Al’s 45, two kids, wife. Townhouse in Oakville worth maybe $425,000, paid off six years ago. “Shoulda moved up then,” he says. “But we fell in love with exotic vacations instead of paying mortgage interest. Now would be an ideal time for our family to move up, but I know this is a market peak so we must wait it out for a few years.” That’s the thing about houses. People with homes want trophies. It’s then a short step to gold chains and a Corvette.
So Al asks me a question about what financial strategy to use in the meantime, since he’s got $200,000 sitting in his RRSP doing nothing. “I had a lost decade.” So here’s the plan he cooked up: “Would it make sense to get RRSP loan against my house, fully open, at market rates let say 7%, invest in low risk diversified portfolio yielding 5% while I am waiting for correction to get my “dream home” down to a reasonable price? Since I am borrowing to invest, I think the 7% interest I have to “pay myself” back to my mortgage would be even tax deductible, so in essence I would get CRA to pay me to pay myself. Sounds sweet, am I missing something?
“Do you know any Bank, Trust which would structure this kind of mortgage without too much fuss? Do I need to insure RRSP mortgage if my LTV is below 75%?”
I get variations on this a lot, so let’s review the basics. Yes, you can hold a mortgage on your own home inside your RRSP. That means you make mortgage payments to yourself, not the bank. The loan must be at market rates and insured by CMHC (no matter how much of the home’s value it represents), plus it has to be administered by an arm’s-length outfit like a trust company.
No, this is not the Smith Manoeuvre (which I wouldn’t touch with tweezers), and yes, it has helped some people squirrel away a lot of money. But not in times like these. After all, with five-year mortgages at 5.5%, why spend scads of money on legals, a trustee and loan insurance when you can get the same in dividend payments from bank preferreds? Besides, a mortgage is a mortgage. You have to pay it back – missed payments can trigger default. And you must retire the debt when you sell the house.
But Al’s plan is just weird. Normally people with lots of cash sloshing in their RRSPs use it when their mortgage comes up for renewal to pay if off and replace it with an RRSP mortgage. But when your home is already debt-free, using retirement funds to create a new home loan just means you blew up a chunk of your equity. And if Al is planning on borrowing against his equity to raise new RRSP funds to create a mortgage, then use his existing funds to invest in other stuff inside his tax shelter, he’s smoking really good stuff.
Money borrowed to put into a tax shelter is not tax-deductible. And any RRSP mortgage cannot be larger than the money already in your retirement plan, which is dictated by your allowable contribution room.
So here is a simpler plan: Get a secured HELOC for $200,000 (a line of credit backed by your residential real estate) at prime – 3% – and invest it in a balanced portfolio (my fav is 40% fixed, 60% growth) making 8% or so. That’s a spread of 5%, which is sweet. Set up the HELOC with interest-only payments because then 100% of what you spend is deductible from your taxable income.
This means $200,000 costs $6,000 a year to carry. In the 40% tax bracket, that drops to about $3,600 net. Meanwhile the portfolio earns $16,000 a year. If most of the returns come in the form of capital gains and dividends, that should be about $11,800 after tax. So, spend $300 a month in debt charges and receive almost $1,000 a month income – and have $200,000 worth of securities, secured by your equity.
This is called diversification. It mitigates against having the bulk of your net worth in one asset alone. It lets the government pay for a big chunk of your borrowing. It takes non-performing real estate equity and turns it into income-producing capital. It takes advantage of generationally-low interest rates to create your own carry trade. It builds up the critically-important non-registered side of your investment portfolio, since RRSPs are destined to become tax bombs.
And it’s something nine in ten Canadians would never dream of doing. Which is why only one in a hundred of us have a net worth of a million, while seven in ten own houses.
Real estate is not the goal. Not the answer. It’s a tool.
The holy grail isn’t living in a place your friends covet. Then they’re not friends. The object is to posses enough wealth with liquidity to give you options. Freedom, choices.
And a Vette. While you still have chest hair.
175 comments ↓
987654321…..0
The tipping point has been hit here in Vancouver. Everyday in the mail i get brochures to buy property, if its’ such a good investment and in such high demand it should sell itself, shouldn’t it?
FIRST!!
Sorry guys…………..I just couldn’t help myself!! It looks so fun!
It’s lady O countdown phone number sumwhere in Zeroville where, theres no such thing as financial worries….
Good times on planet earth now, with sun, water n fish for a carpediem time while the dog bark, howls and defecate.
The Habs will surprise the Canuck in the final’s and leave Pamela Anderson float in English bay!
@realist
You can’t even get your analysis right. 2010 was not a record year for sales. 2007 was as I said. And saying prices are going up in 2011 and everything is fine in the face of slumping sales is as foolish as saying that when the exact same thing happened in 1989. That’s my point. Valid analogy. Whether it plays out we have yet to see.
FIRST !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
As a carry over from the last post…
We should get into a JV with Somali pirates.
Become a Somali citizen……then try to immigrate back into Canada.
No sense being born here ….that relegates one to being 2nd class.
Simply get foot in the door…and sponsor in 10 more.
If can’t beat em…join em.
Garth :
What a scammer plan you got going on there. No wonder the world capitalist system crashed so bad.
News flash, money does not beget money. All money generated by speculations has to, sooner of later, be accountable to the value created by labour.
Your not telling the guy how to make money , your telling the guy how to scam the system and get the jump on everyone else.
Eventual someone has to create the value your scam takes out of the system. That person , as always, will be some honest member of the working class, just trying to to the right thing.
Thanx for teaching people how to be such scumbags.
Of course money begets money. It’s called investing. It pays for your group home. — Garth
Rent a Vette! It’s on this page for $249/weekday day plus $75 insurance. Bye-bye midlife crisis ;)
http://www.gtaexotics.ca/dev/exotic-cars.html
Or for the non-cagers, bikes:
http://www.gtaexotics.ca/dev/motorcycles.html
In reply to Fractional Reserve
“For those of you who have commented that fractional reserve banking has led to the mess we are in, please provide your alternative for our banking system.”
—————-
In 1933, a fellow by the name of Gerald Grattan McGeer
(Mayor of Vancouver, elected MP for Burrard South in 1935) appeared before the MacMillan Commission. (Lord Macmillan was a Director of the Bank of England).
He had some interesting things to say about our currency system.
“By changing the issue and circulation of national currency and the conversion of public credit into purchasing power from a privilege of private monopoly to a public utility, the disastrous cost of interest now incurred in financing governmental enterprise by borrowing private bank credit and private finances can be eliminated.
By changing the regulation and control of the circulation of money and credit purchasing power from a banker’s licence to a public trust, we can, through the maintenance of an adequate volume of consumers’ purchasing power, avoid the movements of the credit cycle and the evils of inflation and deflation.
The adoption of a national banking system does not mean that the mismanagement of public credit by private enterprise will be followed by the public management of private finance. It does mean, however, that the issue and management of public credit and finance will be restored to the government as the trustee of the people, where it properly should be. The private banker can carry on under proper regulation the legitimate business of the merchant banker, namely that of financing private enterprise with his own and his depositors’ funds. But he cannot issue private bank credit as the purchasing power of bankers. That is a profit-making privilege that belongs to the people. It is part of the public domain which no government has the right to hand over to a private monopoly.”
As regards debt under the present system, paying it off is mathematically impossible, as the moment that money is borrowed into existence, there is more owed (with compound interest attached) than exists.
For further a little more updated view, might I suggest
The Crime of the Canadian Banking System
http://www.youtube.com/watch?gl=CA&hl=en&v=O8Zl1Wax8MI&feature=related
The other 2 parts are linked on the right.
Canada’s Great Experiment: 1935-1974
and
Gerald Grattan McGeer
The ’93 federal auditor general’s report:
(http://www.oag-bvg.gc.ca/internet/English/parl_oag_199311_e_1157.html), specifically chapter 5
“5.41 The cost of borrowing is the third area that affects the annual deficit. In 1991-92, the interest on the debt was $41 billion. This cost of borrowing and its compounding effect have a significant impact on Canada’s annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.”
My favourite line though is:
“5.14 Experts will, of course, realize that there are complexities we did not touch on, but we hope that they will agree that there are significant barriers to dealing with them until there is a better and more widespread level of understanding.”
I’m baffled by the Orwellian concept that ‘debt is wealth’.
—
“Banking was conceived in iniquity and was born in sin.
The Bankers own the earth.
Take it away from them,
but leave them the power to create deposits,
and with the flick of the pen they will
create enough deposits to buy it back again.
However, take it away from them, and
all the great fortunes like mine
will disappear and they ought to disappear, for
this would be a happier and better world to live in.
But, if you wish to remain the slaves of Bankers
and pay the cost of your own slavery,
let them continue to create deposits.”
Sir Josiah Stamp
(1880-1941) President of the Bank of England in the 1920’s
Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.
– Graham Towers, Governor of the Bank of Canada from 1935 to 1955
“Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control,will wreck any nation.
Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.”
William Lyon Mackenzie King
(1874-1950) Prime Minister of Canada
“The most powerful force in the universe is compound interest” ~ Albert Einstein
Good post Garth
The Big Cheeses eyeballs popped out at the 200K figure.
But it makes perfect sense, if you have yourself in position.
The RRSP tax bomb.
That may well be a huge hit.
Conservative Love Song
http://youtu.be/s-Vdydy1cVA
Imagine there’s no Harper…
http://youtu.be/FWI9GHIBusM
When I get old I’m going to lose my chest hair too? Nature’s so cruel.
Strategy is fair, so long as the money comes back in to pay for the debt regularly and the securities stay secure. Still quite a bit of risk (but yes, not as much as residential RE).
So Al says: “Now would be an ideal time for our family to move up, but I know this is a market peak so we must wait it out for a few years.”
I never can get my head around statements like this. A market peak now means that Al will get a high price for his home and pay a peak price for his trophy home too. Apples to apples.
But, evidently he’d rather wait to get a lower price for his home so that he can then buy his trophy home at a lower price too? Makes no sense at all. Apples to oranges.
As for getting a HELOC and investing the money. There are serious risks involved.
First of all, leveraging a paid-off tax-free asset (principle residence) requires a much more sophisticated ROI analysis than simply calculating the spread and capital gains implications.
Secondly, prime interest rates on the HELOC could go up from 3% at any time; and of course thirdly, there is no guarantee of an 8% return.
Also, other than keeping monthly payments at a minimum, there is no reason to make interest only payments on the HELOC. The tax write-off is the same even if you pay down the principle a little too. Not to mention the fact that any principle paid down is tax-free equity.
Re a HELOC: Keeping non-performing equity in residential real estate is an admission of idiocy. Second rates will incrementally rise, but so what? All interest is deductible. Third, there is no reason to pay off fully-secured deductible debt. Lastly, there is more certainty in an 8% return form a diversified portfolio than a 0% return from real estate. Stick to flipping. — Garth
Supply side
Sunday, April 17, 2011
The lawsuit targets
International Investment Trade and Service group (Interserco)
General Automotive Industry Corp. of Vietnam (Vinamotors), both partly owned by the Vietnamese government.
