistributing our equity mix a bit (we currently have only about $75K in RSPs, although I am in line for a public service pension in another 20 years or so… if all those retiring Baby Boomers don’t siphon the system dry…). Obviously, this strategy would slow down our campaign to be mortgage free, but maybe the investing should not be postponed any longer…

Does that idea have any merit? Unleash the blog-dogs…
Lisa

You are doing one thing right – coming to the pound for some thoughtful second opinions and selected sniffing. I’m sure we can help.

First, you’re obviously doing fine on the equity front, having built up almost $400,000 in your real estate and hammered that mortgage down. But you’re obviously far behind on accumulating financial assets, since $75,000 at age 40 is nothing to brag about. As for the public sector pension starting in 20 years, you’re making my sides hurt. Have you heard about the future? Climate change, unfathomable public debt, the age wave, peak oil, public health crisis. Ain’t gonna be pretty, Lisa.

As for selling the home, cashing out and renting, that’s always an option. But if you love the place and are happy with the hood, that might not be the solution for you – however I am impressed with the way this blog has polluted your mind.

Another alternative is the one you’re also mulling, which is to use some of that equity to augment your net worth and rescue your financial life from being a one trick pony. After all, there’s little reason to build up a honking big wad of money in your house and then gamble that you’ll be able to get it out exactly when you need it. The real estate market could easily slump for a number of years – now, or two decades from now when the oil starts to run out or the seas rise.

My point is that the best antidote to risk is diversification. And you have (like my departed buddy) almost none. So, change.

You can borrow against your home in a number of ways, like refinancing for a bigger mortgage, taking a second, or setting up a secured line of credit. In all of those cases, the interest on the money you borrow will be 100% deductible from your taxable income, which means you get to reduce income taxes while you invest.

If you use the money to buy securities like stocks, mutual funds, bonds, commodities or other investible assets, you will never face a margin call if the value of your portfolio falls, since the borrowed money is secured by the real estate. Or you could work with a financial advisor (which you should do anyway) and set up an investment loan based on your net worth, without using the house as collateral.

How much to borrow? Why not start with a hundred? Even with that, you’ll still be over-weighted in real estate. And don’t put it all in the RRSP. Also ensure you sock $10,000 into a TFSA each year, invested in growth assets, with the rest in a non-registered plan. An advisor will help you make the right choices, but I’m having trouble understanding how energy, financials and health care will do anything but explode over the next two decades.

Oh yeah, one more thing. Get hubs to buy life insurance. Not the cheap TV stuff.

96 comments ↓

#1 taxpayer like you on 06.14.09 at 11:43 pm

Lisa – Garth and I disagree on borrow against equity to
invest. Though he has stated we generally have too much net worth tied up in one asset, he has also stated “net worth is net worth”. Sure the interest is tax deductible but If things go awry, and you have to sell some of your
investments, you are back to where you started from. Or
worse if the investments slide.

I still see 10 year mortages for less than 6%, costing about $1500 per mo. Again, Garth will beat me up on this, but its still a cheap rate on what appears to be a mangeable mortgage for you. Pay bi-weekly to knock some time off of that. If your used to agressively paying down the mortgage, this should leave a tidy sum to take
Garths advice and invest in the markets.

This approach helps this blog-dog sleep at night……zzzzzz

#2 teepee on 06.15.09 at 12:20 am

Pay off the mortgage. Whatever your payment is now, lots of it is going in interest. Help yourself – pay no one else any interest if you can help. When paid off you’ll have lots to put into investments.

#3 conan on 06.15.09 at 12:21 am

“Oh yeah, one more thing. Get hubs to buy life insurance. Not the cheap TV stuff.”

…. Or the expensive TV stuff (get the medical) or any insurance in which you can not choose the beneficiary .

#4 Nostradamus jr. on 06.15.09 at 12:35 am

Garth…for many decades people understand their Primary Home and their Primary Mortgage payoff/retirement concept.

…However people have become leery to…stocks, mutual funds, financials(bank stocks), bonds or commodities.

Too many of the above have proven to be manipulated, crooked and decimated.

…heck, it seems even the Canadian/U.S. dollars fluctuate 10% against each other two or three times a year.

You advocate “renting” yet you “own” your property.

>>>How much to borrow? Why not start with a hundred? Even with that, you’ll still be over-weighted in real estate.<<<

Don’t you also say, “don’t use your home as an ATM?”

“Financial Advisor”?….Are they anything like “Realtors”?

It seems every investment type fluctuates in major % ranges or beta .

P.S. Am I still being considered as your Federal Finance Minister?

#5 conan on 06.15.09 at 12:37 am

BTW why is the photographer depicted in the photo not running for their life right now?

I see 5 tigers and one peacock snack- pack.

If a summer election is called are you planning to run Garth?

#6 . . . fried eggs and spam . . . on 06.15.09 at 12:57 am

Lisa and partner seem to be level-headed and realistic about their situation. Possibly they could refinance and turn theirs into an RRSP Mortgage, taking it to $150K but that is only one aspect.

I like the idea of borrowing to invest in a non-registered plan, focusing on health, science and technology as well as commodity mutual funds.

Forget the CPP / OAS / GIS — they will all be long gone by the time you get to be as decrepit as we are!

As for your friend and her husband, my condolences. A few months after our firstborn came along, we both got life insurance so that the other was always covered, and we have always set things up and done them equally.

Basic planning and good communication is a pre-requisite, and all that is required.
——
Food prices getting you down? Hasta La Pasta Baby! — http://tinyurl.com/mpw28p
——
Here are the opposites sides of the same article, from two different sites. Which is it, or does anyone really care about the merits of this? — http://tinyurl.com/md7yfo /\ http://tinyurl.com/ltyfjt
——
I’m not old enough to have seen the effects of the Dust Bowl, but it looks as if the Golden State may be headed there again. — http://tinyurl.com/kqyzyg

#7 Munch on 06.15.09 at 12:59 am

“Not the cheap TV stuf”

BWAHAHAHAHA

Brilliant!

“But WAIT, there’s MORE!”

BWAHAHAHAHA

BTW, the FIFA Confederation Cup started in South Africa yesterday – all went smoothly, so all systems go for the Soccer World Cup in 2010!

Wish us luck!

Secretly, I have a sneaky suspicion that it won’t go ahead! Don’t ask me why or how, it’s just a gut feeling!

Munch

#8 Da HK Kid on 06.15.09 at 2:56 am

Great advice Garth. Time to diversify! Diversify does not just spread those eggs around in traditional investments but those you feel as mentioned by Garth are winners moving forward.

I not convinced of hyper inflation! I continue to see deflation and an “L” shaped recovery and flat to moderate inflation. Take everything related to consumer spending and its trickle down and stay out of it.

I have really been converted to the fact that your home is just where you live and is an ongoing expense and NOT to be used as an investment vehicle. This like most has been a daunting task having to strip off 30+ years of printed money by our governments. I got out a long time ago.

When interest rates are due to rise, RE will drop like a stone. Canadians do not get fixed low rate 40 year mortgages they can write off the interest on.

We get 5-7 year fixed rates and interest we eat!

Is it this which is propping up our RE market or are we absolutely in for the biggest drop in RE values ever seen.

I am not sure as nothing seems to make sense and there is contradiction in everyone who is supposed to know.

The only advise I can offer is to keep all your powder dry and have multiple liquidity ready eggs in your basket. RE is not one of them.

My wife and I are the same as you but minus that house. We rent a sweet house and stuff our pockets full of cash each month looking for ways to make money or at least protect it in the brave new world.

Good Luck!

#9 ralph on 06.15.09 at 3:25 am

Or you could try to sell your home now and downsize, then invest the difference. Most of us have more house then we really need anyway.

#10 Jay Currie on 06.15.09 at 3:34 am

One key thing here, Garth: government job.

For the moment Canada is not California and government jobs are going to continue. So there is at least one income here which is as secure as such things get.

The interesting question is which way interest rates will go in the “A trillion here a trillion there and pretty soon you’re talking real money” era. I have to bet “up” and that means the second mortgage route better have a fixed rate. The interest deductibilty is lovely but you have to find somewhere to park the money where capital is preserved and you get some return. Right now that’s tough to find. (Bank preferreds?)

