Entries from February 2013 ↓

The downsizing


Bring me your calcified and blocked intestines. Your thirsty underwear. Your low T. Your slipped chests and fallen roosters. Your cataracts, piles and fresh lumps. Your wrinkles, your Stones and Doors tapes, and your failed dreams.

Yes, it’s Boomer Week here at GreaterFool.

Despised as few other generations, even by the petulant offspring they so lovingly helicoptered, the diseased masses are set to have their final social revenge as they munch through health care budgets, drive their Kias into bus shelters and crash property values. There are, after all, more of these wrinklies than any other age group and the impact of nine million people, half of whom can no longer see their toes, will be palpable.

So far this week, lots of evidence the Boomers as a group have managed to pretty much flip out when it comes to their financial security. The original house hornies, a staggering 78% of them own real estate, and yet half believe they’ll run out of money ten years after retiring and four in ten don’t have a hundred grand put away. Generation fail.

My thesis is that a ton of these former hippies, yuppies and Dinks will have absolutely no option over the next decade but to liquidate the only asset most of them have. Their homes. Sure, some will tough it out and go Purina, others pull a Gordon Pape and eat their equity, and others will trade places with their unemployed genius offspring in the basement. But a whack will, of necessity, bail and rent or downsize – enough to make their children wish they’d never heard of real estate.

For irrefutable proof of this, I call upon my good friend Phil Soper, CEO of Royal LePage Real Estate. This week that massive media machine set out to debunk my views that a Boomer meltdown into Springsteen-induced goo would actually negatively affect real estate. The result was predictable.

Yesterday just about every major news organization capable of copying a media release verbatim carried the same story: “Nearly half of baby boomers have no intention of downsizing,” said the Regina Leader Post. “Nearly half of baby boomers don’t plan on downsizing,” said the Globe and Mail. “Nearly half of baby boomers have no intention of downsizing,” said the Calgary Herald. “Almost half of baby boomers say they’re not interested in downsizing,” said the Montreal Gazette. See my point? LePage knows its stuff. The mainstream media is laconic, malleable and going deservedly bankrupt.

Anyway, let’s get to the gist. What the real estate marketer’s survey found was that 40% of Boomers plan at some point to move to another residence, and of those 43% want a house of similar size. Hmm. That sure looks like 17% of boomers in general have no plans to downsize, which is not exactly the “nearly half” the newspapers splashed in their headlines. (But it is almost identical to the headline on LePage’s media release. That’s, like, so uncanny.)

Furthermore, of those 40% who do plan to move, LePage found that 54% plan to downsize. Now I’m confused. Is 54% of 40% big enough to be nearly half of nine million, when 17% have no plans to downsize? Or is the Globe wrong?

Explain this, okay Phil? “Baby Boomers are the wealthiest generation in Canadian history. They live in large homes with ample space for their many possessions. They love their garages and their yards. This study clearly indicates that contrary to popular belief, most Boomers do not intend to downsize anytime soon.”

So there you go. I’m glad we put the one to bed.

Before I run off to check my catheter, one more thing. The latest numbers have just been released by the once-mighty homebuilders of the GTA. New home sales crashed again in January, down a stunning 34.9% from the same period a year ago. Of the 21,000 new, vacant condos in Toronto, it looks like 686 found owners. Interest in low-rise homes cratered.

The builders are blaming the government. Saying current levels of housing starts are almost a thousand below the long-term average, the builders assert: “This is a direct result of reduced affordability and choice in the low-rise sector and illustrates the effect of public policy on the market.”

Yes, it’s just terrible: Five-year mortgages at 2.99%. Home occupancy with just 5% down. Government-backed home loan insurance. Federal first time home buyers tax credit. BC first time new home buyer bonus. The RRSP Home Buyers Plan. HST new housing rebate. Ontario and Toronto Land Transfer tax credit. Ontario Home Ownership Savings Plan.