The companies are accused of charging individuals $7,000 to $15,000 to bring them to a Texas shipyard with the promise that they would earn $100,000 over a 30-month period while working as welders.
Instead, the workers were “housed like animals,” “treated like indentured servants” and fired after only eight months so the companies could replace them with more migrant laborers, according to the lawsuit seeking $100 million in punitive damages.
Some workers wound up in Pasadena, California, where two U.S.-based companies exploited the Vietnamese by charging $2,000 a month for slum housing and $1,200 monthly for transportation that amounted to little more than once-a-week trips to a grocery store. They were not given the opportunity to learn English and were not given access to television, newspapers or magazines.
The two companies, ILP Agency LLC of Louisiana and Coast to Coast Resources Management Services, formerly based in Houston, were ordered to pay the Vietnamese $60 million as a result of another civil case.
=
Only weeks after a Harris County judge awarded an unprecedented $60 million in civil judgments to Vietnamese welders allegedly exploited by U.S. labor supply companies, the same workers claimed in federal court Wednesday to be victims of a larger international human trafficking conspiracy.
The lawsuit identifies the culprits as two major Vietnamese companies, both partly owned by the Vietnamese government: International Investment Trade and Service group, aka Interserco, and General Automotive Industry Corp. of Vietnam, aka Vinamotors.
The workers’ attorney, Tony Buzbee, describes the Vietnam government-related companies as knowing participants in mass exportation of laborers through deceptive recruiting efforts that exploit workers by stripping them of their savings and shipping them off to U.S. companies eager to benefit from “what amounts to indentured servants.” The federal lawsuit seeks another $100 million in punitive damages.
Interesting post, I exited the markets on March 4 and I,m not going back in. The markets IMO are at the breaking point. But who knows.
So supposedly solvent Canadians have to go through all these hoops, manoeuvres and sleight-of-hand dealing with the tax system, with the goal of increasing leverage just to “invest”…?
That tells me they’re in deep trouble.
Watch out for those HELOC interest rates… they may rise starting tomorrow when the CMHC stops offering insurance on them.
http://www.cmhc.ca/en/corp/faq/faq_008.cfm
135 Marie,
Yes the stakes are high, no room for transparency in this government. Not only Garth, but Linda Keen, President of the Canadian Nuclear Safety Commission, also got the axe from Harper. Now she’s going green…
–
The goal of life is not to run out of money. If one does, that person becomes dependent on govts., which are dependent on banks, etc., etc. and it becomes a pointless, futile effort to live ordinarily.
“So here is a simpler plan: Get a secured HELOC for $200,000 . . .” — Prefer $500K and, using your investment strategies, have it pay me $30-$40K / yr., 80% or more of which is tax free. But that’s just my call.
*
Anarchy in Greece as austerity takes effect. Now there really is nothing left to lose.
Garth’s site Sound familiar?
Radiation Food chain in North Pacific is bad. Geiger Counters “Radiation factors hard to gauge; experts say rely on official data.” Note the words ‘experts’ and ‘official data’. Are these the same experts who brought in sub-primes, liar loans, 0/40, 5/35 and canned Income Trusts? I would rather rely on my own gut feelings. Germany “This is why GE and the nuclear power industry are spending millions of dollars bribing media and hiring online public relations firms to propagandize you into thinking there really is no problem. Profits are far more important than the health of future human generations.” wrh.com.
America’s debt ceiling — a look at the numbers.
4:30 clip Hmmm. Apparently, paying income tax in the US is voluntary. Wonder if it’s voluntary here?
6:05 clip AfPakIraqIranME — Where egotistical, bullying empires go to die. Suck wind, baby!
Geithner “Treasury Secretary Timothy Geithner expressed confidence Sunday that feuding US political parties will reach an agreement to lift the country’s debt limit before its is forced into default.” He is a politician, and cannot be trusted.
Three Amigos “It does not comfort me in the slightest to remember that one of the greatest proponents of pre-emptive war in the 20th century was Adolph Hitler.” wrh.com.
Axis of Evil If taxpayers, who fund these wars, want them stopped and politicians don’t listen, who really wants the wars to continue expanding, thereby bankrupting their countries?
Libya “One only has to read the strategic briefings in U.S. AFRICOM documents to realise the true endgame in Libya: the control of valuable resources and the eviction of China from North Africa.”
Common Interests Gold, PMs, nuke / fiscal meltdowns, and the things that bind them together.
Bovine Excrometer “Iran is secretly helping Syrian President Bashar al-Assad put down pro-democracy demonstrations, according to U.S. officials, who say Tehran is providing gear to suppress crowds and assistance blocking and monitoring protesters’ use of the Internet, cellphones and text-messaging.” Next is Yemen, then Qatar.
Thorium “Though it was discovered in 1828, the metal has not been developed as a nuclear fuel until very recently when countries such as Russia, India and China started making plans to build reactors that use it.”
Rich “Who the government defines as the rich are not those money addicts on Wall Street or the Rockefellers who have tax free foundations so they can evade paying any taxes.”
5:34 clip and Homeless Wall St. sucks money.
China boosting reserves to curb inflation. Fat chance.
Texas University and gold bullion.
Oligarchs “What is really scary is the reality that here in the US, this is absolutely deliberate, with the main focus, on the part of US’s oligarchs, is the complete destruction of the middle class.” wrh.com.
Belarus “This is what the beast looks like when the mask finally comes off.” Gold = Roubles.
Chastisement “Debt dynamics in other advanced economies, including the United States, are of concern.”
5:23 clip SARS in Idaho?
Area 51 Revisited ‘Quake swarms, and the largest ammo dump in the US. Not that far from the SAF.
The trouble is that most are busy trying to keep up with the “Jones”. Only one issue with that, the “Jones” are bankrupt.
Garth et al:
Leap 2020 has put out a new news letter. I found it interesting and thought you would too. Here is the one comment from the article.
“Very Serious Breakdown of the world economic, financial and monetary system” and that this historic failure will occur in autumn 2011 (3). The monetary, financial, economic and geopolitical consequences of this “Very Serious Breakdown” will be of historic proportions and will show the crisis of autumn 2008 for what it really was: a simple detonator. ”
Hope you enjoyed the ride, it really was a fun trip.
Mike
Oh here is the link:
http://www.leap2020.eu/GEAB-N-54-is-available-Global-systemic-crisis-Autumn-2011-Budget-T-Bonds-Dollar-the-three-US-crises-which-will-cause_a6340.html
Responding to BrianT from the previous string. You need to go back and re-read all the dialogue. My point was precisely what you stated. Immigration does not save real estate. You completely missed the point.
A guy with 200k sitting in a RRSP and a paid mortgage is not a risk taker or an active investor. That guy, and guys like him wouldn’t have the balls to do a debt arbitrage deal like that, cause they might lose their home. I know a ton of cube farm dwellers that would think this is insanity.
Is this irony, or just double-speak?
“The subprime crisis in the United States — that’s exactly the kind of accident we want to avoid in the future,” Canadian Finance Minister Jim Flaherty told reporters.
http://www.businessweek.com/ap/financialnews/D9MKKGJ80.htm
So, apparently Mr. Flaherty didn’t get the memo that government-guaranteed mortgage-backed securities (ahem… CMHC) were a major enabler in the U.S. housing bubble?
A combination of Smith Manoeuvre and your investment advice (and my RBC Dominion guys’) is working nicely.
The Smith Manoeuvre allows the average Canadian to make their mortgage tax deductible one pay cheque at a time, unlike “The Strategy”. Both work well.
You suggest people explore a tax deductible mortgage in Money Road…just not “the competitions’ version” I guess. Is that your dislike for it?
I’ve split my HELOC in 2 (one small static and one readvancing). The interest due on both is covered from the new equity from each mortgage payment, so no money out of pocket. It’s called “Guerrilla Capitalization”.
I’m invested in preferred shares and ishares sector funds. Sector rotation and dividends = win. Oh, I wrote off just over $1600 mortgage interest in 2010.
Granted, I am not your average Joe. Wife and I are both O.P.P. and have excellent DB pensions and cost of living increases.
Hoof-hearted – This brief article agrees closely with other sources I’ve come over:
http://www.coinlink.com/Resources/fun-facts/how-much-gold-is-there-in-the-world/
A guy with 200k sitting in a RRSP and a paid off mortgage is not a risk taker
That’s why he has a paid off home and money in the bank.
Another quote to remember in 3-5 years from now:
At the worst, declines of 10 per cent or so in the costliest cities, Vancouver and Toronto, are “not unthinkable,” believes economist Benjamin Tal at CIBC World Markets.
http://www.montrealgazette.com/business/Home+prices+gliding+pause+except+maybe+Vancouver/4626996/story.html
So, let me get this straight… Vancouver prices just increased by 13.4% in 1 year, but a 10% drop is the “worst” scenario Benjamin Tal can see???
Should we be surprised that the same 4-5 RE-friendly economists from the Big Banks are the ones getting interviewed for all of these articles???
#10 Saanichtonian
Yes, you have outlined the perceived evils of fractional reserve banking. I am familiar with all the arguments against it. So having outlined the perceived evils, are you proposing a return to the gold standard? If so I suggest you read the late Canadian economist Kenneth Galbraith’s book, Money From Whence it Came, Where it Went. In it, referring to the gold standard, he wrote, “The history of gold is full of deflation and depression”. Another economist that might be known to some, John Maynard Keynes on gold, “The gold standard is a barbarous anachronism”. Once again Captain Garth, former minister in charge of national revenue would you be so kind as to weigh in on fractional reserve banking versus the gold standard.
Who’s offering HELOC’s at prime? Most are at least prime + 0.5% and the big banks are stuck at prime + 1%.
HELOCs are secured against real estate. You must live in a shipping container. — Garth
My wife was on a day trip last week with a friend who was an Office Manager for Coldwell Banker (let go a few months ago). During their trek the woman admitted to my wife that an agent, who is also a close friend to the three of us, was becoming “quite concerned about the market”. Apparently the agent has had several potential sales fail as well as several potential clients all of a sudden become disinterested.
When I asked my wife why we hadn’t heard anything about it earlier, she laughed and said “do you think it has anything to do with you ranting on about crashing Real Estate?”
Sorry, forgot to include in the above that the agent works in the GTA.
Looks like the housing crash is getting worse as people burn down their under water Homes. Looking more and more like 2008. I expect more fires as the downturn gets worse.
10 Saanichtonian – a mostly clear but still seasonally cold day today out this way. This is not part of the agreement to live in this part of the country is it?
