Little nuts

Days ago I was hooped for dising horny young people. Like there are other kinds. If anyone’s turned into debt piggies these days, I mused, it’s the virgin buyers who treat mortgages with more amusement than horror. After all, if you need to sign up for a fat one to get a sweet house, well, where’s the pen, dude?

Fact is, first-time buyers are probably more responsible for jacking house prices in the last five years than any other single group. And while Americans under the age of 35 have decided renting’s cool and owning sucks, in Canada our lusty little nuts haven’t fallen far from the Boomer tree.

Why are young couples so aroused by real estate? Beats me. But let’s try to help Stefan and Brianna work through it. Yesterday, they sent this:

We’ve been following your blog for a little while now and decided to ask you for a piece of advice since you are after all an expert in this field. We’re in our 20’s (not married yet). We both have very solid jobs.

We are looking into buying a brand new house in Mississauga for approximately $550k. We are planning long term. The downpayment would cover 20% or $110 000 which would leave us with about $440,000 mortgage. After all the calculations and monthly deductions we would end up with approximately $2000 buffer each month.

We know that the market will correct a bit but believe that we are on a level where we would be fine even with the correction. What do you think we should do? Should we buy or not?

Of course, this is a very unusual case. Kids with cash. These twentysomethings, through work or generous families, have a mega-downpayment compared to the cab fare most couples use to leverage real estate. With 20% down a house should be a no-brainer, right?

Maybe not. For example, young buyers have to plan for the end of cheap money, with mortgage rates likely doubling over the next five years. But let’s not factor that in, to be generous. More immediate is a correction in housing prices after a 13-year run which landed us in history’s deepest pile of debt. Any kids buying now must understand they’re jumping in at the top, and risk having to endure a much weaker market.

So let’s assume Stefan and Brianna buy that perfect new house in the distant burbs for $550,000. With closing costs, of course, the price swells to $561,000 (actually a bit more, but it’s always a good rule of thumb to add 2% to the purchase price to close the deal). With a fat $110,000 to put down (and no mortgage insurance needed), their new debt would be $451,000.

With a mortgage of that size borrowed by virgins, the only sane action is to get a five-year fixed loan, which these days is about 4% at most major lenders. And if they do this in 2012, chances are they’ll be forced into a 25-year amortization, since I’m hearing the next federal budget will murder thirty-year loans. So, the monthly payment would be $2,394, not including any occupancy overhead.

Now let’s say the market corrects in the next year by 15%, taking the value of the house down to $467,500. So what?, cry Stefan and Brianna. We ain’t selling.

Good thing. Because if they did (not counting in selling costs or mortgage break penalty), their $110,000 in equity would dwindle to less than $17,000 – giving them a stunning 85% loss on their original investment. And you thought the stock market was risky…

So let’s say they stay in the love nest in this most romantic of Canadian cities for a full five years, and then decide to sell (long enough to get married, bummed and divorced). During those sixty months, Stefan and Brianna would pay $85,876 in interest charges for the privilege of borrowing the mortgage principal. Property taxes would be at least $25,000, while insurance and feathering would add a minimum of ten grand. Dumping the place triggers an average commission of 5%, plus legals and moving, for total selling costs of almost $31,000.

Now let’s assume the value of the house has been fully restored to what they paid – $550,000. After 60 mortgage payments (of $144,000 of which $85,876 was interest), they’d still owe $393,212. The sale proceeds (minus the mortgage and selling costs) would then be $129,913. Whoo-hoo, a profit!

Er. Nope. Remember that $110,000 of that was the original downpayment, which reduces the profit to $19,913. But if the $110,000 had been invested (at a modest 6%) for five years instead of sitting in the house, it would have earned $37,204, which must be considered opportunity cost. Therefore Stefan and Brianna would have actually lost $17,291, even though they sold for as much as they paid.

Now I hear the unemployed realtors on this blog grumbling about me fudging the numbers because S&B would have needed to rent a place if they didn’t buy. Quite true.

The actual cost of them owning this house for five years (finance charges, taxes and maintenance) was $179,000, or almost $3,000 a month. And at the end of it they got their deposit back plus $19,913, reducing the monthly cost to $2,651.

And what does it cost to rent a half-million-dollar house with five bedrooms and three bathrooms in the outer western GTA wasteland? Like this one? Hmmm. Two thousand five hundred a month. But wait. If the $110,000 they’d used as a downpayment was invested (at 6%), the $37,204 in returns would offset rent. So to make a fairer comparison, their occupancy costs would fall to $1,879 a month over five years.

See, kids?

Even if there’s no housing correction and your mortgage payments don’t rise; even if you don’t build a deck or cheat and get divorced; renting’s cheaper than owning. You have freedom and mobility. You trade debt for investment income. You avoid systemic, interest rate and economic risk. You can move to pursue a career, change houses when you get bored and piss off the neighbours with impunity.

Or you can buy, and turn into your parents.

Tough choice.

 

204 comments ↓

#1 Josef on 12.21.11 at 10:00 pm

First!!! OH YEAH BABY!!!!!

#2 T.O. Bubble Boy on 12.21.11 at 10:05 pm

Or, the same kind of house rents for under $2000 up the road in Brampton:
http://toronto.kijiji.ca/c-real-estate-house-rental-5-BEDROOM-HOME-AVAILABLE-BRAMPTON-VAUGHAN-FOR-RENT-1965-W0QQAdIdZ339196353

Or, go for a Semi-Detached Rental in Mississauga, also under $2000:
http://toronto.kijiji.ca/c-real-estate-house-rental-Totally-Renovated-5-bedroom-3-5-bathroom-Mavis-401-W0QQAdIdZ326606446

#3 Nick on 12.21.11 at 10:07 pm

FIRST!

(Sorry everybody… it’s all the rage nowadays; had to try it once in my life)

#4 truth hammer on 12.21.11 at 10:11 pm

Check out this ‘spiders in the closet ‘ style political ‘ad’ by the RED LIBS …….” they will come after us…….and then you…….help….. send us money !!!!”

http://www.vancouversun.com/Maher+Tories+target+union+haters+next+fundraising+drive/5894780/story.html

A bit premature don’t you think seeing that Tories just won a majority ? This mind control, social suasion and politically correct propaganda has already cost Canadian taxpayers billions of dollars……..Lets put a last nail in the Liberal coffin and officially stamp these losers out. With millions of union millionaires already set for life we need to give the average Canadian a chance at the good life.

#5 obert on 12.21.11 at 10:17 pm

All the numbers worked out. Now it’s up to Stefan and Brianna to decide.

#6 Daily Saver Canada on 12.21.11 at 10:18 pm

Great post.

I think the examples and calculations make things so much clearer.

Certainly these numbers dispel all the BS being peddled by the realtors.

Without a doubt at this time in a world of so much uncertainty for many saving is critical and clearly renting allows for better opportunities to save.

#7 GTA condo market crashing on 12.21.11 at 10:24 pm

out of work realtors are getting very worried. Realtor buddy heard the same thing about 25 year mortgages and is really worried. I didnt want to point out the housing crash but the fact he is worried tells me his understanding of the situation. Everyone in the biz knows housing in Canada is a house of cards. Wife tells me her friend at work just got married and is now renting since father who is a realtor said not to buy since prices will fall about the 15% you believe it will garth.

#8 TOC on 12.21.11 at 10:33 pm

http://business.financialpost.com/2011/12/21/clevelands-zombie-house-scourge/

If the original house owner can’t have it, then the bums can’t have it either. So sad

#9 Stinky the Fist on 12.21.11 at 10:34 pm

Little nuts was my nickname in high school. I was certainly the better version of this nickname meaning Lil’ Crazy (not small testicles)

This is a family blog. Watch it. — Garth

#10 Herb on 12.21.11 at 10:36 pm

#4 Truth [sic] Hammer,

read your link again, then try to knock some sense into your own head.

#11 rosie on 12.21.11 at 10:39 pm

Beware Stupid People. Kid at school once wore a t-shirt that said, “I see stupid people.”( this was just after the movie Sixth Sense )

#12 MarcFromOttawa on 12.21.11 at 10:39 pm

Not 1st.

Garth how can you pump out quality articles everyday?

Those amazonian women must be working overtime.

I highly recommend it. — Garth

#13 Harry in Saskatoon, no bust here, maybe next year, or the year after on 12.21.11 at 10:51 pm

Or the house could go up in value next year. Which would be consistent in being the opposite of what this blog has preached for the last 4 to 5 years.

This is not a shot to you Garth, just realism. Anybody can make predictions but most and I mean most people get it wrong because it has always been market perception where people have failed in predicting a “bubble popping” in RE.

There is no strong reason markets will continue to advance, and many why they won’t. That’s realism. — Garth

#14 abraxas on 12.21.11 at 10:52 pm

So… the alternative would be to plop it all into the equity markets that can take 15% of your capital in a single flash crash or a liquidity crisis?

The housing market may be overheated but those who think this blog has no agenda are fooling themselves.

If making 5, 6 or 7 percent is as easy as the author paints it where are his customers’ yachts?

I did not suggest equities. Nor is a 6% return difficult for income-seeking investors, when stable bank preferreds alone yield 5%. — Garth

#15 NewWorldPartyDotOrg on 12.21.11 at 10:56 pm

Young couples are buying because of they’ve never experienced a bubble before and they are panicking.

http://www.newworldparty.org/2011/11/bubbles-extreme-maker-and-breaker-of.html

“Bubbles are usually created and collapsed by the same two emotions that drive the stock market, commodities markets or any market:
– Greed
– Fear”

They fear that if they don’t get in now, they’ll never get in.

“This [young] couple has 96.3% leverage.

With 96.3% leverage, real estate is exorbitantly more volatile than the stock market. If your stock goes to zero, you lose 100% of your investment. If that couple’s house goes to zero, that couple goes “underwater” and loses 2,727% of their investment. (You are right that houses are not going to go to zero. Neither do most stocks. However, if the house price goes down by 3.7%, the couple loses 100% of their investment. Also, house prices can go very low. Houses in Cleveland are now selling for $28,000.)”

#16 Montrealer on 12.21.11 at 11:02 pm

You could also calculate the extra hundred $ or so they have every month in their pockets from renting, that they can invest and compound.

#17 Crazy on 12.21.11 at 11:03 pm

Oh, by the way, rates will never AGAIN go up in any significant amount, as the patient is addicted to debt. You cannot kill the patient.

Or in another way, money is cheap, because banks treat it so. It is FIAT currency, printed in great quantities, and at will. Why should anyone pay alot to borrow it?

#18 Montrealer on 12.21.11 at 11:04 pm

I meant hundreds.. plural.

#19 bob's my uncle on 12.21.11 at 11:10 pm

Brianna and Stefan need to get in asap, the market is set to advance in 2012, if they don’t take this opportunity they will be kicking themselves next summer when the house is in the $650 range.

Stop embarrassing yourself. If you can. — Garth

#20 Crazy on 12.21.11 at 11:11 pm

AND, in the end, after paying the entire mortgage off (in about 7-10 years or so, because very few people take 25 years to pay off a mortgage) they would live for free plus nominal expenses like hydro, heat, and so on.

AND then, when they sell, they take the money and do not pay tax on any gains.

Figure that!

Pay off $450,000 in seven to ten years? Maybe on your planet. — Garth

#21 R2D2 on 12.21.11 at 11:12 pm

Gerry Nicholls, seen in a file photo, thinks the party now faces an uphill battle, since they have a majority government. photo by handout / handout

I went, I read what was there. The incomplete
message … unless Der Leader is granted the divine right of kings.

http://beta.images.theglobeandmail.com/archive/01000/thuedcar11co1_1000285cl-8.jpg
http://www.canada.com/Maher+Tories+target+union+haters+next+fundraising+drive/5894780/story.html#ixzz1hEGzn6wE

#22 Canadian Watchdog on 12.21.11 at 11:14 pm

15% seems to be the majority expectation on this blog, but it also an amount that would wipe out CMHC according their books.

http://i44.tinypic.com/11m6zp5.png

This is going to get ugly sooner or later.

#23 InvestorsFriend (Shawn Allen) on 12.21.11 at 11:16 pm

COMMITMENT?

Our young couple has not yet made the commitment of marriage… but they seem ready to commit to a $440k mortgage. About 25 or 30 years at over $2000 per month.

Not to mention property taxes and all the other responsibilities of home ownership. Utilities, furniture…

Your bosses will love it because they will know how desperate you willl now be to NEVER lose your jobs.

These monster mortgages are almost immune to paying off early since if you happen to come up with an extra $5 or $10k at year-end that hardly puts a dent in this supertanker of a loan.

Renting is flexibility.

A $440k mortgage is a mind-numbing relationship destroying boat anchor.

Commit to getting married and to life not to this debt slavery.

#24 Uh Oh Canada on 12.21.11 at 11:18 pm

Hey Garth,

Thanks for doing all that math. You make me proud to be a renter.

#25 Devore on 12.21.11 at 11:18 pm

#7 TOC

http://business.financialpost.com/2011/12/21/clevelands-zombie-house-scourge/

That’s one way to bring down the shadow inventory. Literally.

#26 T.O. Bubble Boy on 12.21.11 at 11:23 pm

@ #16 Crazy:

Oh, by the way, rates will never AGAIN go up in any significant amount, as the patient is addicted to debt. You cannot kill the patient.

So – you’re basically suggesting that Canada will end up like Japan, with 20+ years of near-zero interest rates?

Ever wonder how their real estate market held up?
(hint: it didn’t do very well)
http://xtimeline.s3.amazonaws.com/Upload/Use200812270443303154240/Elt200901220042085544426.jpg

#27 Harry in Saskatoon, no bust here, maybe next year, or the year after on 12.21.11 at 11:24 pm

There is no strong reason markets will continue to advance, and many why they won’t. That’s realism. — Garth

I agree there are not many strong reasons why the housing market will advance. But there are enough to keep it steady, up or down over the next few years. At worst a soft landing for some places in the west and a harder landing in the East. This thesis would change if Europe and China go off the tracks. And if Ron Paul became president, it would be bye bye economy in Canada along with real estate.

reasons why Canada RE will not suffer much.

