B of M

KIDS modified

Scaring the kids is one of my favourite things. Like little suburban Sean. “I recently came across your blog,” he writes, “and you have sufficiently scared the crap out of me.”

I am so proud.

“The very first post I read of yours was the one of the 24-year-old male living at home, this hit me like a ton of bricks because this happens to be my current circumstance. After going through your posts for the last few weeks, you have me reconsidering my entire financial plan for the foreseeable future.”

Sean continues: “Currently I’m making $45,000 annually. I’ve already built an emergency savings for myself, and now am putting aside 75% of my net pay to my TFSA for a deposit on a home. After maxing out my TFSA the plan was to max out my RRSP, and start non-registered savings with equity heavy funds. Then when I have enough to put 30-40% down as a deposit for new condo somewhere in suburbia (likely Milton or Oakville) cash out my TFSA and non-registered savings, and use the Home Buyer’s plan to withdraw from my RRSP.

“This was the plan, until reading your freaking blog.

“Now I feel like I should be moving out immediately, re-positioning my funds to have more balance, finding a nice cheap place to rent while building up my savings, and waiting and hoping that the housing market has hit rock bottom by the time I have enough saved to pay cash for a new home. I don’t suspect you give out free financial help to random e-mailers, but if you do, any guidance would be greatly appreciated. If not, thank you for the insight you’ve already provided through your posts, and the help you’ve provided me with trying to figure out the best path forward.”

Atta boy, Sean. You’re learning fast. Savings three-quarters of your wages, investing inside a TFSA, wisely deciding to eschew the generational house lust lapping all around you and deciding to be a renter instead of a parental moocher. All worthy choices. Don’t let Mom talk you out of any.

In fact, speaking of her, kids far less prescient (and well-read) than Sean are these days making way bigger withdrawals from the Bank of Mom. A BMO survey shows 43% of moist, virginal house-hunters (and 57% in 416) have found they must cough up a lot more than they were expecting for a home – about $83,000 more. Why? Because demand among the little fools has resulted in crazy urban warfare for listings priced under that magic million-mark.

While sales among move-up buyers have hit a wall in many areas (explaining why the reno business is at a fevered pitch), first-timers continue to do everything possible to burden themselves with unfathomable debt, property taxes and future illiquidity. The survey also shows 76% are now thinking condo values will probably blow up, hence the burning interest in getting slanty, bug-infused semis on dodgy streets, or brand new towns made of pressed corn flakes and glue facing treeless suburban streets.

So, first-time buyer budgets, says the bank, have risen by 21%. Of course, incomes haven’t – but the amount of money parents are willing to throw into dowpayments for their offspring is exploding. It’s estimated up to 40% of all the kids now engaged in bidding wars and bully bids are backed by parental cash. It’s such a factor CMHC is currently engaged in a study to find out how much this is skewing prices and inflating the market.

For example in Toronto, the BeeMo study shows, new buyers have added 20% to their budgets, or about $107,000 more than they first planned on spending. It’s a staggering amount, and helps explain the top end of the market being in decline while the middle burns.

It’s also instructive to see how house-horny Canadian parents contrast with those south of the border. In the US, says the National Association of Realtors, 27% of first-timers receive a cash gift from their families – far less than here (but the highest number thus far recorded). And while new buyers have been gobbling 50% of all the sales in Canada, in the US that number is just 29% – down substantially from the historic norm of 40%.

Why the big difference? Don’t American moms love their daughters enough to keep them in their own granite, stainless and Miele cocoons?

Two explanations: First Canadian mothers can fork over as much money as they want to their kids with no tax consequences to anyone. In the States, IRS rules stipulate any cash gift to a child cannot exceed $14,000 from each spouse, or tax will apply. Second, unlike Canadians, people living in the US know they’re not immune to the laws of economics. They partied through a real estate boom, and then crawled through the subsequent bust. Trillions in middle-class equity was erased when average prices collapsed 32%, so they’re in no hurry to see their kids take on housing risk.

Besides, Boomers in America seem to be a different breed. While here the generation is wedded to bricks and GICs, to the south more retirement plans are stuffed with stocks. As a Bloomberg report noted this week: “The boomers have seen their retirement savings almost double since the end of the recession. They had an average $147,700 in their 401(k) accounts in June, up from $76,500 five years earlier when the economic slump ended, according to data compiled by Fidelity Investments.”

So there ya go, Sean. Some context for your wise choices. You’re on the right track, while so many of your friends – aided and abetted by their myopic helo, property-obsessed parents – have no idea of the turmoil that lies ahead.

You know better. Real men rent.

136 comments ↓

#1 Jas Girn on 09.19.14 at 7:15 pm

Garth, you are awesome!

You still can’t borrow the bike. — Garth

#2 sideline sitter on 09.19.14 at 7:20 pm

Real man, right here!

#3 James on 09.19.14 at 7:21 pm

Good for Sean. My only criticism is why on earth a 24 year old is thinking about buying a house and therefore becoming tied to one area. There’s an entire world out there to explore, and to be honest there are countries that offer far more in the way of opportunities than Canada.

Given the degree to which housing (and related activities such as finance, insurance, etc) occupies a rather large portion of Canada’s economic activity, you can see some dim prospects for jobs in the years ahead. Even worse, high housing costs are correlated with lowered employment prospects, since employees must earn more and transaction costs inhibit labour mobility. (I won’t even speak of the TFW craze, which is also making it a tough job market for citizens).

Were I in his shoes, I’d stash up money and then go to Asia, South America or Africa on a mission to find better opportunities. In my own field, you pretty much have to go to the USA to find something interesting.

#4 not 1st on 09.19.14 at 7:24 pm

How does someone realistically save 75% of their after tax income? I guess staying home and eating cat food works for boomer and millennials too.

#5 Lala on 09.19.14 at 7:25 pm

I had 2 options:

2. Buy a house
1. Invest

Invested $25,000 on 2006-2007, today my company is worth over 2,000,0000 on assets and 350,000 cash. No bad eeeh. The thing is that the social life sucks and weather is terrible.

#6 EarlySpring on 09.19.14 at 7:27 pm

Thanks again for a great post Garth, mainly towards us mid twenty year olds. It’s much appreciated. I live in Saskatoon and work for SaskPower as a power lineman. I can’t help but notice the huge over supply of new builds in Saskatoon and how they continue to build and plan for more growth blows my mind. With my position I see more and more plans come in for more subdivisions and condos. It’s nuts, but I guess the longer I wait and the more supply outs demand the better for me(if I even want a house). But I hear last night and today again that they expect huge amounts of easterners to move west to Alberta and Saskatchewan in the future as a national survey shows, but it looks like things are kind of going stale here to and like you say, who’s going to move when they can’t sell they’re house or have to take a huge loss to do so? Thoughts? Anyone?

#7 Happy Renting on 09.19.14 at 7:35 pm

Way to go, Sean. Way to educate yourself and open up your thinking.

If you and your parents are happy with the current living arrangement (and you both feel what you contribute in rent/expenses/upkeep is fair), staying put in the basement may be a huge boost to your savings rate. I’m generally much in favour of young adults getting their own place once they have a FT job, but if building wealth is your first priority, being a mouldy basement dweller for another 1-3 years could be the right move. As long as you’re willing to delay the freedom and experience your own place gives you.

Check back in with us in 6-12 months, let us know how you’re doing!

#8 pravchaw on 09.19.14 at 7:35 pm

$147,700 in your RRSP/401k won’t take you very far.

Further than $76,000. — Garth

#9 observer on 09.19.14 at 7:35 pm

CMHC chief says housing agency considering passing on mortgage risk to banks

http://business.financialpost.com/2014/09/19/cmhc-chief-says-housing-agency-considering-passing-on-mortgage-risk-to-banks/?__federated=1

Just in case someone else hasn’t posted it yet….

#10 Freedom First on 09.19.14 at 7:45 pm

That is a great comparison of the U.S. housing market mindset before and after the GFC. The Americans, like many other countries who went through the exact same housing deflation, only learned by being financially slammed. Canadians are not different than any other people. They will not believe that their housing market can cause financial ruin to a massive # of Canadians until it does.

Thanks for sharing Sean’s story Garth. It is heartening to read the stories of the people who become aware of how close they came to putting themselves in a dangerously vulnerable financial position. As they realize, rightly, there is never a reason to do that to oneself, many excuses, but no reason. Another one saved. Fantastic.

#11 Retired Boomer - WI on 09.19.14 at 7:48 pm

U.S. Boomers probably are not so much different, just have slightly different values. We all loved sex, drugs, and rock N roll just fine. Did I forget booze? Add that, too. Fast cars, big bikes, and the world awaited our turn.