With regards to your post, it doesnt appear to relate
directly to FRB. And I’m having real problems with eliminating interest on public debt. What is going
to stop the drunken sailors from spending, or probably
more important, who is going to lend them anything? I
wont. Strangely enough, what it may eliminate is defecit spending.
Also, do you have any figures for how much govt debt is owed to private bankers?
“Re a HELOC: Keeping non-performing equity in residential real estate is an admission of idiocy. Second rates will incrementally rise, but so what? All interest is deductible. Third, there is no reason to pay off fully-secured deductible debt. Lastly, there is more certainty in an 8% return form a diversified portfolio than a 0% return from real estate. Stick to flipping.” — Garth
_____________________________________________
I’m not sure that we’re on the same page here. If interest rates rise, my concern is that the spread will narrow, not that the interest is deductible. Fully-secured deductible debt is still debt, and since it represents tax-free equity, there is still an incentive to pay it down.
As for certainty of future investment returns, well quite simply there is none. However, owner-occupied GTA real estate on average is returning about 5% annually, tax-free. No longer flipper material, but not exactly zero.
If rates rise, the spread can narrow and still leave the investor in a positive position, and with a larger tax deduction. More importantly, if rates rise unduly the investor simply liquidates and repays – a simple act with a well balanced portfolio. Say, can you guarantee that 5% return on GTA real estate? Nah, didn’t think so. However, I can guarantee a 5.5% return on my bank preferred shares. — Garth
What kind of advice is that? No one has a crystal ball. If what you propose is true the whole world would be rich yet we all know it doesn’t work that way because the unforeseen happens and everyone goes broke because they got greedy. That’s why the world is in the mess it’s in, greed.
#7 realist – good point, exactly the same questions I had, and sorry to say Garth but your answers to realist were very unconvincing.
So, be timorous. You have much company. — Garth
Garth: I think you are wrong when you say that diversification by borrowing against the house to invest in other assets reduces risk. Usually you increase risk by using leverage like that (except when those other assets are strongly negatively correlated with house prices).
I’ve explained why here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/garth-turner-bleg.html
And you’re wrong. — Garth
In reply to Fractional Reserve
“Yes, you have outlined the perceived evils of fractional reserve banking.”
—-
I made no mention of evils, perceived or otherwise.
I was responding to your question of alternative banking systems.
Please read and comprehend what McGeer was saying, as he was not proposing either fractional reserve or asset backed currencies.
As Nick Rowe points out on his blog, this example of diversification doesn’t work because you’re taking on leverage in the process.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/garth-turner-bleg.html
(See my comment on Nick’s blog post for the mathematical explanation, or hopefully someone else’s comment who can explain it better than I can.)
Diversifying your existing portfolio would reduce the risk, so, if you could do it, it might be a good idea to sell half your house and invest the money in something else. But adding to the size of your portfolio by taking on new investments while you still own your whole house (regardless of whether it’s mortgaged), that will increase your risk, unless there is a sufficiently high negative correlation between the value of your house and the value of your other investments (which is unlikely). It might be worth the additional risk, but it’s not really an example of diversification; it’s an example of investing other people’s money.
Sure, keep all your money in an overvalued house where it pays you nothing and your occupancy costs keep rising. That sounds safe. — Garth
I have the Smith Manouver book on my reading list, but I do like your example, thanks. I am just renewing the mortgage 3.59% fixed for May 1st and readjusting the unused HELOC, so would also be sitting on over $200K inside the HELOC. Now I have a great plan to work towards. And a recommended great investment advisor…..nudge nudge wink wink
RealPaul and his anecdotes about the immigrant scourge taking over his once great nation and sucking it’s blood are laughable. For everyone of those people you relate in your stories I could point to 5 people who have worked harder than you ever have and have never taken a dollar in hand outs. Your father was probably complaining about them Jews and Eyetalians and Pollacks. You’re making him proud.
@#35 GTA House Fires – Is your post a joke? I haven’t heard about a rash of house fires now or in 2008. Can you provide some stats?
#44Believer-Look in the mirror-you call the guy a racist and in your mind that means his background can’t be Jewish, Italian or Polish-geez I wonder what group you figure he belongs to? They must have 100% of the racists.
Garth, you have contradicted yourself.
When real estate values plummet, so will the values of HELOCs and indeed many maybe be called in. You’ve hung your investment hat on a depreciating asset.
Secondly, show us where 8% steady rates of return can be achieved without making me buy your book. 8% would be at the upper end of what can be achieved investing in equities but prime rates on HELOC certainly won’t stay where they are for much longer. You will be squeezed and your really return is probably something like 2 or 3%. Not much return to risk your living quarters on.
Stop. You are embarrassing yourself. — Garth
So if this guy has a $425,000 home and borrows 200,000 against it….
What happens if interest rates go up 3% in the next two years. That should drop house prices at least 20% if we assume rich foreigners are not keeping prices up. This would bring his home value back down to $340,000.
Can the bank make a margin call on his HELOC? And if house prices drop, you can be sure that will take some steam out of the stock market, plus a rise in interest rates will slaughter bonds. So this 8% portfolio might take a 10+% hit.
Seems like a bad idea in a rising interest rate environment, especially will stock markets and housing markets at peaks and looking to correct.
Of course we all know by now that house prices will never fall here in Canada and interest rates will never go up.
Kilt.
This is why most Canadians are financial basket cases. Thank you for exemplifying that. — Garth
“Sure, keep all your money in an overvalued house where it pays you nothing and your occupancy costs keep rising. That sounds safe.”
If you think the house is a bad investment, you should sell the house, not mortgage it.
If you think the house is a good investment, it might be a good idea to mortgage it anyhow, for the extra income, if you’re willing to take the extra risk. But you ARE taking extra risk, not reducing your risk.
Personally, I think a house is a safe investment even if it’s overvalued. No matter what happens to the price, you can still live in it. If you sell the house and rent instead, you take the risk that rents will go up.
#30 Idra
“Diversification is a good idea if you’re smart, but a fantastic idea if you’re less than that.”
Get a life Idra.
Garth dispenses lots of good advice on this forum. Borrowing money, even at P-0.9, to invest in fixed income (even if 40%) is not one of them, unless you self-manage and religiously avoid goverment debt (yields too low) and short-term debt (same deal).
For those that want to go carry trade, it’s better to go whole hog into equities and preferreds (100%), or at least slide down the credit curve and buy corporate / junk debt which yields more.
But even then, you’ll be at a disadvantage compared to market professionals who do these trades all day long. Consider that banks can effectively borrow almost without limit near the bank of Canada overnight rate (1%), which is about 1.1% more favorable than the best floating mortgage rates out there. There’s a reason why corporate and longer term fixed income yields more (interest rate and credit risk). Leave them to the professionals (like me)!
Lessons of the day:
1) Fixed income is good, but don’t borrow, even at P-0.9, to invest in low yielding fixed income
2) And for the love of God, please don’t borrow 5Y fixed to invest in fixed income!
There is nothing more pointless than borrowing at 3.92% (lowest 5Y fixed rate today) and investing at 2.67% (current Canada 5Y bond yield). Not to mention that the 3.92%, for most people is after tax and the 2.67% is pre-tax!
Silly Garth, you preach better about TFSA’s (which are great) and Richmond house prices (which are crazy)
You have no idea what you’re talking about. A fixed income mix can contain preferreds (5.5%), corporates (4.4%), high yield (9%), REITs (6%) and provide a portfolio stabilizer against market volatility. — Garth
The goal of life is to enjoy it. Too bad some people have to stress out over how their “investments” are doing on a daily basis while their savings bounce around on a casino controlled by others who have their own set of priorities.
Vlad:
Learn something about radiation, decay rates, etc. before ‘going with your gut’. Fools like you rushing out buying buying KI pills over I-131 detected in milk at levels 100,000 times below background ought to just turn off your cell phone for a day to mitigate the additional cancer ‘risk’. Seriously. Your worrying is more detrimental to your overall health and quality of life than the so-called ‘fallout’ from Japan.
–
#12 Maxamillion — Thanks for the links — excellent!
*
End Of An Empire and beginning of a depression.
British Military Harrier Dump Jets!
A One and A Two. These make very interesting comparisons. Absorbing Could, or would the IMF absorb the US Fed? It’s just theoretical fiat paper money, run by a bunch of self-serving incompetents.
BRICS could eliminate G20, and Hooligans. Govts. are so broke they’re coming for basics. Wealthy now, pay later.
4:49 clip Smoke rising from all four reactors. Fukuskima Another 5.9 Sunday p.m. Radiation 6,500 times higher than normal.
Cult of Silence “#1 According to the World Bank, 44 million people around the globe have been pushed into extreme poverty since last June because of rising food prices.” He who controls the food (and money) supplies controls the world.
Giant Wolves At least Kannnaduhh has something left to export!
Gadaffi Just as Sadaam now lives in Russia. Libya The globalists, with the help of the BBC, are doing a mighty fine job of profiteering from it.
6:01 clip Undersea photography. Great clip.
CC Slightly more accurate than GW, GC and CC.
Additional ‘quake swarms on California border. Incl. nice maps, with a possible super volcano.
What people should learn from this blog:
Views backed by emotion are difficult to affect. Go against a particular individual view and facts become suspicious.
Justify why current RE prices exist and you may get wrongly branded as a RE agent. Furthermore, you are said to provide false claims.
On the other hand, some contend that RE will crash at least 50%. We may think that these people are less intelligent than the rest of us and are out to lunch so to speak? …but are they if we back bullish comments
with emotion??
It should be clear to everyone by now that the vast majority of regular posters here do not own investment real estate (yes, even perceived pumpers).
Think hard about it.
using your home to borrow and invest is the smith mano…plain jane version.
where should I mail the tweezers? kidding
great blog..huge fan. just chirpin.
Aussie (Asian) Update
More Tightening as China Raises Reserve Ratios
http://www.bloomberg.com/news/2011-04-17/china-raises-reserve-ratio-to-curb-inflation-as-zhou-pledges-more-to-come.html
http://globaleconomicanalysis.blogspot.com/2011/04/zhou-pledges-more-tightening-moodys.html
Australians struggle with household costs
The cost of living has increased, on average, 7.5 per cent across the nation, more than double the official inflation rate of 2.7 per cent, financial group ING Direct says in its Financial Wellbeing Index for the first quarter of 2011.
http://www.news.com.au/breaking-news/australians-struggle-with-household-costs/story-e6frfku0-1226040663678#ixzz1JqbaPePD
You can always trust the RE industry to look after themselves.
http://theage.domain.com.au/real-estate-news/its-time-to-clear-up-auction-confusion-20110418-1dk71.html
Nationwide residential land sales dropped to their lowest level in at least a decade as the cost of blocks increased, a new report shows.
http://www.smh.com.au/business/new-land-sales-slump-to-lowest-in-a-decade-20110418-1dkm3.html#ixzz1JqcJ9nry
Property experts say Melbourne house prices are likely to fall in 2011, but have questioned new figures from the Real Estate Industry of Victoria showing an ugly 6% fall in median prices in the March quarter. LOL
http://www.smartcompany.com.au/property/20110418-experts-play-down-fears-of-dramatic-drop-in-melbourne-house-prices-but-say-pain-is-coming.html
@#14, realist:
Consider it with numbers: If Al has a place worth $400k now and wants to move to a place worth $800k now, then he needs to come up with an extra $400k to move up today (plus transaction fees).