-lower than normal interest rates are not moving up anytime soon
-relatively lower unemployment than other G7 countrys
– economy is diverse with resources. The West is a powerhouse.
-no subprime like the US, even at the loosest lending, most people had to prove income and come in under TDS, GDS numbers, no robosigning or mortgage fraud like in the US.
-our banks are better regulated.
– MLS shows that there is not an over supply of homes. 5 months of inventory across the country. Some places are even sliding into a sellers market.
– people from around the world want to move here, this is the best country in the world, even if there was a over supply, immigration would gobble the excess up.

Surely with all the resources of Re/Max at your disposal, you can do better. Rates will rise, as is unemployment. The West is hugely vulnerable to commodity volatility. Selling kids without money houses financed by cash-back bank loans is pure subprime. Inventory low? Wait three months. And your ignorance on immigration speaks volumes. — Garth

#28 Polk on 12.21.11 at 11:28 pm

@ #13

I agree with your comment. It’s not that easy to earn the return the author states. Preferred shares have an expiry date associated with it and can become “callable” after that date. For example, a bank preferred share may trade at 26, but it can be callable at 25.

Also, you need to take into account the transaction cost and you probably would invest over a period of time and each time you buy it would cost you $$.

I think its easier said than done.

Perpetual preferred shares have no expiry date, are rarely called and pay you handsomely in the meantime. Shares are not called at less than the trading price, and trades are dirt cheap. I sure hope you’re an entomologist and not a financial advisor. — Garth

#29 shanks on 12.21.11 at 11:31 pm

lol stinky the FIST and his little nuts.

#30 Keeping the Faith on 12.21.11 at 11:34 pm

Real Estate is for losers.

Every asset class has its place. — Garth

#31 Van guy blazin kush on 12.21.11 at 11:39 pm

“I’m hearing the next federal budget will murder thirty-year loans.”

Is that the word on the streets Garth?

#32 15% drop in prices just the start on 12.21.11 at 11:42 pm

The housing bubble has popped in Every country in the world except Canada and China which are the last two. China has started its crash as well as Canada. Those who think Canada will not join THE WHOLE WORLD housing crash are delusional. Look out below its going to be a nasty crash. 15% will just be a taste which garth has pointed out. In the end housing will return to 3x earnings. With 25 year mortgages coming back ……look out below.

#33 RM in Oakville on 12.21.11 at 11:49 pm

Hey Josef, you were actually FIRST this time. Feel better? Go buy a lottery ticket, it’s your lucky day! Better yet, actually contribute something useful to this blog. Consider it a Christmas present to the rest of us who tolerate your juvenile fetish.

#34 City Slicker on 12.21.11 at 11:52 pm

Garth how can you pump out quality articles everyday?

Those amazonian women must be working overtime.

I highly recommend it. — Garth
———————————————————-
Agreed. You are a true iron man Garth, and doing it since 2008?!?!
I know we don’t agree on everything, like gold. But I’m sure glad I found a copy of your article in the men’s washroom that day. Wonder how it got there ;)
Thanks for your public service, dude!

You discovered my marketing plan. — Garth

#35 Wasted Opportunities on 12.21.11 at 11:53 pm

In my experience people trying to explain the concept of opportunity cost to people is even harder than getting them to understand the exponential equation.

You’re more likely to succeed in explaining it to a dog than most people, as at least the dog will listen for a few minutes before trying to tell you about granite bench tops.

#36 not 1st on 12.22.11 at 12:00 am

Why buy bank preferred shares which are fairly illiquid as stocks go when you can buy a company like Enbridge or Interpipeline which are yielding 6-7% and actually create a real product for people instead of shuffling paper.

Bank preferreds are 100% liquid and more secure. — Garth

#37 Jon B on 12.22.11 at 12:03 am

Can you run the numbers again based on this young couple sitting down with a financial advisor and investing the $110K in a diversified portfolio that brings in a modest return of -4%? Why does every scenario you create always somehow assume a comfy 6% return? What is it that you know that the TD Waterhouse, Edward Jones and several independant financial advisors I’ve consulted with over the years do not? Perhaps I’m just not “lucky”.

I based this on 80% bank and insurance company preferreds (average yield 5%) plus selected REITs (average 5.4% return plus non-equity-correlated capital growth). There are many other assets which can provide stable income. Get a new advisor. — Garth

#38 Bottoms_Up on 12.22.11 at 12:03 am

If I were them I’d be worrying that by committing to a house now at 550k, that in 1 or 2 years I’d actually be able to get into a house that today is going for 650 or 700k (especially after the mortgage rules change, interest rates go up, and prices come down).

And transaction fees are a killer — make sure you buy the right long-term house to avoid having to sell and rebuy again in the future.

#39 Waterloo Resident on 12.22.11 at 12:17 am

Sorry Garth, you are so wrong. 10 years from now interest rates will be even lower than they are right now. They might go up 0.5% to 1% over the next year or two but then they will head back down to even lower levels that will make today’s rates look high by comparison.

But the job market will be totally dead in 10 years, with Canadian government in major cut-back mode, letting go of more than 20% of its employees.

#40 Ronaldo on 12.22.11 at 12:24 am

#1 Josef – isn’t it past your bedtime? Turn off the computer, turn off the lights and mommie will be up to tuck you in shortly.

#41 Corban on 12.22.11 at 12:25 am

@#33 RM in Oakville

Why hate on the firsts? I’d bet their posts are statistically just as accurate as the rest of the armchair economists who chime in.

#42 Mr Buyer on 12.22.11 at 12:29 am

#4 truth hammer … I am guessing that we can look forward to 2 decades of Liberal rule after the next election. Let’s see, housing bubble fallout, deficit, erosion of health care, invasion of privacy (internet stuff) on behalf of business interests, ancient internet and phone technology at exorbitant prices (I suspect even I could get a corpse elected running against the conservatives next election. I am also guessing a half-hearted effort was put forth this past election because whatever party rides the bubble down is finished for the short and medium term anyways), unemployment, stagnant economy that benefits precious few even when firing on all cylinders (and all overseen by an economist, the bloom is really off the myth of big business as efficient saviour). That’s just to name a few little things (I have not bothered to look much beyond my own relatively petty concerns). That is just my take on it, I am likely way off but it is where I am at presently.

#43 HouseBuster on 12.22.11 at 12:32 am

2003 prices are on the way. A small bounce and then we’re going to party like it’s 1999.

#44 jaymel on 12.22.11 at 12:35 am

Garth you said “Fact is, first-time buyers are probably more responsible for jacking house prices in the last five years than any other single group. And while Americans under the age of 35 have decided renting’s cool and owning sucks, in Canada our lusty little nuts haven’t fallen far from the Boomer tree.”

Sigh…I think that is a little bit unfair. I am not sure I would say it is first time home buyers who sent the market into a orbit…I think it actually has more to do with amortization rules changing from 25 years to 40 years and requiring less down. An excess of credit really means an excess of money in the market fueling demand on a limited supply. To suggest that first time home buyers are to blame seems little bit misplaced. More like policy makers and bankers.

#45 JohnSaccy on 12.22.11 at 12:36 am

With a fat $110,000 to put down (and no mortgage insurance needed), their new debt would be $451,000.

Garth from the CMHC website – The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment.

http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

So they will have to pay insurance, just a smaller percentage?

No insurance above 20% down. — Garth

#46 Habs76-79 on 12.22.11 at 12:37 am

TO QUOTE CRAZY.

Oh, by the way, rates will never AGAIN go up in any significant amount, as the patient is addicted to debt. You cannot kill the patient.

Or in another way, money is cheap, because banks treat it so. It is FIAT currency, printed in great quantities, and at will. Why should anyone pay alot to borrow it?

————————————————————–

Um the reason that it’s fiat is why one of two things will happen if not both.

1: Printing money in greater excess than a nation/society can produce a working economy with will DEVALUE each dollar thus created. This will give you ASSET DEFLATION (cough, cough, real estate for one) and commodities (THE REAL LIFE products and services society needs) especially imported from abroad, price inflation.

2: To try to secure value in printed money govts. will keep trying to sell more and more bonds, but as the fiat money gets weaker and weaker relative to others these bonds will have to command higher interest rates in order to get investors to buy them. This will increase longer term borrowing costs (aka: mortgages for one) to that nation’s citizens.

But in the end both things done will if UNABATED (and govts. typically do a $hitty job at not doing this) will spin a society down the monetary/economy crapper so to speak.

THERE AIN’T NO FREE LUNCH! Cheap credit ultimately kills nations and their economies. It impoverishes those who use it most. Sadly we haven’t the govt. and the banking elites with enough backbone and/or real brains to see this in a long term and to thus try to alleviate the pain of such, as they all only see a short 6 month to 1 year ahead and see that the problems are kicked down the road for as long as possible. BUT! the piper is going to come calling. Even in “It’s different here NOT! CANADA!”

#47 U-The Man on 12.22.11 at 12:40 am

Why worry about 20 somethings wanting to become debt slaves to the banks? I will gladly own bank preferred shares for which these debt slaves are supporting by their motgage payments. Keep those 6% dividend payments coming by encouraging more horny young people to become bank/my slaves.

#48 Peter Goesinya on 12.22.11 at 12:50 am

why the hell didn’t my last post show up G?

WTF man!!!!!!!!!!!!

No idea. Maybe it was embarrassed. — Garth

#49 obert on 12.22.11 at 12:55 am

Many people don’t know much about prefferds and where to find them. A friend of mine asked me where do I find them. My source is http://www.tmx.com under listed company directory. Say Royal bank is Ry.to but the prefferds of the bank will have PR in it. They are bought and sold like any other stocks. Normaly issued at CAD 25. and then depends on market value may be below or above. Sure there is some risk, but these are more stable that common stocks. Not only banks but other companies issue them.

I hope this will be of some hope to the fellow morons on this blog (who fear/hope? for more than 15% drop in house prices.).

Garth, I love your blog and thank you for keeping a alternative perspective on the RE market as compares to MSM. Keep the good work!
Merry Christmas!!

#50 Mike Rotch on 12.22.11 at 12:59 am

Just trying to give myself some perspective on how F’ed I’m going to be if I have to sell my (sane and affordable) home before this shitstorm finishes and recovers.

Based on a back-of-the-cigarette pack calculation, shaving max ammort. terms from 30 years to 25 would boost monthly payments by about 11% on a given present value sale price.

This is on top of the 7 odd percent increase from shaving the allowable term from 35 to 30 years, so monthly carrying costs would be up 19% on a given mortgage value!

From all the stats, we know that the average home buyer was already borrowing more than sanity would dictate. Driving the monthly cost up by 20% is certainly going to put downward pressure on sale prices……it cannot do anything else! Would not be surprised if these two changes alone forced a 10 to 15% reduction in average sale prices even if rates don’t move.

Now if prevailing rates also go up by 1% or so, you’re looking at boosting the monthly costs by another 10%…….

30% boost in the only costs that are real to the average person, coinciding with a flabby economy, and a looming boomer retirement crisis……

That’ll let the gas out of this Hindenburgh in a hurry!

I don’t wish this so I can vultch a better home……I am really really scared!

#51 Mel on 12.22.11 at 12:59 am

Everybody decides where they invest their money. As for me, I have no faith in our Banking system for the simple fact that any recession coming to this country and deeply in debt population is not a risk that I want to take with my money. For that reason, I would not purchase Bank Preferreds.

As a matter of fact, I have shorted our Banks. I still believe if you loose 15% of your house equity, the door is opened for more loses in the future.

Sounds like you do not know the difference between share classes. — Garth

#52 R2D2 on 12.22.11 at 12:59 am

#4truth hammer on 12.21.11 at 10:11 pm

Herb’s right … incoherent sicko’s no longer required.

http://www.msnbc.msn.com/id/21134540/vp/34872839#45759854

http://online.wsj.com/article/SB10001424052970204791104577110573867064702.html

At the stroke of midnight … your pumpkin rolls …

#53 Jane24 on 12.22.11 at 1:08 am

The bit that kills me is that two young kids even think that buying a half million first time house is even slightly normal.

Our first home was a fixer-upper in East York, TO, that we really suffered in before it was comfortable from several years of DIY. This is how all of us got into first homes. Then we aspired to go up a ladder SLOWLY to a home similar to what our parents had after a lifetime of hard graft.

Half a mill for kids is just crazy.

#54 Aussie Roy on 12.22.11 at 1:12 am

Aussie Update

Not so merry, for 100,000 who may lose their jobs after Christmas

http://www.news.com.au/money/australia-in-the-grip-of-a-jobs-crisis/story-e6frfmci-1226228043716

Aussie housing, it’s a mugs game

RIGHT now across the country, home prices are falling. Spring has sprung, and many agents didn’t earn enough commission to feed their BMW lease payments.

But it’s worse if you’re one of their clients – an owner of one of the 388,000 homes unsold as of November (up about 16 per cent from the previous year, according to SQM Research).

More homes unsold means more choice for buyers, meaning sellers will eventually drop their prices – as we’re experiencing right now.

So where next for property prices?

To answer this, we need to look at two interconnected drivers of property prices: confidence and banks.

http://www.heraldsun.com.au/business/banks-control-the-housing-market-so-let-the-buyer-beware/story-fn7j19iv-1226218587984

45% national clearance rate

http://www.myrp.com.au//showNews.do?id=515

Even the RE mega spruikers are bearish for 2012

http://www.myrp.com.au//showNews.do?id=516

Where is that shortage?

Their collection of empty warehouses, buildings and the pub are among the startling figure of 122,211 empty Sydney residential dwellings counted by census workers in 2006.

http://smh.domain.com.au/real-estate-news/land-bankers–sydneys-empty-property-magnates-20111222-1p686.html

#55 viewwest on 12.22.11 at 1:22 am

And what if, God forbid, they lose a job(s)…companies close, get sold and all kinds of things can happen to ‘stable jobs’. Or, what if they want to have children and have to recalculate their budget while home on maternity leave making only a percentage of one of the salaries? Or someone wants to be a stay at home parent for awhile?