Most still embrace at least some of those ideas. Now most on the cusp of retirement age, we have mellowed.

We had our just for RE and know how that ends, in no hurry to push the young into stupidity, they’ll find it on their own soon enough.

It would be interesting to see where most Boomers would change things, if they could. My bet is most would change nothing.

I detect a more conservative bent to the millennial’s than ever for us Boomers. Maybe that is why the generational contempt so often detected on this pathetic blog?

Without regard, your financial acumen is spot on for all generations -if- they listen, understand, and act.

In the meantime we Boomers will just grin, age, and croak off as the silent generation did before us.

At we know the Scotts have voted to remain in the UK, inflation is mainly quiescent, and the investments continue to perform.

We had our chance to remake the world, now it is their turn. What more can a Retired Boomer ask of life?

#12 Andrew on 09.19.14 at 7:50 pm

More evidence this week that renting is now cool in the US (from CBS MoneyWatch):

“According to U.S. census data quoted by RealtyTrac, the number of renters in American homes rose to 34.5 percent in 2011, with close to one-fourth of all U.S. metro regions seeing higher rental rates.

Then there’s the rise of the Millennials, new workers ages 18 to 34, who are foregoing purchasing homes — at least for now — in favor of renting. And that demand, according to Mortgage News Daily, has helped pushed the construction of rental units to a 25-year high.”

Gotta love the freedom that renting provides, especially with house prices at nosebleed levels across the country. It’s going to take a while before Canadian Millennials start warming up to renting since all of their Boomer parents push them into buying property. The mere suggestion of renting a place often brings disbelief, if not outright hostility, from Boomers who think housing is a no-lose proposition.

#13 Realties.ca » B of M on 09.19.14 at 7:53 pm

[…] Source: http://www.greaterfool.ca/2014/09/19/b-of-m-2/ […]

#14 Ray Skunk on 09.19.14 at 8:04 pm

#2 EarlySpring

My thoughts… not really what I think you were asking but I’ll say my piece anyway.

Sounds like you have a great job for your age, making decent money.

My thoughts – work hard now, while you’re young.
Pile in the hours, I imagine a job like yours has plenty of scope for OT and it would pay well. Don’t waste your money on crap like your friends might, buying the latest Golf GTI on 72mo financing, new iPhone every 10 minutes, $250 pairs of jeans. Live a little still (vacation, nights on the town, beer) – just don’t be one of those who spends thousands on pointless stuff that will be useless two years later.

Stuff your TFSA to capacity, fund your RRSP. Get a non-reg account on the go with a decent advisor and start a portfolio.

In five years time the landscape will have changed a lot. You may want to move. You may be wanting to start a family. Whatever you decide, you’ll be in a lot stronger position with the six-figure portfolio you’ll have that will give you so much more freedom in what you decide to do.

Good luck.

#15 Ray Skunk on 09.19.14 at 8:05 pm

#2 became #6.

How strange!

#16 Harbour on 09.19.14 at 8:06 pm

Watched Amanda Lang on the Exchange interview TD retiring ceo Ed Clark today.

Clark says he’d like to see the government tighten lending rules to deal with the threat of asset bubbles because they end bad.

Clark said low interest rates create these asset bubbles and Ottawa should provide a framework on lending because it’s unrealistic for the bank to make consumers borrow less.

The household debt to income ratio rose to 163.6 per cent in the second quarter of this year.

#17 bigtown on 09.19.14 at 8:12 pm

My offspring is in good shape and the grand kids were born in Mexico so they have that tequilla vacination which makes them strong like bull plus they speak Spanish and are close to professional wrestlers…but not with debt. In Mexico money is respected and people are afraid of credit cards so CASH is KING.

Having a healthy family is better than money in the bank cause you can’t buy health. Bow down to the great one.

#18 NotAGreaterFool on 09.19.14 at 8:23 pm

Evan Siddall, President and Chief Executive Officer, Canada Mortgage and Housing Corporation said the following recently:

– As much as we never want to use taxpayer money to bail out banks, governments consistently want to help home owners in the event of a generalized housing crisis -> This means savers are screwed.

– Our task is to define a strategy for CMHC that preserves our buffering role in a crisis, while not assuming so large a market presence that we distort pricing to consumers. -> CMCH is the #1 reason prices are distorted.

– As a risk manager, let me tell you why we aren’t overly worried about a housing bubble at this point in time, based on what we know. This “based on what we know” is an important caveat… -> They don’t have good data, they don’t know :(

– Our educated opinion is that growth in house prices in Canada will moderate. If we are wrong, and price growth remains strong or accelerates, we may need to look to macro-prudential counter-weights to avoid excesses. -> this is fancy for anti bubble policies & more regulations i.e. underwriting standards capital requirements etc..

-So while the conventional view is for a soft landing of the Canadian housing market based on what we know, it’s my job to worry much more about what we don’t know. -> CMCH admits there will be a landing; soft (vs. hard) is preferred and trying to be engineered

– One potentially effective way to convert an “unknown unknown,” …into a “known unknown” – in other words, an identifiable risk that can potentially be managed – is to recruit others to share in the cause of finding it -> CHCH has not a clue and it is hoping the public and private industry can help identify a clue

We are screwed!

Go here for more:

http://www.cmhc.ca/en/corp/nero/sp/2014/2014-09-19-1400.cfm?WT.cg_n=TWT_COR2

#19 Smoking Man on 09.19.14 at 8:25 pm

Notsty

Your post from yesterday, 30 million reward.. New Identity for whistle blower… Of MH17

Ha, Putin has a lot of tricks up his Sleve.

I’m calling a few pilots from Ukraine airforce, some high ranking officers. But I bet the CIA is going ape shit, these people are starving. I say someone comes out within 48 hours. But you won’t hear about it on MSM, they will be busy pumping Toronto Real Estate…

#20 totalinvestor.com on 09.19.14 at 8:33 pm

Scotland, you disappointed me. (:

http://postimg.org/image/fxtswoyor/

#21 Chicken Little on 09.19.14 at 8:38 pm

The Market is Falling!

* TSX ends down 200.19 points, or 1.29 percent, at 15,265.35
* All 10 main sectors are in the red

Canada’s main stock index took its sharpest one-day hit in seven months on Friday as a broad array of stocks from banks to telecommunications and resource companies pushed it to a 1.7 percent decline for the week.
All 10 of the main sectors ended in the red, with heavyweight financial, energy and materials stocks doing the most damage.

The index dropped 200.19 points, or 1.29 percent, to end the
day at 15,265.35. The index recorded a 1.7 percent decline for
the week.
“A market that starts to sell off can often be
self-fulfilling as it hits other people’s stop-loss trades and
continues downward,”

more:
http://www.reuters.com/article/2014/09/19/markets-canada-stocks-idUSL1N0RK14K20140919

While the Greedy, the Panicked and the Fearful are busy selling in a down market, the Garthites are using their weekend to plan for scooping new bargains on Monday when the market re-opens.

#22 Christopher Mewhort, EA on 09.19.14 at 8:44 pm

“In the States, IRS rules stipulate any cash gift to a child cannot exceed $14,000 from each spouse, or tax will apply. ”

Not quite correct. Amounts above the $14K (2014 amount) may be taxed if the lifetime gift limit of ~$6.5 million has been reached. Before the US downturn, it was very common for parents to set up schemes for each parent to give each of the couple the maximum each year for a number of years. This had the effect of increasing the yearly amounts not subject to tax by 400%. Sweet for the kids. Now so many people have lost their homes that the ownership mentality has changed – as you point out. Where house prices have decreased the most, house lust has decreased the most. Where house prices have not decreased (areas of Hawaii, for example), house lust is still alive and well.

#23 waiting on 09.19.14 at 8:44 pm

I’m just reading Jim Treliving’s book “Decisions”. He was telling a story of giving up a very lucrative but tedious dead-end job in the oil patch when he was in his late teens to pursue his dream of joining the much less lucrative RCMP because it was what he felt passionate about. Anyway, that decision of always following his passion instead of the money has led him to great personal (and secondarily, financial) success.
I like his quote about what he thinks chasing money results in. “Big cheques create one thing: debt. Then you’re married to work you don’t like in order to pay off debt you’ve accumulated to try to stave off your depression. People lose decades in brutal financial cycles of this sort – making good money, creating big debt, and then slogging away to pay it off.”

#24 NotAGreaterFool on 09.19.14 at 8:46 pm

Garth said ” It’s a staggering amount, and helps explain the top end of the market being in decline while the middle burns.”

