Leverage

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Jamie rents, but he and his squeeze dream of changing that. Typical house-lusty twentysomethings. Some things never change. But J is way more special than tens of millions of Canadians, because he reads this blog. Still, he wonders…

“As a daily reader, there’s only one thing that I don’t think you’ve given fair treatment to, and that is leverage.  When you compare the financial benefits of owning an expensive home with the financial benefits of instead having your money in a diversified portfolio, I haven’t seen you take into account the incredible amount of leverage that home ownership can give you.  Say, for example, I have $100k which I could either invest in a balanced portfolio or use as a 20% down payment on a $500k condo.  Say the balanced portfolio would consistently earn 7% above inflation and the house would consistently increase in value by 2% above inflation.  In the long term, the balanced portfolio would outperform the house, but in the first 7 or 8 years, the house would earn more than the portfolio because it starts out making 2% of $500k, which is more than 7% of $100k.

“I’ve ignored many important details, but isn’t this a point worth mentioning?  Of course it doesn’t make it any more attractive to buy in an overpriced market, actually far less attractive.  Still, leverage isn’t something I’ve seen you talk about aside from the immense risk that comes along with it (a very valid and important point).  Do you have any thoughts on the potential benefits of leverage?”

Good note. Good question. It’s one often raised here by people convinced that because banks will lever you up with obscene amounts of cheap money you’re way better off dumping it into real estate than investing an equal amount in financial stuff.

Comparisons are almost useless because of the disparate factors which can change the value of a house or an ETF. For example, higher interest rates usually result from a more robust economy, which is great news for stocks. But a bump in mortgage rates can cream homeowners, and shred property values. And if equity markets tank it normally means economic woes, rising job loss and falling consumer confidence, even though rates go back down. More trouble for real estate. Then again, inflation could come roaring back – as unlikely as that seems right now – boosting incomes, making home loans easier to pay, and goosing properties while punishing investors.

Anyway, let’s try.

Let’s buy a $500,000 house somewhere in Ontario with a 10% downpayment (a little higher than normal), then take out a five-year variable-rate mortgage at 3% with a 25-year amortization. This will necessitate buying CMHC iinsurance (because the down is less than 20%), which costs $9,000. Plus there is land transfer tax of $6,475, and about a grand for legals and beer. That brings the total cash required to $66,465.

Then we’ll invest an equal amount in a balanced and diversified portfolio earning the same rate as a 60/40 mix has returned over the past decade (which included the 2008 market meltdown). That’s 7%.

Now let’s wait five years and see what happens, assuming the house grows in value each and every year by the same amount as over the past 10 years, which is 3%. During this period of time the $450,000 mortgage doesn’t need to be renewed (and we’ll assume interest rates don’t increase  – which is very unrealistic), and require payments totaling $128,047. Of that, $65,240 is principal repayment, and the rest – $62,796 – is piddled away in interest.

Okay, so after five years of 3% compound growth, the house is worth $579,637. The cost to sell is $29,981 (5% commission), and the mortgage amount  outstanding is $384,759. That leaves a profit of $165,897, which is a ffat gain on the $66,465 originally invested. Yeah, houses win big! Garth sucks!

But wait. In order to score that $165,897, the homeowner had to shell out $62,796 in interest payments, plus five years of property tax and insurance ($500 a month) which means the net gain was $71,101. In contrast, $66,465 invested in financial assets compounding at 7% a year would give you $93,220 after five years. (Of course this assumes the non-homeowner had no housing costs because he lived in mom’s fruit cellar.)

And what of risks?

They abound, as much with real estate as financial markets. Let’s take a modest case. What would happen to returns, for example, if both housing and a balanced portfolio took a 10% tumble in year three, before resuming normal growth? Well, the house would end up being worth close to its original purchase prices ($506,478) after five years, yielding $33,600 after deducting mortgage interest. The balanced portfolio would contain $78,409. So, the homeowner would have about $33,000 less than initially invested, while the houseless guy had $12,000 more than the start amount.

So, Jamie, buying real estate with little cash and lots of debt is no slam-dunk – unless you have forever price appreciation. We can probably agree those days are kaput. Of course, if a US-style experience happened here – several years of absolute drops in real estate values – leverage becomes the financial equivalent of bubonic plague.

Finally, remember that you can borrow 100% of the money you need to invest in ETFs or preferred shares, and all of the interest is tax-deductible.

Just try that with your mortgage.

132 comments ↓

#1 Jimmy on 01.01.14 at 8:54 pm

First in 2014!!!!

#2 Adolf Honda on 01.01.14 at 9:04 pm

As usual, an awesome post from Garth!

#3 totalinvestor.com on 01.01.14 at 9:04 pm

Garth,what percentage of Toronto home owners do you think will be under water in the next 5 years?

#4 not 1st on 01.01.14 at 9:10 pm

Garth, I cannot believe you wasted ink on this reply post. This guy is certifiable projecting 2% out to infinity on a speculative consumable like a house.

What is a house or gold or bitcoin or similar item? It has no earning potential, its simply speculative that you are betting that someone will want to pay more for it in the future. It cannot have increased sales or buy more assets or shareholders. It has no cash flow.

What is a dividend or a bond or a business or an education? Its assets managed by someone else or yourself for the sole purpose of increasing cash flow now and in the future through increase sales or revenue prospects.

#5 Babblemaster on 01.01.14 at 9:12 pm

Leverage is irrelevant. The only valid comparison would be to compare a) renting a place and putting the $50,000 into investments vs. b) buying the place and putting $50,000 down. Take all costs for a) and b) and compare under various scenarios of positive and negative appreciation over several periods of time. Garth, you’ve done this before.

#6 Matt on 01.01.14 at 9:23 pm

If I said I wanted to borrow a half million to get 90% leverage on investments in Blackberry or Zynga or bitcoins, I’d grow old waiting for the lender to stop laughing.

Why does Jamie’s plan of borrowing a cool half million for a single asset make any more sense than my idea?

#7 Ben on 01.01.14 at 9:31 pm

Garth – I think access to leverage is the biggest stick for the regular person. They have no savings, no hope of ever making it big because they have a crap job. The *only* access to leverage they have is through housing. In many ways it’s a one sided bet. If they just work then because of high housing costs they simply exist and have a crap life. If they leverage up they get a shot at some real money and if it goes to crap they still have a crap life. When you got nothin’ you got nothin’ to lose.

The problem is the cost of housing which then makes it rational for the working class to speculate as when house prices detach from wages you no longer live in a meritocracy so what’s the point? Buy the lottery ticket. This is what feeds the beast and this is why it’s so hard to kill. All working class people only know other people like them who “made good” through property. Breaking that culture takes a crash. Which the elite don’t want so they will have forbearance, schemes to prop up the market – whatever it takes.

I’m with you, but 7% compounded looks like you started with a more realistic number, say 4%, then upped it until you got to something that supported your reasoning.

People know the game is rigged and they do act rationally in the assumption that the market is rational and will remain “rational”. They can’t see the bigger picture and nobody who thinks property is a golden ticket will read your blog. Basically we need to neuter the elite who push credit.

The ‘market’ is not rigged, and 7% is the actual 10-year return on a 60/40 portfolio. The four-year return is north of 10%. — Garth

#8 not 1st on 01.01.14 at 9:34 pm

Finally, remember that you can borrow 100% of the money you need to invest in ETFs or preferred shares, and all of the interest is tax-deductible.

—–

Havent heard of a bank yet that will borrow you money straight out to invest in equities, unless you mean from a HELOC or putting up some other security as backing.

Even so, the rate would be in the prime plus one range so you might make a 2% return investing it.

If you have a pulse and a job you can get a LOC for this amount. Yes, prime plus one, interest-only payments, all deductible. The spread on a balanced portfolio return of 7% is certainly worth the risk for many. — Garth

#9 tb on 01.01.14 at 9:36 pm

So in one case, they’d be living in their nice $500K house and in the other case in his mom’s fruit cellar?

I think the calculation loses its relevance without taking into account the equivalent rental costs.