If the market corrects by 20%, and both high-end and low-end face the same percentage correction, then in a few years Al sells his townhouse for $320k, buys his new place for $640k, and only needs to come up with $320k to make the move — waiting a few years saved him. Plus he could use his equity to invest in financial assets to get even further ahead.
And as an unrelated anecdote, my landlord just asked if we’d be interested in signing a 2-year lease, now that our first year is up. No rent increases if we sign for that long. I don’t think it’s enough incentive to lock in for that long, but it is a data point for those that are concerned that renting doesn’t provide the option for stability.
Why do you recommend this strategy and not the Smith Manoevre?
http://www.walletpop.ca/2011/04/14/time-to-invest-in-canadian-real-estate-find-out-whats-hot-and/?icid=main%7Ccanada-toshiba%7Cdl4%7Csec1_lnk3%7C210092
Real estate expert?
Taiwan to curb “RE Speculation”.
Taiwan’s lawmakers, seeking to curb speculative real estate transactions, have approved a “luxury tax” bill. Although the measure will go down well with low- and medium-income earners in an election year, the measure will cause some collateral damage.
http://www.atimes.com/atimes/China_Business/MD19Cb02.html
As if Melbourne rental yields for houses weren’t already low enough, rents drop further as MSM scream “WE HAVE A SHORTAGE”. – WTF
http://www.theage.com.au/business/signs-of-hope-for-melbourne-renters-20110417-1djoy.html
Deliverator on 04.18.11 at 12:40 am
I-131 detected in milk at levels 100,000 times below background.
MMM, Iodine 131 doesn’t naturally occur, how can it be below background when it usually doesn’t exist.
Big difference between RF radiation (cell phone, rf transmitters etc) and radioactive isotopes radiation.
http://en.wikipedia.org/wiki/I-131
Garth,
I like your blog – a somewhat lonely voice on the real estate bubble – however, this time you make the same mistake repeated over and over from virtually everyone writing on financial planning. My problem is with that 8.0% rate of return on your balanced portfolio. You can’t guarantee it and in reality few can brag that have achieved it over a longer period of time.
My balanced portfolio last year gave 15%. This year it’s running at 9%. Conservative yet aggressive. If you need a guarantee, learn to love KD. — Garth
#41 Saanichtonian
By changing the regulation and control of the circulation of money and credit purchasing power from a banker’s licence to a public trust, we can, through the maintenance of an adequate volume of consumers’ purchasing power, avoid the movements of the credit cycle and the evils of inflation and deflation.
I will agree with transferring the circulation and credit purchasing power from a banker’s licence to a public trust. Fractional reserve banking will still be part of the equation.
Garth, there were a lot of comments yesterday regarding our immigration system. Some of the comments would seem to be somewhat racist.
Admittedly, I don’t know much about what is going on there but would love for you to comment.
Is the system being abused? Are we Canadian taxpayers paying for a huge amount of ‘undesirable ‘people to come in as was mentioned?
Are the immigrants inflating our housing markets?
I would like to get a handle on this factor .Any comments appreciated.
Immigration built Canada. Our current admission rate of about 240,000 seems right. There are bigger things to worry about. — Garth
HELOCs are secured against real estate. You must live in a shipping container. — Garth
I have two shipping containers with HELOC’s on them, one at Scotia and one at TD and both won’t lower their rates from 3% + 1% despite me asking ruthlessly even suggesting I might move my business to one or the other or to someone else. I talked to a broker and he said prime +0.5%, that was the best, but I’d have to close and jump ship where the math didn’t work.
Suggestions?
Keep shopping. Buy also understand a half-point difference means little when the interest is deductible form taxable income (if the money is invested in a rental container). — Garth
Keep shopping. Buy also understand a half-point difference means little when the interest is deductible form taxable income (if the money is invested in a rental container). — Garth
You know I love rental containers. I’ll shop around more in 1.5 years and set up to come talk to you.
You have no idea what you’re talking about. A fixed income mix can contain preferreds (5.5%), corporates (4.4%), high yield (9%), REITs (6%) and provide a portfolio stabilizer against market volatility. — Garth
—————–
It’s really amazing. You can be so level headed on so many fronts but here you are talking about this as if this strategy is a slam dunk when it is obvious that a lot of people do not have the financial acumen to pull it off.
There’s a reason why there are credit spreads. It’s called risk.
Even worse, credit spreads today don’t even reflect current reality. Credit spreads are at pre-crisis levels when our world economy is far from hunky-dory. Investors are so thirsty for yield that they are ready to buy any crap that comes along.
You’ve got to ask yourself a question… If these debt issues are so attractive why aren’t banks putting them on their books? The answer is easy, it’s because the spreads are not attractive enough. They make more money with the underwriting fees.
Another head scratcher… When in the history of Canada has a homeowner been offered rates at better than prime? Never until a couple of years ago. If you ask me, this is another sign of a credit market out of whack.
The fact that Canadians are jumping into these leverage strategies is yet another sign of a credit bubble. Canadians have not saved enough and instead of shrinking their lifestyle to match the quality of their balance sheet, they are ready to leverage every friggin asset in thir garage to get some yield instead of going out there and being productive. They would package and CDO their grandmothers if they could just to squeeze a little more income.
I don’t know when but it’s going to pop big time. And you’ve got to be a darn good market timer when you play this game. Most people aren’t because we are social animals.
There are big risks in leveraged strategies.
For example, if your house is used as collateral and its price tanks, your loan can be recalled and force you to sell your investments at the worse time possible.
But the largest risk in these leverage strategies is that investments don’t return more than the cost of the debt. And considering most Canadians have not done too well in their portfolios without leverage, imagine the results with levergae. Ouch.
“Get a secured HELOC for $200,000 at prime – 3% – and invest it in a balanced portfolio making 8% or so.”
The problem is that 3% is guaranteed, but the 8% is not.
I can guarantee that every year, I’m going to owe 3% on my money, but I might not EARN 8% every year.
If it really were that easy, we’d all be millionaires. We’re not stupid, Garth. You’re completely glossing over the risk premium.
I give up. Enjoy your GIC and your future. — Garth
So, 400,000 paid-up house – monthy carrying costs (insurance, taxes, utilities, repairs/maint.) must be at least $800/mo.
If housing market goes sideways for the next five years, your investment (realtors(s) always tell you it’s an ‘investment’??) loses: $48000.
If you sell during this time, you ‘ll lose another 10-15k in selling & closing costs.
Or, HELOC 200k out of the house and try for a 6-7% return, and deduct the HELOC interest against the 6-7% returns. If you use a TFSAs and RRSP I guess this helps the tax sitaution (near term only, in RRSP’s case) , athough you are kind of locked in with an RRSP.
As per Economics 101, *sunk costs are irrelevant* when making investment decisions.
Meaning: if your paid-up house drops in price it does not matter. After all you’d be living in the house anyway, losing 800/mo, for the five years.
Why your dividend tax credit is worth less
Melissa King
By Gordon Pape | Sat Apr 16 2011
You probably don’t realize it yet but the dividend payments you’re receiving from your stocks aren’t worth as much this year.
The amount of the cheque may be the same, or even a little more. But if the dividends are going into a taxable account (e.g. not a TFSA, RRSP, RESP, or RRIF), you’ll end up with less money in your pocket after the tax folks take their share. In short, you’re getting less bang for your dividend buck.
Why? Because the Conservative government has been reducing the corporate tax rate and will continue to do so if it is re-elected on May 2. As companies pay less tax, investors get a lower credit for the dividends they receive.
To read the rest see
http://www.moneyville.ca/article/973939–why-your-dividend-tax-credit-is-worth-less?bn=1
>#31 Fractional Reserve on 04.17.11 at 9:30 pm
>#10 Saanichtonian
In order to have Fractional Reserve, you first have to specify a reserve. There a four countries that don’t specify a reserve level for their banks: Australia, Canada, New Zealand and Sweden.
Interesting thing, they are all still in a housing bubble.
Don Campbell is tapped out! A recent entry on his blog:
“Yikes! The last time I filled up my car, it was almost impossible to have the pump finish on an ‘even .00 number’. ”
Now I don’t need to tell you that nobody who pays by credit card (free money for a month, plus cash back) cares a whit about stopping on an even dollar amount. Further, you can’t track fuel economy to monitor your car’s health if you’re rounding off the pennies.
Thus, either Campbell’s running expensive balances on his cards and worried about interest, or he’s paying cash and forgoing the free goodies.
#54Nost-Idaho needs the Giant Killer Wolves to keep out the Giant Killer Pigs http://www.boiseweekly.com/boise/unwelcome-invaders-wild-pigs-pose-a-serious-new-threat-to-idaho/Content?oid=2090820
Jon B on 04.18.11 at 12:28 am
The goal of life is to enjoy it. Too bad some people have to stress out over how their “investments” are doing on a daily basis while their savings bounce around on a casino controlled by others who have their own set of priorities………….best thing written in a long time!
“You have no idea what you’re talking about. A fixed income mix can contain preferreds (5.5%), corporates (4.4%), high yield (9%), REITs (6%) and provide a portfolio stabilizer against market volatility. — Garth”
I like preferreds. I like corporates. I think they belong in any long-only (e.g. no debt) portfolio. For most mortgage-free geezers out there, that means you! However, your recommendation falls apart for people who have to BORROW to invest. 4.4% for corporates is barely higher than most 5Y fixed mortgages out there! Is it really worth it?
Why would you borrow investment funds on an amortized mortgage? Nuts. And corporates are just one element of a fixed portfolio. Read more carefully. — Garth
In response to #36 Dark Sad Monster Bunny
“a mostly clear but still seasonally cold day today out this way. This is not part of the agreement to live in this part of the country is it?”
Hmmm. Darned if I can find my copy of the weather contract.
“Also, do you have any figures for how much govt debt is owed to private bankers?”
I can make guestimates. You can drop me a line at yahoo if you wish.
———–
In response to #64 Fractional Reserve
“I will agree with transferring the circulation and credit purchasing power from a banker’s licence to a public trust. Fractional reserve banking will still be part of the equation.”
—
The following sentence talks of eliminating fractional reserve.
“The private banker can carry on under proper regulation the legitimate business of the merchant banker, namely that of financing private enterprise with his own and his depositors’ funds.”