Check this out, in central Toronto:

1) This was listed at $799K, sold to Canadians (they look Asian though) for $905K in 5 days in the middle of summer

http://www.carollome.com/Properties.php/Details/253

2) 3 houses over, there is another home (far better) priced at $1.8M and no takers after 1 week.

http://www.realtor.ca/propertyDetails.aspx?PropertyId=14863236

If priced under $1M in central 416 and they are selling like hotcakes.

#25 Cici on 09.19.14 at 8:57 pm

Hey Sean,

I agree with #7 (Happy Renting).

You seem very responsible and on the right track towards total self-sufficiency. If your ma and pop don’t mind, I’d say stick it out for another year or two, but make them dinner a couple of times a week and do some yard work. Save everything as per your strategy to ensure a growing and secure nest egg that will ensure you are on strong footing when you do leave and never have to go back begging for help.

Then, when you do move out, you’ll have a nice chunk of money in investments and a solid stash of emergency savings, limiting the likelihood that you’ll ever end up back in their basement. I’m sure that you could even throw a hundred or two bucks at them per month to cover some of the basic expenses (like heat, electricity, etc).

In the meantime, learn to cook and clean and take care of yourself, thus ensuring that you build life skills without burdening your parents.

#26 Linda on 09.19.14 at 9:11 pm

The Bank of Mom is o.k. if the parents are able to fund their offspring without financial detriment. If however the parental(s) are funding their offspring by using funds meant for their retirement, I do not see a happy ending. Presumably the parents expect their offspring to pay them back in kind or in service when the parent(s) are no longer able to take care of themselves. This does happen but far less frequently than one might wish. Gift = no obligation; Loan = obligation. Lots of family feuds occur when the terms are not spelled out & the two sides have differing ideas of whether the downpayment was a loan or a gift.

#27 ShawnG in TO on 09.19.14 at 9:27 pm

There’s nothing wrong with a 24 yr old living in parents’ basement as long as he act like a responsible adult. Pay a reasonable amount of rent + utilities, chip in for groceries, etc. After all, Sean’s parents might still have a mortgage to pay, so better to rent the basement to Sean than some unknown stranger.

#28 TEMPORARY® Foreign Prime Minister on 09.19.14 at 9:28 pm

#3 James on 09.19.14 at 7:21 pm
=========================

Excellent post.

Kind of like a reverse TFW program, all self-induced by the current over-lobbied, ideologically-blindered Reforma-Con government.

#29 Montellino on 09.19.14 at 9:31 pm

Im a man.. Mer-man..cough cough Mer-man

#30 Scottish Sheep on 09.19.14 at 9:42 pm

Re:23 Waiting

Yeah right, “Much less lucrative RCMP job”…. I don’t know if people know this but RCMP officers pay NO TAXES on their pension revenues. All this for kissing the queen’s arse all these years. Calculate what pension amount you need to gather to get a pension like that.

I should have chosen to feed my horse at the park too if I would have known this before….

The Scottish missed a great chance to get rid of the old hag and her descendants.

#31 Entrepreneur on 09.19.14 at 9:43 pm

If Sean wants to move out, go for it, but living at home is a what I call a “jumping board” is just as good.

Years ago on Doc Zone they did a documentary on a couple where a family still have their adult children living at home. The parents said that they left home and bought a house but at the end of the show they also said that their parents helped with the down payment.

This mom and pop bank has been going on for a looooong time.

#32 TEMPORARY® Foreign Prime Minister on 09.19.14 at 9:43 pm

#18 NotAGreaterFool on 09.19.14 at 8:23
=========================

Another great post.

I always admire posters who have a talent for translating CEO marketing doublespeak B.S. into common language that everyone can defend themselves with.

#33 Kenchie on 09.19.14 at 9:44 pm

Food for thought:

http://valleywag.gawker.com/are-investors-afraid-of-the-tech-bubble-lets-read-thei-1636926506/+laceydonohue

#34 Renter's Revenge! on 09.19.14 at 9:46 pm

#23 waiting: “Big cheques create one thing: debt. Then you’re married to work you don’t like in order to pay off debt you’ve accumulated to try to stave off your depression.”

Funny, that’s exactly the opposite of what most people say. They tell me to just accept the fact that my job sucks and go spend my money in order to make myself happy. But none of those people are anywhere near as successful as Jim, so what hell do they know? Lol

#35 Inglorious Investor on 09.19.14 at 9:57 pm

“Real men rent.”

Real men do what they want, not what others tell them to do. Right or wrong.

https://www.youtube.com/watch?v=W2qm_-0ceYg

#36 45north on 09.19.14 at 10:04 pm

observer : from your link :

The Financial Post reported this month CMHC was looking at a new formula to push some of its losses on to financial institutions, essentially forcing them to pay a deductible on mortgages insured with the Crown corporation before claims are paid.

the Canadian Bankers Association is said to be against the measure.

no kidding

totalinvestor : Scotland, you disappointed me

but not me

#37 Kenchie on 09.19.14 at 10:04 pm

#30 Scottish Sheep on 09.19.14 at 9:42 pm

“The Scottish missed a great chance to get rid of the old hag and her descendants.”

Guess you didn’t read that they planned to keep the monarchy?

LLTE!

#38 OttawaMike on 09.19.14 at 10:07 pm

CMHC Prez sez banks need to share the risk and is considering offloading some of it on them. Bankers have a problem with this.

http://business.financialpost.com/2014/09/19/cmhc-chief-says-housing-agency-considering-passing-on-mortgage-risk-to-banks/

#39 Inglorious Investor on 09.19.14 at 10:10 pm

“The boomers have seen their retirement savings almost double since the end of the recession. They had an average $147,700 in their 401(k) accounts in June, up from $76,500 five years earlier when the economic slump ended, according to data compiled by Fidelity Investments.”

Yeah, but that $147,700 is still only worth about $76,500 in 2009 dollars. OK, perhaps I exaggerate, but you get the idea. Thank you, Federal Reserve!

There has been very little inflation in the past five years. You don’t exaggerate, you fabricate. — Garth

#40 Inglorious Investor on 09.19.14 at 10:14 pm

So they thought it would be simple and easy, eh? Just say “no” and everything will be OK? Maybe not.

http://armstrongeconomics.com/armstrong_economics_blog/

“The violence has begun in Glasgow as loyalists have started to attack pro-independence supporters. This entire situation remains unresolved and now not only is Scotland divided, the damage in seeping into the UK as a whole. Politicians are already backing away of promises to devolve more power to Scotland. I serious question this will ever end nicely. We are dealing with a major economic crisis as the younger generation are being deprived of their future to support an unsustainable economic system throughout the entire Western society – not just Britain.”

#41 Waiting on 09.19.14 at 10:17 pm

#30 – Treliving joined the RCMP over 50 years ago when the force was a very different institution.

#42 Inglorious Investor on 09.19.14 at 10:25 pm

#26 Linda on 09.19.14 at 9:11 pm

“Presumably the parents expect their offspring to pay them back in kind or in service when the parent(s) are no longer able to take care of themselves. This does happen but far less frequently than one might wish.”

Sad, but true. I’ve seen it too many times myself.

By the way, if you have an elderly, sick, dependent parent whom you’d like to off, just put them in a hospital. The friendly hospital staff can typically do the job for you in a couple of months. No guilt. No crime. It was just time. Sighhhh…

#43 Inglorious Investor on 09.19.14 at 10:27 pm

“There has been very little inflation in the past five years. You don’t exaggerate, you fabricate. — Garth”

Tell that to the muppets. It might work on them.

#44 KommyKim on 09.19.14 at 10:27 pm

RE: #4 not 1st on 09.19.14 at 7:24 pm
How does someone realistically save 75% of their after tax income?

They follow Mr Money Mustache’s advice:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

#45 Scottish Sheep on 09.19.14 at 10:35 pm

#41: Waiting

The job was STILL about licking the queen’s bum back then as it is now. Why we endure her and her parasites is beyond me…..

#46 Spectacle on 09.19.14 at 10:38 pm

#92 Kenchie on 09.19.14 at 11:07 am
Some light reading for the blog dogs interested in China’s housing market:

http://research.stlouisfed.org/wp/2014/2014-022.pdf

******************************************
Hey there Kenchie #92 from last nights post.

Very nice blog comment and citation. How the heck did you find that article?! Most timely to understand some clients of mine, and their investment culture…..

Thanks, most appropriate read for everyone here!

& Thanks Garth for some amazing posts lately.

Anyone know if Sir G got onto his bike this summer? Hope he had a victory ride at least.