Diversifying out of real estate has one great advantage: these people love their house. Nobody loves a bond or banks stock. You can sell that when it hits your target. Your house, not so much.

#11 David Bakody on 06.15.09 at 6:22 am

Lisa, first well done on your family accomplishments, it is obvious you and your partner have done well to this point. I do not fully understand all of Garth’s income tax/loan plans …. but that is not important because he has stated many times “seek out sound professional advice” Me being the cautious type who likes to enjoy a night/ afternoon outing …. would use my RRSP rebate to pay down my mortgage and use the TFSA coupled with a sound insurance plan. Do family things … the simple pleasures of life in your own province on day trips with a picnic basket are treasures to children and things you do with your children as a family are priceless ( not a hockey game for $500+) is a waste hello? But stay cool and enjoy your home and do only scheduled maintenance, I never really done big jobs until the kids left home and as we lived in the same house they had their own jobs for pocket money since they were 12 years old and I never told them how to spend it, not once! They attended local universities and we shared family cars and they still worked part time at Sobey’s, and taught aerobics at the spots centre. So there are advantages to living in an affordable home for a long time ….. in a good friendly place.

#12 wjp on 06.15.09 at 6:43 am

Lisa: I would continue to pay down that mortgage asap…then you can take the monthly mortgage payment and invest…I am not keen on borrowing against the asset even if it gives you a tax advantage as the interest on the mortgage would offset. A good financial advisor would be helpful although I must admit fees on mutual funds etc. can eat away and when the market goes against you, it can be hard to sleep at night. I would prefer to get into DRIPs with a good balance sheet and some of our Canadian Banks could be a good choice. They aren’t going under anytime in your lifetime. This way no fees…you obviously don’t look at your house as an investment but rather a good home in a good location, hard to beat that! As to the future, I suspect things are going to be difficult for us all as time marches on but living there (the future) often takes away of the joys of the present. (the kids) They grow up fast, so enjoy them every day….good luck…

#13 Ray MacDonald on 06.15.09 at 7:14 am

Paying off the mortgage first, then saving for financial assets worked for us. Mind you, we were dealing with 1980s interest rates at the time.
A defined benefit pension is the cornerstone of retirement planning, and its value should not be discounted if you are lucky enough to have one.
As far as borrowing to invest goes, I always thought you should not take risks if you could achieve your goals by simple saving. It was never necessary for us, and we could sleep better at night as a result.
Life insurance is a must if you have young kids. No question about it.

#14 Bill-Muskoka (NAM) on 06.15.09 at 7:39 am

Garth,

Diversification is good, BUT after witnessing the completely criminal activities of investment houses like Merril Lynch who ripped off a dear friend of $250,000 in lifetime savings (a pension that was guaranteed to provide retirement and then ML lost it all even though they had a contract to provide income from it), the decline of value of our investments, the IT scandal by the liar Dim Jim and his Boss Harper, and the unregulated greed of the commodities markets, I have little trust to put my money into ‘investments’. Instead I prefer to put it into things that I can hold in my hand and use to expand my own business and income.

Will I die a rich man or poor man? It will have nothing to do with how much money I have, because my wealth is inside me.

We do have a trusted investment manager and have all our investments in the safest possible places, yet we still lost about 30% through this recent fiasco of mismanagement. Fortunately, because we left things where they were, and are, we have recouped a significant portion that was lost. We withdrew a good chunk and transferred it into our home last Fall. I can at least get up every morning and touch that.

The banks pay nothing nowadays, so that old means of savings and investment is gone. The rest is little better odds than going to the Casino IMHO. There is still far too much corruption and greed controlling things and government is too busy fighting over whether or not to have an elections to bother with dealing with the CAUSE of all this fiscal turmoil.

My dad and brother would be utterly devastated to know GM has gone bankrupt. GM, AT&T, IBM, were all THE Blue Chip Stocks to have to them. No more. Like the John Denver song says ‘Mr. Peabody’s coal train has hauled it away!’

BTW, the pic is beautiful and I love tigers with a passion. The True King of The Beasts (not some maingey lion). Now, if only we were the tigers and the chicken were the politicians running for their lives, perhaps we could all smile a little more? That is where the RISK should really be put!

#15 vtj on 06.15.09 at 7:44 am

Lisa,

Kudos to you and your husband. Garth may not think that $75k in an RRSP is a huge amount at age 40 but having accumulated that and such a large equity stake all while raising 2 kids is spectacular – way to go!

Since you’re asking, if I were you I would continue to pay down the mortgage and I would not get into any additional debt, be it of the investment variety or other. The point is that if you enjoy your job and you don’t want to retire at 50, then why take on the additional risk? You have plenty of time to accumulate a reasonable retirement portfolio to age “6?”, not to mention that your existing $75k should grow to a tidy sum of $300k by the time you’re 67, assuming an 8% return.

Figure out what annual income you’ll need in retirement and work backwards from there to figure out what your investment portfolio should look like at 65 (or whatever age you’d like to retire at). I suspect that you’ll be pleasantly surprised.

One last piece of advice: pick up the latest issue of Moneysense magazine. Some great advice on what financial actions to take depending on your current age “decade” (ie., 20’s, 30’s, etc.).

Oh, and if you don’t already have life insurance, for Pete’s sake, take care of that immediately! Frankly, I just can’t believe that you don’t based on your current situation.

Good luck

#16 Bottoms_Up on 06.15.09 at 7:48 am

Hi Lisa,

First: stay in your home. Sounds like a great place to raise kids.

Second: if you feel that you can beat your mortgage rate by investing in the stock market, then go ahead with Garth’s plan to invest 100,000. If not, pay down your mortgage first. (i.e. if your mortgage rate is 3.5%, but you feel that you can get 7% in the stock market, it makes sense to invest in the stock market before your house; if you think you can’t beat 3.5%, then pay down your mortgage first)

Garth’s plan of taking out a 2nd mortgage on your home is a strategy called ‘upvesting’, and in theory garners much better returns over the long term than just making monthly payments into an investing account. The difference in the numbers can be astounding.

If you do go ahead and begin stock market investing, here are some tips:

Invest in 5 stocks, in 5 difference sectors (i.e. buy RIM or Apple as a tech. stock, ECA or SU as a gas stock, TD as a bank stock etc.). You can also get into cool stocks such as XIU.to (this is a play on the Canadian economy and has very low management expense ratio fees), or FXI.to, a play on the Chinese economy.

Set limit sells on your stocks. This means if they drop below a certain level, you will automatically sell out of your position. This can save your bacon if/when the market has a severe downturn.

Buy only dividend-paying stocks. It has been shown that over the long run, a stock is really only worth what it will pay out as a dividend. You can get some good quality stocks right now that are paying out dividends that are likely higher than the rate on your mortgage!!

Good luck!!

#17 molson cdn on 06.15.09 at 8:04 am

what does TFSA stand for?

#18 Samantha on 06.15.09 at 8:41 am

Lisa –

Based upon the information you have provided, here are a few points/suggestions:

The market value of your home can go up or down and “presently worth in the $500-525K range” means nothing until you cash out your chips and sell the property and the cash in your bank account. Too many people are feeling “richer than they are” due to inflated market values and making very foolish choices with HELOC’s (and I don’t care why it was taken out – investment, new pool, whatever).

Take the purchase price of your home (less any improvement cost) and subtract your mortgage balance $130,000.00 from that number. That amount is the actual equity you have in the property.

You and your husband are indebted for $130,000.00 and there is no mention of any other debt (charge cards, LOC’s). There is also no mention of an easily accessible emergency fund to cover all monthly living expenses.

The economy is bad and getting worse. How will you survive if you or your husband loses their job? Or if both of you lose your jobs? Can you survive on EI for one or both of you? If EI runs out, then it’s savings or the mother of all garage sales.

During the 90’s recession, I worked for one of the “big banks” pulling in money on delinquent debt. It was a horror show. It wasn’t just one person in the household losing a job – it was both people. A challenging and difficult situation quickly turned into a major crisis because people had no emergency fund. They did not have a minimum of 6 months to 1 year of living expenses to cover mortgages, property taxes, car payments, credit card debt, food and utilities. It was not a pleasant situation for them or for those with children.