#56 Nostradamus Le Mad Vlad on 12.22.11 at 1:28 am


For Stefan and Brianna, understand Garth’s advice (rent), and #5 obert — “All the numbers worked out.” Can’t go wrong, and will be way better off.
*
#119 bob’s my uncle on 12.21.11 at 1:55 pm — Thanks for getting back. I refer you to the last eight words of #93 poco’s excellent post.

As to conspiracy theories and the like, one can always use their own freedom of choice to follow the landfill garbage, contrived, paid-for and controlled m$m, which is the same stuff – different day – different headlines, or follow alternative sites. I chose the latter a long time ago, and have since grown in leaps and bounds. Cheers!
*
2012 Economic Forecast “I don’t know exactly what’s going to happen in 2012, but I am betting that a dramatic change is coming…”; ECB Shades of the US Fed bailing out suckers here; MF Capital and JPM are close; Bankruptcy Saab’s going; COMEX becoming irrelevant as Sadaam’s WMD; Sovereign Downgrade Pretty circle; Risk Is Necessary on any level; The Great Divide Wealth uneven distribution.

Asia Puppet show (with HAARP?) has started; 0:17 clip The Christmas Catastrophe; Spot the similarities / differences; 10:49 clip Gartman may be in a different universe; Guns ‘n’ Ammo Different from Guns ‘n’ Roses; German Bonds; Hungarian Junk Bonds; Housing Bondage.
*
War China has already publicly stated it will defend Iran; David Cameron Typical political BS U-turn on Eurozone; 2:47 clip What would happen if China attacks the US? 10:34 clip Drone glitch quite a blow; CC Brisbane, Oz — In The Summertime? Farming is becoming a young person’s job (until Monsanto runs them over); Chavez has this right.

Kim Jong Il one and Kim Jong Il two Watson, come forth! There is a mystery to be solved! dubya rebirthed as Jeb Bush? Cashing In he Mayans have never said said that Dec. 21, 2012 is the end of the world, only that it is the end of their age. Whacknutz and dingleballs have taken it one step further; The Goldilocks Zone Similar to TTZ; Finland “But China is our friend, remember? So says our Government.”; Warren Buffet Doesn’t he live somewhere around here? NDAA Company gets nice contract.

#57 Mr Buyer on 12.22.11 at 1:35 am

I sure hope you’re an entomologist and not a financial advisor. — Garth

Nice one

#58 Dirt Dog on 12.22.11 at 1:48 am

Hey…Mid 20’s …love…Forever…kind of reminde’s me of my first wife.
15% correction in 08 for 6 months = $1,000.00 per day in Vancouver.

Ahhh…wife # 3

Very Merry & A Snappy New One!!!

Hugs

#59 Timing is Everything on 12.22.11 at 1:48 am

The West is hugely vulnerable to commodity volatility. – Garth

Yup. But that’s always been the case.

“there’s reason to believe these trends are more than just a blip.”

‘Saskatoon bound: Newcomers lead westward shift’

http://tinyurl.com/7utl6xb

#60 Amarillo on 12.22.11 at 1:53 am

-#27 Re/Max Harry ‘… people from around the world want to move here, this is the best country in the world, even if there was a over supply, immigration would gobble the excess up.’

Er, no actually many western nations must compete for quality immigrants.

As well, the potential-immigrant pool contains certain nasty types whose values do not match our Cdn values when it comes to respecting females & gays etc. so we have to be vigilant to screen those out or we’ll be forced to have them in our midst.

Immigration is fine when administered responsibly.

However, the government should also advance policies, including perhaps financial incentives, that encourage adoption over abortion.

Many childless Canadian couples would love to adopt but are prevented by beaurocratic incompetence and/or a lack of babies to adopt.

Let’s keep our minds open to policies that encourage adoption.

#61 lord lucan on 12.22.11 at 1:54 am

To #26 regarding Japan:

Yes, the value of housing in Japan has not risen — but landlords have done OK over the past 20 years with yields typically around 6-8% in places like Tokyo, Osaka etc.

However, urban Japan (like London, UK and HK and Singapore) has a chronic undersupply of available housing.

The law in Japan (and again in London) is also more pro-landlord than places like Toronto.

And tenants have to (also, like London) have to pay property tax not the landlord, which helps the cash flow.

And Tokyo properties also don’t have sky high condo fees – which also helps landlord cash flow.

All of which is far more information on the Tokyo housing market than you ever wanted….

#62 Amarillo on 12.22.11 at 1:59 am

Let’s keep our minds open to policies that encourage adoption (please add the following) as a complementary policy alternative to our expensive immigration policies.

#63 Ruben on 12.22.11 at 2:24 am

Garth, can you please make a calculator for your website–like a mortgage calculator, except a reality calculator.

#64 Cristian on 12.22.11 at 2:29 am

Josef and Nick (the “FIRST!” couple), you should marry each other and get a life.
Otherwise, excellent post!

#65 poco on 12.22.11 at 2:33 am

#134 Jan Etter on 12.21.11 at 5:14 pm
#103 truth hammer on 12.21.11 at 12:05 pm
“Teachers all pension millionaires says new report.

http://opinion.financialpost.com/2011/12/21/millionaire-teacher/

just to clarify a bit about defined benefit pensions –they do not necessarily die when the recipient expires—there are many variations (terms) you can take with government pensions
1–no guarantee–gives you the highest monthly income–drop dead 1day after signing –all gone –your contributions stay in the overall pension fund–as long as you live you get the pension
2–5 year guarantee-a little less than the above—as long as you remain living you receive that pension—if you die after the 5 year time limit–nothing—if you die before the 5 year period your beneficiary receives the remaining until 60 months expire
3–10 year guarantee
4–15 year guarantee –each a little less monthly than the previous—so with a 15 year and you die in the first month your beneficiary receives 180 monthly payments
15 years is the longest you can go with a guarantee–remember as long as you remain living you get your pension
—so in your previous example of 50k per year—someone who retires at 55 to 60 yrs of age and lives to 90 –which is not uncommon–may end up taking over 2mil out
don’t forget the COLA
you then get into joint life and last survivor pension –too much to explain here
this is only a quick rundown

#66 Cristian on 12.22.11 at 2:38 am

To “Harry in Saskatoon, no bust here, maybe next year, or the year after”
“people from around the world want to move here, this is the best country in the world”

Dude, it sure looks like you haven’t stuck your nose out of Saskatoon, ever.
I am one of the “people from around the world”, I’ve lived so far in four countries on three different continents and trust me, there ARE actually places better than Canada. You should try travelling a bit, it may crush your ignorant patriotic ego but it would inflate your knowledge, and that is a good thing.

#67 Chris on 12.22.11 at 2:44 am

Of course our happy couple could lose the investment money in the market like most of the other Canadian schlubs who don’t have the inside track to corporate Canada and the halls of power. Losing the dough is the fast track to divorce. At least the house keeps the wife happy. Take the investment risk? Not so much.

I did not suggest an equity investment. What’s the matter with people today? — Garth

#68 Scott in Gibsons on 12.22.11 at 3:03 am

World according to Garth;

“Fact is, first-time buyers are probably more responsible for jacking house prices in the last five years than any other single group”

Coming soon;

Fact is, young Americans, forced to join the military because there are no jobs, are more responsible for the various wars than any other single group

Fact is, young women who dress trashy like their pop-star idols are more responsible for rape than any other single group

Fact is Garth, the youngest members of society are in no position to jack up the price of anything. They have the lowest incomes, the lowest savings, and little credit history. They are being tricked out by the debt pimps who will kick them to the gutter when the correction comes. How can you blame them and not mention the pimps??

My statement is correct. — Garth

#69 Not Fooled By Property Spruikers Hype on 12.22.11 at 3:05 am

Real Estate Institute of Western Australia got upset with me on a Property Blog Site.

I said that they (REIWA) were saying that Perth house prices were falling at $2,300 per week.

This drew a response from their “Communications Mouthpiece” claiming that they said now such thing & that Perth Prices were not falling at $2,300 per week.

Follow the link below & see how I put him back in his place publishing a extract from their own documents showing that in fact their data shows that Perth prices were falling at $2300 per week.

Nothing better than putting a “Spin Doctor” into a spin, you should all try it sometime.

Oh & if your bored over the Christmas break do me a favour go to the REIWA “Facebook” Site ask them questions & then link to my story.

http://nfbpsh.blogspot.com/2011/12/reiwa-mouthpiece-confirms-perth-house.html

Tee Hee Hee it’s going to be a Good Christmas.

#70 Dom_Now_in_Zürich on 12.22.11 at 3:42 am

Garth, what is funny is that you paint a worst case scenario…interest rates rising, divorce, price drop etc..but you really do not need to do that in order to tell this couple what they are thinking of doing is stupid, stupid and more stupid.

Even if everything works out for the best, they get married, have 2.5 kids etc…they will outlast the particle board, mass built house they are buying. The continuous improvements and maintenance alone will be expensive. Why in god’s name would they sacrifice all their flexibility, the ability to take an awesome job in another part of the country, or world? It would be 1 thing if the debt burden could easily be supported by 1 income. What about kids a 5 years of reduced income because 1 of you actually wants to spend time with your kids instead of having to go back to work after 12 weeks to make the mortgage. We bought our first house in Mississauga in 1999 and sold less than 2 years later to break even as we moved for a promotion. If you really want to own buy a triplex and live in the largest unit. Then even if you split you can have some flexibility. To buy in your 20’s, unmarried leaves you with a giant ball and chain that can be expensive to unbolt. BTW, we survived multiple house purchases so we can say it is ok to buy if you want. But that same 550K house would have sold for 1/2 that 15 years ago…not sure you won’t see a 20% plus drop depending on how far out in Mississauga you are. Watch Holmes on Holmes to see what you are really getting. If you were spending 550K on a real bunker, with land and exceptional quality then that would be a different conversation. Good luck.

My scenario included neither rising rates nor falling values. — Garth

#71 Canuck Abroad on 12.22.11 at 3:51 am

Great article Garth, thank you. Everyone completely ignore opportunity costs and forgets about the huge buying and selling costs of ownership and tend to think it terms of “well if the price stays flat I haven’t lost any money”. Nice to see actual numbers that prove otherwise.

By not purchasing now, they will be able to save a bigger downpayment over the next five years and then will be able to choose between putting down an even larger downpayment or buying more house.

Why do two unmarried twenty-somethings need more space – and hassles – than a two-bed apartment? Live a little, guys. Do you really want to spend every weekend over the next five years doing yard work, home repairs, cleaning all those bedrooms and bathrooms, etc. An utterly depressing existence, and you want to sign up for it before even having a kid or turning 30. Ughh…

#72 john on 12.22.11 at 4:20 am

Garth, why are you so confident interest rates are going up, I think you have been saying this for over a year and Carney has not budged, whats going to change in the next year or two that will make him raise interest rates, especially if the economy is soft, which is the reason he has given in the past for not raising rates, i fully expect rates will stay low for the next 5 years,

I have explained this several times. — Garth

#73 Onemorething on 12.22.11 at 5:11 am

Rent that McMansion now as per Garth’s calcs.

It’s that easy…and wait, you laugh all the way to the bank when the owner lowers your rental rate year by year as it’s value collapses.

If you end up liking the home, location is nice, wife begins the nesting period, he’ll wanna sell and you’ll help him with that wont you.

#74 GTA Girl on 12.22.11 at 7:07 am

What is the one true thing is that a young coup,e in their twenties have a even lower chance of staying together for the next 30 years let alone the next 5.

Garth, the only factor you left out was the lawyer fees that the couple will both have to employ as their relationship falls apart and they shoot missiles at each other on who gets what, and how much the house should be listed at.

The thought of 20somethings combining $110k together without a marriage license let alone a legal agreement makes me ill. Unless each walked in with exactly $55k each, which is doubtful.

Run children, go rent a place downtown Toronto. See if you get along, travel. Mississauga home ownership at 20something? Ugh. Don’t do it.

I’m such a romantic.

#75 Kip on 12.22.11 at 7:08 am

“Why are young couples so aroused by eal estate”?

Maybe it’s so they can raise families, feel secure and live a comfortable productive life in our country.

I’m not saying it’s the right or wrong time for this young couple to buy a house but for you, an old wheezer by your own definition, to instill fear into them is irresponsible!

Oh and for the record, like you, I am also a boomer. I just don’t wheeze like you.

Tell me where the article is wrong. — Garth

#76 Joe on 12.22.11 at 8:03 am

Garth, interest rates haven’t risen in about 30 years and if your former political peers are right they’ll stay ultra-low for the next 30 years or maybe they’ll bring in mortgage interest deductibility to lessen the blow in the unlikely event they might increase by a couple of points.

Wrong. Do some research on rate history. And deductibility will never occur. — Garth

#77 Kip on 12.22.11 at 8:07 am

Tell you where the article is wrong?

You are instilling fear into this couple who have a totally different perspective than you. They have have a lifetime of hope and dreams. Canadian dreams. You? Wheeze on old timer!

So, it’s correct. — Garth

#78 Tim on 12.22.11 at 8:15 am

Piss off the neighbours with impunity? ’nuff said, I rent and I play drums!

#79 miketheengineer on 12.22.11 at 8:34 am

To S&B

My advice…rent in Mississauga. Bank the cash as much as possible. Detacted prices will retract. Hold off as long as possible as 10 to 15% savings is a very real possibility in the very near future. Who wouldn’t want an extra 50 to 100k less in mortgate. That is like a trip south every year you are in the place, you want vacations too right? Or nice car payments?. Don’t be morons, hold off. Cheaper to rent a shack (oh sorry home) in Mississauga.

#80 Darryl on 12.22.11 at 8:50 am

One thing you got wrong Garth

Mississauga is not the distant burbs. If you count Etobicoke as TO. then we are the closest burb.

30 minutes drive from my central Mississauga home to central down town TO. Less if I were closer to a highway. Some parts of Mississauga are a 15 minute drive to downtown.

At midnight. — Garth

#81 Victor on 12.22.11 at 8:56 am

And if they do this in 2012, chances are they’ll be forced into a 25-year amortization, since I’m hearing the next federal budget will murder thirty-year loans.

Is this because of Ed Clarke’s recent public comments or something else that is leading you to think this might be a likely change for 2012?