Regards

#47 eddy on 09.19.14 at 10:51 pm

The majority of Scots voted Aye
The vote was rigged, Scots aren’t daft
‘The City’ got the goldmine
Scots got the shaft

#48 Nomad on 09.19.14 at 10:53 pm

“…waiting and hoping that the housing market has hit rock bottom”

Hope is never a good plan, whether it’s with stocks or with house prices.

But I also hope.

I hope that those stocks fall in price Monday: DOL, PD, ACQ, HCG, MIC, MG, LNR.

#49 Snowboid on 09.19.14 at 11:01 pm

#30 Scottish Sheep on 09.19.14 at 9:42 pm…

Not too sure what you mean by “…pension revenues…”

I assume pension income, but the only retired members I currently know that don’t pay taxes are for their disability benefits.

Disabled as a direct result of their RCMP service.

Kissing the queens’ arse isn’t a term often used when referring to the grievious injuries often sustained protecting your numpty ovis aries butt.

I can assure you income tax is taken off at the same rate as all Canadians – but I will ask around at the next local Vets meeting – maybe some of the surviving NWMP members remember a time they didn’t get taxed.

#50 Scottish Sheep on 09.19.14 at 11:10 pm

#49 Snowboid

A lot of people get injured building the cars we drive around or the houses we live in, but nobody talks about THEM as if they are heros…..

I guess RCMP officers and her heinie are just as usefull as a 40 year old living in his parent’s basement…….MOOOOMMM, What’s for dinner? Can I borrow 100$?????? Lol!

Yes, they are exactly as “usefull”!!!!

#51 Scottish Sheep on 09.19.14 at 11:14 pm

I meant “use-full” but I think you get the picture!

#52 Casual Observer on 09.19.14 at 11:22 pm

#18 NotAGreaterFool on 09.19.14 at 8:23 pm

“As much as we never want to use taxpayer money to bail out banks, governments consistently want to help homeowners in the event of a generalized housing crisis.”

Therein lies the problem. Since government will always want to cater to the 70%+ of voters who are homeowners, renters will always be “fighting” the headwind of gov’t policy.

#53 Obvious Truth on 09.19.14 at 11:29 pm

This kid has got a great start.

Think andrew mcreath hit the nail on head with his show today. But equities don’t care about nothing right now.

Sean needs to take it slow and learn lots. These are crazy times.

#54 Rainmaker on 09.19.14 at 11:40 pm

Here’s what can happen when you buy too much real estate and take on too much debt. Listen to Garth – pursue a balance portfolio of which housing can be a component – when the time is right and you can afford it.

What a horror story, couple in their mid 60’s looking to retire, but loaded with both mortgage, line of credit and credit card debts. They are both likely under a lot of stress that is negatively impacting their health.

———————————————————-

With $7,000 a month going to service debt, future bleak unless couple can stem the red ink

http://business.financialpost.com/2014/09/19/with-7000-a-month-going-to-service-debt-future-bleak-unless-couple-can-stem-the-red-ink/

#55 Mark on 09.19.14 at 11:42 pm

“CMHC chief says housing agency considering passing on mortgage risk to banks”

Yeah we’ve seen that link here before. Basically, if the CMHC wants to play hardball with the banks, the CMHC can look forward to the banks withdrawing lending to the market and creating a systemic mortgage funding crisis in the process. The CMHC, writers of subprime mortgage insurance, better think about what they’re really wishing for.

#56 young & foolish on 09.19.14 at 11:45 pm

I can’t wait until it’s “cool” to be renting again! But you will need quite a chunk to get a decent place in most urban centres (where most people work now). Say a half a million at 5% to fund 25K in annual rent.

Yup, sounds good.

#57 Transplant on 09.19.14 at 11:54 pm

#22 Christopher Mewhort, EA

re: In the States, IRS rules stipulate any cash gift to a child cannot exceed $14,000 from each spouse, or tax will apply.

Mr. Turner’s statement is absolutely correct, just a little incomplete although it is enough to explain the scenario he describes.

Put simply, under current laws any individual in the US can receive up to $14,000 annually in the form of a tax-free gift from any other individual. Anything over $14,000 annually from a single individual is taxed. So, if 10 individuals each give me $14,000 in 2014 I have no tax liability. However, if I get only one gift in 2014 and it’s over $14,000, the excess amount is taxable.

This can result in what looks like an unfair and apparently anomalous situation in that I would owe no taxes in the first case even though I received a total of $140,000. But in the second case if I were given a gift of $15,000 I would owe tax on $1,000. It seems to defy common sense but that’s the way it is.

So my wife and I could each give each of our 2 children and each of their spouses $14,000 this year with no tax burden to anyone, a total of $112,000. If one wished to help one of his/her children who is unmarried, the parents could not give him/her more than $28,000 unless he/she is prepared to pay taxes on the amount over that.

#58 Subhuman Dweller on 09.20.14 at 12:29 am

The Basement Dwellers shall inherit the earth. Chasers will fall into a bottomless pit of debt despair. It is time to take what is ours. Rise!

#59 Helen on 09.20.14 at 12:34 am

SEAN!! My hubby and I are so happy for you! Don’t “stick it out another couple of years”. Go forth! Live! Enjoy your life. Owning a home has become short hand for “security”. Their are other ways to be financially secure. Now, be careful not to fall into a relationship with a person who mistakes a mortgage for what a HOME really is.

#60 Mark's Les Obsessed Brother from another Mother on 09.20.14 at 12:46 am

#6 EarlySpring on 09.19.14 at 7:27 pm
“Thoughts? Anyone?”
Just this.

http://www.youtube.com/watch?v=JoJG9EXX7gU

#61 };-) aka Devil's Advocate on 09.20.14 at 12:48 am

Nope, no significant number of foreign owned vacant homes in Vancouver… nope not hardly at all.

http://globalnews.ca/news/1573912/cope-mayoral-candidate-proposes-tax-on-vacant-homes/

#62 Cici on 09.20.14 at 1:39 am

#30

They didn’t miss anything: it was rigged. Big time.

Coincidence or déjà vu? Very similar to the results of Canada vs. Québec circa 1995.

#63 Strathcona on 09.20.14 at 1:54 am

We’re so sunk.

Our public debt to GDP ratio is so bad. Look it up, our numbers aren’t so different than Spain, or Sudan, for that matter.

way too much spending, Garth has never spoken about the end of universal healthcare, but the time may come post-bubble, where Australia, Canada, and the UK cannot afford their liabilities, especially with an aging population.

you need cash, not a slanty semi bought amid an asset bubble.

#64 Helen on 09.20.14 at 2:03 am

#50 Scottish Sheep on 09.19.14 at 11:10 pm

“I guess RCMP officers and her heinie are just as useful as a 40 year old living in his parent’s basement”

I hope you never need to know how important and useful the RCMP are.

#65 SquareNinja on 09.20.14 at 4:06 am

Why not just stay in the basement? That’s a substantial savings over rent, or if one is inclined, rent can be paid to parents thus keeping the money in the family.

#66 Nomad on 09.20.14 at 4:32 am

CMHC chief says:

1) “As much as we never want to use taxpayer money to bail out banks, governments consistently want to help homeowners in the event of a generalized housing crisis.”

Another statement to make borrowers feel safe about over-leveraging. CMHC should put some fear in borrowers’ overly-optimistic minds, not tell them the government is ready to rescue them.

2) “insolvency is a less obvious option for us.”

You’re really saying this to the Financial Post? Less obvious option?

#67 Steve French on 09.20.14 at 6:48 am

I watched a snail crawl along the edge of a straight razor. That’s my dream; that’s my nightmare.

Crawling, slithering, along the edge of a straight razor… and surviving!

#68 Steve French on 09.20.14 at 6:54 am

Well, you see Smoking Man . . .

In these times of a an extreme Canadian housing bubble , things get confused out there.

Power, ideals, the old morality, the practical necessity of a roof over your head.

But out there with these Canadian Housing Lusters and Virgins, at Seneca Casino, it must be a temptation to be god.

Because there’s a conflict in every human heart, between the rational and the irrational, between good and evil, between buying and renting.

And renting does not always triumph.

Sometimes, the dark side overcomes what Garth called the better angels of our nature, and people take out a massive mortage and place a downplayment.

Every man has got a breaking point. You and I have one.

Many Canadians has reached theirs.

And very obviously, the Canadian housing market… has gone…. insane.

#69 Smoking Man on 09.20.14 at 8:39 am

#66 Steve French on 09.20.14 at 6:48 amCrawling, slithering, along the edge of a straight razor… and surviving!

That is one the best movies ever made, love how you blended it into your next post with real estate.

Back in the day, I identified with Willard. Now I’m Kurtz, but you knew that..

