Entries from May 2014 ↓

Little fools

CRAP modified

“Are you sure that’s a good idea?” I asked. He’d just told me about the pre-build condo purchase – $60,000 down on a unit that’s a long 45-minute commuter train ride away from the city core, not scheduled to be completed until 2017.

“It’s a futures contract,” I explained, “rife with all the risk that entails, and you’ll never be able to rent it out for positive cash flow.” So, he said, I’ll just flip it then for a profit. And that’s when I told him the CRA would consider any profit (as unlikely as it may be) as business income, and pile it on top of his taxable salary. He was appalled.

“By the way,” I asked, “what do you do?”

“I’m a real estate lawyer.”

I checked. He is. Six years closing deals and advising people. Of course, knowing the law and being financially literate are not the same thing. You may learn about torts and tarts during law school, but not necessarily about managing cash. In fact, few people in this country ever receive formal training in handling the one thing that we all need – money.

That’s not to say financial literacy is ignored by the schools. It isn’t. They give it lip service, but in lots of places (Ontario, for example) money talk is blended into other subject areas, and is not a course on its own like, say, dissecting frogs. Here’s the official bumpf:

How is financial literacy taught in Ontario schools?
Financial literacy is part of the elementary and secondary curriculum in many different subjects such as mathematics, social studies, Canadian and World studies, business studies and many others. In some subjects, students may be learning specific skills such as understanding money, consumer awareness, personal finances, budgeting and money management that will help them develop financial literacy skills. In other subjects, financial literacy connections may be made as students learn about their place in the world, as a responsible and compassionate citizen or when they study different economic systems.

Through the curriculum, students are developing skills in critical thinking, decision-making and problem solving that can be applied to subjects at school and to real life situations. Resources have been developed for teachers to help them connect financial literacy topics across the curriculum to deepen students’ learning and make financial literacy more relevant.

Well, obviously, it ain’t working.

Randy reads this pathetic blog which, so far, has not incapacitated him enough to resign as a teacher. “I teach economics at a private school in Vancouver,” he tells me. “I have taught public school for over 30 years and private the past five. Very few schools public or private teach economics. A shame. I have enjoyed your blog for some time. I try to infuse economic concepts and real life examples to make it relevant (with a large dose humor and interactive material).”

Imagine. Combining economic and financial info with actual real-life information and humour. All that’s missing are colourful references to underwear. In any case, Randy has decided to reach out here for some assistance in schooling the urchins.

The question is how to turn out young adults who can actually analyze whether or not it makes sense to acquire a concrete box in return for assuming $400,000 in debt. Or how to say no to a mutual fund salesguy who will make more money every year from your RRSP than you do. Or knowing what a preferred share is, how a bond works, what ETF, HFT and EFT stand for and why mortgages are amortized. How do we change a system where kids come out of seven years of university dumb enough that [email protected] can talk them into a GIC? Why are girls taught to fear risk when they live longer and often run out of money? Why do people buy new cars yet lease water heaters? How can you earn enough to move out of your folks’ basement before you’re thirty?

Randy says he wants help in developing a curriculum “based upon 10 broad concepts/common sense economic ideas that every young Canadian should begin their life knowing.

“What truths would they center around?” he asks. “What financial situations would they center upon?”

And so, blog dogs, this is a rare opportunity (now that we’ve straightened out the realtors) to become Educators. What would you suggest Randy include as the 10 most worthy financial things to teach his doughy-eyed brood, lest they become the greater fools of tomorrow?

Debt 1, brains 0

BEER modified

When the world looks at what Canadians are doing to themselves in terms of housing, heads shake, eyebrows arch and a little ‘WTF?’ is murmured in several languages. Americans, Irish, Spaniards and others are amused that we watched their markets inflate, then blow up, and learned nothing.

The OECD (Oganization for Economic Development and Cooperation) thinks we’re nuts. By their measure, real estate is overvalued here by 30% to 64% when prices are pitted against rents, or the income families receive. The only reasons this can happen are cheap money, government incentives, and a wilful blindness to the consequences of debt. Most poor beavers believe interest rates will never rise in their lifetimes, that house prices (at worst) will stay steady, and real estate is the best possible asset to own.

They thought that way in Florida a decade ago, too. With better weather.

There’s another reason so many today are sure it’s different here. Immigration. While this blog is crawling with envious xenophobes who decry what they think Chinese money has done to prices in Vancouver or Markham, realtors keeping telling folks you’d better buy before some guy with a suitcase and bad haircut beats you to it.

A recent Conference Board study says the OECD is nothing by a bunch of scaremongerers, and real estate in Canada costs a bundle exactly because we’ve a growing portion of the population that was not born here.

So, here’s an argument the HAM-hating houseless and the HAM-loving realtors will relish:

“The foreign-born population can significantly alter the landscape of a country’s housing market. In many instances, immigrants arrive in a new country with some pre-established wealth. If a specific market welcomes a relatively large share of wealthy immigrants, their arrival creates a new source of demand that not only stimulates demand for housing, but can also raise house prices significantly without any changes to personal disposable income per capita. Accordingly, a rising share of the foreign-born population can lead to a higher house price-to-disposable income per capita ratio.”

The Conference Board then argues that Toronto and Vancouver, despite having lower income growth than the rest of the country, have seen a higher bloat in house prices over the last two decades. These places also have lots of foreign-born citizens – 46% in the GTA and 40% in Mouldy City. The Board acknowledges immigrants earn less and an influx of them brings down overall wages, but still suggests houses cost more because of newcomers.

“From the analysis, it appears that markets with higher shares of foreign-born population are associated with higher ratio of average house prices-to-average disposable income per capita, at least for Canada. And since the share of the foreign-born population has been rising continuously in Canada, from 16% in 1981 to 20.6% in 2011, one should therefore expect a steady rise in the house price-to-disposable income per capita ratio. Concluding that Canada’s housing market is over-valued by 30% by simply comparing its current ratio of average house price-to-disposable income per capita to its historical average is thus inappropriate since this ratio tends to increase over time.”

See how much fun numbers are? If immigrants make less, and lots of them live in your town, then house prices aren’t so bad when you measure them against incomes. So, wazza problem?

“In the end, while the Conference Board of Canada does expect modest house price increases in the near future, and even some slight declines in some markets, we stick to our positioning that Canada’s housing market is nowhere near about to correct drastically, as the OECD study seems to suggest.”

John builds and sells houses in mid-town Toronto. “I have never believed this crap,” he says, of the immigrants-fuel-prices argument. “I have never met or sold a house to a recently arrived immigrant that decided to blow his brains out on a house on Glencairn Avenue.  To the best of my knowledge they are also not the ones buying condominiums either, excluding foreign investors that never actually move here.

“Perhaps this argument can be made for areas outside of the GTA for areas like Brampton, Mississauga, Markham, etc. but that does not explain why a SFH in the core is now over $ 1, 000,000.  Those prices are being driven by dumb Caucasian Canadians with no brains and lots of debt.”

And John’s right.

Houses cost too much because people buy them.

In doing so they take on historic levels of debt, shelve retirement saving, suck off all their liquid assets and employ extreme leverage. Without temporarily-cheap rates or the government insurance making bankers careless, houses in Van or 416 wouldn’t cost a mill. And we’d still have immigrants. You might just like them more.