#82 Kevin on 12.22.11 at 8:59 am

Garth, you cherry-picked the most expensive period of home ownership: the first 5 years. When the interest component of their payments is at the absolute maximum.

Why not re-run the numbers after 35 years? You know, 15 years after the house has been paid off, and rents have rocketed through the stratosphere?

Nobody stays in a home 35 years any more. Your logic isn’t. — Garth

#83 truth hammer on 12.22.11 at 9:12 am

poco 67……..teachers worth 2 million….after the outrageous paycheques and perks they grab during the relatively few years they work, and on top of all the paid holidays? Canadians have to be nutz not to figure that this whole civil service cash grab /rip off is unsustainable. Why are CDN teachers compensated three times what an American teacher makes? Ditto with firemen, garbagemen, policemen, street sweepers..etc etc etc….Who is going to pay for this now that taxation is pushing 100%?

The succession of Liberal governments beat down freedom to the point where the country suffers from a mass Stockholm Syndrome…… People were chastised for speaking their minds during the dictatorship of the Red Rag Liberals……jailed for expressing their will….hunted down for standing up for their rights as citizens…..laws were passed restricting expression across the nation in order to push the Liberal agenda….. when their powerbase was a plethora of spontaneous constituencies in southern Ontario.

Of course we’re going to have to weed the Lib dinosaurs out….. at least the current administration is allowing those people to speak out. The vested interest of the Liberal Socialists is in self preservation…they see that fat cat way of life being threatened…they want to keep the perks , giant paycheques and scam funds they granted themselves during their regime. Lets wheel them out gracefully but firmly to the rubbish tip of history.

Lets see…who needs the tax revenue more…fat cat unions or starving kids…..luxury living civil servants or freezing seniors……hungry working class Canadians or the coddled slush fund Liberal special interests?

Who is it that is always agitating for higher taxes to pay the gouging corrupt and greedy……..the union leaders and special interests of course. Does the truth frighten people so much that they become dissonant at the prospect of independant thought?When do the socialists learn that taxing citizens 100% brings the whole country down.

And for the Goofy Gus who fronts Obama politics in this forum…are you working for the CBC? Liberals taxed people to the point that they couldn’t afford to have children……where would that have ended if they hadn’t been thrown out of office?

The Libs thought they could replace the low birth rate with immigration but they forgot that affluent Asians immigrants are not socialists and the immigration scam backfired.

#84 TurnerNation on 12.22.11 at 9:18 am

Anyone in the GTA (Garth Turner Area) paying greater than $350,000 for a ~2000 sq foot cookie cutter builder chipboard ‘n brick special, built 6 feet away from next house, is overpaying.

That’s all they are worth, tops.

#85 Cory on 12.22.11 at 9:19 am

#23 Investors Friend (Shawn Allen)

You are right on. I remember when we upgraded and bought a larger home in 1992. the house cost $237K and we put down $102K down. Our $135K mortgage drove me nuts. We would save $15K and want to put it down at the end of the year on the mortgage but it was daunting. We would still owe over 100K.

So now I can just imagine having a $440K mortgage. You can never build wealth. It’s all about debt and stress and home improvements and keeping up with the Joneses in the new subdivision.

#86 CTO on 12.22.11 at 9:20 am

#74 john

John?
Are you not versed in phyisics? “For every action, there will be an equal and opposite reaction”. “Zero” is a number at the very bottom of the interest rate scale, remember sesame street?

The jist of it is, for every healthy reason our central banker has lowered interest rates to this level (emergency!), there are 10 unhealthy reasons for leaving it there. These, by his own words, are emergency rates, they are not, nor would ever have been normal.

They have to go up, or we are all doomed. If you can’t figure that out, then it’s not worth commenting to you….

#87 househornyhousewife on 12.22.11 at 9:22 am

Garth,

This is one instance where I wholeheartedly disagree with you.

If these kids have stable jobs that they intend to keep over the longterm then they aren’t going to be running off anywhere anytime soon (figure on at least 10 years). Plus, if they have a decent downpayment of 20% to put down on this place then this will shelter them from the possibility that their mortgage will be greater than the value of their house in the near future .. in case they need to sell in an emergency or something.

I have not seen this house but $550,000.00 for a home of that size in Mississauga these days doesn’t seem too unreasonable and I doubt a correction will reduce its value by as much as 15% .. (if it was in Brampton maybe). Also, as you said, the value of their home will likely reach this level again in the distant future when they may want to sell (to move to a better home or whatever .. not everyone moves because they cheat and get divorced, you know).

I think that looking at the buying of real estate equation strictly from a numbers perspective is not the right way to go. Yeah, a house costs money but if these kids are willing to pay it in order to have what they want AND, more importantly, they are ABLE to pay for it, then why not ?

That Harley that you own is depreciating in value every single day and there are other things you could have done with that cash that are probably more prudent. However, you knew that it was an expense and you did it anyway because you wanted it and it made your life more fun (albeit more risky). Sure your life and disability insurance premiums are double what you would normally pay and all of that black sequined leather costs a bit more coin as well .. but life is to be lived and if you can afford something then once in a while you should be able to splurge and get it.

I thought that the point of your blog was to dissuade youngsters who couldn’t afford homes from doing the unthinkable. These kids may actually be good candidates for home ownership and may like the idea of being like their parents. As long as they are saavy and begin putting enough aside for their retirement (they have time) then why the hell not ? … oh, and I noticed you left out the welcome tax as an expense for new home ownership .. doesn’t everyone have this in Canada ? (or is it just us sucker Québecers ?) .. this is a doosy to have to pay (around 1.5% of the sale price … sheesh !).

HHHW

Anyone who puts 100% of their net worth in a single asset deserves their fate. — Garth

#88 TurnerNation on 12.22.11 at 9:24 am

An interesting – and riskier – financial preferred is brokerage firm GMP’s GMP.PR.B stock.
Trading under par at $20.25, yielding ~6.8%.

#89 CTO on 12.22.11 at 9:31 am

#20 Crazy

You are a textbook example of those who have Mathematical Literacy issues in this country.

Even with zero interest rates this couple would take 20 – 30yrs to pay off a $450000 mortgage without a lifetime of Kraft dinners and no heat.

#90 stickler on 12.22.11 at 9:35 am

article says “feathering would add a minimum of ten grand”.

I agree…but the feathering would be required even if they rent the same house. Furniture, feathers, nick nacks & paddy wacks.

Also your 6% investment return (which i think is a little optimistic these days) will be reduced due to tax.

I do agree that the fundamentals support renting in this case (and many properties in the GTA) for sure.

Just saying

(a) New houses require window coverings, which become part of the edifice and have no value in a transaction. (b) Dividend income is about 85% tax-free. — Garth

#91 Herb on 12.22.11 at 9:38 am

There is a truth hidden in the link at #4 that should be retrieved and held high:

Don’t try to explain why something’s bad. Take advantage of the prejudice that’s already there.”

Ladies and gentlemen, I present to you the modus operandi of the Conservative Party of Canada and its unique contribution to politics in Canada.

#92 fancy_pants on 12.22.11 at 9:38 am

not all young are hot and horny for RE. Some are simply looking for a modest place to settle into and call home.

HOWEVER, b/c there are many, many folk who are horny for RE, this asset has ballooned to a point of forcing the acute, prudent folk onto the sidelines. Unfortunately, under the current circumstances, renting is likely their wisest choice at his point in time.

Sometimes “better safe than sorry” is the best advice to follow. There is one feeling worse than missing the boat.. it’s catching the wrong one.

Real estate ownership is a Canadian cult. ‘Home’ is where your dog lives. — Garth

#93 Curious! on 12.22.11 at 9:43 am

What?! Mississauga a west GTA wasteland? no way :p

Excellent post Garth with all the number crunching done for upto 5 yrs for various scenarios…i will def use this as a reference next time rent vs mort argument comes up.

#60 Amarillo on 12.22.11 at 1:53 am
Why dont you make a “values” scanner and we will get it installed at every port of entry and all Canadian embassies to keep the ‘nasties’ out…that will be a great service to Canada and we will be forever grateful to you. And to start of at the right point why dont we focus in on the exact section of the immigrant pool i.e. pick on Muslim-sounding names…i am sure you will find all of your nasties there.

#94 Mr. Lee on 12.22.11 at 9:49 am

GT, where do you suggest i do research on Perpetual preferred shares? My online brokerage doesnt give much information on them? Should i go directly to the company website that issues the Perpetual preferred shares?

Get an advisor. Cheap is expensive. — Garth

#95 Tom on 12.22.11 at 9:56 am

“But if the $110,000 had been invested (at a modest 6%) for five years”

you lost me here. Let me know where I can get these kinds of returns and sign me up.

Opportunity cost should be around 2% because other than fixed rate investments everything is way too volatile to assume any kinds of gains.

Why is it necessary too cover the same ground endlessly? Are we so brainwashed by the banks, or each other? — Garth

#96 allister on 12.22.11 at 9:58 am

B&S need to look seriously at why they want the house.
They haven’t made a marriage commitment, they don’t mention any kids, they are only two people and how much room do two people need anyway? Will the house be closer to work or will a long commute be in order? They are free to do whatever they want right now.

Or, are they just worried about missing the capital gain?

I lived through falling RE prices in 1980-83 and again in 92-94. RE can fall and sometimes hard, a capital gain is not a guarantee.I have seen people lose their houses and farms when interest rates rise.

#97 OttawaRenter on 12.22.11 at 10:14 am

Hi Garth,

Thanks for making the math easily understandable in this posting. Some of you other postings were well written, but ended with comments such as ‘do the math.’ While us laypeople might be capable of executing a mathematical equation, we are sometimes unaware of all the variables. Nice to see them all presented.

#98 dmno on 12.22.11 at 10:20 am

$5000 a year in property taxes….really.

It’s a low estimate. — Garth

#99 Matt on 12.22.11 at 10:25 am

So I suppose you rent, Garth? Somehow I doubt it…

No, but residential real estate is held at less than 30% of my net worth. Anyone sticking 100% in one asset deserves what’s coming. — Garth

#100 AACI-Okanagan on 12.22.11 at 10:30 am

84 Kevin on 12.22.11 at 8:59 am

Garth, you cherry-picked the most expensive period of home ownership: the first 5 years. When the interest component of their payments is at the absolute maximum.

and what happens after the 5 year term is over and the couple has to redo their mortgage?

#101 jaymel on 12.22.11 at 10:31 am

truth hammer…teacher here make 3 times what they make in the states. Ha what are you talking about? What do you think teachers here make and what do you think teachers in the states make?

#102 eaglebay - Parksville on 12.22.11 at 10:38 am

#45 jaymel on 12.22.11 at 12:35 am

In other words, these “young people” jumped off the bridge because something told them to.
I guess no common sense and no thinking on their own.
The government made me do it.

#103 bob's my uncle on 12.22.11 at 10:51 am

Stop embarrassing yourself. If you can. — Garth

Why would you say that? I am giving sounds advice here, the GTA is the land where most foreigners are moving to and are unloading their suitcases of money, if these 2 want to be left stranded while rich foreigners pump up the market than it’s their choice.

Did it again. — Garth

#104 Kevin on 12.22.11 at 10:54 am

OnTheSidelines wrote: “You don’t get something for nothing, and that 6% must necessarily come with a risk premium.”

To which Garth said: “The investment ignorance on this blog is stunning.”

But he’s right, Garth. The proof is in the math. If a bank preferred paying 6% were risk-equivalent to a GIC paying 0.5%, then why would anyone ever buy a GIC? They wouldn’t. They’d all pile into those bank preferreds instead, and by the laws of supply and demand, that would drive the price of those preferred shares up to the point where that 6% yield fell to match the GIC (which would, correspondingly, rise). If they truly were the same risk, then they’d pay the same rate, say, 3%.

The very fact that preferreds pay more than GICs is proof that they carry higher risk. It’s basic Efficient Market Theory. It’s simple supply-and-demand. Calling us “ignorant” doesn’t erase the undeniable fact that there is such a thing as a “risk premium.” You don’t get higher returns for identical risk. Higher returns must come with higher risks. The market will shift its investing habits until any such inefficiencies are eliminated.

You have no idea what you’re talking about. If RBC missed a dividend payment on its preferreds, you sure wouldn’t want a GIC in there. — Garth

#105 NorthOf49 on 12.22.11 at 11:02 am

Wow Garth, some real dummies on the blog lately. Too much egg nog on the brain perhaps? Anyway, keep up the good work. Your words resonate with the majority. Regarding young people and real estate, I couldn’t agree more. I know more than a few young couples fresh out of university or college, employed but no real stability running to the bank with the wedding busta to grab a $300K mortgage to buy their dream townhouse. Rent?? Are you kidding? Junior would lose all respect from his Euro dad, and Missy will NOT be squeezing out puppies in a rental.

#106 eaglebay - Parksville on 12.22.11 at 11:06 am

#62 lord lucan on 12.22.11 at 1:54 am

It doesn’t matter who pays property taxes and condo fees. They’re built into the rent for as much as the market will allow.
The landlord will always be on the hook for the difference.
What happens if the renter doesn’t pay the bills?

#107 disciple on 12.22.11 at 11:08 am

#90 Turnernation… I would stay away from rate reset preferreds because with the coming legislative changes they will all almost certainly be called, with possible capital losses. Pile into floating rate type instead and you’re hedged against rising rates… BCE.PR.H /Y, BAM.PR.R…. notice I do not recommend banks? I hate banks, in case you didn’t notice… if you are close to retirement then banks are OK I guess, only because they are less risky right now than non-financials and for the steady dividend income, but for the younger crowd, please join me in the war of attrition against them, and by the time we retire, they will be irrelevant and hopefully… gone (there I go dreaming again).

#93… Herb… all I can say is Wow! You get the disciple Medal of Insight for 2011. Head of nail, meet hammer…

The worst advice. Fixed-rate preferreds are far more secure and protective. And no bank preferred will be recalled at a capital loss. Such folly today. — Garth

#108 Devil's Advocate on 12.22.11 at 11:09 am

“But if the $110,000 had been invested (at a modest 6%) for five years” – Garth

I too would like to find those “modest” 6%, and thereby must be secure, investment returns for as soon as I do I’m retiring to a white sandy beach in some far away sun soaked land.