In other words, private banks work only with existing capital, and no longer have the privliedge of creating credit from thin air. 100% reserves.
http://www.votepair.ca/
Okay, I have to admit this one is a bit unorthodox. I’m all for tapping into one’s home equity to take advantage of other investment opportunities that pose a greater return than the HELOC’s rate…. only for a very short period of time. I had many friends here in the States that did precisely what you’re recommending, Garth. When values across the nation began plummeting, the Banks began calling in the HELOC’s, even in still quite healthy markets where no RE depreciation had yet been experienced. This meant they had to pay in full the HELOC as per the agreement signed with the bank, and frankly some of them did not have the funds to do it. Effectively, they were using their home as a piggy bank. After all, we have determined that RE is/will be a depreciating asset class in Canada too, therefore these HELOCs would more than likely be called as well. Can you help me understand how you would hedge this activity? Thanks.
@#46 BrianT
Thanks for that. Next time you may want to include a free magnifying glass with your post so that we could see your point. Keep up the interesting commentary and unabashed support of the openly racist.
Is this the end of the US dollar?
http://www.bloomberg.com/news/2011-04-15/texas-university-endowment-holds-almost-1-billion-in-gold-bars.html
76 Saanichtonian – frost on the windshield this AM!! Blasphemy!
I dont understand a 100% reserve. How does that work?
How do you lend out any money?
Use HELOC to invest. Yikes!
Using leverage from an asset that is in a bubble to invest in another asset class that is in an even bigger bubble – that is very brazen. I don’t see the equity market continuing to make gains while the real estate market suffers. They’re both fueled by the same thing – too much speculation encouraged by cheap money (debt). A lesser mortal (than Garth) should not be taking such unnecessary risks on both fronts at this time of great economic uncertainty.
Great strategy but questionable timing.
Actually not. This is precisely the time at which diversification could save the bacon of many people who have the bulk of their net worth in one or two assets. Money is inexpensive and tax-deductible debt is a clear advantage. Sadly too many posters today have the vapours. — Garth
To # 69 Moneta and # 79 American. Excellent statements you both have stated. Keep up the great contributions. I think the majority of people who are debt free don’t want to gamble with their money. We all had great advisers till 08 and 09 took a dive. What was their excuse.
To #66 bigrider
Garth, there were a lot of comments yesterday regarding our immigration system. Some of the comments would seem to be somewhat racist.
Admittedly, I don’t know much about what is going on there but would love for you to comment.
Is the system being abused? Are we Canadian taxpayers paying for a huge amount of ‘undesirable ‘people to come in as was mentioned?
Are the immigrants inflating our housing markets?
=====================================
And this is the official statistics:
http://www.cic.gc.ca/english/resources/statistics/facts2010-preliminary/01.asp
Pay special attention to the 3223 PR in the investors category together with 8492 spouses and dependants.
These are the rich people – the ones that used to buy their permanent residency with $400k that was changed I believe in Nov. to 800k.
But there was and is a loophole – if you do not have these in cash you could arrange for a 5-years loan with upfront payment of 100k in interest (if 400k borrowed) and 200k on interest (under the new requirements of 800k). Add 20k in fees to the immigration layer/consultant who brokered the deal.
I just wanted to add my 2 cents to the fractional reserve banking debate. I dont think its about whether its good or bad just some of the regulations that govern it. We have it so how can we stop the banks being reckless lenders. IMHO Valuations.
You want to reduce RE prices for FHBs and remove the risks of speculators gambling with borrowed money, then be serious about VALUATIONS. At present valuations are determined by previous sales in your immediate area. If a valuation were based on the income generating potential of the property was used to calculate a maximum mortgage (say the long term average of 8% return – price would be annual rent times 12) it could put a stop to speculators being given 90% mortgages on properties returning as little as 3%.
If you wanted to buy a property that was only yielding 4% then it would require the person to take the risk with their own capital.
IMHO this type of valuation (which your max mortgage would be calculated on) could not encourage or facilitate any housing bubble to any great extent. Even if there was a small amount of speculation the speculators would be risking their own money.
Remove the speculation and you remove the need for many young couples paying the current over inflated house prices and risking their own financial future.
Written without my specks tonight so sorry for any typos.
#77 Saanitchtonian.
I understand that under the proposed system you have referenced private banks would be stripped of their fractional reserve privileges and this privilege (it is indeed a great priviledge)would be transferred to a public trust. On this I would agree that society would benefit. At the same time, the fractional reserve method would be employed by the public trust would it not? Please clarify.
well tickle me pink..
S&P MOVES USA OUTLOOK TO NEGATIVE
Standard & Poor’s on Monday downgraded the outlook for the United States to negative, saying it believes there’s a risk U.S. policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.
Debt remains at AAA. — Garth
Why are people scoffing at 8%?
My portfolio has NEVER dropped below 10% a year, and that was back in the 2008 “crash”.
Usually my (rediculously conservative) portfolio average around 12 to 14%.
Its not hard to do. If your portfolio is stuck at 3% – you need to get a financial advisor.. or if you have one, sack them – and get someone good!
#79 The American
Can you help me understand how you would hedge this activity? Thanks.
——————————————————————————
I would also like Garth to weigh in on hedging. Money Road mentions it as viable. I`ve been using HSD.TO and it has been tracking well while the VIX is low.
A great hedging strategy is probably why Garth is so fearless in the markets.
A balanced portfolio contains a strong hedge element, which seems to elude most people here today. The key is multiple asset classes which are not correlated, many of which provide a predictable income stream. — Garth
#83 unbalanced on 04.18.11 at 10:36 am
To # 69 Moneta and # 79 American. Excellent statements you both have stated. Keep up the great contributions. I think the majority of people who are debt free don’t want to gamble with their money. We all had great advisers till 08 and 09 took a dive. What was their excuse.
………………………
We knew well before 08 or 09 that we did not have a great advisor and stopped adding to our investments well before then. We did not get out of the market, but asked our MF sales guy to change to a more balanced portfolio. Like the majority of investors we were ignorant. We had only started investing 13 years ago and experienced 3 downturns during that time. We didn’t know how find a good FA. A neighbour recommended someone, but they too had lost during the years so I was reluctant to follow their advice. Just heard 2 wks ago that they have already contacted someone with a view to switching. When the opportunity presents itself, will try to find out if they switched and with whom – curious. In my experience, money, politics and religion are taboo subjects, tho we and a neighbour across the street have party signs on our lawns; we were the first to do so.
PS to my previous post. We finally did find a good FA :-).
Actually not. This is precisely the time at which diversification could save the bacon of many people who have the bulk of their net worth in one or two assets. Money is inexpensive and tax-deductible debt is a clear advantage. Sadly too many posters today have the vapours. — Garth
***********************************************
Oh, hey! Garth replied on my comment. I feel honoured. :) Suddenly, I have discovered being afflicted by something commonly reserved for the opposite sex.
Garth, now that I have your attention… How about selling the townhouse instead? Al can then invest the proceeds of the sale in a “balanced portfolio” and rent a “move-up” house he so covets.
I realize he’d end up with a higher living cost because of the rent (vs. no mortgage payments now). However, with $425K invested “making 8% or so”, I think he would have more than enough to carry the living cost and maybe some left over for a lease on a Vette (yuck!).
In the end, he gets to live in a house that he wants (now!) while watching the unraveling of the real estate ponzi scheme (that he himself alluded to).
Less Risk, More Liquid and No Debt.
There’s nothing intrinsically wrong with owning real estate. Just dumb to have too much money there. I own all kinds of deliciously useless things. — Garth
Love the readers’ replies. Nice to see some people reflecting on the larger societal picture, namely # 8 skip…..
” What a scammer plan you got going on there….Your not telling the guy how to make money , your telling the guy how to scam the system and get the jump on everyone else….Thanx for teaching people how to be such scumbags.”
And # 52, Jon B …” The goal of life is to enjoy it. Too bad some people have to stress out over how their “investments” are doing on a daily basis while their savings bounce around on a casino controlled by others who have their own set of priorities.”
And the real kicker # 38 Tony….What kind of advice is that? No one has a crystal ball. If what you propose is true the whole world would be rich yet we all know it doesn’t work that way because the unforeseen happens and everyone goes broke because they got greedy. That’s why the world is in the mess it’s in, greed.”
Sure nice to see some people here looking at the bigger picture. Tell me Garth what makes you different from all other pumpers promising riches out of thin air? Why on earth with the 8% and 15% gains you brag about here do you waste your time with this pathetic blog for sheeple rather than put serious money where your mouth is and start a hedge fund? Are you really making such a bundle off the books and talks?
Long ago I stopped needing more money. I write this blog in the hope it will help educate more people, open their eyes to opportunities and dangers and raise awareness of the investment vehicles the banks hope they miss. I am selling nothing here but a twenty-dollar book you can get at the library for nothing. But comments like this remind me to constantly question why I do it. Thanks. — Garth
#89Oasis-No need to list all the debt rated AAA by S&P and Moodys which turned to garbage literally days later-it is a long list.
#81Believe-I didn’t think it was cryptic-your comment was racist. My comment wasn’t a defence of his post as much as an expression of contempt for yours.
Planning with property with Gail Vaz-Oxlade
http://www.hgtv.ca/video/
A couple making 120k a year have 3 properties with mortgages of 870k. These 3 properties are putting them in the hole by 2k a month! But they do not know that their rental properties are not making them money until Gail comes in.
How many other couples in Canada are living this way?
In reply to #86 Fractional Reserve
“On this I would agree that society would benefit. At the same time, the fractional reserve method would be employed by the public trust would it not? ”
It seems that we agree that society would benefit.
In your opinion, is Canadian cash the reserve? As of Feb 28th, there is $54.7835 billion in circulation world wide
(http://www.bankofcanada.ca/en/about/pdf/boc_statement280211.pdf)
Are the reserves the assets of this country? forests, oil, minerals, infrastructure? (a much higher number than required to back a currency)
Are the reserves the people and their production?
If the government is indeed a representitive of the people of Canada, and they create the currency interest free, or even at nominal interest payable back to the people (government), do the people, as compared to private bank bond and shareholders, not benefit?
#27 Dark Sad Monster Bunny
Re Gold….I have room to store quite a bit of that Gold
No problem,send it via mail.
Other than that, I rooted for Auric Goldfinger in That James Bond movie….Gold is a silly bauble.
Reply to #83 Dark Sad Monster Bunny
“I dont understand a 100% reserve. How does that work?
How do you lend out any money?”
—
Pretty much the same as it is now. The only difference i could see is that if money was loaned out, it could not also be accessable.
In other words, if I put money in a savings account, and it is used for a loan by the bank, then I cannot simultaneouly draw on it.
#69 Moneta on 04.18.11 at 8:55 am
Impeccably said. Agree 100% with you.