As long as you owe money on your house, you can lose it. And once the house is paid in full, you can still lose it if you fall behind on property taxes.
With respect to investing, becoming involved with any non-guaranteed product is like going to Vegas. Don’t play with money you can’t afford to lose, and don’t make the mistake of thinking that you will garner a big “windfall” from the markets. You might make some money or maybe not. Depends on what you do and when you do it. It also depends on the actions (manipulation) of other bigger fish who like to play the market. It didn’t take too many of them to hurt a whole lot of people in the crash of ‘29. And it continues today, because people just keep playing the game (market).

What about RESP’s for the children? You need a fund for planned expenses as well – future maintenance on the house for example.

If you don’t want to rent because you don’t want to leave your current neighborhood, then take a long, hard and very critical look at your home. “An older, central urban neighborhood” implies that your home is older. How is the foundation, plumbing, electrical, insulation, windows, sewer connection to the house (some old neighborhoods weren’t updated), roof, etc.? Then fast forward the present condition of these items 5 years, 10 years, 20 years and consider the cost outlay over time for repair and maintenance. You just might find it easier to “stomach” renting or even moving to a different neighborhood.

Quaint, central, urban neighborhoods can change and not for the better. When I was in the market for urban houses, I always checked out the neighborhoods in the evening after supper when people were home and on weekends. Many neighborhoods look fine during the day, but the evenings are indicative of serious social problems.

A last comment on “if all those retiring Baby Boomers don’t siphon the system dry”. It isn’t a matter of boomers or anyone else who has dutifully paid into that system “siphoning” the system dry. It is, however, very much a matter of the people who were appointed to manage the fund – my fund, your fund and the fund of every Canadian who paid into it since it’s inception in 1967.

Perhaps, more consideration might be give to the “leaky vessel” it has become due to the current investment board who were appointed to manage the fund in 1999, the 32 years of previous management, and underpinning the entire mess: contributions that should have been increased to meet future demographic need. I mean it’s not like they didn’t see that one coming.

Good luck with your choices.

#19 gold bugger on 06.15.09 at 8:47 am

Borrowing against your house to invest in the stock market is, frankly, retarded advice. It was called The Strategy and it would have ruined most people had they chosen to follow it.

The housing market might be a lot of things, but most people can figure out who’s buying, who’s selling, and what things cost. The stock market is opaque, perpetually manipulated and greatly stacked against retail investors. It’s the greatest invention for separating suckers from their money since casinos and governments.

As to Garth’s soon-to-be impoverished friend, TERM life insurance is the cheapest peace of mind you can ever buy. Purchase enough to provide 2-3 years of annual salary for your family. WHOLE life insurance is basically a scam to provide an enormous fee to the insurance salesman up front and put your money into the market where they collect more pointless fees. TOTAL. RIPOFF.

Unlike buying pieces of metal that pay no income, and hoping for the best? Actually, financial diversification is the best investment philosophy there is. Most homeowners (and gold buggers) have yet to learn this. — Garth

#20 Devil's Advocate on 06.15.09 at 8:59 am

Interest rates must rise. When they do house prices will fall respectively as we are at the peak of affordability (surpassed it actually) in terms of payments which is a function of principle and interest the principle being the cost of the home. Higher the cost the lower the interest need be to offset increased monthly costs, higher the interest lower the cost of the home need be to offset increased monthly payments. All simple enough.

So, why would you want to own a depreciating asset when you will likely be able to replace it for less in the future. Especially so given that higher rates of interest are going to have a marked effect on the growth of the savings from the sale of your home now.

What a beautiful world for wanna-be homeowners who have saved cash… increasing savings and decreasing home values.

Hard to break out of the old paradigms. As it becomes more obvious more will though. But by the time they do they will have let a lot of opporunity slip through their fingers.

#21 squidly77 on 06.15.09 at 9:09 am

its stupid money….get over it
live life love your kids and enjoy the sunshine
got nothing ? so what ?
its a trap a damned trap !!
http://www.youtube.com/watch?v=WCkOmcIl79s

#22 pbrasseur on 06.15.09 at 9:12 am

Lisa,

If you guys made it this far then you’re surely smart enough to know whet to do next.

Seems to me your situation is pretty good as it is and you don’t need major changes. Just continue to do what your are doing, paying down your debt and saving.

#23 squidly77 on 06.15.09 at 9:16 am

dont buy into real estate now
the industry is full of money pigs
rent and enjoy
dont enter the stock market now
its full of money pigs
all anyone cares about is money..insure him insure her
buy this buy that….dont do this do that
money money money money money money money money money money money money
give me more money and i will be happy

money money money money money money money money money money nmoney money
just give me some money
i want more money give me more !!!!!!!!
http://www.youtube.com/watch?v=JkhX5W7JoWI

#24 Darwin O'Connor on 06.15.09 at 9:17 am

“I’m having trouble understanding how energy, financials and health care will do anything but explode over the next two decades.”

If we start seriously dealing with Climate Change, that could cause demand for oil to start dropping even faster then supply, which would be bad for oil (and coal) companies. This probably isn’t going to happen in the next 5 years, but it is possible in the next 10-20 years.

We’re not even seriously talking about change, let alone dealing with it. The die’s cast. This is now an unsolvable situation. Sadly. — Garth

#25 charles on 06.15.09 at 9:20 am

Garth,
My condolences to both you and the widow on the passing of your friend.
I urge you to consider that perhaps your perspective on the size of the estate left is inadequate and a shortcoming on your friend’s part. It would seem that if a home free and clear, no debt and $30K in savings is not a good scenario for 90% of Canadians surviving a loss of a spouse you are mistaken. Life insurance is not available to many people for various reasons and many simply do not believe in it.
It would seem an estate smaller than what you have created is inadequate. There is a real world out here where most work, sweat, love then die and it is not in the 50% tax bracket.

#26 Herb on 06.15.09 at 9:27 am

Put yourself in the picture: it’s you and the herd of bankers, brokers and traders chasing a chunk of you.

Of course you’ll make a killing!

#27 Devil's Advocate on 06.15.09 at 9:49 am

But then there is that inflation / hyper-inflation threat.

Damned if you do, damned if you don’t.

#28 Ben on 06.15.09 at 10:05 am

Stay put.
Continue to pay the mortgage at a rate that will see it paid off in say 8 years.
Spend significantly less than you make, and direct the savings toward RRSP and TFSA.
You are in a good position, and will be just fine.

#29 Keith in Calgary on 06.15.09 at 10:05 am

Lisa……

Attempt to sell the house…….there is always something out there that is nicer for rent, for less money each month than what you pay now to rent the mortgage money from a bank, you guys just aren’t trying hard enough.

There’s nothing to “stomach” with renting, it is cheaper by a longshot, and you are more financially flexible. Buying is emotional for the vast majority.

Stay 100% liquid in a mix of foreign and CAD cash. The world wide economic mess is not over by a mile……I see a minimum of a further decade of RE losses and marginal consumer stagflation ahead here in Canada. 5+ years of no gains sure beats a decade of losses, and IMHO that is what we’re all in for.

—————————-

In only 30 years time I have seen the mentality of homeowners evolve……the mid 70’s scenario on a $65K house was where they saved up a 15% cash downpayment, took out a 10% vendor take back second mortgage (and paid that off in 2 years) as well as amortized the first mortgage from their bank over 25 years (that actually got paid off in 15 years).

Today, the concept of paying off ones debt is mostly foreign, it is doubtful that many of the thousands of freshly minted “homwowners” will do what my parents did as I described above, yet they tag themselves with the smarmy title of “homeowner”.

#30 squidly77 on 06.15.09 at 10:06 am

my last couple of posts were satire
money is damned important as its security
but its not an end to an end

why invest in real estate when its at all time highs ?
has any bubble lasted more than 20 years ?
will this one ?
of course not

same with the stock markets….theyre crammed full of gambling fools

my point is..keep your hands outta your pockets and enjoy the summer and lets see where we are next fall

#31 LS on 06.15.09 at 10:47 am

75k in your 40s is not a lot, but it’s also not a disaster. Certainly there is absolutely no cause to suddenly eschew your saving ways and start gambling with your money by taking on more house-debt to put into the stock market.