The question was financial. Some people enjoy living with fruit. — Garth

#10 Jsan on 01.01.14 at 9:38 pm

Just watched the “Lang and O’Leary Exchange” on CBC this evening. Kevin O’Leary said do not buy real estate in Canada for investment or for living in. He said rent. Amanda Lang asked well what about those who plan on staying for a long time? Kevin said first off who stays in their house or especially condos for any length of time nowadays and he also said that when you factor in the purchasing and closing costs you would need the prices to jump considerably to just break even after those costs and he said if prices more than likely drop you will pretty much not recover that money. She also asked well doesn’t real estate eventually go up over time and he just laughed and rolled his eyes. He also said he expects rents to start declining.

#11 Smoking Man on 01.01.14 at 9:38 pm

GARTH, you are giving away far too many secrets away for free.

Finally, remember that you can borrow 100% of the money you need to invest in ETFs or preferred shares, and all of the interest is tax-deductible.-Garth

Retired boomer from yesterday.

I have watched my folks deteriorate in a nursing home, brutal. Pops is turning 98 and mom 95 in Feb.

Living corpses. Dad’s still up and about, still strong and can still run. but my dog has a higher IQ.
He can’t talk anymore, makes sounds and facial expressions, and will mimic you, clap hands, he will.

Mom only gets up form the bed to be wheeled to the kitchen, or a diaper change, her mind is slipping fast, keeps asking to see her grand daughter, she ain’t got one.

I’m planning on at clocking out at 70-80, the quality of life is shit, after that.

So I spend, drink, smoke and
gamble and do just about anything my mind thinks will be fun.

People think 100 years is a long time, it’s not.

Stop worrying, have fun, I got hit by a truck this year, I could care less.

Well, I still got to do the quads, you know short term rentals, then the truck can hit me.

I have done it all.

Oh and get my book out there.

#12 David on 01.01.14 at 9:41 pm

Ummm, don’t you still have to subtract off the principal repayment from the $71,101?

#13 CAT on 01.01.14 at 9:44 pm

But do most of your readers live in mom’s fruit cellar?

#14 Bobby on 01.01.14 at 9:44 pm

Happy New Year Garth!

I recall many years ago a new realtor told me I was stupid to have monies in a well managed pension fund. Real estate was where it was at he said. But, I didn’t listen and still chose to invest. Funds are up significantly, the properties around here………well.

Have been looking at lots of empty properties that are sitting empty and idle. Sure the realtors are always expecting an offer tomorrow, but I can see through the noise.

Keep up the good work. There is someone out there listening.

#15 Unknown Marketer on 01.01.14 at 9:45 pm

I use to think that a house it condo was 90% a financial one. It’s actually the other way around. What I also think is that most people today believe that their fortunes will be found in home equity and loto tickets.

When u do the math where mortgages are back to higher levels massive amounts of equity will be wiped out. For some reason the vast majority of people have decided not the believe it.

I am confident those who get it are now looking to capitalize on those who don’t. I know I am. Bailed out of the Vancouver Condo market. Had a 2000 ft plus debt free.

My feeling of self worth is not tied to rent vs owning. In reality many don’t own their homes they own a big debt. We can learn a lot more understanding that. The math is the math. We are in the most bloated market in the world and it’s over. Lots of screaming deals are being brewed now.

Hoping it will be different will keep u broke.

So happy new year GT. Now for those of us who
Get it lets makes some plans.

#16 Paul on 01.01.14 at 9:50 pm

Garth,

When the correction finally happens; will it be a sharp drop or a long drawn out decline? (Lower mainland )

#17 Ben on 01.01.14 at 9:50 pm

Garth, thanks for the reply – I said the game is rigged – the wider policies of allowing high loan to value pumps housing beyond wages and this creates a housing boom. Then people who leverage up win big. It’s all a sham because in a speculative market there have to be losers also (the young). I wasn’t suggesting that house prices themselves are rigged, but the factors which create high house prices are rigged even if it’s not a conspiracy but simply a collection of vested interests such as banks lobbying for higher LTV / longer terms or politicians who want the “growth” effect of more credit.

As for 7% compounded – well maybe that is fair enough.

I think most people see housing leverage as their only way out. Housing costs mean the masses can’t save so they can’t invest and get that 7%. That is my main point. So they have to leverage up with no deposit down and then pray. The supply of credit enables speculation which then drives up rents and paints Joe Average into a corner. People spend more on housing, less money goes to businesses and they invest less. Suddenly housing becomes the only game in town. It’s a positive feedback loop that is tough to break out of.

Anyhow, I enjoy your blog, I can only hope you didn’t get indigestion on my questioning your 7% figure :-)

#18 DaleFromCalgary on 01.01.14 at 9:53 pm

#6 has a valid point. The homeowner gets his living space free as part of the comparison, while the investor had to pay rent as part of his opportunity cost. To make a fair comparison, rent should be deducted from the investor’s return.

The homeowner would still lose because of property taxes, utility bills, maintenance, and repairs. But nonetheless, ALL costs must be included in such calculations for both owners and tenants. It is such costs that I’ve pointed out to young couples I know thinking of buying or who bragged to me they were only paying $2,000 a month for their brand-new particleboard shacks in Seton or Saddleridge. I then ask them about house insurance, heating bills, etcetera, which suddenly quiets them.

Notice I did not ascribe any value to the downpayment the homeowner made. In other words, if invested that sum would increase by $30,000, which is another cost to ownership. Add that to interest paid, property tax and other ancillary costs, and you have rent equivalent. I assumed that was self-evident, but I forgot about you. — Garth

#19 DaleFromCalgary on 01.01.14 at 9:56 pm

Sorry. I meant #9’s comment.

#20 Rexx Rock on 01.01.14 at 9:59 pm

A balanced fund will not always give you 3%-8% returns every year.Some years you may have negative returns of say 3%-8%.It goes both ways.We all know that.Some of the best hedge and mutual fund managers have bad years ,some times in a row.You have to be realistic if you speculate in the stock market.Thats what Madoff promised, good returns every year and we know how that turned out.

(a) A balanced fund is not a balanced portfolio. (b) Of course returns fluctuate, which is why I used an actual average over a decade. (c) No individual stocks are involved. — Garth

#21 Smoking Man on 01.01.14 at 9:59 pm

#122 45north on 01.01.14 at 7:39 pmSmoking man: Anyone know how to delete face book post, info urgently needed.

on Facebook put your mouse over your comment. A little pencil should appear. Click on it and you will see a pop-up box “edit or delete”. Choose delete.

Too late damage is done, I know how to do it on computer, it’s this darn Samsung machine giving me a hard time.

I gave it to the wife’s family guns a blazing, making smoking man posts look like ballerina poetry.

Personally I ment every word I spoke, but it hurt my wife, my words where true, and it was only a matter of time, before they came out.

Her family are freaks of nature, the compete with a extend family, who my wife’s family think are low life’s, I love those people, I publicly challenged the hiarcky of the family and I will never be forgiven for doing it in such a
public fashion.

I’m on a supper high, my kids and wife want me assassinated.

There is a price to live in luxury I want to tell them.

Your comfort was earned with risk only a mad man would do. So you can’t have it booth ways.

#22 Smudgekin on 01.01.14 at 10:07 pm

Smoking Man wear a hivis vest. You go out get hit you retire on insurance.

#23 Freedom First on 01.01.14 at 10:12 pm

Leverage. Nice to start the New Year off with a bang.

From what I have seen in my life, RE leverage, more than any other leverage, has financially crushed more gonads than everything else combined. I have seen millionaires crushed by leverage the same as I have seen Joe average crushed by leverage.

I have had moments(of insanity) where I have thought of using leverage, but I am glad I did not, as personally, I equate leverage with 2 things, 1 being delusions of grandeur, and the other, plain out greed.

Also, Garth’s rule of 90 concerning RE should always be followed. No exception.

#24 David on 01.01.14 at 10:14 pm

Running through the above numbers again gives the following:

A) Home owner

$579 637 (Sale price)
– $608 252 (Purchase price + CMHC + transfer tax + interest payments + sales commission)
= – $28 615

I.e. it takes a long time to get money out of a house.

B) Renter

$93 220 (Net return)
– $66, 465 (Original investment)
= + $26, 755

This is $55 370 in favour of the renter, BEFORE monthly costs are factored in. These will be much higher for the renter (>$1500?) compared to the homeowner ($500).