#70 T.O. Bubble Boy on 09.20.14 at 8:51 am

@ #24 NotAGreaterFool on 09.19.14 at 8:46 pm
Garth said ” It’s a staggering amount, and helps explain the top end of the market being in decline while the middle burns.”

Check this out, in central Toronto:

1) This was listed at $799K, sold to Canadians (they look Asian though) for $905K in 5 days in the middle of summer

http://www.carollome.com/Properties.php/Details/253

2) 3 houses over, there is another home (far better) priced at $1.8M and no takers after 1 week.

http://www.realtor.ca/propertyDetails.aspx?PropertyId=14863236

If priced under $1M in central 416 and they are selling like hotcakes.

————————————–

Yes – this has been the trend ever since the CMHC rule change (capping insured mortgage at $1M purchase price).

The Midtown/North Toronto market seems to be:

– LOTS of people can get $1M to buy a house. $999k and under sell in first week. There is also a battle between developers and first-time buyers in this range, as the developers use the lots to build $1.5M to $2M homes.

– MANY people can get $1M to $1.5M to buy a slightly nicer house. Most of these are move up buyers who sell their < $1M place and buy a bit higher. There are fewer developers in this range, unless they are designing a $2M+ home. These sell in one week also.

– A FEW people can get $1.5M to $2M to buy a skinny McMansion (built by a developer) or a premium house/lot. These take 2-4 weeks to sell.

– VERY FEW people can get $2M+ to buy a house. These can take months to sell.

#71 Stumpy on 09.20.14 at 9:03 am

Everyone would feel the pain from a housing decline to some degree. I wonder how municipalities would handle the budget hit. E.g. What would be the impact to Toronto with a 30% drop in property tax revenue and reduction in land transfer tax revenue? It’s not insignificant

#72 Bottoms_Up on 09.20.14 at 9:24 am

#62 Strathcona on 09.20.14 at 1:54 am
————————————————-
Japan’s debt to GDP ratio is 250%. Ours is what, 80%?

#73 Bottoms_Up on 09.20.14 at 9:34 am

#43 Inglorious Investor on 09.19.14 at 10:27 pm
———————————————————
When I look at Ottawa, here’s what I’ve seen since 2009:

20% increase in cost of:

1) housing, rents
2) hydro, water/sewer
3) gasoline
4) food (either price increases or food size decreases)
5) daycare
6) property taxes (ok maybe 10% increase there)

However, there have been decreases in the cost of cars, non-necessary assets, mortgage rates etc.

I would say inflation has been quite significant for the things you actually have to buy.

#74 Bob Rice on 09.20.14 at 9:37 am

Parental cash is probably a much bigger factor in keeping prices inflated than any impact by foreign investment… I have friends whose parents gave them huge amounts of cash – 100K and more – to by their first homes… some even bought homes for their kids. This is especially prevalent in the Italian-Canadian community..

#75 saskatoon on 09.20.14 at 9:38 am

dude…wtf…it’s not gitmo.

#76 Happy Renting on 09.20.14 at 10:21 am

#44 KommyKim on 09.19.14 at 10:27 pm
RE: #4 not 1st on 09.19.14 at 7:24 pm
How does someone realistically save 75% of their after tax income?

They follow Mr Money Mustache’s advice:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

And/or be like LH and earn a pile of money to begin with. Though even with the bigger paycheques, it’s still a feat to keep lifestyle inflation in check, especially if coupled up and with kiddos. (LH: employment income + house rents = ~2M pa? Am I in the right ball park?)

#77 Peter on 09.20.14 at 12:25 pm

I don’t know why you removed/censored my comment I made on your other post. You should encourage different points of view. Are you only going to allow posts that don’t question your wisdom?

You say above this: ” Respectful, wide-ranging discussion on the topic of the posting is encouraged, and will not be censored.”

Then why was mine censored!?

There is no record of another post from you. — Garth

#78 Strathcona on 09.20.14 at 12:38 pm

#71 Bottoms_Up on 09.20.14 at 9:24am
——————————–
yes, as bad as Canada is the US and Japan are far worse. You’re right, we haven’t hit deflation as bad as the Japanese yet, but have simmilar demographic problems, although not as severe. Ours are far more regional.

I don’t see why a country like Canada, with so many natural resources, should be so deep in debt, both nationally and individually.

#79 Smoking Man on 09.20.14 at 12:40 pm

Today marks a milestone in my devolution..

I’m no longer smoking cigarettes.. Gone forever that rush, that amazing trill of sipping on my morning coffee, then taking down a Malbourg 50% on the first drag.

Call me The Dyslexic Vapour Man.

http://www.Dyslexicsmokingman.blogspot.com

#80 Tony on 09.20.14 at 1:16 pm

Re: #6 EarlySpring on 09.19.14 at 7:27 pm

Oil should retest or break below the $35 U.S. level in the next few years as America slips into a depression from recession. Alberta and Newfoundland will be the worst places for employment. Avoid housing like the plague.

#81 Tony on 09.20.14 at 1:20 pm

Re: #8 pravchaw on 09.19.14 at 7:35 pm

Especially when that $147,700 becomes less than $47,700 when the ponzi market implodes.

You constant bleating is a bore. — Garth

#82 Mark on 09.20.14 at 1:48 pm

“Therein lies the problem. Since government will always want to cater to the 70%+ of voters who are homeowners, renters will always be “fighting” the headwind of gov’t policy.”

But government policy actions almost always backfire and create the opposite effect. Raising taxes slows the economy and doesn’t actually increase tax revenue. Cutting back civil servants almost always creates a demand for ‘consultants’ in the public sector. The “War on Drugs” has enriched drug sales, illicit and licit, beyond anyone’s wildest dreams. I think we can probably extend this to what will probably happen with house prices in the wake of the sector going into over-capacity and all the hyper-stimulation provided through the CMHC’s $900B of subprime mortgage guarantees written. Loans that were considered so poor in quality that the private sector wanted nothing to do with them without a government guarantee.

#83 Mark on 09.20.14 at 1:54 pm

“When I look at Ottawa, here’s what I’ve seen since 2009:”

What about since 2008? Because I found some old gas station receipts in my car, and the price per liter is still less today than it was in 2008. Also, food seems to have gone down here. Not Ottawa though, but rural western Canada. Comparing the depths of the downturn in 2009 to today where its been a nice straight ~2% inflation line since 2007/2008 looks pretty benign to me. Besides, if inflation was higher, why is everyone still shovelling money into low-interest GICs and such?

#84 prairieboy43 on 09.20.14 at 2:08 pm

Kid save for a rainy day.
Out here in Northern AB Elk hunting. Beautiful fall day. Having no debt, stress free, enjoying the wild Canada. Priceless!! Maybe we will get lucky and see some elk. It does’nt matter. Love it.

#85 Shawn on 09.20.14 at 2:22 pm

Why Rich countries are in debt

Strathcona at 76 said:

I don’t see why a country like Canada, with so many natural resources, should be so deep in debt, both nationally and individually.

*******************************************
The national government is in debt because the tax payers prefer it to be. And it is economically efficient for the government to be in debt.

Assume for the moment that the government spending is at the correct level. Big assumption but let’s make it.

Spending can be funded 100% by taxes today or say 90% by taxes today and 10% by borrowed money.

Assume too that the average tax payer has debt.

If you raise taxes to eliminate borrowing then the tax payer who is already in debt must either cu
r back spending or go deeper into to debt to pay the taxes.

If tax payers borrow at 6% and the government borrows at 3% then it is efficient for the government rather than the average tax payer to borrow.

The bottom line is that it is economically efficient for governments to borrow. They always have and always will.

It’s nothing to worry about unless it gets out of hand. Canada’s debt is not out of hand.

Now, let’s all get back to worrying about more important things. Like the fact that (shocker of shockers!) men who are paid to hit each other on the field sometimes hit people off the field.

#86 Shawn on 09.20.14 at 2:40 pm

Stock Market P/E ratios

In case anyone is curious the trailing GAAP earnings on the S&P 500 (which is at 2,010) are $103.21 for a P/E of 19.5.

The trailing operating earnings. (This is where we deduct unusual losses, because you know we want to pretend it is unusual for any companies in a group of 500 companies to have any one-time losses) are $111.94 for a P/E of 18.0

The forecast GAAP earnings. (Which forecasts have a history of being optimistic) are $123.10, for a forward P/E of 16.3.

The forecast operating earnings (again pretending that unusual losses on the S&P 500 are unusual even though they happen every year) are $126.16 for a forward P/E of 15.9

All of these I calculated using earnings data from S&P available here:

http://ca.spindices.com/documents/additional-material/sp-500-eps-est.xlsx

*****************************************
Observations: When someone talks about the P/E ratio of the S&P 500 they rarely tell you if it is trailing or forecast, actual earnings or operating earnings.