Fat chance. Inflation is 3% and gains are taxable. A return of 6% is a minimum target, easily achievable on a multi-year basis. — Garth

#109 Bottoms_Up on 12.22.11 at 11:13 am

#76 GTA Girl on 12.22.11 at 7:07 am
—————————————-
There’s actually been some studies done on divorce rates relative to education, and it was found that rates are actually much lower than the often-quoted 50% chance if both couples in the relationship have higher education.

Not all couples were created equally.

#110 Daisy Mae on 12.22.11 at 11:13 am

JAYMEL: “I think it actually has more to do with amortization rules changing from 25 years to 40 years and requiring less down…”

******************************

….which made real estate ‘affordable’ to the first-time buyers.

#111 Devil's Advocate on 12.22.11 at 11:15 am

#86TurnerNation on 12.22.11 at 9:18 am
Anyone in the GTA (Garth Turner Area) paying greater than $350,000 for a ~2000 sq foot cookie cutter builder chipboard ‘n brick special, built 6 feet away from next house, is overpaying.

That’s all they are worth, tops.

Say’s you.

The homeowners who are selling don’t give a rat’s ass what you think however as they entertain the offers from those who are ready, willing and able to pay more. And that my friend is the true measure of what something is worth, not what you think.

#112 Bottoms_Up on 12.22.11 at 11:20 am

#70 Scott in Gibsons on 12.22.11 at 3:03 am
—————————————————
Garth’s statement is correct, because buyers are the ones that ultimately say ‘yes’ to paying these inflated prices.

They say ‘yes’ because they don’t understand the magnitude of the debt, how amortization works and peripheral costs associated with home ownership. They are also fed the line ‘if you can afford the monthly payment (at 0 down 40 year amortization with lowest interest rates in history), then you can afford the home”.

#113 EdmontonJim on 12.22.11 at 11:22 am

So for these people, buying a house isn’t the best financial decision they could make, but it’s not the worst one either. As I said yesterday, for those who can afford it, buying is a lifestyle choice, not an investment.

So put this in the category of post-graduate degrees, children and big weddings: Costly, stressful and with little payback, but part of life for many otherwise sane people.

#114 Bottoms_Up on 12.22.11 at 11:25 am

#64 Onthesidelines on 12.22.11 at 2:00 am
————————————————
Garth is a financial advisor, he cares about people and if you have enough money he would probably help you out.

I’m sure there are some very, very smart people that have their wealth being managed by Garth. And they have probably seen 6-8% yearly gains.

#115 eaglebay - Parksville on 12.22.11 at 11:25 am

#76 GTA Girl on 12.22.11 at 7:07 am

They’re probably already living together. So, it’s the same as being married.
She walks with half of whatever.

#116 disciple on 12.22.11 at 11:26 am

Pro-Vaccine Immunologist Admits a Shocking Truth About Vaccines:

http://gaetacommunications.com/site/?p=1092

#117 poco on 12.22.11 at 11:34 am

#85 truth hammer on 12.22.11 at 9:12 am
……..teachers worth 2 million….after the outrageous paycheques and perks they grab during the relatively few years they work, and on top of all the paid holidays? Canadians have to be nutz not to figure that this whole civil service cash grab /rip off is unsustainable. Why are CDN teachers compensated three times what an American teacher makes? Ditto with firemen, garbagemen, policemen, street sweepers..etc etc etc….Who is going to pay for this now that taxation is pushing 100%?—-etc etc
______________________________________________

WOW–i was only pointing out the fact pensions don’t necessarily stop upon the death of the recipient— i would say you have many of your facts wrong regarding the statement above

#118 Daisy Mae on 12.22.11 at 11:35 am

#64 ONTHESIDELINES:

“There is a reason why hundreds of billions are sitting on the sidelines in treasures earning negative interest… at least for the time being.”

You just proved my point. — Garth

********************************

We ARE ignorant when it comes to financial planning — and that’s why we come to this blog.

The above statement proves it.

#119 Herb on 12.22.11 at 11:40 am

#85 Truth [sic] Hammer,

thank you for your providing the proof for my #93 before it was even posted.

#120 Daisy Mae on 12.22.11 at 11:49 am

SCOTT IN GIBSONS: “Fact is Garth, the youngest members of society are in no position to jack up the price of anything. They have the lowest incomes, the lowest savings, and little credit history.”

****************************

Fact is, they ARE responsible for the bidding wars — along with speculators and flippers — BECAUSE of their low incomes, along with no savings and no credit rating.

The present government was stupid to tamper with the 25-year amortization, making all this possible.

#121 Bubby on 12.22.11 at 11:53 am

One hundred and FIRST!

#122 disciple on 12.22.11 at 11:54 am

This is also just a little nuts. But very important. Here is an excerpt from Manley P. Hall’s seminal work:

The Bacon-Shakspere (sic) controversy, as its most able advocates realize, involves the most profound aspects of science, religion, and ethics; he who solves its mystery may yet find therein the key to the supposedly lost wisdom of antiquity.

Certain absurdities in Shakspere’s private life are irreconcilable. While supposedly at the zenith of his literary career, he was actually engaged in buying malt, presumably for a brewing business! Also picture the immortal Shakspere–the reputed author of The Merchant of Venice–as a moneylender! Yet among those against whom Shakspere brought action to collect petty sums was a fellow townsman–one Philip Rogers–whom he sued for an unpaid loan of two shillings, or about forty-eight cents! In short, there is nothing known in the life of Shakspere that would justify the literary excellence imputed to him.

Yet who but a Platonist, a Qabbalist, or a Pythagorean could have written The Tempest, Macbeth, Hamlet, or The Tragedy of Cymbeline? Who but one deeply versed in Paracelsian lore could have conceived, A Midsummer Night’s Dream?

It was in recognition of Bacon’s intellectual accomplishments that King James turned over to him the translators’ manuscripts of what is now known as the King James Bible for the presumable purpose of checking, editing, and revising them. The documents remained in his hands for nearly a year, but no information is to be had concerning what occurred in that time.

#123 Herb on 12.22.11 at 11:56 am

Here we think that interest rates are going to go up, and then the mailman brings an offer from American Express for 0.99% interest on any outstanding balance until February 2013!

It’s time to load up a credit card. Oh yeaahhh!!!!!

#124 james on 12.22.11 at 11:56 am

garth,
your thoughts on peak oil?

#125 ThiNg on 12.22.11 at 12:12 pm

#106 EdmontonJim

If only your parents had realised the ‘little payback’ and decided to not have kids…

#126 mousey on 12.22.11 at 12:13 pm

Who are these young people? At their age I was figuring out how I could save on text books so I could back pack in Europe for two months.

Regarding the “mysterious” preferred shares. If your financial advisor is vague about them, or can’t explain them, move on buddy…it just isn’t that complicated. You can find out the particulars of the preferred shares, say in TD or Royal, by going to the corporate site, and eventually you can navigate to the preferred shares. The terms for the particular issue of preferred shares will be set out in black and white – the rate, the call and call price, etc. You may not understand all of the info because there is a certain lingo used, but you can get a good idea about the basics. Want to see how these have been performing…go to an exchange site, like the one the Globe and Mail has and put in the trade symbol and see what the trade history has been. I’m not saying you can become an expert in 5 minutes. My point is that a professional financial advisor absolutely should be able to tell you what you need to know about preferred shares.

Vanwest update: listings have dwindled and what is left is truly crap. There are 12 listins for 3 bedroom houses for under 1.2 million and you are assured a good laugh when you see the property details for places, some of which are seriously dumpy. There are some non prepaid lease places – quite nice actually – on aboriginal land…so forget about those. Then we have the houses on busy streets and then we have the just plain delusional bungy box fixer upper to help you get into the red hot market. Good grief. Vanwest needs a beat down…not a correction.

Merry Christmas and best wishes for the new year.

#127 Jan Etter on 12.22.11 at 12:14 pm

#67 poco on 12.22.11 at 2:33 am

Good points. Also worth clarifying that gov’t pensions differ – for example, federal gov’t pensions are normally 2/3rds contributed by the employer; Ontario gov’t and OMERS 50/50 shared between employer and employee, I believe. Not sure what the big banks generally contribute to their DB plans (note some are moving to DC plans for new hires).

#128 fancy_pants on 12.22.11 at 12:20 pm

Yesterday, my dental hygienist was yacking while I was in the chair with my mouth agape.

She said her and husband were going to put their house up for sale Jan 1st. She said it was just the two of them and they really don’t need 4 bedrooms + inground pool that they use half a dozen times per year. She has gotten tired of spending so much time cleaning (they have pets). She said they are looking to downsize a little.

I was thinking – no $hit, why would you have bought such a big house in the first place? but instead nodded in agreement – good idea. Why do they call common sense just that when eludes so many-a common people?

Ah well, c’est la vie. I left feeling content with my average house, no mortgage or debts, $ in the bank and presents under the tree – and still enough to give to charity of choice. I have found the most elusive yet rewarding of assets – contentment.

Don’t get me wrong I am not shoving smugness in your face – I once chased dreams of getting $$$ and lost LARGE. Sometimes you have to hit bottom before you realize how high and nice your view was/is. Live life instead of chasing it down the road.

#129 george on 12.22.11 at 12:23 pm

Old Age Security for baby boomers heads toward $100-billion a year

http://www.theglobeandmail.com/news/politics/old-age-security-for-baby-boomers-heads-toward-100-billion-a-year/article2280064/

#130 malkoo on 12.22.11 at 12:29 pm

Sold my house with 96% of asking price ….no condition for mortgage , inspection or anything else – now to be a happy renter soon :)

#131 Ben on 12.22.11 at 12:31 pm

December 22, 2011, 11:20 AM ET.Yield Hogs Slaughtered by Alaska Communications

By Randall Forsyth
The folly of chasing the highest yields again was demonstrated by the 22% plunge Thursday in shares of Alaska Communications Systems Group (ALSK) after the telecom’s announcement after the close Wednesday that it will slash its dividend by 77%, to 20 cents annually.

Until yesterday’s payout announcement, yield had been the main attraction for the fixed-line telecom. Its former 86-cent dividend provided a yield of 19.6% at Wednesday’s closing price of $4.39. Thursday, shareholders who thought they would reap that fat yield are looking at a loss since of 97 cents–more than the previous annual payout.

Quoted yields of nearly 20% are the market’s signal that the dividend likely is unsustainable. Alaska Communications said it would save $29.8 million of cash annually as a result of the shrunken payout, which figures to a yield of 5.9%. Even before today’s stock debacle, its price had slid steadily from its 52-week of $11.61 attained almost a year ago.

#132 InvestorsFriend (Shawn Allen) on 12.22.11 at 12:32 pm

UNITED STATES MORTGAGE DEAL

Freddie Mac said Thursday that the average on the 30-year home loan fell from 3.94 percent the previous week. The 3.91 percent rate is the lowest average for long-term fixed mortgages on records dating to the 1950’s

****************************

Garth said above that in Canada a typical 5-year locked in rate is 4%.

In the United States they can lock in for 30 years at the same rate of 4% AND they have the right to refinance for a small fee (interest rate differentials DO NOT apply to insured mortgages in the United States).

No one has ever been able to explan how the Americans get such an incredibly better deal than in Canada. Locked in for 30 years folks! And they can renogotiate at any time. AND the mortgage is sometimes non-recourse.

Canada has a fairly open competitive market for loans. Our banks can securitise our government insured loans and sell 30-year bonds to investors.

SO why would the American banks be able to offer such a better deal.

A 30-year fixed rate in Canada would probbaly be well over 6% IF you could even get it. And you would have no ability to pay it early or get a lower rate if rates fell.

Do we (go forbid) need Fannie Mae and Freddy Mac to come here to Canada?

#133 Pat on 12.22.11 at 12:34 pm

Don’t feed the troll (GT).

#134 Van guy blazin kush on 12.22.11 at 12:36 pm

Property tax in BC is much lower. If it’s your home, you pay much less.

#135 InvestorsFriend (Shawn Allen) on 12.22.11 at 12:39 pm

PHYSICS GENIUSes?

Some Physics geniuses above point out that if preferred shares are safe and pay 5% then no one would buy a GIC at say half of one percent.

Well, partly right because perpetual preferred have massive interest rate risk if interest rates rise suddenly.

AND in bankruptcy of a bank, GICs are deposits and get paid out before preferred share holders.

BUT the arguments that bargains can’t exist due to physics is WRONG.

Markets can be segmented. Only a small portion of the population is able to buy preferred shares. You need a brokerage account. Anyone can walk into a bank and buy a GIC. And GICs are sold and pushed by mutual fund advisors who get a big fee for doing so.

Same product can sell for different prices in different stores. Physics does not apply to marketing unless you account for different inertia of different buyers (call it different friction factors)

There is zero risk of a ‘massive interest rate’ increase, and you know it. Even so, investors who bought preferreds would continue to receive 100% of their income. In the event of a bankruptcy of a major Canadian bank, nobody would be made whole. You know that, too. Fortunately neither will happen. Makes me wonder why you bothered. — Garth

#136 John on 12.22.11 at 12:47 pm

To #91, CTO

thanks for the non-lesson Big Bird, go back to watching Sesame Street, I suggest watching ‘The Count’.

#137 City Slicker on 12.22.11 at 12:57 pm

So let’s say they stay in the love nest in this most romantic of Canadian cities for a full five years, and then decide to sell (long enough to get married, bummed and divorced).
———————————————————-
Garth you’re too optimistic, I think the standard time for those marrying in their 20’s is divorce in 2 years.

#138 Jaymel on 12.22.11 at 1:03 pm

104 eaglebay In other words, these “young people” jumped off the bridge because something told them to.
I guess no common sense and no thinking on their own.
The government made me do it.

No not everyone I didn’t and am saving to buy but I find it rather amazing that everyone encouraged house buying, anyone with any intelligence should have saw a correction coming but everyone who should have known better was too busy making money off the fools rushing in to stop this. It is easy to blame the young people and first time home buyers when in reality everyone is to blame for this mess.