Over sixty months there’s no clear winner, then, and one should instead look at risks. Which has been Garth’s point all these years, of course

#25 Retired Boomer - WI on 01.01.14 at 10:16 pm

#11 Smoking Man

DELETED

#26 Brian on 01.01.14 at 10:27 pm

Garth, I’m sorry but I gotta agree with #5 and #9. If you’re going to entertain this argument you have to properly account for equivalent rent. In my area I can buy a two bedroom condo for 430k $600/month maintenance and $250/month taxes OR rent for $1750. Rent vs own comes pretty close, I chose to rent because I plan to move in under 3 years but longer term buying makes sense ASSUMING interest rates stay low.

In your example renting is cheaper. The lost return on $430K at 7% is $2,500 a month. Plus fees and taxes, that’s a total of $3,358, or almost twice the rent. If you leverage, you have financing to add to the fixed costs. Buy a calculator. — Garth

#27 AACI Home Dog on 01.01.14 at 10:28 pm

Is a vrm available with a cmhc mortgage ?
Here’s to a good 2014 !

Of course. But you must qualify at the fixed rate. — Garth

#28 Joe Mukherjee on 01.01.14 at 10:28 pm

ETFs
Total Stock Market Index 15%
Small-Cap Index 15%
European Stock Index 10%
Pacific Stock Index 10%
Emerging Markets Index 10%
Short-term Bond Index 10%
High-Yield Corporates 10%
Inflation-Protected Securities 10%
REIT 5%
Precious Metals 5%

http://www.investmentu.com/research/gone-fishin-index-fund-portfolio.html

Some useful suggestions for building a balance diversified portfolio.

Not my choices. — Garth

#29 TRT on 01.01.14 at 10:41 pm

Totalinvestor:

“Garth,what percentage of Toronto home owners do you think will be under water in the next 5 years?”

–> NONE! Those that bought today gave 5% down. 15% of mortgage balance will be paid in 5 years at minimum payments.

So 20% of house paid for in 5 years. Even Garth isn’t forecasting a 20% correction in the 416. Even if this happened (unlikely), they still wouldn’t be underwater.

Those that bought in 2009-2011 with leverage struck it rich! It is what it is.

#30 Victor V on 01.01.14 at 10:42 pm

#8

Even so, the rate would be in the prime plus one range so you might make a 2% return investing it.

If you have a pulse and a job you can get a LOC for this amount. Yes, prime plus one, interest-only payments, all deductible. The spread on a balanced portfolio return of 7% is certainly worth the risk for many. — Garth

==================

I am one of the ‘many’ Garth is referring to. I pay just 3% on my margin balance so fortunate to be at prime given I borrow in excess of $100K. As noted, the interest is deductible, making the construct even more advantageous.

http://www.tdwaterhouse.ca/products-services/investing/td-direct-investing/accounts/rates.jsp

#31 Devore on 01.01.14 at 10:43 pm

Of course you can make oodles of money with leverage. But the key word is risk. Leverage multiplies risk. You can just as easily lose everything, or even more than everything, if prices fall. Without a proper hedge, you’re essentially all-in that prices will keep going up.

#32 quebec economist on 01.01.14 at 10:46 pm

Financially your arguments hold.

However some may ‘benefit’ (increase personal welfare) by owning a home. This benefit comes at a cost. Most do not think this is a cost. What I try to remind people is that buying a house for investement purposes is a bad idea. Buying a house for your personal enjoyement is justified…as is buying a 200$ bottle of wine.

Finally renting is not living in a cellar… Most people think renting homes all look like what they rented in University. The reality is really nice things exist for families and professionals. We rent an awesome place for half of mortgages…I did a 10 minutes search and I found this place to rent minutes to downtown toronto…looks comfy 3000$ a month…

http://www.padmapper.com/show.php?type=5&id=170957487&src=main

expensive but much less then buying in that neighbourhood.

#33 WWorld According To Garth on 01.01.14 at 10:47 pm

Im planning on taking my carbon tax fuelled motor sailer through the arctic circle this summer just like Ally Gore said I could 5 years ago.

Oh wait….

http://www.cbc.ca/news/technology/arctic-sea-ice-volume-up-50-1.2465952

#34 Saint Herb on 01.01.14 at 10:48 pm

How does the principle factor into the analysis? Do you count getting your own money back as a return on investment?

Does the principle repayment, offset the rental costs?

The analysis doesn’t make sense unless both cases get a place to live in. No matter what, the person needs a place to live which is going to cost money, through purchase or rent.

If you don’t have much money to invest than leverage seems to be the better bet assuming that housing will continue going up even a modest amount. That is what makes the dinner time debate futile. People will always tell you that house prices go up because there are more and more people and less houses to buy. “Buy now or be priced out forever.”

Nephew is in this dilemma now. I told him to rent. His mom told him to buy. I lost. Buy, buy, buy they said and I was throwing away my money on rent.

#35 L Lawliet on 01.01.14 at 10:56 pm

“Finally, remember that you can borrow 100% of the money you need to invest in ETFs or preferred shares, and all of the interest is tax-deductible.”

Using borrowed money to invest is a fool’s gamble. Had one used money from his LOC to buy XRE at the start of May 2013, his gamble would have lost 16% before the end of June. And he would still have to pay 4% (prime+1) per year on his borrowed money for as long as he holds his position. His dividend yield is only 4% (because he bought before the price drop). He has to wait for a 20% price gain just to break even. Think of the hapless gambler’s anguish. What kind of potential return is worth trading mental health for?

By the way, one has to own a home to get a line of credit (HELOC). How does an average renter get a line of credit to bet on stocks?

(a) My reference was to a balanced and diversified portfolio, not a single asset. (b) No asset loses money if you do not sell it. (c) Anyone with a job can get a LOC. I said nothing about a HELOC. (d) Nor did I talk about ‘betting on stocks.’ (e) But thanks for dealing with many irrational, groundless phobias in one post. Efficient. — Garth

#36 South Showa on 01.01.14 at 11:08 pm

http://t.co/9BHKLTt41p

An interesting take on the 2014 US economy.

#37 Canadian Watchdog on 01.01.14 at 11:11 pm

Remember folks, borrowing from a lender to buy ETFs and preferreds is not gambling. Chart It's investing!

Jokes aside: here's why hedge fund and money managers push clients to borrow. Video "That's their clients money that's lost, not their money."

You borrow money when something is cheap that has little downside risk. Not at the top of market when you're exposed to more downside then upside potential. Not to mention when correlations break and assets you thought had low beta start heading north of 1.

Bad advice.

Thus, the point of my post. Real estate leverage is not riskless. — Garth

#38 not 1st on 01.01.14 at 11:11 pm

32 WWorld According To Garth on 01.01.14 at 10:47 pm

—–

Yup, when its -55 in Winnipeg like the other night and -40 at night for a month in Sask (like December), its hard to believe there is no sea ice up north.

#39 Mark on 01.01.14 at 11:16 pm

No asset loses money if you do not sell it. – Garth

Except for gold, right Garth?

Gold pays no dividends or interest and needs to be stored. The answer is yes. — Garth

#40 OttawaMike on 01.01.14 at 11:24 pm

Have any other readers looked at the Turkish ETF:TUR?

It is down about 30% in 2013 after a 67% run up. It seems their govt. corruption inquiry is spooking investors.

Romania and Bulgaria also seem a good developing market play this year.

#41 not 1st on 01.01.14 at 11:56 pm

#35 South Showa on 01.01.14 at 11:08 pm

An interesting take on the 2014 US economy.

If Econ 101 still applied, all that would be true, but I doubt its going to happen.

2 Trillion has been printed up by the FED which went right into the stock market. Another 8 trill was stimulated by the govt. This money has to go somewhere and it hasnt impacted inflation yet.

The govt wants companies to put it into the economy as jobs, but they wont. Instead companies are going to use that windfall to improve efficiency (ie. use tech to downsize people), buyback shares, pursue M&As and increase dividends.

Once they have done that, cost savings will simply be passed on to the consumer and the ravenous black friday hordes will continue. Throw in some endless Mad Men marketing and the days of the indebted consumer are far from over.