I like to focus on the trailing P/E because it is the most factual.

A P/E of 19.5 is high but probably not outrageous given today’s interest rates.

The forward P/Es as low as 15.9 would be attractive, if they were not an optimistic fiction.

The S&P 500 valuation is relatively high but might remain so. Some caution is warranted.

Perhaps a balanced portfolio approach…

#87 Westcdn on 09.20.14 at 2:41 pm

A personal missive
I am seeing signs that commodity prices are breaking down. To me, it is an indicator of global economic slowdown. Canada (Alberta) as well as Australia, Russia and a host of smaller emerging nations will feel the pain if it continues. The US does not need a stronger dollar although it will happen so I doubt the Fed will allow interest rates to rise beyond a 1% plus or minus 0.25% across the spectrum. Also the amount of capital fleeing to the US$ will dampen interest rate rises. Usually when I talk about interest rates, I am referring to 10 year money – just so you know. There is no need for North America to prime the pump with cheap interest rates because the economies just create bubbles in asset values (yield) and a large number of losers if a crash happens. The good news is that equity shares are held by strong hands (such as pension funds) and will not be shaken lightly from their trees. Personally, I refrain from investing in companies with large pension obligations and debt but I do consider cash flow as crucial.
People talk about inflation of basic living expenses but don’t see that wage stagnation is the real problem. Consumer prices will vary with supply and demand so it no surprise that prices of certain things will increase despite frozen income. My fear is that we are on a course of reduced Canadian living standards simply because we are not particularly productive or innovative. The amount of capital being spent on RE and share buybacks worries me. It is not the course of a sustainable future. However, the world is what it is and I will play along (running dog lackey). The Scottish “No” vote just proves to me that the boomers want the status quo to continue and the elitists couldn’t be happier because their promises appear to be real.
Despite the negative overtones of my comments, I have no plans to leave Canada and believe we can do better but I will change my mind with the times, slowly… sigh

#88 Shawn on 09.20.14 at 2:46 pm

P.S. the historical average trailing P/E of the S&P 500 is 15.9 (this removed a couple of outliers where it went above 50 due to temporary low earnings).

The average P/E of 15.9 also corresponds to years when interest rates were on average higher than today.

Logically we can support a higher than average P/E today.

Unless that is the outlook for growth in 2014 is lower than it was over most of the last 80 years or so , which is probably the case…

So trailing P/E higher than about 16 on the index are probably a cause for caution. We are at 19.5… hmmm…

#89 Mark on 09.20.14 at 2:49 pm

“I can’t wait until it’s “cool” to be renting again! But you will need quite a chunk to get a decent place in most urban centres (where most people work now). Say a half a million at 5% to fund 25K in annual rent. “

First of all, 5% is a fairly low rate and is easily achievable with a similar risk profile to owning a house. Even Garth’s fairly low risk (certainly lower risk than owning a house) portfolios are kicking off 7-8%/annum.

Secondly, rent is a blend of not only renting a place, but various ancillary services such as maintenance, sometimes utilities, property management, etc. You’d still have to pay for these if you owned, so you should subtract the cost of such from the rent you’re comparing to.

When you use a more appropriate rate of return on the investments, and consider the net rent, not the gross rent, your number should drop by around half.

#90 The American on 09.20.14 at 3:15 pm

Tony + Unsubstantiated Claims = Blog Comic Relief
Tony – Unsubstantiated Claims = Invalid Altogether
Tony + Substantiated Claims = Unicorn
Tony – Substantiated Claims = Tony

#91 The American on 09.20.14 at 3:16 pm

Any way you do the math, it must really suck to be Tony.

#92 Casual Observer on 09.20.14 at 3:54 pm

“But government policy actions almost always backfire and create the opposite effect. Raising taxes slows the economy and doesn’t actually increase tax revenue.”

Not necessarily. It all depends on where our tax rate currently sits on the theoretical “Laffer Curve”.
http://en.wikipedia.org/wiki/Laffer_curve

If the gov’t anticipates a severe housing slump and they want to fight market forces, they’ve demonstrated that they are willing to do that through policy (CMHC MBS bail-out, low interest rates, first-time buyer tax credits, etc.).

I’m not saying that they will, or that they will be successful if they do, but they have publicly acknowledged that “…governments consistently want to help homeowners in the event of a generalized housing crisis”.

#93 Spectacle on 09.20.14 at 3:58 pm

#64 SquareNinja on 09.20.14 at 4:06 am
Why not just stay in the basement? That’s a substantial savings over rent, or if one is inclined, rent can be paid to parents thus keeping the money in the family.
***************************
Re Square ninja and the young generation breathing mildew @’Moms…….
#64 Square Ninja has a very good point. Let’s exaggerate a bit here: everyone in some European countries lives at moms .

Why not keep the $ in the family, GO TO SCHOOL for a real market income increaser ( made up word) to you resume .

Your in diapers @ moms, then go to work, then moms in diapers, it’s all good!

Be different young people, and pay Garth with your rent to manage your ever growing portfolio! You are saving/ investing….

Regards all

#94 devore on 09.20.14 at 3:58 pm

#70 Stumpy

Everyone would feel the pain from a housing decline to some degree. I wonder how municipalities would handle the budget hit. E.g. What would be the impact to Toronto with a 30% drop in property tax revenue and reduction in land transfer tax revenue? It’s not insignificant

There will never be a shortfall in property taxes in Canada due to the way they are set for every budget.

#95 Mark on 09.20.14 at 4:52 pm

“The S&P 500 valuation is relatively high but might remain so. Some caution is warranted. ”

The problem with the S&P500, and its “P/E” is that most S&P500-constiuent firms are highly levered to interest rates going down. We saw this acutely during the 2008 “credit crisis” where large numbers of US corporate CEO’s insisted (and even in some cases gave sworn testimony) before Congress that their businesses would go bankrupt if they didn’t receive bailouts and lower costs of capital in the capital markets.

Contrast this with the P/E of Canadian firms. Somewhat lower on average (around 14-15), *and* Canadian firms are not nearly as indebted. Additionally, Canadian firms have suffered significantly over the past 30 years in the falling interest rate environment.

So what would you rather have, the S&P500 with a high P/E that will probably crumble as rates go up. Or the cheaper TSX, which has significant negative correlation to long-term interest rates, and will probably experience more “E” as rates go up?

IMHO, Canada’s stock market is primed to dramatically outperform that of the USA over the next few decades. Just like in 1980 when Dow = 1000, TSX = 2000, I believe we’ll see a similar ratio once again reached. Along with a much stronger Canadian dollar (ie: $1.3 or more USD$).

#96 NostyVlad the Snugglebombed on 09.20.14 at 5:38 pm

#135 Chickenlittle on 09.19.14 at 10:01 pm — cite>”What will we put in our scotch when the ice melts?”

News extra! Here is a critical update from our friendly local reporter, Al I’m Right and You’re Not Gore who is currently swimming in Yellowstone’s Caldera: Report (This explains why we’re all fried eggs.)

Unfortunately, due to chemical outer-balances and inter-reactions, Al melted into a giant, gaseous windbag and was last heard muttering, “The day I made that statement, about the inventing the internet, I was tired because I’d been up all night inventing the Camcorder.”

You could try windy scotch gasbags!

#97 LTL_FTC on 09.20.14 at 6:14 pm

People often confuse how property taxes are calculated.

For instance, in California, the mill rate has a legislatively imposed maximum and properties have a legislatively imposed maximum value increase (proposition 13, 1978). However, if property values drop across the board, a whole City (e.g. San Fran) can experience a correlated decrease in tax revenue.

In Canada, a city’s budget is set first (i.e. total required property tax revenue is determined) then is divided by the total assessed value of the tax base to determine the mill rate. Just because property values decline 20% across the board doesn’t mean that taxes go down 20% – the mill rate is adjusted to get the budgeted revenue.

Nutshell:

California (decreasing values) x capped mill rate = decreased property tax revenue

Canada (decreasing values) x increasing mill rate = stable property tax revenue

Only in a financial catastrophe would Canadian municipalities see a drop in revenue (e.g. the mill closes in a one mill town and most people leave to seek income elsewhere. Clearly the overall property tax revenue is going down.

#98 UVZ on 09.20.14 at 6:22 pm

#84 Shawn on 09.20.14 at 2:40 pm

Thank you for the post and P/E link.