#139 Kevin on 12.22.11 at 1:11 pm

TD Bank is out with a housing report
REGIONAL HOUSING MARKETS:
A YEAR IN REVIEW AND A LOOK AHEAD
http://www.td.com/document/PDF/economics/special/sg1211_housing.pdf

“We believe that the average Canadian home price is over-valued by roughly 10%. Metrics like price
to income, price to rent, and affordability all support this conclusion. We expect that the price excess
will gradually unwind over the next two years in light of a softening in employment conditions in 2012
followed by higher interest rates in 2013.”

#140 SLN on 12.22.11 at 1:12 pm

What’s the matter with people today, asks Garth … I guess he’s responding to the fact that there are quite a few posts registering their disagreement with the “easy 6%” returns people can get investing in preferreds, etc.

What is the matter is that for most people there are no magical 6% returns, because most people don’t make their living researching investments, or sitting waiting to call their brokers, or have the savvy to find trustworthy FAs, and want to escape the fees associated with investing. Not to mention that Most People don’t have an ‘extra’ 100 grand that they can park anywhere for long enough to make 6%. Finally, Most People sense that the world financial system is on the brink of complete catastrophe.. IE: who the he77 knows what investments are safe, let alone if their deposits are even safe!

I do a lot of listening to a lot of financial people.. investment advisors, economists, former brokers, etc and a great many of them are at a loss … they are advising to wait it out in cash and if you have any that you want to preserve to go for metals.

Basically that’s what is ‘wrong’ with people today.
cheers.

As you say, this lack of information, fear and groundless mistrust is why most people do not have sufficient liquid assets. Good job. — Garth

#141 ThiNg on 12.22.11 at 1:46 pm

We own two houses and both were bought with 50% down AND both have rental units which subsidise the mortgage. We’re locked in for 5 years at 3.75%. I have a secure job (as secure as can be in today’s market) and so does the wifey. BUT we are terrified about the coming changes and are going into super-saving mode. I can’t imagine how two 20 year olds can take on that much debt and not care. I agree with previous posters that this is definitely a form of lifelong slavery…

#142 spaceman on 12.22.11 at 1:47 pm

Remember when the shoe shine boy was telling you he was buying a condo in West Van, well had my addidas buffed the other day, now he tells me prices are falling, don’t buy he says… I think I may listen.

Ok it came from my 80 year old Auntie, in Surrey, but you gotta note the analogy. The perception on the street by the common man is this, its over.

#143 ThiNg on 12.22.11 at 2:03 pm

Oh and I should add, I have a good friend who is real estate lawyer in Southwestern Ontario. He says that he has never been so busy, but not in house purchases, in refinances! He was working wil 3am on Monday night because people want to close to have the money before Christmas. Talk about using the house equity as a giant ATM…

I just hope they are all using the money to buy their kids and spouses preferred bank shares or other appreciating liquid assets (like Garth says)…

#144 Daisy Mae on 12.22.11 at 2:20 pm

#89 HOUSEHORNYHOUSEWIFE: “That Harley that you own is depreciating in value every single day and there are other things you could have done with that cash that are probably more prudent..”

************************************

He’s entitled to a life. He can afford it. It probably set him back $25,000-$30,000 or whatever. So what? That’s a far cry from $550,000 amortized over 30 years to newbies.

#145 You can't handle the truth on 12.22.11 at 2:24 pm

@ Truth Hammer

First off, I am not sure why I am wasting my time responding to your nonsense but perhaps this response may help you somewhat.

Your lack of understanding about the teachers pension plan is appalling. Teachers pay handsomely into their pension throughout their careers and have hired a group to manage their pension assets to ensure the money will be there when retirement arrives. We could all learn something about how they do it. Teachers have a very important role in society, educating (and sometimes even raising) our children so that future generations can be more well off than we are.

You also seem to be quite mixed up in your own arguments. You blame the Liberals for oppressing our freedoms while current government does not even allow freedom of speech or thought within its own party. You mention the need to help starving children, freezing seniors and hungry working class Canadians yet you denounce any form of socialism. Taxes go to pay for these services to the people in need.

Merry xmas my friend!

#146 Davey Boy on 12.22.11 at 2:29 pm

#117 eaglebay parksville

A little off topic but just so you know common law in Ontario is very different than common law in BC. I know from personal experience, do a search on it and see for yourself.

#147 InvestorsFriend (Shawn Allen) on 12.22.11 at 2:36 pm

PREFEERED SHARES INTEREST RATE RISK

Garth responded to me at 137

There is zero risk of a ‘massive interest rate’ increase, and you know it. Even so, investors who bought preferreds would continue to receive 100% of their income. In the event of a bankruptcy of a major Canadian bank, nobody would be made whole. You know that, too. Fortunately neither will happen. Makes me wonder why you bothered. — Garth

*********************************

TIME TO SCHOOL GARTH here.

I said perpetual preferred have massive interest rate risk if interest rates rise suddenly.

A $25 dollar perpetual at 5% is worth $25 and pays $1.25 per year. Value can be calcualted as $1.25/0.05 equals $25. If the market rate rises modestly to 6% then our pref share sstill pays $1.25 (like Garth said) but is now worth $1.25/0.06 $20.83. A fairly massive 17% drop in value.

If rates rise to 7% our pref. share is worth $17.86 or 29% less than we paid.

I would not put the risk of a 2% increase in long-term rates at zero. It can happen fast.

MORE SCHOOL:

The GIC investor is a depositor and is protected by the Canadian deposit insurance corporation (up to certain limits). But I take your implied point that if RBC goes down so might the deposit fund.

Okay class dismissed. (You’re Welcome!)

Rates are not rising, and will not increase rapidly in the foreseeable future. Additionally, whatever rates do, investors continue to get 100% of their payments. Also germane is the fact that a high demand for quality assets like these can easily mitigate rate changes and the impact on capital values. Ever ask yourself why investors have been desperate to get bonds that pay nothing, driving prices higher? You are scaremongering again without basis, and sounding like an equity shill. — Garth

#148 jess on 12.22.11 at 2:40 pm

llusory correlation
…” everyone is to blame for this mess.”

…”Unregulated private lenders who sought profits in risky subprime loans were bigger contributors to the crash than federal housing policy, critics of the Republican argument say. They also point to simultaneous housing bubbles in other countries beyond the reach of U.S laws and surges in the value of non-housing investments such as corporate bonds. ”
==
The federal government will introduce legislation to prevent banks from offering financial products that function like life annuities, finance minister Jim Flaherty said Friday.

=

The European Securities and Markets Authority announced Thursday that it has decided to endorse Australia’s regime for overseeing credit ratings.

=
symbotic rather than absolute
” In sum, the proposed Act overreaches genuine national concerns. While the economic importance and pervasive character of the securities market may, in principle, support federal intervention that is qualitatively different from what the provinces can do, they do not justify a wholesale takeover of the regulation of the securities industry which is the ultimate consequence of the proposed federal legislation. A cooperative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available and is supported by Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities.”

http://scc.lexum.org/en/2011/2011scc66/2011scc66.html

#149 MrHulot on 12.22.11 at 2:43 pm

One economist I really like and respect is Gary Shilling. He has been recommending long bonds (30+) for a long time and I have done well with them. Some Long Bonds funds in Canada have returned 15-20% for the last 3 years.

Garth, in your opinion, is it time to get out of these if you are predicting rates to go up?

#150 InvestorsFriend (Shawn Allen) on 12.22.11 at 2:44 pm

CANADIAN 25-YEAR FIXED MORTGAGE IS MORE THAN DOUBLE THE U.S. 30-YEAR FIXED RATE. WHY?

Further to my post at 137, there is a 25-year fixed mortgage rate available in Canada for 8.75%. This compares to 3.9% in the United states for 30-year and in the U.S. the BANK is locked in but you are not.

I just sent the following to both CMHC and the Canadian Banker’s Association.

(Sorry for the long post)

In today’s news from the United States I see:

“WASHINGTON (AP) — The average rate on the 30-year fixed mortgage fell to a record 3.91 percent this week, the third time this year that rates have hit new lows.”

Meanwhile in Canada the posted mortgage rates for longer fixed terms are:

5-year fixed 5.29% but 4.09% special deal (so similar to U.S. 30-year fixed rate)

10-year fixed 6.75% but 5.45% special deal (39% higher than U.S. 30-year fixed)

25-year fixed 8.75% (call for special deal) I called and the mortgage specialist was not aware what the special deal might be and had never heard of anyone locking in for 30 years. The posted rate is more than double the U.S. 30-year fixed rate.

http://www.rbcroyalbank.com/mortgages/mortgage-rates.html

Not only is the 30-year fixed U.S. rate massively lower but I understand that borrowers have the right under insured mortgages in the United States (in most or all States) to refinance if interest rates drop and only pay relatively small fees. Interest rate differential penalties DO NOT APPLY (at least in many or most cases to my understanding). This is why refinancing of United States mortgage were so much in the news over the years as interest rates fell. Borrowers saved massive amounts. I believe it was investors in mortgage backed securities who in effect lost money because their high interest investments got paid out early.

So, in the United states the normal practice is to take a 30-year fixed mortgage (today’s average) rate 3.91%. Customer’s rate can never rise but if rates go down or the house is sold they can get a lower rate or pay off the mortgage early for relatively minimal penalties. No interest differential applies (This is my understanding but I am about 99% sure this is correct).

In Canada people usually lock if for five years maximum (today’s rate around 4%) and face interest differentials if rates fall or they sell the house and need to pay-off early.

Clearly the American consumers have a massively better deal.

Just as clearly the bank’s in the U.S. get a worse deal and I believe this is why they securitize the loans to pass the refinance risks and early payout risks on to investors.

Canadian bank’s if they offered a 25-year rate could also securitise the loans. They could also do away with interest differentials if the investors would take that risk. (Could they not?)

My question is:

Do you understand what aspects of the American mortgage market makes it possible for the American banks to offer 30-year fixed rates at rates similar to the 5-year fixed rate in Canada and yet the American consumer has much better rights and fewer penalties to pay out the loan early or refinance to a lower rate? And the rate in Canada for a 25-year fixed rate is more than double the 30-year fixed rate in the United States but exposes the Canadian consumer to potentially massive interest differential penalties. What explains this? Why can’t Canadians get a 25-year fixed rate with minimmal prepayment penaties like the Americans get?

Could you please have your top people provide an in depth answer to this?

#151 Signpost in the bushes on 12.22.11 at 2:45 pm

#70 “My statement is correct.”-Garth

Reminds one of the fellow who says; “My mind is made up, don’t confuse me with facts.”

If my statement is incorrect, then correct it. Foaming doesn’t count. — Garth

#152 Peter on 12.22.11 at 2:57 pm

#82 Etobicoke as TO.
I grew up in Etobicoke….since when did it teleport to Yonge and Bloor?

#153 jess on 12.22.11 at 2:58 pm

Young people rock!

It would be cheap too, as water could be produced for about $1 per gallon, while electricity could be generated for about 35 cents per kilowatt hour of energy. ”There is no other technology to compare it against, economically, but it’s obvious that 34 cents per kilowatt hour is cheap compared to building a power plant and installing power lines, especially in remote areas,” Woodall said. ”You could drop the alloy, a small reaction vessel and a fuel cell into a remote area via parachute. Then the reactor could be assembled along with the fuel cell. The polluted water or the seawater would be added to the reactor and the reaction converts the aluminum and water into aluminum hydroxide, heat and hydrogen gas on demand.”

Simple! And as aluminum hydroxide waste is non-toxic it can be disposed of in a landfill.

Read more: Purdue University Students Turn Ordinary Saltwater into Hydrogen Power and Drinking Water | Inhabitat – Green Design Will Save the World

http://inhabitat.com/purdue-university-students-turn-ordinary-saltwater-into-hydrogen-power-and-drinking-water/

#154 reasonfirst on 12.22.11 at 3:02 pm

#113 Devil’s Advocate on 12.22.11 at 11:15 am
” And that my friend is the true measure of what something is worth, not what you think”

And there you have it – DA thinks we should not bother thinking…

#155 SLN on 12.22.11 at 3:08 pm

As you say, this lack of information, fear and groundless mistrust is why most people do not have sufficient liquid assets. Good job. — Garth

___________

:)
But information, ballsiness & trust are only worth something in an open society which applies the laws equally to all. In Canada there is much secrecy particularly wrt our real financial standing.. espcially banks. In this global economy there are many sets of ‘laws’ and intricately entwined finances… when Lehman went bust most of the brokers on the Street in London were shocked at the implications. Even people who work in finance 24/7 don’t know how one institutional crisis will impact other institutions across international boundaries.

This may be fear & mistrust, but I don’t know if it is groundless. I’m not in any way arguing that buying overpriced RE is a good idea, I’m just explaining why, from my perspective, so many balk at the notion that we’re all capable of a ‘modest 6%’ return. No amount of ‘don’t be a chicken’ is going to make someone like me hand over all my wealth to some advisor who really doesn’t give a crap whether I live or die.

#156 Kevin on 12.22.11 at 3:21 pm

IMF chimes in about high house prices and high household debt in Canada
http://www.imf.org/external/pubs/ft/scr/2011/cr11364.pdf
IMF is saying that house prices in Canada are overvalued by 10%.

“The authorities are closely
monitoring the housing market and have adopted macro-prudential measures to curb
mortgage growth; however, additional measures may be needed in the event of further
sustained increases in household debt and house prices, currently at historically high
levels.”

#157 City Slicker on 12.22.11 at 3:23 pm

Why do two unmarried twenty-somethings need more space – and hassles – than a two-bed apartment? Live a little, guys. Do you really want to spend every weekend over the next five years doing yard work, home repairs, cleaning all those bedrooms and bathrooms, etc. An utterly depressing existence, and you want to sign up for it before even having a kid or turning 30. Ughh…
———————————————————-
Likely cause their friends are doing it too. It’s a perpetuating vicious cycle all ego and inadequecy driven. Also known as heard mentality.

#158 Junius on 12.22.11 at 3:24 pm

Mish Shedlock has made his year end predictions. I don’t always agree with Mish’s remedies but he got lots of things right in the past on the global economy.