#42 Victor V on 01.01.14 at 11:58 pm

http://www.thestar.com/business/real_estate/2013/12/31/toronto_condos_2014_to_be_the_year_of_the_big_move.html

Developers, and federal finance minister Jim Flaherty, will be watching closely to see how many condo buyers struggle or fail to close on units they bought in the preconstruction phase two or three years ago with meagre down payments, before tighter mortgage lending rules and last year’s slight bump up in interest rates made finalizing deals more difficult.

In the past few months, mortgage brokers, realtors and developers have seen a surge in people, especially the self-employed, “scrambling” to get final financing from institutions that have not only toughened lending requirements, but grown more leery of the condo sector.

Already, some buyers have had to walk away from deposits or borrow from family or secondary lenders at higher rates. Others have sought developer approval to put their units up for sale on the so-called “assignment market” as the project was just coming to completion, in hopes they could find a new buyer before final payments were due.

#43 Shawn on 01.02.14 at 12:01 am

Dillusional?

Garth at 34: No asset loses money if you do not sell it.

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

Seriously? I have several stocks (from years ago) that have gone to zero. They sit in my investment account, unsold.

My broker statements indicate the money is lost whether I want to admit it or not.

We can’t have it both ways and count capital gains as return and then pretend capital losses are not real if we don’t sell.

If assets not sold don’t represent losses, then why in heck are warning people not to buy houses? Fretting about being underwater and such?

I can always count on people who wish to be smarter than me (and likely are) taking statements to extremes. Go bait someone else. — Garth

#44 Waterloo Resident on 01.02.14 at 12:06 am

#10 Jsan:
Quote: “Just watched the “Lang and O’Leary Exchange” on CBC this evening. ……. Kevin O’Leary also said he expects rents to start declining.”

Sorry, but FAT CHANCE of that happening. More likely to win the lotto 649 than get a rent reduction. Only way to reduce your rent is to move and find some other place, but then the $3,000 cost of moving takes away any savings in rent you find.

#45 Francis on 01.02.14 at 12:10 am

What your opinion about leverage a large portion of the broadband market ETF invest in Canadian, US and international in a unregistered account to compensate the advantage of home leverage for renter.

It a strategy that would like to try but most feedback on credible blog said that leverage raise the risk for little return but I still think that using leverage after a correction in stock is a great way to make good money with other people money.

Any tough about this?

#46 T.O. Bubble Boy on 01.02.14 at 12:12 am

While I agree with Garth’s conclusion, he forgot the tax factor… principal residence has no capital gains vs. investments are taxable.

Investment losses are deductible. Real estate losses are not. — Garth

#47 Shawn on 01.02.14 at 12:24 am

Fair comment

I can always count on people who wish to be smarter than me (and likely are) taking statements to extremes. Go bait someone else. — Garth

*****************************
Fair comment… The market is not always correct…

#48 DJ on 01.02.14 at 12:41 am

Should you not also exclude the taxes of the investments. I’m assuming that the 7% is per-tax, while the house is the principle residence and therefore tax free capital gain, since we are splitting hairs.

#49 DJ on 01.02.14 at 12:43 am

Correction, pre-tax.

#50 Julia on 01.02.14 at 12:56 am

Anyone with a job can get a line of credit. This is true Garth, but without a house just try to get one at a decent interest rate. Anyone know how? My bank offered me 9% unless I transferred all my investments to them, and even if i did the rate was nowhere near a HELOC. Suggestions welcome.

#51 Andrew Woburn on 01.02.14 at 1:02 am

I have just spent an interesting hour with Canadian population age-distribution statistics. Two immediate conclusions:

1) There really wasn’t a baby boom

2) The young and house horny are in even greater peril than I thought

The StatsCan chart http://www.statcan.gc.ca/pub/91-520-x/2010001/ct047-eng.htm shows the age distribution pyramid for Canada in 2009. Note that the largest cohort of Canadians there is aged 45. They were born in 1964. They were not fathered by sex-starved soldiers returning from WWII. Some were likely grandkids of those soldiers. The rate of population increase shows a gentle steady slope from the war years until 1965. Then the population increase
suddenly collapses. Either Canadians renounced sex en masse or they discovered the Pill. One way to look at the chart is how many children didn’t get born after 1965. It wasn’t a boom in 1945, it was a collapse after 1965.

Hopefully a read of this chart will clear up the mass confusion about “boomers”. They are not all heading into nursing homes next year. They are not all selfishly holding on to their jobs past retirement age since most are not anywhere close to 65. Most of them won’t even look all that rich when mortage interest reverts to normal and their phantom house equity shrinks.

The chart also clearly shows the peril awaiting the over-leveraged thirty-year olds: there just aren’t that many fifteen-year-olds moving up.

Ten years out when you realize you can’t stand living with two teenagers in a 700 foot skybox, just when you find you are rolling over that cheap mortgage at 7%, just when it sinks in you have lost 20-40% of the price of your condo because of interest rate shifts (but you still owe the money), you find that there aren’t enough twenty somethings ready to buy. In fact by then they will have heard so many scare stories about people like you being whipsawed by towering debts, they will mostly run away screaming. Your alternatives are rent, vasectomy or prayer (to the God of Immigration). And yes, your in-laws really did mean well. Maybe you’ll get a really nice crying towel for Christmas 2024.

#52 A Yank in BC on 01.02.14 at 1:06 am

#43 Waterloo Resident on 01.02.14 at 12:06 am

Rents certainly can (and do) decline without moving. I pay a whopping 25% less for the house I am currently renting than what I originally paid to rent it 3 years ago. And it’s a really really nice house too. A steal-of-a-deal at what we currently pay.

#53 Freedom First on 01.02.14 at 1:26 am

#34 L Lawliet

(e)………………………-Garth.

Perfect. Priceless Garth:)

#54 RayofLight on 01.02.14 at 1:26 am

#39 OttawaMike:
Why consider TUR? There are safer proven investable equities that are are in upward channels ,good companies in long term growth sectors. Eg TRN.N,BEAV.N,HD.N
With TUR, you are betting on some sort of turnaround story ,and I don’t think you can trust that area .

#55 KommyKim on 01.02.14 at 1:39 am

RE: #42 Shawn on 01.02.14 at 12:01 am
Dillusional?
Garth at 34: No asset loses money if you do not sell it.
************************************
Seriously? I have several stocks (from years ago) that have gone to zero. They sit in my investment account, unsold.

That’s why Garth keeps harping the line, “don’t buy stocks”, buy ETFs instead. It’s very unlikely an equity or bond ETF will go to zero and even less likely for an major index ETF to do so. Now they do sometimes get wound down, but you should get redeemed at the NAV price which may suck timing wise.

#56 Is that profit-gaining or equity-building? on 01.02.14 at 2:00 am

I admire the effort to calculate the trade-off between investing in real estate and investing in financial markets and, indeed, there are a number of variables which make the calculation difficult. However, there seems to be one very large and overriding misunderstanding in the discussion: a confusion of the terms ‘profit’ and ‘equity’. Garth touches on it, but glosses over it without fully acknowledging it. The issue should not be dismissed as unimportant as it goes to the heart of the misunderstanding.

He states that, according to his scenario, investing in the stock market could result in a gain of $93,220 while investing in real estate would generate a profit of $165,897. His parenthetical aside” “(Of course this assumes the non-homeowner had no housing costs because he lived in mom’s fruit cellar.)” hints at the problem.

The ostensible ‘profit’ in real estate is not wholly a profit since much of the money that created it is coming from the homeowner’s income as he/she pays back the loan to the bank. Therefore it is more accurately termed ‘equity’; the homeowner is building equity, much of which cannot be attributed to any overt profit attributable to capital appreciation or simply inflation.

Meanwhile, the stock-market investor is gaining a purer ‘profit’ resulting from a capital gain, but his/her housing costs are not being factored in to the calculation. For the calculation to be more equitable and accurate, the housing costs must be acknowledged under both scenarios (an apples-to-apples comparison) and the distinction in terminology between ‘realizing a profit’ and ‘building equity’ should be expressed more clearly.

The stock-market investor makes a profit from capital gain; the real-estate investor builds equity (part profit from capital gain, but also simply the paying down of debt).