#14 realist
Same old BS. It doesn’t matter when you buy, as long as the monthly payment is the same, right? I thought we’ve beat it to death here already. Buy when prices are low, interest rates higher. That way, your debt will be smaller (easier to pay off quicker) and interest rates may decline, lowering your carrying costs. As opposed to buying at record high prices destined to tumble and record low interest rates that can only go up. Good plan. Do you do this for a living?
Trump for pres
http://money.cnn.com/2011/04/17/news/economy/trump_china_trade_war/index.htm
With the gutless, wishy washy Obama running the US to the ground. Its time for REAL CHANGE.
If trump gets in, I’m sure serious changes will be made to even out the playing field for US vs Chinese workers.
“However, I can guarantee a 5.5% return on my bank preferred shares. — Garth”
You can almost guarantee a 5.5% yield, but not a 5.5% return. The price of the shares could drop steeply as interest rates rise giving much lower, or even negative, rates of return.
Yield, yes. That’s why most people buy them – not for capital gains. I have now typed that sentence twelve hundred times. — Garth
There’s nothing intrinsically wrong with owning real estate. Just dumb to have too much money there. I own all kinds of deliciously useless things. — Garth
Agreed…And it seems the more ‘deliciously useless’… all the more fun. However…too much of anything ain’t good.
I’ve had too many sno-cones on occasion. Not fun.
Wow, you people don’t know how to read. Al has a paid-off townhouse. There is no mention of consumer debt, car loans, student loans. He has RRSPs to an amount many boomers with looming retirements would envy – although that isn’t saying much. Clearly, Al and the Mrs. know how to manage their spending. Al said that for the last decade, rather than squirreling away the extra money, they have been having a good time traveling and living the high life, and yet, unlike many, still no debt!
I seriously doubt Garth would give the same advice to someone who has as much total debt as equity in their house. He has posted stories about such people and his first piece of advice is always SELL and RENT.
So many home owners think nothing of a HELOC to modernize a kitchen when the old one was still functional but talk of “risk” at the thought of using the same amount from a HELOC to use for a balanced portfolio.
Al may not know how to go about investing the equity from his home, but he does have the smarts to find a good investment advisor to help him get the job done. Kudos to him.
“Bully offers lose their bite”
Another sign that we are in a bubble
http://www.theglobeandmail.com/life/home-and-garden/real-estate/buying-and-selling/in-toronto-house-hunt-bully-offers-are-losing-their-bite/article1985387/
some people think this is a scam?
that we are scumbags ? for not wanting to pay extra tax when there are legitimate ways to avoid it?
and then some other git thinks life is too much fun to be wasting it worry about investments.
what if you dont worry about the investments ,is that all right?
onthesidelines would you be so kind as to explain your investment strategy?
why are you here anyway? philosophy is generally not discussed in real-estate blogs.
“If the market corrects by 20%, and both high-end and low-end face the same percentage correction, then in a few years Al sells his townhouse for $320k, buys his new place for $640k, and only needs to come up with $320k to make the move — waiting a few years saved him. Plus he could use his equity to invest in financial assets to get even further ahead.”
Usually the high end takes a bigger percentage hit than the lower end in a declining market, because the vast majority will not have the ability to buy “up”. Instead, most people will be downsizing.
Debt remains at AAA. — Garth
________________________________
not for too much longer…
Garth, your blog is great and everything but seriously you need to be more open to other points of view. The visitors to this blog aren’t casual surfers. They are people that own and have owned real estate, had HELOC and RRSPs and TFSAs businesses and invested in the stock market.
Debt arbitrage is tried all over the world unsuccessfully. The U.S. govt is trying it now, issuing 0% treasuries, borrowing to banks at 2% and then on to people at 5%. It doesn’t last because its all debt fueled.
If you can get 15%, great, but the average guy fights for 6 or 7% and its not the quality of the adviser. If your broker could make 15% for himself, he wouldn’t be working as a broker anymore. Wherever you have invested I can bet that country has a sovereign debt crisis coming and those yields are going to be getting a haircut real soon.
#95On-Possibly your life as a cubicle farm dweller is secure, but it might not be as changes appear to be underway. Discussing investment strategy bores you but IMHO you should try to understand why this is so.
#83 Dark Sad Monster Bunny
Oh ye of little imagination and no faith.
Deposit banking: you deposit money in a bank to keep it safe. You don’t want to hide your cash under the mattress. Or maybe you do. The bank will charge you a fee for this service and others, like electronic payments. This money is available to you whenever you need it.
Investment banking: you deposit money here with the understanding the bank will lend it out, and there is a certain risk associated with that. For that risk, you will be compensated. You do not get to withdraw your money whenever you choose.
Fractional banking comes from the idea that whatever money you deposit in a bank is always available to you. This was a nice perk for depositors, based on statistics that showed people ever want all their money out at the same time. This allowed banks to play fast and loose with deposits by lending them out, to make money on the side, keeping just enough cash on hand to meet the usual withdraw demands. In exchange, depositors are paid a pittance to overlook the bank is putting their hard earned money at risk. 99% of the time, it works fine. But they forgot to account for risk properly (sounds familiar?). This would be demonstrated periodically when a certain bank was reported to be unsafe, and their depositors took their money out. It was also demonstrated on a large scale in the 1920s, when many banks found themselves in this position.
Nevertheless, bank profits needed to be preserved at all costs, so rather than scrapping this broken system that brought the western world to the brink of death, the fractional scheme needed to persevere. Federal deposit insurance was brought in, to guarantee deposits, and reduce the chances of a bank run occurring again. People believe their money is safe, the feds guarantee it after all.
There is widespread belief this system is the best system possible, and is necessary, despite its flaws. This belief is not rational, but it is entrenched, so I do not expect to ever see any demands or attempts to be made at a 100% reserve system.
#101 saanichtonian on 04.18.11 at 12:43 pm
Reply to #83 Dark Sad Monster Bunny
“I dont understand a 100% reserve. How does that work?
How do you lend out any money?”
—
In other words, if I put money in a savings account, and it is used for a loan by the bank, then I cannot simultaneouly draw on it.
—-
Seems to me, just glancing at the posts) that the larger issue is, say Joe takes a loan from The 100% No Fractional Reserve Bank (T100NFRB) and uses it to buy a house from José and José decides it’s time to get a bank account. What’s to stop José from opening an account at T100NFRB and then what’s to stop T100NFRB from assuming his deposits are available to loan out again?
It is not immigration that has been supporting real estate values in Toronto and Vancouver. Money has been for moved out of China for quite a while. Some saw this coming.
http://biggovernment.com/cstreet/2011/04/18/china-is-about-to-suffer-a-banking-crisis/
Here you go Garth. Contrary to your predictions- as I keep saying the plunge in listings is the big story here.
http://www.torontorealestateboard.com/consumer_info/market_news/news2011/pdf/nr_mid_month_0411.pdf
Here is another option. Start an online business (or two) and start building passive income. In most cases. the entire cost of starting the business is tax deductible, and so is any advertising associated with it. Smartest deicision I’ve ever made.
People need to start thinking outside of the box. All I hear is “jobs this, jobs that”. The truth is, maybe 3-5% of people working for others will ever make any substantial money. Job security is dead. I’ve been laid off one too many times to ever have confidence in working for someone else.
If you have a good paying career, that’s great. But either way, additional income streams are the way to go, and the internet is one of the best places to earn them. I made more last year (part time) from online businesses than I would have averaging 8% returns on $200,000. And I risked less than $1,000 of my own money to do it. Anyone can do the same.
#95 Onthesidelines,
Shame on you….
#95 Onthesidelines,
If you are human being, your moral should make you feel guilty of visiting this website anymore…
Just wondering…
There was a young blogger a while back. A week or so.
Had $5k to his name, I think. He was going to get some sort of post-secondary education using all the $5k. Now $5k to some, may as well be a million $ to others.
I say, good move. That is an investment (gamble?…semantics) that should pay dividends (read… advantage) for the rest of his life. No guarantees though. That’s for sure. But a decent bet.
What is the goal of life, for him/her? I wonder.
When you have nothing, you can try everything.
Old proverb from somewhere back there.
I am selling nothing here but a twenty-dollar book you can get at the library for nothing. But comments like this remind me to constantly question why I do it. Thanks. — Garth
Thanks again Garth, for putting you free time and energy into this blog. You are “returning to the community”, and as such, make an excellent example of a model citizen. Too bad our government does not make room for voices such as yours.
Anybody who claims returns are guaranteed is a snake-oil salesman.
Like saying real estate always goes up? — Garth
G-Man is taking it from all sides today – people, Garth is just providing points to diversify.
I don’t have the steel balls to ever pull that off – reason being – I believe most of the news, financial reporting are all lies (yep, I trust no one). I see Garth’s point of view, but if…and could be possible…you leverage your paid off house and the game falls apart –
I not only lose my house – I lose my wife, kids and security – that’s one way of financing that I’ll never consider -but I appreciate that Garth providing such a possible ploy – Good on yeah Garth – Keep up the fantastic work, people gotta learn to chill –
#84 debtified on 04.18.11 at 10:22 am
“I don’t see the equity market continuing to make gains while the real estate market suffers.”
Well US Real Estate exploded but the Dow and Nasdaq are doing just fine.
Gas $1.39. I hope the blogdogs own some Oil along with their leveraged RE and GICs.
why I do it. — Garth
Because it`s the best dam blog in the country.
I think it is time for regulars on this blog to start reading books about the finincial sector. Start with the Big Short. Then you will realize what is exactly going on.
Step 1 – Prop up the markets with ‘free money’ courtesy of central banks via record low interest rates. Credit markets via liquidity.
Step 2 – Once propping has occured. Remove liquidity from the markets and force the decline.
Step 3 – Sell out when all the retail investors are jumping into the market = right now, today!
Step 4 – Short the decline….rinse and repeat. All done with free money. Ask Golman Sacs! They are pros! Look at how much they make on short squeezes on a daily basis!
Folks, read read read read about what is going on. The information is out there. It takes work. Everything Garth has talked about is readily available to those who are interested and willing to put forth the effort.
Mr. R.
king steve your in trouble .
http://www.theglobeandmail.com/news/politics/ottawa-notebook/voting-mob-mentality-has-young-people-running-amok/article1989013/
53 Deliverator
Reactor 3 uses MOX (mixed oxide: plutonium/uranium mixture). Half lives: plutonium 239 24,000 years, uranium 235 700 million years. Even caesium 137 with a 30 year half life has an isotope not considered safe for 10 to 20 times longer, ie. 600 years.
Consider CRIIRAD in France, advising pregnant women and children not to consume fresh milk or vegetables with large leaves. Or consider the World Health and IAEA 1959 Pact, whereby WHO is gagged from releasing any info not approved by the IAEA. They are forced to stick to a 4000 Chernobyl death count; latest research is 1 million and counting. GE, with media, nuclear, military weapons interests will never share the truth with us.