See his note about the Canadian housing bubble popping:

http://globaleconomicanalysis.blogspot.com/2011/12/bernanke-spreads-happy-dust-did-economy.html

#159 Kevin on 12.22.11 at 3:27 pm

Sorry, some more from the IMF
http://www.imf.org/external/pubs/ft/scr/2011/cr11364.pdf

“The authorities and staff discussed the scope for further macro-prudential measures should household debt and house prices continue to rise much more rapidly than disposable income.”

“Nevertheless, they stressed that, should the slowdown in the growth of mortgage debt prove temporary, they would be ready to consider additional measures. Staff and the authorities agreed that the introduction of such measures, if required, would need to be well timed and appropriately balanced to avoid pro-cyclical effects. Staff suggested that, to minimize these risks, such measures could include larger down-payment requirements for new mortgages and requiring lower debt service-to-income ratios. Staff also inquired whether measures could target housing markets in specific provinces where prices have increased most rapidly. The authorities noted that they were not considering regulations differentiated across provinces. Continued tight supervision of financial institutions would also ensure conservative underwriting standards and strict adherence to the existing regulations.”

#160 Westernman on 12.22.11 at 3:33 pm

Garth,
The last paragraph kinda made me chuckle when you started a sentence ” you have freedom” …
It has been my observation that the overwhelming majority of Canadians couldn’t care less about freedom… they don’t even know what it is. They are concerned about many things ( RV’s, Hockey, Tim Hortens etc. ) and if this blog is any example – correct spelling above all, but not freedom.

#161 Alex B on 12.22.11 at 3:44 pm

Good one today, addressed some of my concerns from yesterday, much appreciated! I appreciate what HHHW said that if they plan to stay a long time, and want a fancy house, it makes sort of sense. The problem is that it sure is a huge liability hanging over your head. What if the jobs dry up? what if Alberta is booming in your field of expertise (ostrich farming?) you can’t move, you can’t leave. Its a risk, appropriate for some, maybe not for others, besides retirement, your brain goes to mush, even if I had a big sack of retirement money, would I want to stop working at 55? or 65? not sure on that, some of the most capable older people I’ve met are still contracting at their own pace, or working less hours, but still working. The big big problem is that liquid is good right? nobody argues that, but 6% return on 100k is cool right now, but how many of us have 100k? or 400k? or can afford multiple houses? I’m sure the mega cash you have is a better return in 4-6% return investments, but lots of people ain’t hardly got much extra money on top of the rent they pay. Its either rent money going into house equity or nothing. Keep up the good work, I appreciate the diversity in your blog, ultimatly you gotta figure the risk/benefit for yourself and use this info as more helpful info on the decisions.

#162 poco on 12.22.11 at 3:46 pm

#113 Devil’s Advocate on 12.22.11 at 11:15 am
#86TurnerNation on 12.22.11 at 9:18 am
Anyone in the GTA (Garth Turner Area) paying greater than $350,000 for a ~2000 sq foot cookie cutter builder chipboard ‘n brick special, built 6 feet away from next house, is overpaying.

That’s all they are worth, tops.

Say’s you.

The homeowners who are selling don’t give a rat’s ass what you think however as they entertain the offers from those who are ready, willing and able to pay more. And that my friend is the true measure of what something is worth, not what you think
______________________________________________
wrongo-bongo again DA–why do you bother?? i really think the homeowners do give a rat’s ass what potential buyers think of their pricing because there are very few buyers that are willing to pay todays prices
offers you say—homeowners are praying for any offer as they watch their equity slip away in this downturn—properties listed for months with no interest—price drops aplenty –owners taking 5%–10% and 15% off their list price just to escape, and this is after properties have fallen considerably since the spring of 2010 (and we’re just getting started)

i wonder where some of these will end up selling for in the future (tri cities)
v919931–listed June 11–699k—-now at 610k
v922737–listed Nov11–654.8k–now at 599k
v922738–listed June 08–779k–this one’s been chasing the market for over 3 years–now at 609k
no cherry picking here– it’s all over as you know –and don’t come back and tell me these, like hundreds of others that are dropping their prices, are obviously overpriced–that spin doesn’t work

i knew that itch was getting pretty bad–knew you couldn’t stay away

PS: have you been posting under the handle “bob’s my uncle”??

#163 Mister Sanity on 12.22.11 at 3:56 pm

#146 Daisy Mae on 12.22.11 at 2:20 pm
#89 HOUSEHORNYHOUSEWIFE: “That Harley that you own is depreciating in value every single day and there are other things you could have done with that cash that are probably more prudent..”

************************************

He’s entitled to a life. He can afford it. It probably set him back $25,000-$30,000 or whatever. So what? That’s a far cry from $550,000 amortized over 30 years to newbies.

——————————

It’s not fair to compare Garth to young new home buyers. Of course Garth’s house is less than 30% of his equity. Was it always like that? When was it when he first bought his home? Likewise, a young family is not going to have a lot of net worth outside of housing. Even if house prices dropped 50%, most new buyers would still have way more than 30% of their net worth in their house. It should decline over time, so comparing an oldie like Garth to a newbie is apples and oranges.

#164 You will never know on 12.22.11 at 3:56 pm

A co-worker introduced me to this blog back in 2007. At the time I had purchased a detached house with the builder in maple for 432k. As my closing was approaching and I was getting more and more nervous. I had 20% to put down but reading this blog made me decide to get out of the deal.
To make a long story short, I got out and the builder agreed to give me my 30k deposit back. I heard they later sold the same house for 500k to another buyer and today it is worth 650.

Let’s say Garth is right and we will see a 15% drop in prices in 2012 that would bring the price down to 552k compared to 432 that I had paid in 07.

After I got out of that deal, I decided to purchase another property a few months later so did so for 465k. I spend another 45 in upgrades and the same house is worth over 700k as we speak.

I am grateful I did not listen to Garth and his advice in 2007 because he is simply a pessimist and has been saying there will be a correction since God knows when and eventually I am sure there will be a correction. But if you can afford to buy a place then go for it. I bought my place with 20% down and my mtg amount was 396 3.5% for 5 years. My mtg is at 334k right now. I will be making an additional 10% payment in a couple of weeks and I have also doubled up my weekly payments. My goal is to pay the mtg in the next 4-5 years.

Tell me Garth, if I should have listened to you and rented instead of my 200k profit just on the house appreciation:)

This blog did not exist in 2007, and your ‘story’ has equal credibility. — Garth

#165 Kevin on 12.22.11 at 3:59 pm

The IMF has hinted that the Feds are looking at the mortgage market again with household debt at dizzying heights.

Here is how mortgage credit growth looks like year over year for each month since Jan 2009. Numbers from the Bank of Canada.

1/1/2009 9.7 1/1/2010 6.6 1/1/2011 7.5
2/1/2009 9.1 2/1/2010 6.8 2/1/2011 7.3
3/1/2009 8.1 3/1/2010 7.1 3/1/2011 7.9
4/1/2009 8 4/1/2010 6.7 4/1/2011 8
5/1/2009 7.4 5/1/2010 7.3 5/1/2011 7.6
6/1/2009 7.3 6/1/2010 7.3 6/1/2011 7.3
7/1/2009 7.1 7/1/2010 7.1 7/1/2011 7.2
8/1/2009 6.8 8/1/2010 7.3 8/1/2011 7.3
9/1/2009 6.7 9/1/2010 7.2 9/1/2011 7.2
10/1/2009 6.9 10/1/2010 6.9 10/1/2011 7.5
11/1/2009 7.2 11/1/2010 7.2
12/1/2009 6.5 12/1/2010 7.1

If mortgage debt growth for the end of 2011 continues to outpace 2010’s numbers in an environment of lower wage growth, it would be foolish not to expect more mortgage rules.

#166 DM in C on 12.22.11 at 4:16 pm

Wow, it’s a Christmas miracle — despite numerous forever goodbyes and subsequent derogatory remarks about the never-changing arguments on this lovely blog, DA has returned.

Talk about never changing.

#167 Smoking Man on 12.22.11 at 4:22 pm

Gloom and doom is back in fashion.

I had dream all the bubble heads and basement dwellers around a camp fire roasting marsh mellows and sing burn baby burn…………..

Today’s headlines :
IMF casts nervous eye on Canadian housing market
Conference board of Canada says Canadians outlook lowest ever.
And so on and so on.

Well I don’t see it, been to a mall lately?

The machine has to stop dead in it’s tracks this real estate market because interest rates fixed and float are about to nose dive………

That’s all it is. The herd in Canada that owns real estate are a stubborn lot, they don’t get what they want in terms of price, they will sell. Then zero inventory……

Back in the gloom days of late 2008 and early 2009 when Gloom and Doom was force feed to us every second, in print, tv and radio. The herd just took down listing starting this latest rush………The herd knows Carney coconuts are tied…….And they don’t care about price to income ratios, they look at Rent vs Buy……Through bias glasses and are pro buy

Thats it

#168 kilby on 12.22.11 at 4:32 pm

Teacher’s Pay.

Masters with 16 years service in Washington State pays $64,174.

Top Step in Coquitlam (Vancouver BC area) Pay grade 11 pays $69,857.

US retirement benefits are better. Not much difference at all.

#169 disciple on 12.22.11 at 4:33 pm

#156 SLN … “No amount of ‘don’t be a chicken’ is going to make someone like me hand over all my wealth to some advisor who really doesn’t give a crap whether I live or die.”

LOL….You need to play the game to help ensure future comfort for you and your loved ones, regardless of any conspiracy afoot (and there are many afoot, believe me)…

IMHO, you don’t need an advisor if your portfolio is less than 500,000 or so… They won’t give you their full effort and attention anyway… Here’s what you can do to get some moderately fair income from your money real quick…

1) Go to Scotiabank and open a brokerage account, remember to claim the dividend tax credit…The reason I am recommending this particular broker is because they now offer commission-free trades on selected Claymore, iShares, and Horizons ETF’s.

2) Buy as much of FIE as you can. (It is quite diversified with preferreds, REIT’s, straight common stock, bonds, etc…) including some bank issues, but if it’s yield income you want this is the ticket). The MER is 1.00% (pretty high) but the dividends are outstanding, more than making up for it. And the price is low. Or you can pick from any of the ETF’s to get started. Stay away from long bonds (aggregate etc… with Housing Trusts).

3) Sit back and enjoy the rest of 2012. You are now a passive investor, participating in the economy. I am looking at some awesome penny stocks right now and may report on them later, but I would never recommend gambling with your growth portion of your portfolio. You don’t need to be driving a Bugatti, but as long as you’re outpacing inflation and have enough cash flow to keep up with living, there is no reason to be afraid…

Hope I’ve helped…

#170 I'm stupid on 12.22.11 at 4:39 pm

Here is where you can get 6% return for all those who keep saying its not possible.

SLF.PR.F

There are a million preferred shares that will give you 5-6%. Fear is the only thing that prevents you from investing. It’s the reason most put their money in bank accounts or give it to tnlab for security. All the while you are losing money due to inflation. I for one would rather lose money in the market instead of losing it to inflation. If I lose it on the market I can deduct it from my taxes if inflation takes it all I can do is cry in the corner.

#171 disciple on 12.22.11 at 4:44 pm

Just a clarification… long bonds are OK I guess if they are inflation-indexed (e.g. real return). Remember, my vantage point is not the same as a boomer’s… but I guess Garth is right, you do need some bonds or negative correlation somewhere there in your portfolio…just in case…

#172 GregW, Oakville on 12.22.11 at 5:01 pm

Hi Nastra, I’m not sure what 2012 will bring, but trying to stay positive about the future. Here’s something to think about just before x-mas. Dec 24 CBC radio show.
http://www.cbc.ca/quirks/ 12:10 -1pm or down load
“What if we get it right? …
We’ll speak to scientists who are imagining a realistic best-case scenario for what our world could look like in 2050, and what path we’ll need to follow to get there.”

#173 smartalox on 12.22.11 at 5:03 pm

Garth! Are you moonlighting in the popular press again? This looks like a succinct summary of everything you’ve been saying this year:

http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/12-ways-to-build-wealth-in-2012/article2279147/

#174 Cato on 12.22.11 at 5:14 pm

Surprising how many people naively think they are in stable jobs. There are very few truly guaranteed jobs, even career civil servants might be surprised at changes coming in near future. Very few 20 somethings are in stable employment. A changing labour market means those with mobility have a distinct edge. It makes absolutely no sense to make a long term commitment to a house in this economic environment. Why sacrifice future earnings potential just for the sake of being tied to a house.

Young, heavily indebted home owners get hit the hardest on multiple fronts. This group is the most sensitive to changes in interest rates & the labour market. If such a large part of a single demographic is slaughtered financially there are serious long term repercussions for the country. If this group stumbles and never reaches their peak earnings potential don’t for a moment think entitlements are safe. This group of millennials might be the first to suffer but the baby boomers will suffer most in the long run. A collapsing social safety net is probably not the future boomers were envisioning but its the reality thats coming, there is no avoiding it now.

#175 poco on 12.22.11 at 5:34 pm

#167 Smoking Man on 12.22.11 at 4:22 pm
Gloom and doom is back in fashion.
Today’s headlines :
IMF casts nervous eye on Canadian housing market
Conference board of Canada says Canadians outlook lowest ever.
And so on and so on.

Well I don’t see it, been to a mall lately?
______________________________________________

been to an open house lately? didn’t think so–no one else has either
___________________________
#167 disciple on 12.22.11 at 4:33 pm
1) Go to Scotiabank and open a brokerage account, remember to claim the dividend tax credit…
______________________________________________

open a TFSA brokerage account–20k as of Jan 1st–nothing to claim

__________________________

#170 I’m stupid on 12.22.11 at 4:39 pm
if I lose it on the market I can deduct it from my taxes…..

if you are referring to stocks, you better read the tax laws on capital losses before you blow your bundle !!

#176 GregW, Oakville on 12.22.11 at 5:42 pm

Hi Nastra, some articles you might also be interested in.
http://spectrum.ieee.org/blog/energywise
-More Casualties in Solar Crunch
-Russia Admitted to WTO–Energy Issues Fudged?
-Canada’s Kyoto Withdrawal
Lots of other stuff at this IEEE site too.