#57 Decline in Rental Fee "Yank in BC"? on 01.02.14 at 2:04 am

#51 A Yank in BC on 01.02.14 at 1:06 am

How did you manage to arrange that?

#58 Andrew Woburn on 01.02.14 at 2:05 am

Re the aging population issues raised by TheCatFoodLady yesterday

According to StatsCan Canada has aged permanently:

“According to all selected scenarios, the number of people aged 65 years or over would surpass the number of children aged less than 14 years or under. This shift, a first in the history of the Canadian population, would occur between 2015 and 2021.”

“According to all selected scenarios, the proportion of seniors aged 65 years or over would continue to increase in the future. This group would represent between 23% and 25% of the population by 2036 and between 24% and 28% by 2061, compared to 14% in 2009. By 2036, the number of seniors would be more than double the number observed in 2009.”

However the idea that there will be one worker per three seniors is a little overblown. According to StatsCan:

“According to all selected scenarios, the proportion that represents the working-age population among the total population would decrease progressively up to 2036 to reach about 60% and would then remain fairly stable. In 2009, the proportion that represents the working-age population was 69%.”

My guess is we are in for some wrenching political fights over the status of the very old. I have watched my father die at 87 and my mother become a 94-year-old vegetable in a nursing home. More and more boomers are going to watch the reality of extreme aging in the next decade, and like me, they are not going to accept the alternatives on offer. If my very proud mother knew she was going to spend the last years of her life in a semi-coma having people change her diapers, she would have jumped off a bridge. She is getting amazing care from people who are practically angels but it breaks my heart to see her slumped in a wheelchair with no life at all and no prospect of anything except more deterioration. And no, cynics, there is no inheritance issue here. This is about personal dignity.

If my mother were an animal, the SPCA would intervene to prevent further cruelty. We have to develop a system that can bring mercy to those without life or hope. When it is time for me, I certainly will not trust the authorities to act in my best interests.

#59 Ralph Cramdown on 01.02.14 at 2:12 am

Leverage, really?

Leverage is pretty simple to understand. Most people who got rich used leverage. Many people have gotten rich and then poor again because of too much leverage (Trump, Reichmannns, Campeau, etc. etc.)

Leverage can’t make a bad investment good. In moderation, it can make a good investment better. Too much can turn a good investment bad.

Principles: The cash that the investment throws off must pay off the loan within a reasonable amount of time, even including unanticipated vacancies or expenses, interest rate rises or what have you. For high leverage, this means that your expected cash return on the investment must be higher than the interest rate on the loan, and not just a little bit higher unless your cash income is guaranteed to go up over a short period of time. Even with low leverage, if the rate on the loan isn’t quite a bit lower than on the investment, you’re probably doing something wrong.

Taking into account the possible fluctuations in value of the investment and covenants with your lender, do you have enough equity, or could the lender force you to sell at the worst time if the market temporarily goes against you, turning a small temporary adverse move into a large permanent loss?

On an unrelated note: If you make only one financial resolution to improve your investment returns this year, pledge to stop reading Zeroedge except occasionally, for entertainment.

#60 Flamed out in Kitchener on 01.02.14 at 2:46 am

Only use leverage if / when we have another crisis and fear pushes the markets down by 20 – 40% … then when the REITS and Utilities and Pipes are on sale, lever up and ride the bounce back to sanity … then sell enough to extinguish the debt and enjoy your dividends of the remaining investment … do this a few times over a few cycles and your retirement will have cash flow for life with likely divy increases over the years as a bonus.

Happy new year Garth – love your sense of humor.

#61 DR on 01.02.14 at 2:50 am

Would bet money anyone here would buy that 500K house…..in Leaside. Tomorrow.

#62 Peter on 01.02.14 at 3:15 am

Something doesn’t make sense here… how can you not take into account the value of a place where you live in your calculation? You have to add in the value of the rent over the 5 years in your calculation. For a $500k, probably a monthly rate of $2000 over 5 years results in $120k extra… hmm… am I missing something or did home ownership suddenly become much more prudent?

I hope I am wrong here…

#63 Happy Renting on 01.02.14 at 3:44 am

Unless Jamie has a crystal ball, leveraged, undiversified investment in one asset is not better than a diversified portfolio, leveraged or not. And as Garth says, LOC (or margin) if you want the effects of leverage (but the safety of diversification.)

#44 Francis – yes, that will work IF you can accurately identify the market’s bottom. With leverage, the investment gains are all yours if you call it correctly, but the losses are all yours, too, if you get it wrong. Remember, you are on the hook for every dollar borrowed, whether you make money or not. Those “other people” get their principal and interest on the money you borrow, without trying to time the market. You gamble, their investment return is assured.

#64 Not 1st on 01.02.14 at 4:23 am

Garth or any other blog dogs, if I own a Canadian Controlled Private Corporation and I buy a dividend bearing stock inside it, then the tax rate on that investment income is an astounding 47%

How do you shelter that income or should you avoid dividends inside a CCPC altogether and just invest for growth?

#65 Arse on 01.02.14 at 5:11 am

I think 2014 is going to be a shaky year for the world economy. I am relatively bullish on the U.S. stock market and neutral on real estate.

#66 Kilby on 01.02.14 at 8:06 am

Anyone with a job can get a line of credit. This is true Garth, but without a house just try to get one at a decent interest rate. Anyone know how? My bank offered me 9% unless I transferred all my investments to them, and even if i did the rate was nowhere near a HELOC. Suggestions welcome.
——————————————————————–
Our line of credit is prime +1…4% with some investments as security. Unsecured LOCs start at 6%.

Not exactly. Good credit and a job is often plus one. Shop around. — Garth

#67 Brian on 01.02.14 at 8:42 am

Garth I know it was late so I’ll cut you some slack. You didn’t mean to calculate the opportunity cost on the purchase price right? If I had 430k to plunk down @ 7% I wouldn’t be posting. Try again but on 10% down payment .

Leverage was my, I mean your point.

Same outcome. Renting wins. — Garth

#68 tb on 01.02.14 at 8:59 am

#63 not1st

There’s a tax refund when the investment dividend income is paid out as dividend, in turn, to shareholders. So the effective combined corporate/personal rate becomes 28%. Capital gains do have a slight advantage at 24%:

http://www.advisor.ca/tax/tax-news/investment-solutions-for-business-owners-109941

#69 *NAKED APE* on 01.02.14 at 9:04 am

@ 57 Andrew Woburn… I hear ya buddy!

Going to visit Mom today – she’s 83 and in the highest level care facility. Next stop is a hospital bed and then the morgue. I hate that place!! People hunched over in wheelchairs parked in the hallways totally oblivious to what’s going on around them. Lots of screaming and moaning and other crazy stuff. Many bed-ridden and semi-comatose…

Mom’s body is totally ravaged with arthritis, neuralgia, COPD, macular degeneration, blind in one eye and dementia setting in. She’s probably one of the very few that isn’t in diapers. 26 different meds to keep her in a relatively pain-free state. Sleeps all day and most of the night. We discuss the medications frequently as sometimes they counteract each other and then the SHTF. We say it’s all about the “quality” of life to each other as siblings, but this is not quality of life and it’s extremely tough to see her deteriorate further with each and every visit.

She keeps saying, ‘if I would have known that this is what what the golden years would be like, I would have offed myself long ago. Wait till you get to be my age and in this state’. I say – NOT – by the time I get even close to your condition, assisted suicide will be legal as I will not put myself through what you are going through.

And there’s no inheritance issues in our family’s case either……… It IS about dignity!

Yes indeed, there will have to be some serious discussions moving forward on what we deem as quality of life/choices/burden on society/who makes the decisions/etc., because in MY mind, this current way of warehousing our elderly sure isn’t the answer.

#70 Detalumis on 01.02.14 at 9:06 am

#57 people say this all the time, I’m never going to allow myself to be a vegetable but it’s just talk. I moved into a senior area in my 30s by accident, I then spent the next 20 years observing them. It’s basically a faux life where you never think about dying and the way you do that is by changing the subject. I have seen those with a spouse with dementia never considering that they themselves might ever get it. They just go into full out denial including avoiding anybody that is really sick or is carted off to “the home”.