Best case is they can somehow stop this by years end. Anyone with kids should turn off msm and start researching how to safeguard your family.
Devore, I personally, as saver, feel there is nothing ethical in the fact that when banks need money they get newly printed from Fed, they should go and ask those who has real money – savers at what percent they(savers) are willing to lend them(bankers) their money at. What happens now is the Fed rips all savers by creating new money and removing “store value” from it. They are bandits sitting in their glass towers expropriating money from people, plain and simple
they are thieves.
Where do these Chinese and Indians get their money from? I thought wages were very low in those countries and people were generally poor….
Yes and No.
YES: Wages continue to be very low in India. You can get a housekeeper for about $4 per day. Why so low? Because of rampant population growth that creates an oversupply of unskilled labour.
NO: 20 years ago, land prices (farm etc.) in the plains of India’s Punjab province were on average $500-$1000 per acre. Fast Forward 20 years and the average land price there is $40,000 per acre. Yes, this is the average. There are no mortgages on this land.
While the Population continues to grow, RE rises and wages remain low.
Now, you have some farmers there that are instant multimillionaires. I know people that live in villages and have 1000 and 150 acres respectively. Their incomes are relatively low but their land is worth a mint.
If these people wish to immigrate, they can. Why? Because they HAVE money. It wasn’t earned in the traditional sense. The financial system rewarded them.
And with globalization (currency flows and trade), that money is going to be seen more and more in Toronto and Vancouver.
Think about this: If you have a place with 1+ billion people crammed into an area almost the same size as Canada, then RE per unit area will eventually be alot more expensive there than here. Then selling a little bit there will get you something a relatively bigger here (west side Vancouver home).
#70 – ‘If it really were that easy, we’d all be millionaires. We’re not stupid, Garth. You’re completely glossing over the risk premium.’ Kevin
Oh right and we all know how many people became millionaires by investing in GIC’s. LOL.
Wow – those GTA mid-month numbers are quite surprising… only a 3% decrease in sales volumes vs. 2010 (which was a record April). It will be interesting to see how close sales get to the 10898 from 2010.
One BIG factor to consider though — Easter was at the beginning of April in 2010 (April 2nd was Good Friday)… so, sales for the first half of the month should have been a bit slower vs. second half of the month in April 2010.
Also – keep in mind — if April sales don’t hit 10898 (from 4444 mid-month, and Easter coming up), that will be 12 straight months of YOY sales decreases!
In reply to #114 AG Sage
“Seems to me, just glancing at the posts) that the larger issue is, say Joe takes a loan from The 100% No Fractional Reserve Bank (T100NFRB) and uses it to buy a house from José and José decides it’s time to get a bank account. What’s to stop José from opening an account at T100NFRB and then what’s to stop T100NFRB from assuming his deposits are available to loan out again?”
—
Joe has taken a loan from the bank covered by its depositors.
Those depositors have agreed to the loan and have no money until it is paid back. They just have a bookkeeeping entry that says the Joe owes them the money (capital) that José now has.
The bank is the middleman for a piece of the interest (profit) instead of creating the deposit from thin air and getting it all (loan and interest) as profit.
#116 SAD
Good link
The less known and far more important secret-weapon of the “China Economic Miracle” is the absolute control of the banking industry by China’s four largest state-owned banks (“SOB”); Industrial and Commercial Bank, Agricultural Bank, People’s Bank of China and Construction. Since the government does not provide adequate social welfare programs and restricts its citizen’s investment options to bank accounts, about 40% of Chinese household income is deposited in SOBs each month. The SOBs then leverage the deposits by ten times and loan 75% of this massive amount of cash at extremely low interest rates to state-owned-enterprises (“SOE”). The other 25% of lending is allocated to real estate development.
China is no stranger to bankers making risky loans to communist party officials and their crony real estate developers. During the Asian Financial Crisis of the mid-1990s, it is estimated that 40% of all SOB loans were non-performing and most were written off. The Chinese paid for the SOB losses with a 76% devaluation of their currency that crushed the people’s buying-power by 76%. From 1997 to 2004 Chinese frivolous lending was somewhat restrained, but since 2003 the bureaucrats have mandated a massive expansion of lending. In comparison to the U.S. and Europe where bank lending is flat, SOBs have been expanding loans by 25% annually.
========
So basically, they didn’t learn a damn thing from the Hong Kong ponzi scheme.
You almost wonder if this was a state sanctioned economic hit man type- of -plan….to inflitrate other countries and their economies and create a fiscal addiction.
This bubble’s bust is gonna be ugly
“Yield, yes. That’s why most people buy them – not for capital gains. I have now typed that sentence twelve hundred times. — Garth”
You’re presenting this ‘sure fire’ way of making money, and yet seem oblivious to the risks. Interest rates have only one way to go; up. That will increase the monthly nut on the HELOC, which could easily go higher than the dividend. It would also push the value of the preferreds down, possibly below the value of the debt.
If someone wants a financial arrangement where they lose money every month and need to bring additional money to the table to unwind it, they should buy a condo.
I suppose this couldn’t happen with the current calm and stability in financial markets and the world.
Extremism does not serve your argument. Rates by Christmas may be 1% higher, according to the consensus. That puts the prime at 4%, which is still tax-deductible, reducing the effective rate back to 3% for most. A preferred paying 5.5% today will still pay 5.5% then, and the year after, and the year after. The yield will be in the form of dividends, so factoring in the dividend tax credit, that equals about 6.5% on an equivalent GIC. That is double the cost of borrowing. But wait – the interest cost is on a diversified portfolio of which fixed income is just 40% and preferreds just 20%. Factoring in even substandard gains on the other 10 or so uncorrelated assets, any competent advisor would produce a return at least equal to the 20-year average of the TSX, which is 7%. You do have an advisor, right? — Garth
#99 Saanichtonian
If the government is indeed a representitive of the people of Canada, and they create the currency interest free, or even at nominal interest payable back to the people (government), do the people, as compared to private bank bond and shareholders, not benefit?
Yes, this would be the ideal situation. My argument is that the fractional reserve method is not itself the problem. It is a very profitable system and very flexible as opposed to the gold standard and a no fractional reserve system. It would provide billions in revenue for Canadian citizens if it was in the hands of the government. The foolish acquisition of debt whether to a private lender or a non fractional reserve bank has the same net effect. You are a slave to the debt, the system to which you owe it is irrelevant. Will our banks ever be taken over by the government? Of course not but in a theoretical world it would be a win-win situation for all if they were. Credit would be available to citizens and the enormous profits generated would be used for the benefit of Canadian citizens.
#134 saanichtonian
#114 AG Sage
Haven’t you guys watched ‘It’s a Wonderful Life’?
It explains everything…. ;)
Dear Whiners About Banks.
Buy some bank shares ya damn fools. No money? No problem, the bank will lend you money to buy ’em if your credit is good or you have a house with equity.
Oh well, just finished sharpening all the tools in my toolbox.
I see there are still more to sharpen……
“Like saying real estate always goes up?” — Garth
Sinking to their level doesn’t justify being a hypocrit. Borrowing to invest in risky business. Regardless of how “safe” the investments are. Framing it any other way is misleading. It can pay off, but it leaves you extra vulnerable to unforseen circumstances.
To me you made more sense when you were advocating for people to sell their house, rent and invest the proceeds. At least that way you don’t end up in debt if things go sideways. As the Americans found out in 2008, home prices and stock markets can quite easily crash at the same time.
Nowhere have I ever said an investment return is guaranteed – unless it is. As for borrowing to invest, no factory would ever have been built without it. — Garth
#32 Chris L
Mine is prime and through TD.
#133 T.O. Bubble Boy
At what point is new listings going to return to normal? It has been consistently down for months now and that is supporting prices in the face of slumping sales. Down 21% is something to really to look at when prices go up 12% to $483,000 in GTA. In April 2010 new listings was up 59%. Avg. detached in the 416 is now $772,721.
#131 Thetruth
said “Think about this: If you have a place with 1+ billion people crammed into an area almost the same size as Canada, then RE per unit area will eventually be alot more expensive”
Dwell on this: Japan has that density, and yet their real estate has fallen by 75% since the early 90’s. Why? It’s all about age. Their demographics are roughly 18 years older than Canada’s. In other words, even with immigration to help us, Canada will experience a worse real estate bear market between now and 2030 since we have no land restraints compared to Japan. That little island of 125 million is all mountains, and yet 3/4’s off sale real estate!
What’s the deal with all of the posters slamming this strategy, let alone the people getting all preachy about the nature of our society and greed.
1.) If this is too risky for you, don’t do it. But guess what, wanting to have money is a great thing, but actually going out and getting it means you need to take on risk. It seems like a pretty obvious point but worth mentioning since so many people seem to be missing it.
2.) Guess what? Our economic system and the system that the majority of the world has chosen to adopt is based on greed. Think of a scale where on one end everything is shared by everyone and it everyone is equal, and on the other end everyone is responsible for themselves and nothing is shared. Every nation falls somewhere on that scale. But the closer you end up towards everyone looking out for themselves the closer you get to a system where greed is paramount to survival. If you don’t like it, then go somewhere where you can give all of your money to the government who will then take responsibility to redistribute everything equally to all members of the society.
Seemed to work out pretty good for the USSR and Cuba.
#130 realist
Oh, I see, always a good time to buy, always a good time to sell. Amazing, these things, houses.
No one needs to put their life on hold over suitable shelter. Well, only when they can’t afford to sell when they need to, only then does housing dictate life choices.
Your point was that it doesn’t matter whether you buy low or buy high, as long as the monthly payment is the same and affordable. This is plainly wrong.
Garth: Can you elaborate on ‘Preferreds’ in a future post. Which type is best (reset rate fixed, perpetuals, etc). Also, how will coming interest rate hikes affect yields? Any specific ones you suggest? Thanks.
What is going to these faux-millionaires living in Milton and commuting with gas @ $1.40?
If they were smart they would start downsizing ASAP. But they aren’t and they won’t. That is the tragedy.
Makes sense to grab HELOC now while the getting is good, I know plenty family/friends in the US who are good credit risk but have to fight for secured credit line banks up here would rubber stamp.
Another shot across the bow courtesy of the S&P warning today – bond vigilantes are starting to grumble a bit louder. Politicians are putting on a brave face but they know bond markets are the ultimate power in the universe. Grab the free money while you can, odds are high the bond market adults are going to start kicking political children off the playground.
Nowhere have I ever said an investment return is guaranteed – unless it is. As for borrowing to invest, no factory would ever have been built without it. — Garth
Quite true. That’s why we invented corporations. So if the investment doesn’t work out the corporation can go bankrupt and stuff the lender with the debt. The investors lose money, but they still keep their houses … unless they took out a loan against their house to make the investment.