#99 CPG on 09.20.14 at 6:40 pm

“Some European countries should consider additional fiscal measures to bolster growth, even if they temporarily delay efforts to shrink their budget deficits, Canadian Finance Minister Joe Oliver said in an interview.”

Global Finance Chiefs Said to Warn of Mounting Economic Risks

http://www.bloomberg.com/news/2014-09-20/global-finance-chiefs-said-to-warn-of-mounting-economic-risks.html

#100 Victor V on 09.20.14 at 7:20 pm

New pension rules allow retirees to withdraw directly from plans

http://www.theglobeandmail.com/report-on-business/new-pension-rules-allow-retirees-to-withdraw-directly-from-plans/article20710832/

The federal government has introduced new regulations that would permit retirees to remove varying amounts of money each year from their defined contribution pension plans, meaning they can take more cash than is currently allowed as they reach later years of retirement.

The change has raised concerns that it could lead to pensioners withdrawing too much money and then facing hardship later, but others say the guidelines have caps that will limit withdrawals in early years of retirement…

…Lawyer Mitch Frazer, a pension expert at Torys LLP in Toronto, said the amendments may help some people who need more cash for medical expenses or other costs as they age. But he fears many people will take out their maximum withdrawals too early to fund discretionary purchases and end up with less in their final years.

“From a societal perspective, you’ve taken away a steady stream of income from people who may not necessarily be excellent at managing their money,” he said.

#101 Mark on 09.20.14 at 8:00 pm

“Only in a financial catastrophe would Canadian municipalities see a drop in revenue (e.g. the mill closes in a one mill town and most people leave to seek income elsewhere. Clearly the overall property tax revenue is going down.”

Overall, a very good synopsis of how it works in Canada. However, municipalities have been enjoying large amounts of non-tax “ancillary” revenue as the result of development over the past decade. As housing starts and renovations slow down, much of this ancillary revenue will disappear. At the same time, homeowners (and/or their mortgage owners) will be fighting increases to the mill rate, and wasteful municipal spending tooth and nail.

So to say that falling RE prices doesn’t imply, eventually, a sort of revenue Armageddon for the municipalities in Canada is only sort of partially true in practice.

#102 Ret on 09.20.14 at 8:41 pm

Millrate 101 tonight. Wow, am I getting an education in simple arithmetic.

So how did Hamilton wind up with $74,000,000 (2012) in unpaid property taxes?

Needless to say, those of us who pay on time have had our millrates increased to cover the cost of services like police, fire and bussing, for those who don’t pay.

Welcome to Hamilton! “Unpaid taxes accounted for 8.1 per cent of the city’s total levy last year, …” Fifty-nine percent (59%) of those unpaid taxes were from residential properties.

If raising millrates was the answer, Detroit wouldn’t have any financial problems.

http://www.cbc.ca/news/canada/hamilton/news/more-hamiltonians-struggling-to-pay-property-taxes-1.2458648

#103 blobby on 09.20.14 at 8:47 pm

24 is considered to be a “kid” still?

Honestly – man up and move out – stop living off your folks.

#104 UVZ on 09.20.14 at 8:47 pm

#93 Mark on 09.20.14 at 4:52 pm

“The problem with the S&P500, and its “P/E” is that most S&P500-constiuent firms are highly levered to interest rates going down.”

Thanks for the observation. In your opinion/analysis, what is the relative leverage rate (US vs. Canada)?

#105 UVZ on 09.20.14 at 9:02 pm

http://business.financialpost.com/2014/09/19/cmhc-chief-says-housing-agency-considering-passing-on-mortgage-risk-to-banks/

To me the statements by the CMHC chief appear cryptic — central bank style — which is not a surprise considering what a hot potato this subject is.

After reading the article, whatever the chief is really saying and the FP article is saying and the banks are really thinking/negotiating is still a mystery to me.

Also remember, that the government insures “only 90%” (per another FP article) of private mortgage insurer loans.

#106 young & foolish on 09.20.14 at 9:51 pm

“From a societal perspective, you’ve taken away a steady stream of income from people who may not necessarily be excellent at managing their money,”

kicking the can …

#107 Setting the Record Straight on 09.20.14 at 9:53 pm

@98
“New pension rules allow retirees to withdraw directly from plans”

Actually what is needed is more flexibility with respect to Rrsp/rrif withdrawal factors. Currently they are designed to force you to withdraw virtually all your funds by age 90. Many of us will live well into our nineties and even beyond.

At the very least the withdrawal calculation should be based on 101.

This is a minimum withdrawal not a maximum.

#108 Smoking Man on 09.20.14 at 9:57 pm

I do apologize to my 27 fans, been light on the post lately, got book to finish.. Can’t waste my most creative months Sep to Dec on tree hugging idiots.

Little taste of my shit book.

Chapter 4
Dinging Down the House.

There we were, the four of us waiting for the elevator door to open. Each of us with ten thousand dollars of disposable fun and a complete miss trust of each other.

The elevator dinger dings twice, “That’s ours” I said.

Ashman blurts out. “How do you know it’s going down Smokey. ”

Barrington chines in “Every elevator in the world works this way, the only thing humans ever got right. Most people don’t know that. Humans forever blinded to the obvious. “One Ding for up, two dings for down you ding aling.”

#109 young & foolish on 09.20.14 at 10:04 pm

“When you use a more appropriate rate of return on the investments, and consider the net rent, not the gross rent, your number should drop by around half.”

5% is prudent. And you still end up paying gross rent. I was not trying to make an argument for buying RE as opposed to remaining “liquid”. But I was considering the equity required to equal yearly rent on decent housing.

#110 Smoking Man on 09.20.14 at 10:50 pm

You play by the rules, you make it, you become famous, adoring fans worship you. Chemicals in your brain convince you your a special bastard.

Then you die, then eventually your youngest fans die.

Why am I the only one that understands this. Life is about fun, not saving, life is about risk taking cause in the end.

We are all worm food…

No one gets it…. The mind fooling the the mind.

You hate a relative tell em. Now before it’s to late.

Smokey on the shit list again on face book..

#111 Smoking Man on 09.20.14 at 11:15 pm

We all go threw our programmed rituals, the road to happiness.

Bastards, true happiness can only be achieved by one thing.

Going insane… Am I ever going to get through to anyone?

Oh no, the thinkers, the smart, the school got it all figured out..

Ha, me and my moving lips ,proudly talking to myself in public.. While the dumb judge me.

It’s hallarious….

#112 Smoking Man on 09.20.14 at 11:34 pm

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#113 Smoking Man on 09.20.14 at 11:40 pm

DELETED

#114 LTL_FTC on 09.20.14 at 11:51 pm

#99 Mark on 09.20.14 at 8:00 pm

Correct. My lax wording. I only refer to the basics of property tax revenue. Development revenue for a city is a whole other story. And yes, during Armageddon, all bets are off.

#115 Mark on 09.21.14 at 12:42 am

“5% is prudent. “

No its not. Not when very conservative, low-risk (lower than housing) portfolios are good for 7-8%/annum. You, just like the RE industry, are swaying your numbers to make housing ownership look better than it really is.


And you still end up paying gross rent.

But you really need to compare the net benefits, not the gross benefits. So comparing gross against net isn’t exactly appropriate nor fair. An owner has a significant quantum of expenses over and above the opportunity costs on his/her capital, and any financing expenses. Such as property taxes, long-term maintenance, short-term maintenance, among others.

I was not trying to make an argument for buying RE as opposed to remaining “liquid”. But I was considering the equity required to equal yearly rent on decent housing.”

Well your numbers appear to have exaggerated the sort of portfolio required to “equal yearly rent on decent housing” by a factor of around 100%. For the reasons I outlined. Now whether you posted such with a motive, or just posted out of sheer ignorance, I can’t be certain.

#116 Tony on 09.21.14 at 1:20 am

Re: #102 UVZ on 09.20.14 at 8:47 pm

I think Mark has falling and rising interest rates mixed up. Very few firms prosper in a rising interest rate environment but do prosper in a falling rate environment.

#117 kommykim on 09.21.14 at 1:29 am

RE: #90 Casual Observer on 09.20.14 at 3:54 pm
Not necessarily. It all depends on where our tax rate currently sits on the theoretical “Laffer Curve”.

The Laffer curve is a joke. Makes me laugh. No one should take it seriously.

#118 devore on 09.21.14 at 1:53 am

#100 Ret

There will obviously be some unpaid property taxes, but that is not directly result of lower property values. If assessed values drop, tax rates (mill rate) will simply go up.