#177 Groovin123 on 12.22.11 at 5:55 pm

Screw the house. Invest that money, you can make a 6% return in this market easily with sound sleep at night. You wanna be trendy? Rent an upscale little apartment somewhere, and TRAVEL THE WORLD you’re in your 20’s!

#178 Mr. Plow on 12.22.11 at 6:15 pm

I have said it before, I will say it again.

Running these exercises over a 5 year period is meaningless since everyone needs shelter for the course of their life.

Why not run the numbers over a 60 year period a compare the renter and the owner? The owner incurs higher costs upfront and less costs on the back end comes out cheaper in the end, with ownership of the asset.

I think these folks are not buying at the low end of the market, but I still think they should buy if they plan on living somewhere for the rest of their life.

And as an aside, can you break down the $11,000 in closing costs? I have bought and sold many properties, when buying I don’t think I have ever incurred more than a couple of grand.

#179 jess on 12.22.11 at 6:29 pm

Special Report: Phantom firms bleed millions from Medicare
fake aids clinics
Because Huarte’s shell companies, like others, were incorporated with various state governments, the corporate documentation gave the fake clinics a veneer of legitimacy

Wed Dec 21, 2011 10:08am EST

SHELL GAMES: A Reuters Investigation

Why would Secretaries of State and business groups lobby against this bill?

that would make the states collect/ record the data on the identities behind nominee officers and owners.

http://www.reuters.com/article/2011/12/21/us-shellgames-medicare-resistance-idUSTRE7BK0QM20111221

The Great Corporate Tax Dodge
http://topics.bloomberg.com/the-great-corporate-tax-dodge/

Medtronic does more than half of its $16 billion in annual sales of pacemakers, defibrillators and other devices in the U.S. It manufactures the equipment at this facility, legacy of a defunct U.S. tax break designed to encourage investment on the poverty-stricken island. Yet, Medtronic credits the income to a mailbox in a Cayman Islands office building.

This isn’t what the U.S. Congress had in mind when it did away with the federal tax credit for companies’ Puerto Rican profits. The break was attacked by Republicans and Democrats as too expensive, and as of 2006, it ended. So Medtronic and other companies found a solution: They are avoiding taxes by moving those profits into shell subsidiaries in havens such as the Cayman Islands, Switzerland and the Netherlands.

http://topics.bloomberg.com/the-great-corporate-tax-dodge/

#180 disciple on 12.22.11 at 6:46 pm

Poco, I was assuming SLN had more than 20K to invest. If you’re younger with less savings but don’t need the income then definitely milk that TFSA and don’t look back.

#181 Devil's Advocate on 12.22.11 at 7:05 pm

#164poco on 12.22.11 at 3:46 pm
#156reasonfirst on 12.22.11 at 3:02 pm

The AAIC definition of market value: “What a ready, willing and able buyer is prepared to pay a ready willing and able seller, neither being under undue influence to buy or sell.”

Look it up

#169DM in C on 12.22.11 at 4:16 pm

Don’t ya just hate me? };-)

Young First Time Buyers:

Now I don’t advocate being a silly fool but I am quite sure I recall even Garth commenting on his earliest ventures into real estate with some serious trepidation. Now Garth, like me, is an old fart who has seen his net worth grow as a in part because of it. My point is buying your first chunk of dirt is always a daunting endeavour. Not too many have thought at the time they entered home ownership that it was on sale.

Thing of it is – when do buyers buy? In a Buyer’s Market? Nope. I think we’d all agree that at this point in the economic cycle across most of this country it is a Buyer’s Market – wouldn’t you? Are buyers buying? Hell no! Why aren’t they buying? Because they are afraid prices are going to fall further – right? Of course I’m right. Buyers want the best deal they can get and if they think next year or next month prices will be lower they will wait.

Now exactly in the economic cycle is it that most buyers buy if not in a Buyer’s Market because they are afraid prices might fall further? They buy in a Seller’s Market because they are afraid that if they do not they will be priced out forever!

The smart people don’t buy, or sell, in a Buyer’s Market or a Seller’s Market. The smart people wait for the market to find them by being IN the market. They know the only way you know for sure that the market has peaked or bottoms is after it has passed.

There is a “safe zone” in real estate somewhere within your personal tolerances between the peak and the bottom. We are three and four years past the peak now and that is a long time in any given economic cycle. Do you really think it’s going to drop that much further?

But back to the advice of old farts like Garth and me – if we screw up we don’t have much time left in which to fix it. Look, if you are that tight getting into a home that you will be enduring sleepless nights and bickering over the cost of no-name brand vs brand name groceries then don’t do it – don’t buy the house. But it you have the resources and want the lifestyle homeownership brings jump in for the long term benefits. What’s the worst that can happen? It’s just money. There are a lot of people out there who spend as much on a lot of other useless things which have little or residual value compared to a house at the end of the day. Harleys, Hummers come to mind. Don’t take too much offence Garth… I’m into equally economically absurd boats.

Live your life!

#182 Steven Rowlandson on 12.22.11 at 7:06 pm

I think there are several problems.
1. Young people just don’t know any better. Really they must think that the price of real estate is legit and it is old fashioned nonsense for there to be a low ratio between the price of a house and one income.

2. I think there is also a tendency for parents to be quick to send their adult children out into the world to buy their first home or tough it out some how regardless of the ability of the young ones to handle the costs. It is just like a sow bear sending the cubs up a tree and leaving. Most youngsters don’t have 6 figure bank accounts and incomes by the time they leave home. There are definite limits to the financial abilities of young adults in this 1 to 2 times minimum wage economy that places even the cheapest house in canada beyond reach. This might come as a shock to canadians but between age 18 and 32 young men and women should be having big families and having a home of their own and not having a giant mortgage and no standard of living just to make realtors, bankers and speculators rich. It is high time society got its priorities sorted out before it becomes extinct and or bankrupt.

As for the previous postings I was having trouble with my typing.

#183 Van guy blazin kush on 12.22.11 at 7:10 pm

Poco,

These listings you are posting with price reductions are simply over priced to begin with. So even after the reductions, it’s still over priced. In Coq, listings are piling up north of the Barnet hwy. Below the Barnet, there’s not many listings at all. Overall in the Tri-cities, condos are in trouble. Especially in the Coq Ctr area, they keep building.

Overall listings in the Van area has dropped 20% since Oct 1. This spring will answer our RE market.

#184 Smoking Man on 12.22.11 at 7:39 pm

#178 poco on 12.22.11 at 5:34 pm

Open house?

2 days before xmas…..Ok

As always its hard for people to objective when they fall in love with a hand or a belief.

#185 Harlee on 12.22.11 at 7:52 pm

My financial advisor is Yogi Yorgison.

Oh I yust go nuts at Christmas
When each kid hangs up his sock
It’s a time for kids to flip their lids
While their papa goes in hock.

To the point and musical !

#186 Mike Rotch on 12.22.11 at 8:19 pm

171 Kilby, RE Teachers’ salaries.

Apparently BC sucks for one more reason. Our fellow blog dog citing high teacher salaries may be from Ontario.

If I’m not mistaken, they max out at something like $95K here.

It ain’t an easy job, and I have lots of respect for those who are good at it.

That said, $95K (for something edging towards 80% of a standard work year),
summers off, and,
a first rate DB pension plan,

In summary, considering that we’re talking about something that arguably only requires an undergrad humanities degree and a bit more post-grad undergrad …..well, this career path far better than a kick in the nuts!

Oh for a Premier with the balls to take on this cartel and bring their compensation package a bit closer to reality!

Would also be nice if they could put an end to the incredible waste and idiocy raining down from the Boards of Education…….

#187 Mike Rotch on 12.22.11 at 8:22 pm

173 I’m Stupid:
“…… If I lose it on the market I can deduct it from my taxes if inflation takes it all I can do is cry in the corner.”

Never heard it expressed quite this way…..This one is a gem!

#188 Mike Rotch on 12.22.11 at 8:29 pm

Mr. Plow Re: closing costs:

“…….And as an aside, can you break down the $11,000 in closing costs? I have bought and sold many properties, when buying I don’t think I have ever incurred more than a couple of grand.”

It’s certainly more than “a couple of grand”…….

I cannot account for all of the $11K estimate, but there’s something around 1% just on the land transfer taxes. On a $550K property, that accounts for a healthy chunk of $11K.

Legals, title search, insurance, etc. add another chunk

#189 TurnerNation on 12.22.11 at 8:33 pm

#113Devil’s Advocate on 12.22.11 at 11:15 am

That’s not very kelownial of you.

#190 jess on 12.22.11 at 8:45 pm

The End of the Chinese Dream
As China’s economy continues to trend downward, Beijing’s elites are sparking a new, palpable frustration in the general population.
BY CHRISTINA LARSON | DECEMBER 21, 2011
http://www.foreignpolicy.com/articles/2011/12/21/end_of_the_chinese_dream

…”The rich are becoming a dynasty.” Now people in China recognize that “you get your position not by degree or hard work, but by your daddy.” Anti added that though corruption and guanxi are hardly new concepts in China, there was previously a greater belief in social mobility through merit. “Before, university was a channel to help you to ruling class. Now the ruling class just promote themselves.

#191 new-era on 12.22.11 at 8:54 pm

#150 Jess

Only one to blame is the government:

Low interest + 40 years and CMHC using taxpayers money to get into the real estate roullet game.

Sets up the following

– Banks can loan without risk
– The poor and un educated can buy a house. With nothing down. Low risk for them its do (get rich) or die (lose what they put into it which is next to nothing)
– Pay no interest to savers, punishing savers. and nudging the spenders and the go nuts and rising the debt.

There are alot of stupid people out there that can’t do basic math. The government is running a ponzi scheme.
When the music stops we will all pay

#192 Terra No-more on 12.22.11 at 9:07 pm

Hi Garth more animal attack & public nudity pics on the blog please.

#193 bob's my uncle on 12.22.11 at 9:22 pm

#184 Devil’s Advocate

Me likes you Devil, where did you come from?

#194 comfortably numb on 12.22.11 at 9:23 pm

#184 Devil’s Advocate

“it’s just money”

That’s hilarious…when it’s my $500,000 it’s just money but ask a realtor to take a cut in his commission and listen to the whining begin…

#195 poco on 12.22.11 at 9:26 pm

#186Van guy blazin kush on 12.22.11 at 7:10 pm
Poco,

These listings you are posting with price reductions are simply over priced to begin with. So even after the reductions, it’s still over priced. In Coq, listings are piling up north of the Barnet hwy. Below the Barnet, there’s not many listings at all. Overall in the Tri-cities, condos are in trouble. Especially in the Coq Ctr area, they keep building.
______________________________________________

sorry bud, but that’s what comparables were selling for a short 6 to 8 months ago–i’ve got lots like that

do you have any idea how many of those condos you speak of are underwater?

you should do a little research into the Vancouver condos–do you think there’s any underwater–you might be surprised

#196 Pat on 12.22.11 at 9:27 pm

GT: “There is zero risk of a ‘massive interest rate’ increase, and you know it.”

GT (a few hours earlier): “For example, young buyers have to plan for the end of cheap money, with mortgage rates likely doubling over the next five years.”

:)))

Nice cherry-picking. The first comment related to the impact of rising bond yields on investment returns over the coming months. The second was normalization of mortgage rates over five years. You do know the difference, right? — Garth

#197 Peter NYC on 12.22.11 at 9:28 pm

Dear investorsfriend
Your analysis is completely correct. Down here in the USA we do 30 year fixed with 30 year amortization. Canadians get screwed with 5 year fixed with 30 year aMS No penalty here to pay off the note and refinance at will. The reason is Canada historically had a less developed long term bond market than the USA. It was seen as higher risk. USA leveraged its status using gse entities to securitize the entire mtg mkt and sell it off to (sucker) foreigners. Today the gse entities back a majority of the mtg market. Welcome to socialism USA style. The ill informed public is clueless. If that doesn’t have Canadians steamed – as a stimulus measure post crisis Fannie Mae (who is sucking the teet of the public) extended from 4 to 10 the number of Fannie Mae mtgs an individual may sign up for. I am at 7 right now hope to get to 10 in 2012. Not only this Fannie Mae doesn’t restrict to single family I’m buying 4 plexes with 5.25 % 30 year fixed

#198 a prairie dawg on 12.22.11 at 10:18 pm

Little Nuts…

That describes most Realtards©, speckers, flippers, lawyers, bankers, doomers, and politicians. Have I left anyone out? lmao

The new normal? Leave this world in debt. Put your granite and stainless tombstone on your Visa you cheap bastard…

Sorry, bad day….

To Garth and some of the more lucid regular blog dawgs, all the best.

To the Realtards©, start brushing up on your “do you want fries with that” speech, you’re going to need it. lol

peace out. yo

#199 McLovin on 12.22.11 at 10:22 pm

Give up Garth there is no educating these idiots.

#200 McLovin on 12.22.11 at 10:27 pm

DA why are you still here spinning your bullshit?

I thought your took your Remax sign and left for good. I really thought this was the last time you would be be here.

Give us all a great Christmas present and get lost for good. We don’t need your useless pumping. You have been discredited so many times its stunning that you are still here.

PS – Kelowna is a smoking crater that gets noticeably worse by the month and you know it. So seriously beat it!

#201 Future Expatriate on 12.23.11 at 10:34 am

Thought you might want to comment on the “sense” of this portfolio:

Ron Paul’s Portfolio

As unbalanced as he is. — Garth

#202 Mr Buyer on 12.23.11 at 11:07 am

#85 truth hammer…So the Liberals are responsible for the current state of affairs…I think a name change from truth hammer is in order

#203 Mr Buyer on 12.23.11 at 11:10 am

#85 truth hammer…I know, maybe truth hammered would be more fitting.

#204 poco on 12.23.11 at 12:02 pm

Oh DA you are so easy—–your last definition was totally opposite from what your previous post said
might i suggest you go back a few weeks and read over some of your posts -(you know — before you had a hissy fit and swore you’ld never come back)—you contradict yourself over and over again—still delusional