When I suggest to people hey, here is a dementia test you can take they just don’t want to hear about it. The only way to avoid Alzheimer’s is to stop taking medical tests and major treatment when you retire, if you get breast cancer go with the flow. I see women getting treated for it when they are close to 90 making it an almost 100 percent certainty they will die of Alzheimer’s. If you have heart issues c’est la vie, don’t get a pacemaker. I really don’t think boomers will be different. I’m the only person I know that has signed up with Dignitas and doesn’t get colonoscopies, the rest are hoping to live to 100.

#71 learningfromyou on 01.02.14 at 9:27 am

Outstanding post Garth. Thank you

Just one question please
Fisrt my facts:
When you say that everyone could have access to LOC very easily, I assume you make reference to non secure LOC, the first one I got had a minimum of 5k credit and 5% of interest rate, now 6.5%

The secured LOC, those linked to your house and mortgage have interest rate close to the one you mentioned in your post.

Now my question
——————
Is it possible to get a LOC without having a house at the interest rate mentioned in your post?

Go and ask. — Garth

#72 kitchener on 01.02.14 at 10:00 am

61 Peter, no you are not wrong. Brad Lamb is going to be sending this post out to all his prospects to show them how for just a tiny bit more money than living in your mom’s fruit cellar for free, you can live in a half million house for five years. Happy wife = happy life, and all that.

#73 Nicolas on 01.02.14 at 10:16 am

Happy new year Garth.

I think I speak for many when I say I’d like to read more about the tax deductible interest-prime plus one thingy you mentioned today.

-26C in Montreal this morning, the whole world can’t wait to move here, Americans are piling up at the border, begging us to let them enter our great county.

#74 nubbers on 01.02.14 at 10:33 am

Yes, leverage cuts both ways. I calculate that in a previous house price crash, I managed to convert an initial ‘investment’ of $10,000 into a loss of $110,000 three years later (converted into today’s money).

House prices in Canada are currently at about the same stage as when I committed to having my gonads crushed.

#75 The Man From Nantucket on 01.02.14 at 10:37 am

See some questions about LOCs and rates.

Been a while since I’ve shopped for a new product, but, a couple years ago, the typical offering at the chartered banks was somewhere between

Prime to prime + 1% for secured HELOC,

Prime + 2% to prime + 3% for unsecured.

You may be able to squeeze a better deal if you have a mortgage and/or substantial investments with the institution.

Read the fine print on these things carefully. There are a number of clauses which tilt things into the bank’s favour……including comical rate resets if you miss payments. You may not be able to convince a loan officer to strike these, but, make sure you at least know what’s there and defend yourself accordingly.

#76 Not 1st on 01.02.14 at 10:52 am

Why do people think about killing themselves in the future when they could make choices now that can prevent that state. Not everyone ends up a veggie in their 80s and if you don’t have genetics on your side then lifestyle is the next best thing.

I see too many people still smoking and eating junk and not getting exercise. My grandmothers made it to 87 and 92 and never were in a care home. They had their wits until the end. Our neighbours dad is 93 and still helps his son around the farm.

Some people advocate a live hard then due approach. My experience is that that kind of neglect will earn you the last 10 years of your life with a lot of unnecessary health problems.

#77 Rabbit One on 01.02.14 at 10:58 am

>#65 Kilby

My bank offered me 9% unless I transferred all my investments to them,

This is “tied selling” and is prohibited practice in the banks.

Leverage : borrowing for investment magnifies return and losses. never easier to get credit against real estate (5% down is 20X leverage).
You could easily lose more than your initial investment (downpayment), that’s leverage investing.

#78 Rabbit One on 01.02.14 at 11:03 am

Comment on comparison of real estate and investment.

House price appreciation (2%) is based on history average, and your gain is only real one at the time of sale.

Balanced diversified portfolio’s return (7%) is more predictable, and probable.
Can realize gains at any time.

Btw, homeowner’s real estate capital gains are not taxable. How about capital losses on principal residence? Cannot write it off? anyone knows?

#79 IndyGuy on 01.02.14 at 11:07 am

Garth, if everyone were to dump RE and start renting, wouldn’t that raise rent prices?

Rents are already crazy here in Toronto. Last thing I’d want as a renter more people renting.

Fortunately for you, bilions ignore me. — Garth

#80 Agio on 01.02.14 at 11:23 am

In your response you used 50k as the dp number adding on CMHC costs and higher debt service.
Not an accurate comparison as Jamie wrote “I have $100k which I could either invest in a balanced portfolio or use as a 20% down payment on a $500k condo.”
Course it’s all theoretical crap but usually you crush the 2% year over year appreciation of the condo straight up.

My example was more real-life. The difference would be insignificant enough to change the basic result. — Garth

#81 TurnerNation on 01.02.14 at 11:29 am

Kaput? Kaputs on XFN.TO says Batman.

#82 RVP on 01.02.14 at 11:48 am

I just want to say Ben’s comments on this blog ring true with me. Working class folks with little savings and no investments–for them, leverage into housing is their only chance. It is like buying a lottery ticket–there is a lot of risk–but your only shot of winning and hitting it big is if you drink the kool-aid and take on the mortgage debt and buy a house. It would be great if we could use leverage/mortgage debt to invest in other asset classes besides housing, but we can’t. What Ben is saying about this not being a meritocracy because the cost of owning a home is beyond the reach of the working class is absolutely right. That is a game changer–it changes the way young people who are trying to establish themselves look at things. Taking on massive debt and piling it into a mortgage may be their only shot. Their is no way other way to compete with those who have inherited real estate wealth. So that’s how it’s not a meritocracy–your net worth has no relation to your work effort, talent, or abilities–it’s all about how you are positioned in the real estate market (when did you buy? pre-boom years? can they live at home with parents while they save a down payment? can parents help them with a down payment? do their parents have a laneway house for them to live in? oh, their parents were renters–they are condemned to a lifetime of renting–it’s like we have these real estate dynasties that are passed on from generation to generation–your position in the real estate market in terms of whether you own a SFH, condo, own outright, mortgaged to the hilt, or a lowly renter is largely determined by your family’s position before you were born). It does become rational to speculate in housing at this point. I also agree with Ben’s comments about the game being rigged. It doesn’t have to mean it is a deliberate conspiracy–it’s the vested interests have set things up to their own benefit and they don’t want that to change–we see this in every domain of society today, not just real estate and finance.

Step one to being a loser is thinking like one. The market is not rigged. Real estate risk is extreme. You have a vast array of options, presented daily on this blog and elsewhere. — Garth

#83 CP on 01.02.14 at 11:56 am

Any comment on this appointment Garth?

http://business.financialpost.com/2013/12/20/cmhc-evan-siddall/

Former Goldman Sachs investment banker appointed to head CMHC

Better than a former realtor. — Garth

#84 not 1st on 01.02.14 at 12:17 pm

One thing about going underwater using leverage is that if it happens on a house, you have to wait for the entire market to come back which could take 20 years like TO in 1989 or Japan.

If you go underwater on a dividend stock, the market doesnt have to do anything and eventually the dividend will get you back to even. Imagine you put $100,000 into a stock and there is a 30% correction the next day. That stock is still throwing off 5% regardless of the share price. Within 5 or 6 years you are back to even. If you have cash flow, it can correct a lot of mistakes.

#85 Dual Citizen in Canada on 01.02.14 at 12:22 pm

#51 A Yank in BC on 01.02.14 at 1:06 am
I managed to negotiate my rent reduction last year due to a couple of factors:
1) I am a great tenant (shameless self promotion)
2) I am a landlord myself so I understand the importance of keeping good tenants
3) The landlord wants to keep the cash flow going
4) I played the, “everyone is buying, noone is renting”, argument and there was no lineup of renters knocking at his door.
5) I sign a lease

#86 Tony on 01.02.14 at 12:24 pm

Re: #59 Flamed out in Kitchener on 01.02.14 at 2:46 am

You probably won’t have to wait longer than a few months for that to happen. Good luck this will be the year of the bottomless pit where people lose everything by buying on the dips. Remember the markets are only there for one purpose. So the most amount of people lose the most amount of money. That’s how the most amount of people will lose the most amount of money quite soon.