Dare I eat a peach? — Garth
Mr. Plow on 04.18.11 at 5:19 pm
What’s the deal with all of the posters slamming this strategy, let alone the people getting all preachy about the nature of our society and greed.
1.) If this is too risky for you, don’t do it. But guess what, wanting to have money is a great thing, but actually going out and getting it means you need to take on risk. It seems like a pretty obvious point but worth mentioning since so many people seem to be missing it.
———-
That’s the point. Garth is essentially saying that this strategy is risk free and that people with their mortgage paid off not doing are idiots.
I said neither. So much for the respect I held you in. — Garth
Makes sense to grab HELOC now while the getting is good, I know plenty family/friends in the US who are good credit risk but have to fight for secured credit line banks up here would rubber stamp.
——–
Many people in the US paid thousands to get these HELOCs but as soon as the situtation turned sour, the banks recalled them.
1st rule of banking: banks lend when you don’t need it and tighten the purse strings when you need it.
If you don’t like $1.50/L gas then get a job that pays for your gas. I work in the government and they give me a car. I also get a shiny credit card to pay for things that cars need. I need gas and I need the 407. I don’t care if gas goes to $3/L because taxpayer dollars are endless.
This is another reason I don’t really buy the whole real estate crash idea. The government will dip into the endless CMHC pot to bail Canadians out anyway. The long and short is simple: all my co-workers who have bought real estate have done very well. The renters, well, they’re still renting.
Hey thinking of the election, grab me a beer out of the fridge! I am looking for a Conservative Lite no NOT a Conservative but a CONSERVATIVE LITE
#123 Double down
So you would lose your wife?
Because of a house (money).
Isn’t love grand.
More solid FACTS! Looking great folks. If you invested 2 million in REal Estate last year you are up 300 GRAND! TAX FREE and you got a home in to boot. SURGING DEMAND, do the math folks going much much higher
+++++++++++++++++++++++++++++++++++++
The average price of a home in British Columbia rose 15 per cent from March of last year to March 2011, the B.C. Real Estate Association reported in a news release today.
The BCREA release said Multiple Listing Service “We continue to observe a two-speed market in BC, with surging consumer demand in Metro Vancouver overshadowing more moderate demand in other regions,” Cameron Muir, BCREA chief ecconomist, said in the release.
“Vigorous consumer demand drove Greater Vancouver to its most active March since 2004, while the Fraser Valley had its strongest March in four years.
#151 realist
People are free to do whatever they wish with their money, even if those things are not financially prudent. Like buying expensive cars, as long as they can afford them, no one gets hurt, no?
Unfortunately, no one is buying houses with their money these days, rather they are borrowing up to 95% of the purchase price, a loan that is ultimately backstopped by the taxpayer. If that weren’t the case, I wouldn’t give a flying hoot about any of this. Not too many Lamborghini dealers letting those babies off the lot with 5% down.
amakudari, or “descent from heaven” —
The term’s literal meaning, “descent from heaven”, refers to the descent of the Shinto gods from heaven to earth; the modern usage employs it as a metaphor, where “heaven” refers to the upper echelons of the civil service, the civil servants are the deities, and the earth are the private sector corporations.
“In amakudari, senior civil servants retire to join organisations linked with or under the jurisdiction of their ministries or agencies when they reach mandatory retirement age, usually between 50 and 60 in the public service. The former officials may collude with their former colleagues to help their new employers secure government contracts, avoid regulatory inspections and generally secure preferential treatment from the bureaucracy. “(wiki)
#55 thetruth,
You said, “What people should learn from this blog?
We should learn that people who use names like “thetruth” and “the realist” neither speak the truth or are realistic.
30 somethings are so screwed.
http://www.canadiancapitalist.com/why-30-year-olds-are-screwed/
#75 BrianT — Giant killer pigs? Bring on the bacon sandwiches!
#141 JoshL — “Nowhere have I ever said an investment return is guaranteed – unless it is.”
GICs and CSBs are guaranteed to lose money. That’s why they are guaranteed. Investment strategy for paupers!
#154 Rampage
And by “have done well” do you mean they have been paying much more than they would have if they were renting? Or they bought 10 years ago, when house prices were more reasonable, and sold recently to lock in their profits?
Maybe you should give some examples as to how they have done well.
This is how Richmond looks like when the BIG ONE hit.
http://blog.alexanderhiggins.com/2011/04/18/viral-video-dramatic-video-japan-tsunami-18192/
#144 Phil
You didn’t do your homework….
Ummmm….. Japan has a declining population, india and Canada are growing at about the same rate and increasing their populations.
#152 Moneta
I didn’t interpret “risk free” from anything that has been said.
I guess I get annoyed when people are given something and its not right for them so they assume it is not right for everyone.
That work thing got in the way of some fine blogging today. Thank you devore @114 for explaining how the
current system would essentially separate into “deposit”
banks and “investment” banks.
But we have been thru this “reserve” debate before. Saanichtonian raised the question as to what actually can act as a reserve. Some good abstract thinking going on.
I don’t consider my bank balance as “money” but rather a store of labour. That labour may be borrowed by others, but returned later with a small surplus added.
So I remain “entrenched” with blogger fractional reserve. Nothing wrong with the idea, the system or the game. Maybe some of the players need to adhere to the rules better.
Point to ponder. I had a house built a few years back.
Borrowed some “money”. Never saw a dollar of it. Just
some numbers on a piece of paper. Wrote some other
pieces of paper to a contractor. He never saw a single
dollar. Worked hard and collected more pieces of paper
with numbers on them. Never saw a dollar. Numbers
changed on sheets of paper every month. A few years
later house is paid off. Whole thing happened without a
single piece of “reserve” anything.
And back by popular demand from “Its a wonderful life”
– the bank run!
http://www.youtube.com/watch?v=EOzMdEwYmDU
circular ? risk slicing
Friday’s charges were the first to be filed by the SEC’s Structured and New Products Unit, formed to pursue abuses in highly sophisticated deals, many of which were registered in the Cayman Islands, where investors don’t have to pay U.S. federal taxes.
http://www.truth-out.org/goldman-sachs-and-executive-charged-fraud/1302937200
I shall wear white flannel trousers, and walk upon the beach.
“……Sadly too many posters today have the vapours. — Garth….”
Ahhhhhhh, Music to my ears(and nose )
Your comebacks are hilarious!
#89 Oasis
“well tickle me pink…”
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I have to admit I am baffled by what joy you receive from hearing that S&P has put the dollar on credit watch. Is that good for your small holdings of precious metals perhaps?
The thing is that there is little benefit that can come from a dollar that actually does crash and you will be as negatively impacted as everyone else. I often wonder, Oasis, if you even think these issues through to their natural conclusions.
Nonetheless, it is worth noting that the dollar has begun to reverse course and I fully expect this to continue through summer. Whether precious metals make a long overdue correction on this news is anyones guess although I cannot see why they should rise in tandem with the greenback.
What is most important though is that commodities (and oil in particular) see a pullback and some of the overheating that defined those markets abating. This is a very welcome relief everywhere as inflationary pressures should settle down while we all catch our wind and recover from the speculative blizzard of the last eight months or so.
The commodity bull is far from over. This is a good time for profit taking though and a natural healthy correction is in everyones best interests before resuming is course some time down the road.
What we absolutely do not want to see at this point in time is a stubborn rising Bull market drive the economy straight back into another recession prematurely on the back of excessive speculation.
You could say I am in a good mood today on this news.
a bit off topic but my favorite quote from “My First Place”…. “I work on contract and it’s quite possible that in 2 months, my contract will not be renewed. It’s especially stressful since I am buying my first home” LOL…really? Did you just say that? HGTV is so entertaining to me. (former house horndog and now renting).
In reply to #137 Fractional Reserve
“Yes, this would be the ideal situation. My argument is that the fractional reserve method is not itself the problem. It is a very profitable system and very flexible as opposed to the gold standard and a no fractional reserve system. ”
Profitable for whom?
“It would provide billions in revenue for Canadian citizens if it was in the hands of the government.”
It would provide billions in revenue for Canadian citizens if it was in the hands of the citizens.
It would provide billions in revenue for Canadian government if it was in the hands of the government.
“Will our banks ever be taken over by the government?
Of course not but in a theoretical world it would be a win-win situation for all if they were. Credit would be available to citizens and the enormous profits generated would be used for the benefit of Canadian citizens.”
You mean something like, say, the Bank of Canada, an institution that was made a federal public utility in 1938 and issued much of our currency until about 1974, that paid for WWII, the St. Lawrence Seaway. the public medical plan, the transcanada highway and much more, all without the onerous interest we now pay.
Consider that the total federal debt was $18 Billion in 1974, and then reread the above excerpt from the 1993 federal auditor general’s report.
“5.41 The cost of borrowing is the third area that affects the annual deficit. In 1991-92, the interest on the debt was $41 billion. This cost of borrowing and its compounding effect have a significant impact on Canada’s annual deficits. From Confederation up to 1991-92, the federal government accumulated a net debt of $423 billion. Of this, $37 billion represents the accumulated shortfall in meeting the cost of government programs since Confederation. The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.”
A total shortfall of $37 Billion since 1867 (125 years).
A total shortfall of $19 Billion since 1974 (18 years).
And an increase in total federal debt of $386 billion in that same 18 years…almost all interest.
Not for the benefit of any Canadian, and no debt paid down.
We had the system in place.
Where has it gone?
#173 realist
A WHOLE 20%? Wow.
I don’t care how much equity (minus HELOC) people who bought 20 years ago have, when they bought for pennies. They’re not buying at the top of the market.
Your blanket statement that one should buy a house as long as one can afford the monthly payment is ludicrous. It is a 30 year commitment, that is very interest rate sensitive, because buyers tend to buy as much house as they can afford. They can hardly help it, with prices where they are.
No one knows where the market is headed tomorrow, but that is why we have financial analysis. It is able to value an asset, and determine whether asking prices are too high, too low, or about right. From this, one can deduce whether prices will be heading up or down, because of another economic fact: reversion to the mean. This can then guide your decision on whether to buy something.
You should absolutely be worried that taxpayers are on the hook via CMHC. Get real.
Dare I eat a peach? — Garth
Ok humor me … what the heck does that even mean?
It means this. — Garth
#14 I never can get my head around statements like this. A market peak now means that Al will get a high price for his home and pay a peak price for his trophy home too. Apples to apples.
Not apples to oranges, grapes to grapefruit, you seem to miss the fact that yes they gain some equity on the sale of existing, and use that to leverage an even bigger mistake. When you sell a stock at a high point, you pocket the cash, you don’t use it to make a loan and buy the same stock back again, only now you are leveraged, and bought 10 times the amount you sold?
Hello? do we see the logic here? the only gain at a peak market, is to sell and rent and wait for a decline. But as Housing is illiquid and emotional, it is hard to do. Which is why, it is not a good investment strategy. Just a place to live.