Entries from January 2011 ↓

Cairo

Last year half the houses that were listed in the Vancouver area failed to find buyers. There are townhouses in the suburban fringes which are selling for less than people paid five years ago. And in some neighbourhoods where the TV cameras and knots of rich Asian investors never go, it takes six to eight months to get rid of a house.

But this post is not about Vancouver.

I use it as the country’s best-known example of a property market on fire, where bidding wars for million-dollar shacks attract global attention and citizens are supposedly happy to commit 70% of their gross income to feeding a house. But, of course, this is false. Even in the Lower Mainland, the actual story of real estate is one of growing fear, tinged with desperation – of people starting to realize they’ve put far too much of their wealth in a single thing, whose value can wobble and fade along with every other asset.

Worth remembering this as Cairo burns. Could be way more significant than it seems. Markets thought so on Friday, with stocks tanking, oil surging $3.70 a barrel and the US dollar bounding higher. Suddenly optimism about new little American green shoots was swept away on worries a populist Islamic revolutionary spirit is scorching its way across that part of the world most Canadians can’t finger on a map.

So what? So this could be the catalyst that jumps oil through $100, sets gas prices soaring, hobbles Europe and kindles a new debt crisis, just as seriously austere budgets in places like Britain are tanking economic growth and kicking the equity out of homeowners.

That’ll mean more falling financial markets and a generally crappy spring housing season in Brampton and Surrey. Oh yeah, and everywhere else.

For way too long on this pathetic blog I’ve been telling you that the greatest enemy house prices and previously-functioning marriages have is debt. Canadians have been gorging on it since emergency interest rates were invoked two years ago. That mass of borrowed money is the only reason real estate values have soared at a time when unemployment sucked and salaries flatlined.

Hardly a day goes by I don’t talk to another couple trashed by their own financial gluttony. Seduced by house porn and pimped by cheap money, they’ve pumped everything into a piece of inflated real estate and now realize their chances of escaping are slim. Facing certain losses if they sell, people in Calgary, Edmonton, suburban Toronto and Port Moody now wish they had bailed last June.

That, as history will tell, was the peak of our real estate market. Le gros bubble. The Royal Canadian Gasbag. F’s folly.

So when an Egypt comes along, surprising things can happen to accelerate the inevitable. Markets stumble. Bond yields (and mortgage rates) go up. Companies pull back. Energy prices jump. Costs pop. And everyone feels a little less confident. Mix in Ottawa’s murder of 35-year mortgages, surging electricity bills in Ontario, political mayhem in BC and a massively over-extended consumer, and you have every reason to doubt the spring housing market.

Of course, it’s only real estate. Just finances. House lust.

I heard in Cairo, amid the rioting, shooting and tear gas, citizens rushed to the Egyptian Museum and formed a human chain around it, in order to keep out looters.

“I’m standing here to defend and to protect our national treasure,” said Farid Saad, a 40-year-old engineer.

Kinda makes you wonder what the hell you did with your Friday.

What were you thinking?

Blair and Cindy make $130,000 between them. Two snivellers. Mortgage of $250,000 they took with a 40-year am at a prime-0.6% rate. “But we have always paid it at 6.65% which is essentially a 20 year  payment schedule — particularly with the low VRM, which has allowed us to crush the principal over the last 3 years,” says he.

The problem? Not enough money. At least, not sufficient take-home pay to feed the house, the kids and the future. (The redeeming factor is they read this blog. Yes, a step closer to salvation.)

So how can a couple making twice the family average be in a bind? It seems easy.

“Here’s how things shake out,” he says. “If we Max out TFSA:  ~850/month. If we Max out RESP: ~420/month. If we Max out RRSP: ~2200/month. Meanwhile the mortgage + property tax + Utilities/Insurance: ~2500/month. Food, Household supplies, House/Life Insurance, Transportation (gas, car Insurance, etc.), $2500/month. Childcare $1600/month.

“That equals $10,000/month. Alas, our net pay is only around $7500/month, leaving a shortfall of about $2500 bucks. The house isn’t really killing us, and we are paying it down fairly aggressively with high fixed payments and a VRM.  I’d rather not cut down on these payments — especially with so much going to principal at the moment. We don’t live high on the hog – minimal savings, one car, no cell phone, no non-mortgage debt, no all inclusive vacations, etc., so living expenses can’t be dropped too much.

“The childcare is a killer, obviously, but eliminating it by having one of us stay home doesn’t quite make sense financially, and isn’t something we are interested in anyway. So . . . which to cut?  TFSA?  RRSP?  RESP?  Mortgage?   Any thoughts would be much appreciated — and I’m sure there are a lot of blog dogs out there in a similar position who would also be interested.”

You bet. And my first comment you’ll hate. But life’s about choices, and you chose to have kids and buy a house. This may be at the root of our entitlement society, where suddenly a SFH has become a right. Obviously if you wanted a family then you’d understand your financial obligation to take care of them – which these days includes a heaping big pile of money for university. So, was it really the wisest thing to put your cash into a down payment, and now have no savings, no RESP, no financial cushion – even at $130K a year? I hear there are families in Europe that actually have children in leased premises, and not all of them become terrorists.

But, here ya are. And if you choose to stay a homeowner, you’d better get a plan.

First, stop with the insane mortgage payments. The bank screwed up by giving you a mortgage at six-tenths below prime, which means it’s just 2.4%. Checked the inflation rate lately, Blair? Uh-huh. It’s 2.4%. That means the bank is giving you free money to live in the house. And I can guarantee that they love industrious, straight-ass little beavers like you, who are busy papering over their mistake by shoveling money in the front door of the branch.

So, why is it that you are throwing away this financial advantage, and madly building equity in a house that will likely be worth a third less in five years?

If you didn’t accelerate your payments, the house monthly would be $810, not three times that. So right there is enough to max your TFSA and throw $1,200 a month at the RRSP. That will earn you a tax refund this year of about $5,700 – which can be invested in the RESP. So without earning another nickel in income, you can in fact contribute to all three of these tax shelters.

But that’s just the start.

Instead of repaying mortgage money that costs you 2.4%, take the capital which will build up inside the TFSA, RRSP and RESP and invest it in growth and income-producing assets. This blog should have given you some ideas by now. Like exchange-traded funds which are cheap to buy, totally liquid, pass through dividends, provide excellent diversification, have no disgusting management fees and offer the promise of good long-term growth. Or preferred shares in banks and insurers, which are blue chip assets with low volatility and 6% dividend yields. Over time you can build up a non-registered portfolio also, then move the preferreds outside so you claim the dividend tax credit.

Hell, Blair, if you’ve poured enough cash into that house, you could always borrow against the equity to set up that non-registered fund. If it contains very secure and highly liquid stuff (like bank preferreds) then you have the security of being able to pay the loan off at any time – and yet get 100% interest deductibility. You can even have the fund pay the interest for you, while you get to write it off your income.

Not for everybody, Blair. And if you go that route, get some advice.

Remember, fellow dog, this is a time when the old rules will sink you.

  • Real estate will be a declining asset bringing tears to many.
  • The greatest gift an investment can give will be liquidity.
  • Repaying low-interest debt’s as dumb as investing for low returns.
  • Eschewing tax shelters and free government money is financial suicide.
  • Thinking children will value memories of a house with a chestnut tree over a university education is vanity.
  • Not being able to live on twice what most people earn means you screwed up.
  • Whining about it is worse.

Aren’t you glad you wrote?