Have you ever seen such a torrent of giveaways? If anything, the real estate industry should be on its knees before the altar of public policy.

Speaking of knees, for Boomers rolling a joint is not what it used to be.

Family planning


The bungalow must have been fetching back in the day. Lately it’s little more than dozer fodder, which is why a couple of west end developers have been sniffing at the bushes. Anna won’t sell and take the money, however, not while her Mikey’s still at home, feeding the washing machine, emptying the table and borrowing the Toyota.

Anna and her husband, Sergei, have a grand total of $90,000 in a taxable payment coming from a former employer’s pension plan. That’s it, plus his CPP and some part-time wages. In their mid-sixties, they obviously need to dump the house, invest the money, move and punt Mikey. After all, he’s 26.

“What were you doing at twenty-six,” I ask her. “Married and working,” she says. Exactly my point.

Anna says it’s different now. Mikey can’t afford rent on the money he makes, so he’s going back to school. He’ll be there when he’s thirty and finds his first gray chest hair. I ask the parents if the kid understands their precarious financial position, and the fact they’re running out of money.

But I know the answer. Most families would rather share a disease than talk about money. So the parents inch towards penury, the thing in the basement feels entitled to meals and laundry service, and the future goes untended. Just another household on the edge, prisoners of their own destructive emotional baggage.

My encounter came to mind yesterday as I read through what can only be called a shocking report from the Ontario Securities Commission’s educational arm. The OSC’s Investor Education Fund interviewed 1,500 homeowners, all over 50 and half retired, about their houses and their preparedness for the rest of their lives.

If you’re a clinger like Mikey and think Boomers are the chosen tribe, think again. Here’s what the regulators found.

  • 20% of these fifty-plus people have no idea how much they’ve saved.
  • Half think their savings, whatever they are, will be gone within 10 years of the last job.
  • 40% have less than $100,000. How long will that last?
  • 41% say they’re not willing to sell their house, borrow against it, downsize or rent.
  • A quarter expect to retire with debt, a third of whom have no idea how they will pay it off.

Now, remember what I told you yesterday? This year (first time ever) there will be more wrinklies than kids. Over 70% of Boomers don’t think they can retire at 66 and three-quarters plan on working, sucking up jobs their kids want. This is a social and economic tsunami in the making, and at the heart of the mess is real estate.

Simply put, this is what happens when an entire nation goes horny for houses, does next to no financial planning, confuses investing with gambling, equates property with security, swallows huge amounts of mortgage debt and is financially illiterate. At this point there’s nothing which will rescue most Boomers, or deflect the spray about to hit their kids. Real estate values will decline, the economy will stumble and demographics will taketh what it gaveth. This is precisely why smart people will break from the herd which is now thundering busily towards the cliff.

Here’s what I suggested for Anna and Sergei: List the house immediately, since the third week in February constitutes the ‘spring season’ in Toronto, as it does in Vancouver. It could be the last decent one for years to come. Don’t cheap out with a FSBO, but go full-bore MLS to ensure the place is marketed properly by the best agent in the hood.

Rent a nice two-bedroom condo for two grand a month and be done with endless repairs, property taxes and insurance (and Mikey). Invest the house proceeds in a balanced portfolio (half growth assets and half fixed) which includes ETFs, preferreds shares, REITs and some fatter corporate bonds, with lots of geographic and sector diversity. Better still, get a smart person to do it for you and deduct the fees from your new income.

Dump $51,000 of this in two TFSAs, taking taxable assets and making them tax-free. Put another $25,500 in a TFSA under Mikey’s name, on the condition you’ll tell his parole officer about the carjacking if he touches it. Ensure you have a tax-efficient monthly income stream coming in to pay the rent (if set up as return of capital, and it’ll be tax-free).

Now you have balance, diversification, liquidity, tax avoidance, wealth, freedom – and you live in a better place.

As for Mikey, he can start a blog on parasites.