The cardinal rule is, pay down that damn debt! Get the mortgage gone, and then you will still have plenty of time to save for retirement with no expenses.

Sure, you might come out ahead with Garth’s advice, but the risk is far far higher than just continuing to do what you’ve been doing. You could come out ahead in the stock market, but there is also a significant risk of another crash that will destroy it all. Why bother with the stress if you don’t have to?

You have 25 years to pay down 130k and start saving. Mortgage free by 45-50, and then 50 years of all your money going into retirement funds. Or you can start gambling and hope for the jackpot.. Whatever sounds best I guess.

#32 squidly77 on 06.15.09 at 10:48 am

love the picture
the birds dead
dont like the photographers chances either
darwin is everywhere

#33 LS on 06.15.09 at 10:48 am

“and then 50 years of all your money going into retirement funds”

I of course meant 15 years

#34 squidly77 on 06.15.09 at 10:56 am

(i know its phony)

eduardo i have a pin…

http://www.avarvarei.ro/img/housing_bubble.jpg

http://blog.antiquetrader.com/blog/content/binary/Housing%20bubble.gif

i miss vultur….anyone seen him lately
hes trying to figure it all out he really is
he usually hangs out at a bar and looks like this
http://www.patricialin.com/images/confused.bmp

#35 Nostradamus jr. on 06.15.09 at 11:09 am

Garth,

#14 Bill Muskoka, #15 VTJ & #16 Bottoms Up

…reitierate that all the investment vehicles you suggest have also been decimated…but a home in the right location may in fact remain the best hedge or investment during these turbulent times.

…You yourself have bought a property.

Yes I know, 50 – 70% discount…but you gutted all or most of it….so it looks like you are investing +- 30% in renovations.

today’s CREA news indicates Real Estate prices have recovered….Looks like they’ve recovered in the Prime city areas first and foremost….like Toronto and Vancouver.

…Course i believe Toronto will not continue rising…it sits in the centre of a new Welfare Province.

(New York City is on the verge of another major RE price drop.

http://www.businessinsider.com/hey-new-york-here-comes-the-housing-bust-2009-6 )

…Vancouver on the other hand, will become the next Financial, Trade, Culture and Leisure Capital of North America.

#36 marnic on 06.15.09 at 11:35 am

17: TFSA=Tax-Free Savings Account

#37 David Bakody on 06.15.09 at 11:45 am

Please to read there are many who feel paying a mortgage off is still good business sense. Of course Garth is right about world investments and planning for the future. Much has been said and insurance is as complicated as investments …..company plans can offer value and government plans are good also. (Safety in numbers) so for all that has been said most 90% agree with Garth’s advice …. which is pay down debt and invest wisely ….. and investing means all areas of cash flow. A bought and paid for home in a nice safe area with no outside debt is always good ….coupled with secure investments is a dream come true …. but Lisa please enjoy life along the way and keep your family close. I never owned a new car a good 2-3 year old car saved me thousands …. I never forgot the words a old salesman told me buy a new car and drive it around the block and you will loose 30-40% and then I bought a 2 year car for less than half price and drove it for 5 years and still got a fair dollar on a trade. Buy quality but buy it on sale …. from cloths to homes and the bigger the sale the better.

#38 KenDa on 06.15.09 at 12:10 pm

Garth and other bloggers,
I have been reading this blog and the comments for months now. I also believe the housing market needs a correction and believe that some of Garth’s predictions will come true in the next 3-5 years
1. Prices will go down – 15-20%
2. Taxes will increase to pay for the govt deficit
3. Interest rates will increase – at least 2% in the next 2 years
4. Other costs will increase

That said… am reading today that housing market is up again and prices are not lower but slightly higher (toronto/GTA and other markets too).
Where are the housing market price decreases?

Okay..assuming they do go down..but with increased int rates, will waiters be better off?
simple math: mortgage $300K @ 4% fixed for 25 years now = $1584 per month

in 2 years: with rates up by 2%, for the same monthly repayments, you’d need to take a mortgage of $246K.
This will happen if prices go down 18%

Hence those delaying now must hope for at least 18% decrease in house prices (note: if int rate goes up by 3%, pray for 25% price decrease then)

as for the other costs, we will all have to bear them…buying now or in 2years.
Views pls

#39 Nathan in Edmonton on 06.15.09 at 12:15 pm

Lisa, I’m in a very similar position as you and I have decided that selling my house is not an option, as it is a tangible object that I will own, hopefully by the time I’m 45. Owning a home (not a resource hog mansion) outright allows you to live quite modesty and Garth’s friend could probably live comfortably if she can find a part-time job. Very few people our age will be enjoying the kind of retirement that the plus 65 are now; I have decided to learn skills that will keep me employable or at least able to barter my skills and service well into my later years.

#40 Live Within Your Means on 06.15.09 at 12:17 pm

Global economy to get ‘shock of its life’ when oil hits triple digits

http://www.thehilltimes.ca/html/cover_index.php?display=story&full_path=/2009/june/15/qa_rubin/&c=1

An interesting article.

Last post. Heading to the airport in a few minutes. I’ll miss reading this blog while away & keeping up to date on what’s happening in Canada. I’ve bookmarked Garth’s post.

#41 Shocked! on 06.15.09 at 12:38 pm

Who the hell would have expected this?

http://www.reuters.com/article/bondsNews/idUSN1539148420090615

Canadian home resale prices rise to record in May

TORONTO, June 15 (Reuters) – Resale prices for Canadian homes rose to their highest average on record in May, while sales activity climbed for a fourth straight month as consumer confidence strengthened, according to an industry report released on Monday.

But rebounding sales in some of the most expensive markets skewed the national average, the Canadian Real Estate Association said in the report.

The average home price last month rose 0.4 percent to C$319,757 ($282,971), topping the previous record set a year ago. It was the first year-over-year increase since May last year.

The average price has recovered 16.4 percent from the low reached in January, CREA said.

Home sales rose 8 percent to 37,649 units in May from April, the fourth consecutive monthly increase on a seasonally adjusted basis. Nationally, 49,521 units changed hands in May, down 0.8 percent from a year ago.

“New records were posted in only 15 percent of local markets in May, none of which are among the most active or expensive,” CREA said.

“The strong rebound in sales activity, not price, in Canada’s most expensive markets is driving up average prices nationally and in some provinces, just as a sharp decline in activity in these markets pushed average prices lower in late 2008.”

Of the 25 major markets that CREA tracks, 14 reported rises in unit sales year-over-year, with five markets, mostly in the western provinces of Alberta and British Columbia, posting double-digit increases.

Prices rose in 14 markets, led by a 17.3 percent increase in Newfoundland and Labrador and a 12.1 percent climb in Saint John, New Brunswick.

($1=$1.13 Canadian) (Reporting by Ka Yan Ng; Editing by Frank McGurty)

© Thomson Reuters 2009 All rights reserved

#42 Alex on 06.15.09 at 12:53 pm

This time I will have to agree with #4 Nostradamus,

financial advisers are no better than real estate egents and buying equity mutual funds is equal to gambling in casino, plus hefty MER fees – long term positive outcome is questionable as we ABSOLUTELY don’t know what will happen to the stock market in 20 years.

Lisa – pay off your mortgage aggressively and switch at least 20% of your paper savings into hard assets.

#43 David on 06.15.09 at 12:53 pm

Sounds like Lisa et famille have virtually all their eggs in the housing basket. Standard portfolio theory implies elimination of unique risk through diversification. That is pretty standard fare in all MBA programmes. No amount of diversification could eliminate the AIG debacle when the company actually had to pay out claims on its credit default swaps when the US housing market started the first legs of its current collapse. Diversification will not and can not eliminate systemic risk and having a paid off house in a crashing market will only mean a delay a future losses should you choose to stay there.
Assuming Lisa’s house is worth $525K, maybe Lisa should run some simulated P&L’s on how much rental return the family would garner from the home. It is certainly admirable that there was an aggressive pay down on the mortgage, but if having an overpriced fully paid off home and renting from oneself makes financial sense, then that option should be pursued. Based on fundamentals any potential buyers would need a pretax family income in the $175K range or be willing to pay $4200 per month equivalent rent (525,000/125 months).
Alternative investments are no guarantee of returns, flubs or mistakes, but you have the option of quickly exiting those producing craptacular results.