There are however other ways a real estate slump can hurt city halls across the country, as assorted real estate activity generates a significant portion of revenues. Construction and renovation permits, as well as fat payments and surcharges levied on condo developers. With the real estate boom on the upswing, cities grow dependent on this kind of income, ramping up spending (it’s a boom!) but loathe to raise direct taxes (don’t scare the sheep). In a disaster scenario, like Detroit, where you have properties being abandoned en masse, but that’s an extreme corner case unlikely to be seen in any major Canadian city.

#119 Mark on 09.21.14 at 9:46 am

“I think Mark has falling and rising interest rates mixed up. Very few firms prosper in a rising interest rate environment but do prosper in a falling rate environment.”

No, not true, especially for companies that are financed with long-term debt (which depreciates in a rising rate environment), and for whom have invested in long-term, capital-intensive investments (which also tends to become more valuable in a rising rate environment).

Rising rates are not doom and gloom. Lots of companies and sectors of the economy will benefit. Lots will suffer though. In the falling rate environment, firms which borrowed heavily short-term, and did not make capital intensive investments performed the best. In a rising rate environment, these will be amongst the worst performers.

#120 I am a lineman for the County on 09.21.14 at 10:18 am

On a golf weekend to Cranbrook, I’m reading the dogs early here in the BC forest with the sun coming up and chipmunks chirping.

The local Kijiji in southern Alberta where I’m from is simply stuffed with trades & labor opportunities that I would have (and did) jump on as a young man.

I remember sleeping in my car for a week at the Chinook Mall in Calgary after I moved there for a carpenter job, until I found some room-mates.

The moral of the story is that living unemployed in parents’ basement is not the only option for young people in depressed areas. Go to where the work is young man, young woman.

#121 Chickenlittle on 09.21.14 at 10:19 am

Re Nosty:

“You could try windy scotch gasbags!”

I think Al Gore himself is a source of geothermal energy. Since he has stopped evangelizing the winters have gotten colder. Come back, Al! I’m cold!

“The earth’s core is a few million degrees?!? LOL!!!

#122 High Plains Drifter on 09.21.14 at 12:18 pm

Home owners need to be aware of this incessant drumbeat by financial institution agents attacking their equity that is set by the free market in housing. This handwringing over house prices disguises an attack on present homeowners, (both mortgaged and non mortgaged) balance sheet. We are all corporations now and being hived off as consumers is just a way of denying us balance sheet equality with the formally incorporated.

#123 Fed-up on 09.21.14 at 1:56 pm

Older article but well written.

http://www.nationalpost.com/opinion/columnists/story.html?id=734ff73e-1f8c-4bfd-b3de-5e468913e8be

#124 Victor V on 09.21.14 at 2:17 pm

http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/when-it-comes-to-buying-a-house-smaller-is-better/article20510260/

When you buy a house, you’re going to be facing a lot of expenses, most of which you haven’t faced before, above and beyond your new mortgage payments. Heating, electricity, insurance, and property taxes are just some of the additional bills that come with owning a house. All other factors being equal, the bigger the house, the bigger those expenses will be.

Regardless of how your house is heated, it would seem reasonable to assume that it would cost twice as much to heat (or air condition) a 3,200 square foot home than it would one that is 1,600 square feet. But, as reasonable as this seems, it’s incorrect; it actually costs more than twice as much. Yes, the larger home has double the space to keep warm or cool, but it also has more doors and windows that will allow drafts in during winter and cool air out during the summer.

On top of that, the larger home will have more exterior wall surface exposed to the outside during the winter months, which will make the house harder to heat. Circumstances vary, but it can cost up to three times as much or more to heat and cool a home that is only twice as big.

#125 Casual Observer on 09.21.14 at 2:25 pm

“5% is prudent. “

No its not. Not when very conservative, low-risk (lower than housing) portfolios are good for 7-8%/annum.

Residential rent is paid with after tax dollars. 7-8% return would work out to around 5% after tax.

#126 Entrepreneur on 09.21.14 at 2:51 pm

Could the difference between the American mom and the Canadian mom contribution be that Canada is known to be a land of unions? We also know that the banks will lend loans to people with a secure job. We also know that small business cannot get loans that easy or not at all. Add or substract the problem.

The bank of mom has been going on for a loooong time, other moms have caught on, now in the past few years moms are spending more to help the kids out. Not all moms but more so now than ever before. The word is out.

#127 Pulp Faction on 09.21.14 at 3:17 pm

I used to be Sean.

So, two pieces of advice for Sean……

1). Buy the book, “Money Road” it’s only twenny bux and well worth it. It’s almost free.

2). Read the book.

#128 Mark on 09.21.14 at 4:26 pm

“Residential rent is paid with after tax dollars. 7-8% return would work out to around 5% after tax.”

Sure, but you can borrow and deduct financing expense buying that hypothetical “7-8%” Garth balanced portfolio. You can’t buying a house.

I’m not going to say, even for a moment, that over the long term, and at the right price, home ownership is a bad thing. Its actually quite a good thing. But to pay nosebleed prices, as we have in the contemporary environment, is where the problem really begins and ends.

#129 jackace52 on 09.21.14 at 4:29 pm

The Bank of Mom is one of the most extreme pernicious forms of codependency in existence. Keeping adult children in the basement with no rent is another. There is absolutely nothing loving about about either of these abuses.

#130 Mark on 09.21.14 at 4:30 pm

“Home owners need to be aware of this incessant drumbeat by financial institution agents attacking their equity that is set by the free market in housing. “

Well geez, after a good decade of housing outperforming mortgages (as financial assets), don’t you think that the banks and lenders will want to improve their return on their assets?

Remember that banks are just “fronts” for lenders, and lenders are ultimately people like you and me who put a few bucks aside for retirement and decide to invest it in fixed income.

#131 Kenchie on 09.21.14 at 4:33 pm

#45 Scottish Sheep on 09.19.14 at 10:35 pm
“#41: Waiting

The job was STILL about licking the queen’s bum back then as it is now. Why we endure her and her parasites is beyond me…..”

Ummm, Canadians don’t pay a cent to the Queen’s maintenance cost unless the royal family takes a trip to Canada.

Watch and learn…

https://www.youtube.com/watch?v=bhyYgnhhKFw&list=PLqs5ohhass_QZtSkX06DmWOaEaadwmw_D&index=40

#132 Victor V on 09.21.14 at 4:35 pm

No fear of housing bubble: CMHC

http://www.theglobeandmail.com/report-on-business/economy/housing/cmhc-doesnt-fear-a-housing-bubble-ceo-says/article20711061/

Wow. That’s a surprise. — Garth

#133 Kenchie on 09.21.14 at 4:40 pm

#46 Spectacle on 09.19.14 at 10:38 pm

“#92 Kenchie on 09.19.14 at 11:07 am
Some light reading for the blog dogs interested in China’s housing market:

http://research.stlouisfed.org/wp/2014/2014-022.pdf

******************************************
Hey there Kenchie #92 from last nights post.

Very nice blog comment and citation. How the heck did you find that article?! Most timely to understand some clients of mine, and their investment culture…..”

Hi Spectacle, you are most welcome.

This link came from a Deutsche Bank economics email I subscribe to at work. Every week they send an email called “Weekend Reading”.

#134 Kenchie on 09.21.14 at 4:54 pm

#74 Bob Rice on 09.20.14 at 9:37 am

“Parental cash is probably a much bigger factor in keeping prices inflated than any impact by foreign investment… I have friends whose parents gave them huge amounts of cash – 100K and more – to by their first homes… some even bought homes for their kids. This is especially prevalent in the Italian-Canadian community..”

Ding, ding, ding. We have a winner. This is what I see constantly, particularly for Asians in Vancouver. And it’s big in my own extended and nuclear family (even when it’s against my wishes). This weekend my sis just signed up for a 1 bed pre-construction in Greenwich, London that will be completed in 2017. She waited in lineup from 8am with nothing but HAM from HK and the Mainland. She said it felt like Vancouver. I protested her doing this, but my dad ignored my advice and said she would get about 30% of purchase price for a downpayment. Ridiculous. Boomers are part of the problem.

#135 Casual Observer on 09.21.14 at 7:35 pm

Sure, but you can borrow and deduct financing expense buying that hypothetical “7-8%” Garth balanced portfolio. You can’t buying a house.

The example given by “young & foolish” was using portfolio returns to pay for renting, not buying.

Interest costs would lower the hypothetical 7-8% return even more.

#136 Lynn on 09.21.14 at 10:46 pm

http://www.cbc.ca/news/canada/british-columbia/treetops-near-multi-million-dollar-west-vancouver-home-lead-to-lawsuit-1.2773438

Take a look, it’s funny how West Vancouver been taken by chinese, check out the plantiff and defendant’s names…