You said that last year. Markets were up 30%. — Garth

#87 angela on 01.02.14 at 12:58 pm

The ‘market’ is not rigged, and 7% is the actual 10-year return on a 60/40 portfolio. The four-year return is north of 10%. — Garth

Libor rate move along nothing to see here

#88 Rainclouds on 01.02.14 at 1:39 pm

#43

$3000 to move ? Wow waterloo must have swampers wearing 3piece suits ………here on the left coast i went from a house to apt $450.00 and 4 beers…………….maybe recalculate

And the rent has not increased

#89 I've seen this movie before on 01.02.14 at 2:04 pm

#82 CP on 01.02.14 at 11:56 am

Any comment on this appointment Garth?

http://business.financialpost.com/2013/12/20/cmhc-evan-siddall/

Former Goldman Sachs investment banker appointed to head CMHC

Better than a former realtor. — Garth

——

I’ve seen this movie before:

Scene 1- Sell CMHC to Lucky Larry Silverstein.

” I felt a compelling urge to own them”

Scene 2- Larry buys extra insurance

Scene 3- Expand the program to include buyers who cant breathe

Scene 4- Cyber attack on CMHC computers

Scene 5- Goldman Sachs, last known owner of the houses ends up owning them again.

Scene 6- Larry collects insurance payout

Scene 7- Comforting words from the Prime Minister

Scene 8- Government take loans from Goldman Sachs to re-build

rinse, repeat

#90 RayofLight on 01.02.14 at 2:44 pm

Is it just me ,or what?
If I see a comment that is over about 5 lines long,my mind glazes over, and I have to quickly go on to the next.
Detail & Quantity does not make “a point”, after 5 lines…who cares?

#91 fixie guy on 01.02.14 at 2:47 pm

As others pointed out, a consistent 2% annual increase in home values above inflation is Hans Christian Andersen material. It’s faith for the math deficient who see no issue gauging the tide by the markings on a boat’s stern.
The average inflation adjusted wage for men in Canada changed little since 1976:

http://www.statcan.gc.ca/pub/89-503-x/2010001/article/11388/c-g/c-g001-eng.htm

A 2% annual increase in home prices over 40 years is ~215% inflation adjusted. The arithmetic doesn’t work.
Over one hundred years the increase is 700%. Older homes are common in Europe. Maybe the smart money is moving to former Eastern Bloc nations where wages can afford that.

#92 gladiator on 01.02.14 at 2:52 pm

Garth, would you refute information from an official document of an official global organization like IMF?
They are saying that there is “revived interest in a one-off capital levy on households’ net assets” – a 10% one-off tax on net wealth would bring down the public debt to its pre-crisis level.
Now you will negate again the probability of this happening especially in Canada, but the simple fact that this is being considered by an influential global organization is disturbing enough.
I know the document considers European economy only and so on, but when (not “if”) the proverbial sh|t hits the fan here, I expect all bets to be off and such a tax to be considered in Canada as well. I hear a sh|tstorm coming…
Enjoy page 59 of this document:
http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

#93 A Yank in BC on 01.02.14 at 3:09 pm

#56 Decline in Rental Fee

What #84 Dual Citizen said. That’s exactly how.

#94 Future Expatriate on 01.02.14 at 3:12 pm

There you go again with your darned math, Garth.

Happy New Year!

#95 Squatter on 01.02.14 at 3:28 pm

#88 RayofLight on 01.02.14 at 2:44 pm
Is it just me ,or what?
If I see a comment that is over about 5 lines long,my mind glazes over, and I have to quickly go on to the next.
Detail & Quantity does not make “a point”, after 5 lines…who cares?
——————————————-
I agree, some people here write their own blogs within the comments section…

#96 :):(Ying Yang on 01.02.14 at 4:00 pm

#21 Smoking Man on 01.01.14 at 9:59 pm
#122 45north on 01.01.14 at 7:39 pmSmoking man: Anyone know how to delete face book post, info urgently needed.
on Facebook put your mouse over your comment. A little pencil should appear. Click on it and you will see a pop-up box “edit or delete”. Choose delete.

Too late damage is done, I know how to do it on computer, it’s this darn Samsung machine giving me a hard time.

……………………………………………………………………..

Way to go Smoking Man! I would love to tell some of my relitives where they could go but Asian culture says noooooooo…..
My Uncle is as rich and weathly as you can get in Hong Kong, has two Mercedes a SLS AMG Roadster and G-Class for my Aunt who can even drive the dam car. She has to get a driver to take her anywhere. They hit it big in bussiness but no children. They are the most miserable people and they put down everyone as if they are a higher class. My uncle came from the same upbrining as my father. So they are cut from the same cloth as the saying goes. My uncle is a bonified multi-millionaire and he doesn’t help out my parents who had a modest life. They appear to have forgot where they came from and only associate with the wealthy in Hong Kong now. My father says never to say anything bad about his brother, he said family is still family. I do agree but I’d still like to tell my unlce to go take his money and shove it!
Good for you Smoking Man! Happy New Year!
P.S. Back from Hongcouver, hate it out there but WTF happened here with this Ice stuff and cold.

#97 :):(Ying Yang on 01.02.14 at 4:38 pm

Smoking Man my brother is taking the job offer in Singapore as a code monkey for another bank.
He negotiated more than the $270k USD plus all expenses. They through in some nice perks, car, personal assistant and stock options at the bank.
P.S. when in Vancouver we drove down to Seattle Preminium Outlets Mall and next door is a Casino called Tulalip. My brother goes in for one and a half hours and comes out with $7500.00 after taxes. Man he has a lucky chip in his pocket. Anyway I got some nice after Christmas toys from my brother. Hope you did well over the holidays.

#98 SoFaKing on 01.02.14 at 4:42 pm

the market is not rigged — Garth

Not rigged? Taper, then no taper…

Garth, the Fed had its hands all over the market with their cheap credit the very day they announced to taper. It’s called the PPT and you obviously know it.

#99 Jay on 01.02.14 at 4:43 pm

It always blows me away that people don’t understand that leverage is a 2-way street. “Look at all the money you stand to make!” They’ll say, to which I always respond “Look at all the money you stand to lose!”

If assets you buy with cash drop dramatically, you’ve lost some of your cash. If assets you bought with debt drop dramatically, you might be out more than you have. If you’re talking about a 700k shithole in a working class neighborhood, you could lose more than you ever had.

#100 James on 01.02.14 at 4:45 pm

Average toronto sfh return for the past 10year 150%. Leveraged and tax free

Average GTA price 2003, $293,067. Average today, $520,379, Change, 77.5%. — Garth

#101 Renter's Revenge! on 01.02.14 at 4:50 pm

Doesn’t the Case-Shiller house price index show that US house prices are essentially unchanged when adjusted for inflation over the past 120 years?

Reversion to the mean is a bitch.

If your house’s value is expected to grow by 2%/year above inflation, what factors do you think will cause that growth?

#102 Squatter on 01.02.14 at 5:05 pm

I would suggest an automatic cut-off after 20 lines per
daily blog. Anyone agrees with me?

#103 dave b on 01.02.14 at 5:11 pm

Do you pay land transfer tax/fees if you’re buying your first home?

#104 just sayin.... on 01.02.14 at 5:40 pm

a long term 7% return on unrealistic, anyone who can guarantee that would be a zillionaire selling their services to every pension fund in the world.

Most pension funds (invested by professionals in the stock market) return are woefully less than 7%, if not negative. Thats why almost no companies have final salary pension anymore (except politicians) and most pensions pay out less and less every year struggling to meet their liabilities.

“The bad performance of UK workplace pension funds was only outdone by the US and Spain, where the value of money in pension funds has fallen by between 1 and 2 per cent a year over the last decade. …”

http://www.telegraph.co.uk/finance/personalfinance/pensions/9325041/UK-pension-performance-among-worst-in-developed-world.html

The ten-year average of a 60/40 portfolio, properly weighted, is just north of 7%. (And that includes the 2008-9 crisis.) Guess you don’t have one. — Garth

#105 Smoking Man on 01.02.14 at 5:50 pm

Ying Yang

Don’t expect your dad’s brother to help.

No one dose, there is always someone who’s passed us off that has more loot than us. We want to beat then. So you need all the poker chips.

In today’s society people express there identity by there possessions.