#44 dave99 on 06.15.09 at 1:12 pm

#38 KenDa,

The key mistake in your simple scenario is that the 4% mortgage rate would only apply for the next 5 years, and not the next 25 years. (Also, there are no more 4% 5-year fixed’s available, the best out there is 4.39%).

#45 Grantmi on 06.15.09 at 1:15 pm

Similar to the above story of Garth’s.

I mentioned a couple of post back that Kids will be moving back into their parents basement, or B. suites due to loosing their yob!!!!

How about the reverse!!!!!

Parent MOVING INTO kids house due to having his PENSION CUT due to the current economic MELT DOWN!!!

http://tinyurl.com/Pensioner-SOL

He said one former colleague who is well into his 70s will lose $400 per month, and is planning to move into the basement of his daughter’s house to make ends met. He said some retirees will lose up to $1,000 per month.

“Move along… Nothing to see here!!”

#46 Barb the proof reader on 06.15.09 at 1:34 pm

#18 Samantha on 06.15.09 at 8:41 am

Samantha, very well said.

Lisa,
You’ve received some great advice so far.

If one or both of you becomes disabled or jobless, what have you got to pay the bills for six months, a year, permanently?

Property & auto insurances are necessary evils – but their rate increases will become even worse.

Property taxes in cities, as in Calgary …. might as well cut off my arm, billed over $500 more this year alone.

And a big warning, insurances can be very deceiving — disability insurers can be the devil incarnate. Bank’s Mortgage & disability insurance is notoriously bad. I beg people to NOT buy bank mortgage insurance, it is a scheme designed to not pay.. lawyers, financial experts, journalists, all investigated. It’s a scam. My insurance industry background and experiences give me the ability to warn you, and my bank mgnt friends confirm.

Talk to your personal financial advisor about proper insurances and the companies to buy from, when you ask them about your other investments. Some companies and venues are better than others. They will know.

As far as the stock market, Garth above is stating if you chose to invest, there are a few areas. But it is a bit dangerous now. Long term at this point would be a painful route, there are better ways. The world financial game is a failing state. It’s failing in plunges, to plateaus and uncharted waters. It’s not a healthy market, not for a long time, there are short term opportunities and risks.

Life Insurance.. when my grandfather died he was a top manager in one of the most ‘respected’ life ins. co’s. They STILL gave grandma a hard time. Finally, after receiving it, there were unexpected world changes, so she lived the rest of her life in poverty. Buy the best life insurance and calculate survivor’s needs carefully.

#47 Barb the proof reader on 06.15.09 at 1:40 pm

And Lisa, I’m not saying don’t invest in the stock market, but that there’s downside if you can ride it out — invest only in those industries that are positioned to grow in the future, and Garth has covered those.

#48 Future Expatriate on 06.15.09 at 1:45 pm

Diversification wasn’t what it was cracked up to be in 1929… or 1930… or 1931… or 1932… or 1933… etc. etc. etc.

P.S. Tigers in the pic are stockbrokers and “financial” “planners”, not realtors. The realtors are the DEAD toothless tigers you can’t see in the back of the pic.

#49 Barb the proof reader on 06.15.09 at 1:49 pm

O/T but in the news
Column re: Flanagan

#50 Naramata on 06.15.09 at 1:52 pm

#10 Jay …

I would not count on a government job …I worked for Environment Canada running a grant program for BC and Yukon ….then they decided to buy helicopters … (’93) Grant program, projects across region, my job gone ..one day notice.

#51 Barb the proof reader on 06.15.09 at 1:53 pm

#40 Live Within Your Means on 06.15.09 at 12:17 pm

Great link Live, and have a good trip – bon voyage.

#52 My_View on 06.15.09 at 1:55 pm

GTA Market;

Notice the months till target (link below), 2005 price levels. (Now 259 months to go) That #change, for example, back in Feb, 2009 the target months were only 8 months away and the decrease in value was 10%. So the beginning of the year was a good time to buy when you factor in all the dark news and low long term rates. However, I still believe the market will correct and the price level in months will decrease. But it won’t be as drastic or severe, maybe 10% and worst off areas 20%. We are approaching 2010, and for price levels to crash well over a decade, highly unlikely.

http://www.chpc.biz/

#53 Future Expatriate on 06.15.09 at 2:07 pm

Real estate porn channel gets real, finally!

Real Estate Intervention

HIGHLY recommended. Nothing in the world more entertaining then seeing clueless greedy sellers get bonked in the head with the reality sledgehammer.

#54 Barb the proof reader on 06.15.09 at 2:08 pm

Garth, condolences, I similarly had a friend pass away this year, sudden heart attack, 54. He too should have known better, he was up in bank mgnt. Left his widow in a complete mess with next to nothing. He was perceived as the last person without proper life insurance. She is struggling.
Ditto for a friend’s son, retired early, 56, seemed healthy, enjoying life, bam. Widow struggling financially.

#55 Vancouver_bear on 06.15.09 at 2:13 pm

#35 Nostradamus jr. on 06.15.09 at 11:09 am

…Vancouver on the other hand, will become the next Financial, Trade, Cultural DISASTER of North America.

I think this is more approprite, cause after olympics things will go straight to the toilet.

#56 Barb the proof reader on 06.15.09 at 2:22 pm

If Lisa and every Canadian were taught financial planning in school, and other relevant subjects that could stop the vicious cycle of repeating past mistakes, we could be so much better off.

Speaking of, this explains a lot, “F” handed to Alberta where high schoolers are not required to take any Canadian history” http://tinyurl.com/l3nowb

#57 desert dweller on 06.15.09 at 2:37 pm

Lisa,

Let’s say you borrow $200,000 against your house and diversify it in the stock market. Preferred scenario: stocks go up (they always do in the long run, except maybe in Japan where they are still down about 70% from where they were twenty years ago, but we’re smarter than the Japanese, right?), house prices go up, and you win two ways.

Non-preferred, but another possible scenario: stock market and real estate both down 30%. You will have a house worth $350,000 with mortgages of maybe $300,000 against it and stock market investments worth $140,000 resulting in a combined equity of less than $200,000.

Nobody knows the future, but while there is risk in not being diversified, there is also risk in leverage.

Consider carefully which risk you wish to assume.

#58 Grantmi on 06.15.09 at 2:57 pm

Here comes more pressure on Vancouver home sales!!

(and cheaper rental accommodation! Yippee)

http://www.straight.com/article-102875/laneway-houses-prove-smaller-can-be-better

LANEWAY HOMES!!!

100 units possibly being considered from City Hall next week.

#59 waitingforrain on 06.15.09 at 3:07 pm

Garth,

I have a question….my fiance and me were planning to buy this month in Lacombe Ab, we have been working on pre approvals and narrowing down houses to veiw. We really want to move, (closer to family and friends) but your articles have got us scared. We are first time home buyers and would have no problems paying the mortgage every month, we rent now but are not enjoying it. How stressed should we be? Should we carry on with our plans? or would we be absolutely foolish to buy now? Please help!

#60 jess on 06.15.09 at 3:35 pm

during the depression fake money
Milan (AsiaNews) – Italy’s financial police (Guardia italiana di Finanza) has seized US bonds worth US 134.5 billion from two Japanese nationals at Chiasso (40 km from Milan) on the border between Italy and Switzerland. They include 249 US Federal Reserve bonds worth US$ 500 million each, plus ten Kennedy bonds and other US government securities worth a billion dollar each.

Italian authorities have not yet determined whether they are real or fake, but if they are real the attempt to take them into Switzerland would be the largest financial smuggling operation in history; if they are fake, the matter would be even more mind-boggling because the quality of the counterfeit work is such that the fake bonds are undistinguishable from the real ones.

What caught the policemen’s attention were the billion dollar securities. Such a large denomination is not available in regular financial and banking markets. Only states handle such amounts of money…

http://www.asianews.it/index.php?l=en&art=15456&size=A

#61 Nostradamus jr. on 06.15.09 at 3:42 pm

>>>Will Obama Bulldoze 50 American Cities?<<<

http://www.businessinsider.com/will-obama-bulldoze-50-american-cities-2009-6

…Will Harper Bulldoze 5 Canadian Cities?

considering Canada has @ 1/10th US population 5 cities would be an equal.

Lets see….Windsor, Oshawa, Milton, Oakville and Ottawa all make sense to be bulldozed to me.

Then Real estate prices would recover in Ontario…as opposed to the continuation of turning Ontario into a welfare province.

Seriously, it gets rid of useless Federal Politics plus “taxpayer $$$ invested into GM, Government Motors”.

…You heard it here first…

#62 Barb the proof reader on 06.15.09 at 3:56 pm

Household debt emerges as greatest risk to Canada’s financial system

http://www.theglobeandmail.com/report-on-business/household-debt-emerges-as-greatest-risk-to-canadas-financial-system/article1182320/

While stressing that the possibility of a mass bankruptcy is remote, the ability of Canadians to repay their bank loans has replaced frozen credit markets as the main fear factor among policy makers, the report said.

#63 Joren on 06.15.09 at 4:40 pm

Garth I think I already know the answer, but I’d be interested in your opinion on the insurance the banks sell on Lines of Credit (SHELOC) and probably Mortgages as well. I’m sure some of the other bloggers may benefit from what you have to say as well.

For example, I have a home equity line that I have used to invest in the market. (Don’t ask when… lets just say I won’t be selling them for a while ;-) Every month I pay insurance in the event that I die, or am diagnosed with a critical illness. Recently I’ve heard numerous stories where the bank (TD in this case), upon getting a claim from someone who had been paying premiums, decides not to pay out because “the insurance isn’t underwritten until time of claim”. They then do the due diligence they should have done way back when and decide not to pay or basically get out of what they were expected to do. No refund of premiums however.

Is this insurance a scam or is it even worthwhile? I’m beginning to think that perhaps that money could be better put towards oh I don’t know, groceries, alcohol or Garth Turner books.

#64 Dark Wettler on 06.15.09 at 5:20 pm

From April 2nd:

Deflation is where the price of a car falls. When wages and salaries fall. When pension and health care benefits cannot be met, and are reduced. When business input costs are reduced. When electronics costs tumble. When large corporations bankrupt, leaving rivers of unpaid supplier invoices. When tax rates decline. When 5.43 million Americans are on unemployment benefits but the actual number of jobless is double. When, above all, there is the expectation that people will pay less for goods – houses included – in six months, than today. Deflation is not when your grocery bill goes up 5%, which is the result of an entirely different dynamic (exacerbated by credit woes). Tell me, exactly, how you are paying more for everything than you did two years ago. Gotta stop shopping at Holts, dude. — Garth

Garth, I am confused. If we are suffering massive deflation then stock markets and commodities prices do not rise. If the deflationist argument is correct, how has oil doubled in three months? You berated me for demonstrating that asset deflation and price inflation can coexist. Actually, you refused to post my detailed rebuttal to your comment above. I know this because it was on the blog saying ‘your comment is awaiting moderation’…. So which is it?

The original purpose of your blog was to tell people that real estate will continue to depreciate by perhaps 20-30%. Borrowing against a depreciating asset does not strike me as being particularly bright.

Stock markets may well begin a second leg down. I’m not sure why you like financials Garth, forecast loan losses are set to explode into 2012, and interest rate swap derivatives (far larger than the credit default swaps problem) is looking vulnerable to collapse. When I began speaking to people of the pending derivatives failures back in 2005 people’s eyes just glazed over, nobody had even heard of OTC derivatives.

Watch for increased regularity of Trillions of dollars in bond auctions by the Treasury department. Who will continue to buy all the paper? The Fed will be left to sop up the excess via ‘quantitative easing’ (read printing money out of thin air). This is dollar negative, period. Unless the laws of supply and demand have been forever suspended.

Lisa, I agree with Garth (in spite of his confusion) that commodities -energy and agriculture especially – will be among the best performers going forward. That is because I believe that monetary inflation always begets price inflation. But the general stock markets (especially financials)… not so much.

As for financial advisors… no. Unless one comes recommended from someone you trust. And they have a stellar track record. And they think for themselves, not regurgitating the BS dispensed on financial TV or in the business section of one of our national newspapers. Oops, you used to be a business editor Garth?

For example, my mother used an expert financial advisor (I believe that you can get your accreditation out of a Cracker Jack box) and suffered a 60% loss into the end of 2008. Sad thing for someone approaching retirement. I have been able to gain her almost a 55% return on her money since taking it over three months ago. I consider the investments I made for her to be low-risk. Precious metals, energy, base metals and agriculture, in that order.

If you like your house, stay in it and pay off your mortgage before rates move 2-3 times higher. Realize that you will take a haircut in equity, though you purchased early enough that you will likely remain ahead. Wait for the market volatility to settle. Or bite the bullet and sell now. I believe (based on years of research and intimate understanding of capital markets) that we are only one year into a 5-7 year problem.

.02.

I never suggested we have, or will have “massive” deflation. You just made that up. I have said moderate deflation will last a year or two followed by moderate inflation and rapidly rising rates. Yes, price defation and asset inflation can occur at the same time, and have. As for the wisdom of having an advisor to assist you with with an investment strategy rather than leaving it to an amateur, you illustrate the point perfectly. BTW, your ‘rebuttal’ was published. — Garth

#65 dd on 06.15.09 at 5:34 pm

” but I’m having trouble understanding how energy, financials and health care will do anything but explode over the next two decades.”

Energy and health ok … but financials? Are you sure? With all the deleveraging going on shouldn’t one stay out this?

#66 . . . fried eggs and spam . . . on 06.15.09 at 6:06 pm

Cupcake Cuddlers, filled with a Jelly-Belly Centre. Ahhhh! The Males, a.k.a. Whales of The Species (Blubber-Chops) are playing around with the remotes. Back to reality here!

Let’s take a look at some of the headlines from The Daily Reckoning today. Strangely enough, they make a lot of sense:

“. . . An exploded bubble can’t be reflated…Global trade collapsing…down by double digits…Deaf, dumb, and blind to the biggest bubble ever…The Mogambo Guru on Tim Geithner’s fiscal delusions . . .”

Fiscal Delusions + Geithner / Paulson / Bernanke / Carney = Sheeple. Now we can all move along, realizing that ever more Sheeple are being led to Slaughterhouse Abyss of fiscal delusions. I guess that is their freedom of choice!

In case you weren’t aware, a brief look back to the future is in order here . . .

” ‘Committee to Save the World’ Fails Twice!

“It was 10 years ago this month that Time magazine gave us the Committee to Save the World.

“Looking proud, confident…Alan Greenspan, Robert Rubin and Larry Summers proposed to save the world from the Asian debt crisis… They should have left well enough alone. Because of them, we now have a crisis that is far worse.

“But the longer the rally goes on, the more people think it is permanent. They think the crisis is over already. . . . When the baby finally gets to the top of the steps, the poor lil’ fella will fall backwards… and bounce all the way to the bottom.”

From Money and Markets.com — http://tinyurl.com/lr84e8
——
#7 Munch on 06.15.09 at 12:59 am — “Secretly, I have a sneaky suspicion that it won’t go ahead! Don’t ask me why or how, it’s just a gut feeling!”

The 2010 Winter Olympics follow the World Cup (a few months in between).

With Harper now being tossed into mud puddle by Flanagan, someone closer to the elite will be handed the position of PM here.

Then, I’m sure the elite will let us enjoy our last moments of freedom together before they pull the plug on all the worldwide fiscals in spring 2011! But the precursor, or harbinger must appear first — http://tinyurl.com/mkvqql

World Cup Final? Argentina 3 Brazil 1 — you read it here first! The South Americans leave the rest in the dust when it comes to skill!

#67 ts harpoon on 06.15.09 at 6:41 pm

I am currently half way through “Your World Is About To Get A Whole Lot Smaller” by Jeff Rubin. Information contained within the book could be the way to profit from PEAK OIL and at least prepare for a new way of living.