I have decided to carve out mine with words. I’m that that good yet, but my goal is to make my new found hero, Hunter S Thompson look like an account.

An impossible goal, but as
always in anything I embark on, aim for the stars, land on the moon.

Glad for your bro.

Oh side note, club 101 is being knocked down, building a new one in corner

#106 Not 1st on 01.02.14 at 5:56 pm

Geez no posts about Fukushima or Haarp or vaccinations.

#107 Ralph Cramdown on 01.02.14 at 6:05 pm

#101 Squatter — “I would suggest an automatic cut-off after 20 lines per daily blog.”

I’m pretty sure you can implement this in software in your brain, if you grok FORTRAN. If not, maybe adjust the mouse scroll wheel sensitivity?

#108 SoFaKing on 01.02.14 at 6:11 pm

@#88 – I’ve seen this movie before

Ohhhh Ya! We saw that exact same scenario in Greece.

GS – aka vampire squid now collects user fees from the Greeks
in everything from bus fares to utilities for generations to come.

Is it gonna be different here? Nope! Not unless we elect a goverment with a moral compass for its citizens and laws are changed.

#109 SoFaKing on 01.02.14 at 6:29 pm

@#88 – I’ve seen this movie before

Goldman talking about transparency. LOL!LOL!

http://www.bloomberg.com/news/2013-11-22/goldman-would-refuse-another-greece-swap-sherwood-says.html

#110 SoFaKing on 01.02.14 at 6:33 pm

Garth, your hedgies have already smelled the blood.

#111 Network Admin on 01.02.14 at 6:42 pm

Most pension funds (invested by professionals in the stock market) return are woefully less than 7%, if not negative.

CPPIB

5 yr annualized 4.2%
10 yr annualized 7.4%

http://www.cppib.com/en/our-performance.html

#112 Alwyn on 01.02.14 at 6:47 pm

Before rushing off to sell your house to rent, remember that Don Comb-Over made his first-fist-full of cash after painting a small apartment building he owned, then jacking rent rates.

The value of any rental building is a function of the total rent obtainable. Swings and Roundabouts.

#113 Not 1st on 01.02.14 at 6:57 pm

5% dividend plus annual growth equal to at least inflation is 7% isn’t it?

#114 Retired Boomer - WI on 01.02.14 at 7:11 pm

#11 Smoking Man…

With Pops at 98 and mom at 95 know what you have been going through, watching them slip with each visit. Old school chum just lost her mom to Alzheimer’s at 85. Her mom did not even recognize her on her last visits. That is heartbreaking. No known cure for adult dementia or Alzheimer’s but they are working on it.

Me, I’ll just live my life style that should be self-limiting at some point well before I drool in my oatmeal.

As for Jamie, well why buy a condo? That is like buying the second rate, or third rate car. Yes, it may get you there but you probably can’t sell it except at a give-away price.
You are near the top of the market, not the bottom.
It is more likely downhill from here, rather than an uphill trek. Still, it is your money. There are lots of owners of junk, whether 4 wheeled, or lived in.

#115 1 on 01.02.14 at 7:20 pm

A blog tends to improve the return rate

#110 Network Admin on 01.02.14 at 6:42 pm
Most pension funds (invested by professionals in the stock market) return are woefully less than 7%, if not negative.

CPPIB

5 yr annualized 4.2%
10 yr annualized 7.4%

http://www.cppib.com/en/our-performance.html

#116 Obvious Truth on 01.02.14 at 7:29 pm

Ottp average 10.1% return since 1990.

500 000 would be close to 4 mil. At 6% that would throw off a quarter mil.

Half mil houses in the early 90’s in Toronto are probably worth 2 mil tops. Plus a great many costs and renos. Or torn down and rebuilt.

Comparing housing to investing is ridiculous. Really.

#117 Blacksheep on 01.02.14 at 7:36 pm

I’ve seen this movie before # 88,

“Scene 1- Sell CMHC to Lucky Larry Silverstein.”
——————————————-
Funny cause it’s true : )

#118 Blacksheep on 01.02.14 at 7:41 pm

CP #82,

“Former Goldman Sachs investment banker appointed to head CMHC”
——————————————————
Aw come on….what could go wrong?

#119 :):( Ying Yang on 01.02.14 at 7:44 pm

Smoking Man you are correct I don’t expect anything from my uncle but he should have helped my parents! Funny thing is we are the only family my uncle has and his wife has no relatives left. Who knows maybe I’ll inherit his $$$ in the end but right now he is a wanker. Too bad about club 101 my brother and I had a great time there.

#120 espressobob on 01.02.14 at 7:48 pm

#112 Not 1st

In terms of a non-registered account all the div is tax efficient. Its a wonder how more don’t get it?

RE is in vogue for now.

#121 Babblemaster on 01.02.14 at 8:13 pm

#101 Squatter

“I would suggest an automatic cut-off after 20 lines per
daily blog. Anyone agrees with me?”

————————————————-

Not me. Let people pontificate, rant and rave all they want. I always have the option to not read their post.

#122 Mister Obvious on 01.02.14 at 8:27 pm

#101 Squatter

I would suggest an automatic cut-off after 20 lines per daily blog. Anyone agrees with me?
————————

I agree there should be a limit but ‘number of lines’ is not very precise.

Garth posts on average about 1000 words daily or about 6000 characters including spaces. I think a reasonable maximum limit for comments would be maybe half that size.

So, if there is to be limit, I propose 3000 characters.

#123 The Assessment is here! on 01.02.14 at 9:02 pm

Assessment history for my humble abode on central VI

2009 – $456k
2010 – $435k
2011 – $447k
2012 – $430k
2013 – #404k
2014 – $381k

16.5% “melt” over 5 years. I have also compared it to several other similar houses on my street – same trend.

I bet my taxes will still go up…..

#124 Daisy Mae on 01.02.14 at 9:03 pm

#89 RayofLight: “Is it just me or what? If I see a comment that is over about 5 lines long, my mind glazes over…”

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

I remember that rule when it came to composing resumes. Keep them short. And to the point. Period.

#125 dosouth on 01.02.14 at 9:08 pm

Speaks for itself out west here….

Congrats on procastinating…you are poorer than you thought

#126 Daisy Mae on 01.02.14 at 9:10 pm

#113 Retire: “Me, I’ll just live my life style that should be self-limiting at some point well before I drool in my oatmeal….”

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

My aunt, age 92, passed away recently…in her sleep.
No health issues — just abit of ‘forgetfulness’.

#127 mick on 01.02.14 at 10:29 pm

simply put, leverage does not make a bad investment good or good investment bad. it simply magnifies the returns while making increasing the likelihood of non survival.

#128 Indyguy on 01.02.14 at 11:05 pm

I doubt 60/40 mix would continue to yield north of 7%.

Not unless the 60% equity is heavy in foreign equities or high growth ETFs.

Saturated equities don’t grow faster than the rate of the economy which is at best 4% even with massive help from the FED, and is not likely to grow in decades to come as we’re in a de-leveraging cycle of the economy.

In 55 years from now, we’d be living pre 1700s style anyways as there will be no oil, no rapid transfer of labor and goods, reverse globalization and trade, and a lower standard of living with less plastics, energy, luxury goods, etc.

#129 Shortymac on 01.02.14 at 11:23 pm

So Garth, when would it be a good time to buy a house for a young couple?

3 to 5 years when the dust has settled? Assuming we have a sizable down payment and a sizable (separate) investment nest egg.

Ask me then. — Garth

#130 YVR Real Estate Fan on 01.03.14 at 2:25 am

Garth,
Long time reader first time poster.
As some other comments mentioned–finance 101–you need to either factor in rent payments to the invest in equity scenario OR factor in the rent SAVINGS into the own scenario, otherwise it’s not an apples to apples comparison of what your equity investment is earning.

#131 Old Man on 01.03.14 at 3:41 pm

#95 Ying Yang – You hit the magic words about your uncle; very wealthy with no children. It would not surprise me in the least if he has established a nice Trust Fund for you. Be very kind and nice to that uncle, as might pay off.

#132 Sgip on 01.04.14 at 5:28 am

140 characters max

BUILDING SEVEN

F*35 Harper corp con con man

.