My suggested list of summer reading material for all you blog dawgs (if you haven’t already): “Sheeple” Garth Turner, “After the Crash” by Garth Turner and Your World Is About To Get A Whole Lot Smaller” by Jeff Rubin.

That is all.

#68 David Bakody on 06.15.09 at 7:42 pm

Guradian news to-day

Worst days of US crisis may lie ahead, says IMFNo recovery until next year in world’s biggest economy, while ECB says European banks face $283bn more in write-downs

So where does that leave little ode Canada with only 32 million poeple that relies on the US for 85% of it’s trade?

#69 Herb on 06.15.09 at 7:54 pm

Barb @ 56,

where was the institution of financial planning when financials and markets were going to hell in a handbasket? There is no point teaching that same financial planning in school, but elementary prudence might work.

Let’s not forget that great post-Depression line from Amos and Andy: “I’s still the broker, but you now is da brokee!”

#70 Vancouver_bear on 06.15.09 at 8:10 pm

#68 David Bakody on 06.15.09 at 7:42 pm

So where does that leave little ode Canada with only 32 million poeple that relies on the US for 85% of it’s trade?

It leaves us in the same shithole, but we are not sitting and doing nothing… we keep borrowing, while the economy sinks. The borrowing helps us to make sure that the hole is even deeper then it was before, so we will be able to peacefully sink in it.

Enough irony. I just can’t understand how families with one not so high income can afford to pay 400k for a shitty house in Vancouver, which to me is worthless….well I would not allow my dog to live in there.
BC and Van are in for a big housing rollercoaster. Look what is happening in California and don’t tell me “it’s different here” I heard it from californians before and look where they are now?

#71 D on 06.15.09 at 8:22 pm

Don’t “fill up on debt”, it seems to be Garth’s inconsistent decision of the day. Other days he’d beat you up for loading up on debt.

Borrowing on your house as advice on a blog that espouses negative equity leaves out the emotional value of risk, never mind common sense.

The smart money is on destroy your debt and then you have the most powerful wealth building tool available to you, your income.

#72 Eduardo on 06.15.09 at 8:58 pm

Hey Squidster, I looked at the picture. Put some out of work autoworkers on the front to distinguish from the cowboy hats and pumpjacks.

#73 Coho on 06.15.09 at 8:59 pm

Nostradamus jr #4

I agree with the first half of your post.

People turning a blind eye to the systemic fraud of the global banking/financial system and the manipulated markets are either in denial or very foolish…maybe both.

I’m surprised Garth would advocate gambling in the markets. In light of what we’ve seen and heard particularly in the last 9 months, there IS NO SUCH THING AS INVESTING IN THE MARKETS. It’s much more like gambling and the only people that will make money in the long run are the insiders…the REAL insiders, which are NOT financial advisors.

The elite have called the wealth in for the middle class. They’ll get us one way or the other if we buy into any of their games. If one is inclined, then by all means, liquidate your real estate and sit on the sidelines for a while…WITH your cash in hand. In my opinion it would be a mistake to realize a financial gain in real estate only to sink it into another ruling elite rigged vehicle, such as the markets. It would be like jumping from the pot into the frying pan.

#74 Da HK Kid on 06.15.09 at 9:00 pm

There is one thing I am very confident in, until there is a clear bottom in housing, there will be NO recovery.

The US hasn’t found it yet but they are about to see -20% more to go easy as oversupply is just taking hold and wont let go. Defaults, Foreclosures, Doubling up Occupancies its a vicious cycle.

If you then throw in another downturn in Unemployment and 130% household spending now at 95% go to 70% you will see the likelihood of the new trend where saving is cool.

Think of all the businesses that have ballooned for the last 30 years based on this and the consolidation will be massive the next 3-5 years. From commercial to residential, from retail to casinos to hotels to airlines.

As for Canadian RE, get real people, the hold on prices was only due to the bounce of the bottom. When you fall so far so quickly, there is a euphoric dream world that comes soon after until you really check for internal damage. Canadian RE was just lucky to tag on to the bounce. The downward trend is inevitable.

There is no reason for commodities to flourish, tell me where the demand will be. Oil is just a play from the USD which is coming back up given the retest of lows and flight to safety. When the S&P hits 878 that is the key resistance in the stock market not the DOW or Nas!

Earnings will get crushed!

Get ready for the next phase!

#75 Da HK Kid on 06.15.09 at 9:06 pm

Also, read Premature Excitement – From MISH!

http://globaleconomicanalysis.blogspot.com/2009/06/premature-excitement.html

#76 Da HK Kid on 06.15.09 at 9:12 pm

GARY SHILLING – MUST SEE MAY I SAY MORE!

http://www.youtube.com/watch?v=8C1AzXVbEbI

If you don’t subscribe to views, you are absolutely lost!

#77 Jonathan on 06.15.09 at 9:14 pm

#38 KenDa

Assuming $300,000 mortgage.. and five year fixed rate mortgage…

Every 1% increase in interest rate costs an additional <$3,000 per year. With principal payments, the total cost over 5 years is $14,000 (quick and dirty calculation assuming $1,000 less interest due to principal repayment).

If interest rates rise by 2% by the end of the second year, then the cost is $3,000 for 3 years (3 years left in the term) for a total cost of $9,000.

In total, buying today saves you $14K + 9K = 23K over the life of your 5 year mortgage assuming that interest rates rise 1% immediately (which they are) and another 1% in 2 years.

Assuming you put 20% down, then your home price would be $375,000 and you would have a 300K mortgage.

23/375 = 6% fall in home prices and you are at break even.

#78 ts harpoon on 06.15.09 at 9:46 pm

Bernie Madoff’s being sentenced June 29th. 113 of his victims have submitted impact statements. Here they are:

http://graphics8.nytimes.com/images/blogs/dealbook/madoff_victims_impact.PDF

#79 Dark Wettler on 06.15.09 at 10:09 pm

I never suggested we have, or will have “massive” deflation. You just made that up. I have said moderate deflation will last a year or two followed by moderate inflation and rapidly rising rates. Yes, price defation and asset inflation can occur at the same time, and have. As for the wisdom of having an advisor to assist you with with an investment strategy rather than leaving it to an amateur, you illustrate the point perfectly. BTW, your ‘rebuttal’ was published. — Garth

Garth, you are correct, you did not say ‘massive’ deflation. I apologize.

You never published my rebuttal, it was not the two posts that followed the original but a rather lengthy explanation of how I am paying more for everything that matters than I was two years ago.

Ask the people on this blog how their portfolios held up through the market collapse last fall. How many of them use advisors?

I am a trader. Using the correct investment strategy (managing risk) can result in robust gains in volatile markets. That does not mean going all in. It means selecting sectors that outperform and utilizing a small portion of your capital, exiting if a position goes against you. I regard the positions in my Mother’s portfolio as low risk because they are small with the bulk of her portfolio in cash. My own (admittedly more volatile) portfolio enjoys returns many, many multiples higher. I have been at this for a very long time.

If you want to speak of an amateur, let’s look at your background. A former business editor and politician with an English Lit degree. Please list the asset classes that have provided better returns to date than precious metals, energy, base metals and agriculture. I am very interested to know.

‘There is no way the US is going to allow a devaluation of its currency, since that would spell the end of global bondholders willing to buy its debt.’

The sentence above was lifted from your April 2nd blog. This epitomizes your misunderstanding of capital markets. I would be more than happy to demonstrate this to you, but will keep this post short (if you post it) for the sake of brevity.

I regret you have fallen into ad hominem, since I have never suggested I’m a financial advisor. I’m just a guy with some observations which seem to keep you like a moth to flame. You say you’re a trader. In your basement in Vernon, or professionally in your mom’s house? — Garth

#80 Devil's Advocate on 06.15.09 at 10:15 pm

It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town.

He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher.

The Butcher takes the 100 dollar bill, and runs to pay his debt to the pig raiser.

The pig raiser takes the 100 dollar bill, and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit.

The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything.

At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism ..

And that, ladies and gentlemen, is how our Governments are doing business today.

#81 Investx on 06.15.09 at 10:36 pm

House prices doing well. When will the crash resume?

#82 Happy Renter in North Van on 06.15.09 at 11:07 pm

Here’s a post to misleading story on “Yourhome.ca” titled
“Canadian home resale prices rise to record in May”
——————————————————————

Thankfully most intelligent Canadians realize that this is the best time to buy! With prices where they currently sit and interest at the lowest they will EVERY be it makes sense to jump into the market. It has also become very clear (even to the most “uneducated” consumer) that what happened in the USA is not the same as what happened here. Sure things could be alot better, but overall we made it through the trough pretty well.

Submitted by Justin R at 4:07 PM Monday, June 15 2009
——————————————————————-
Somebody should give Justin’s head a shake…

#83 XMInKel on 06.15.09 at 11:16 pm

I agree with Garth on most of his view points but not this one! Lisa’s monthly mortgage is less than the rent she will pay if she chooses to rent. Therefore, there is little point to sell her house. As RRSP, Lisa’s pension is good enough for an ordinary retired person. In financial planning, there are many rules but I like one of them very much, that is to pay off you debt first! In Lisa’s case, her debt is her mortgage.

#84 Dark Wettler on 06.15.09 at 11:36 pm

I regret you have fallen into ad hominem, since I have never suggested I’m a financial advisor. I’m just a guy with some observations which seem to keep you like a moth to flame. You say you’re a trader. In your basement in Vernon, or professionally in your mom’s house? — Garth

I never suggested you were a financial advisor either.

#85 Barb the proof reader on 06.16.09 at 12:05 am

Herb @ 69,

I agree Herb. You got me remembering a 2nd year university course. I can still clearly recall the section on mortgages, no greater than 32% of income. Those kind of basics stick with you and could easily be adapted to high school basics.

#86 Dave on 06.16.09 at 12:24 am

If you want to speak of an amateur, let’s look at your background. A former business editor and politician with an English Lit degree. Please list the asset classes that have provided better returns to date than precious metals, energy, base metals and agriculture. I am very interested to know.

——————————————-

hey, I’m into the energies and precious metals as well. Garth hasn’t slandered all those markets. I think you’re being a bit harsh. I also think that Garth’s blog is the absolute best place to Canadian real estate information. For the record, I pay for a lot of cash to get information from sources that I trust. It’s rare that I come across a place that offers good information for free.

Garth is bang on about what’s going on with our real estate market. You guys will love him even more in a couple of years once this all unfolds and you realize how much cash he saved your a$$es.

#87 Freedom85 on 06.16.09 at 12:24 am

I’m new to the blog and I agree with the main theme; that being debt reduction. The main focus of all those under 50 should be have a good balance of reducing debt (Job 1) and building savings. In this era of low interest rates, debt reduction should be the main theme. Many lose focus that the debt is only one issue. The other issue is that having debt reduces free or disposable income.
In the economy we’re in, while deflation or credit destruction seems to be the fear, inflation could be worse especially hyperinflation (or loss of confidence in the governments/currencies of the world). If we have deflation, holding savings or cash is the most important thing and having no debt is especially important as debt becomes more expensive if asset prices are falling. Bankers hate deflation. That is why we will probably have inflation. If we have inflation, prices rise as a symptom of printing too much money and holding assets is better than holding cash.
But either way having the debt paid for is best, then you can employ your capital. Diversification of income is key as Garth says but how many people will really try this overall. A small percentage, therefore debt reduction frees up additional capital.
My guess is we will have prices rising in things we use and prices falling in things we own, which makes debt reduction even more important.

#88 Dave on 06.16.09 at 12:25 am

oops, my spelling was bad. Forgive me, it’s late.

#89 Samantha on 06.16.09 at 6:12 am

#79

“I am a trader.”

“If you want to speak of an amateur, let’s look at your background. A former business editor and politician with an English Lit degree.”

Let’s begin with a simple definition of trader from Websters:

noun:
1) a person who trades; merchant
2) a ship used in trade
3) a stockbroker who trades esp. for his own account rather than customers’ accounts.

synonyms: merchant, businessman, trafficker, dealer

And these definitions of “trader”:

from the Sydney Morning Herald (link follows):

“ATO tough on ‘professional trader’ definition.”

“Whether a person is a shareholder or a trader is determined on a case-by-case basis by the ATO. But a universal rule is that a share trader is classed as someone who is undertaking “business activities for the purpose of earning income from buying and selling shares”. The volume and frequency of transactions are important determining factors – not necessarily the amount of capital invested. Other important determinants are evidence of a business plan and the keeping of records in a “business-like manner”.

http://www.smh.com.au/business/money/tools/guides/investment/trader_def.html

and from: http://www.fairmark.com/traders/defined.htm

“Definition of “Trader”
The definition has evolved from court rulings.
There is no definition of trader in the Internal Revenue Code or in the regulations. Instead, the definition has evolved through a number of court cases over the years.” (Do read the entire article).

Your superiority is baseless weighted against the above definitions of “trader.” There are many professional designations represented here, and most, thank goodness, have the class and grace not to descend into gauche and ignorant insults against the person who graciously provides this forum for what is, normally, intelligent discussion.

The information you wished to share regarding stock markets, investing, etc. could have been written in a way that did not make you sound like a condescending braggart (us simple country folks like to call it “all hat, no horse”) reciting information from a prospectus.

#90 Glenn on 06.16.09 at 9:22 am

“She was shocked and, I suspect, pissed.”

I would love to know what drives the mentality of western feminists that they simply must, under all circumstances, be “taken care of” from cradle to grave. With nary a setback or the inescapable drudgery that men have had to deal with since the beginning of time.

No “at least we had a happy marriage” or “he did the best he could”. In the end it hardly matters, marriage rates are the lowest in recorded history and will only slump deeper as the economy heads down the tubes.

Whats that quote from the Koran? Hell is filled with ungrateful women?

#91 pjwlk on 06.16.09 at 10:20 am

Insurance…Yeah… Make sure you read and UNDERSTAND all of the fine print in your policy. Since I’m an adrenalin junkie and participate in some risky stuff every now and again I had a ten year life policy drawn up to cover my death while I paid off the house.

The details of this policy were astounding. They pre-screened me for all hereditary diseases they could test me for and made sure that I didn’t smoke or drink heavily. The policy stated that I wasn’t covered for death from an infectious disease. Well me thinks there are only two ways of getting a disease, one is by infection and the other is hereditary!

That meant the only way my wife could collect was if I died by accident, which I’m sure the insurance company calculated the probability for most people as near zero. Well, that suited me fine because accidental death was the primary reason I felt I may meet my own demise.

Personally, I think if you don’t have huge outstanding debt, your money might be better off invested somewhere else instead of wasting it on an insurance policy where you may never get paid what you think you will.

#92 Rossco on 06.16.09 at 2:29 pm

Garth,
I have been a big follower of your however I dont think you have explained the entire picture with the advise that has been offered here
Taking a secure line credit on the house is no problem with most banks and I even got a 1/2% below prime doing so but it still was around 2-1/2% at its lowest (and as you say only going the one way…up) and then the investment broker wants his cut to (mine wanted 2-1/2%%)
You are correct in stating that the interest is tax deductible so the actual cost is around 1-3/4% so that means you need to make 4-1/4% to break even with expenses.
With todays market this is not likely to happen so maybe you could explain your logic a little more for us as I may have been doing it wrong.

#93 Dark Wettler on 06.16.09 at 3:31 pm

#86 Dave on 06.16.09 at 12:24 am

Yes Dave, I suppose it was a bit harsh. But then Garth has been a real —hole to some of the other contributors here. If you were to go back a ways you would see what I mean.

Examples? Or are you making this up, too? — Garth

#94 Dark Wettler on 06.16.09 at 3:39 pm

#89 Samantha on 06.16.09 at 6:12 am

Thanks Samantha. I’m a country folk as well.

#95 Davinci on 06.17.09 at 10:23 pm

Risk = holding paper money.

Holding paper money = rich. — Garth

#96 Moribund Monty on 06.27.09 at 2:35 pm

Run for MP, and then suck up to the PM like hell. Nothing beats the ability to tax the peasaants and if that fails, to print money and adjust your own pension to cover the inflation resulting from monetizing the debt.

Your only risk is revolution, which puts everybody back to square one.