Entries from November 2014 ↓

If I had a million dollars

HIPPIES modified

“My girl and I were casually making dinner,” says Matt, “listening to the CBC when the Barenakeladies ‘If I had a Million Dollars’ came on the radio and my girlfriend said ‘If I had a million dollars I could almost afford to buy a house.’ And when I laughed she got mad. Because she was serious, like seriously distraught.”

Obviously Matt has a death wish. He continues:

“I think if she could she would spend a million dollars on a house and be happy about it no matter where the markets go. Market forces are nothing when compared to the nesting instinct. There is too much emotion involved, it’s so much more than an investment, and the people selling houses know it. But for some reason they are allowed to push these emotionally dominating expensive boxes on us without a worry about all the debt we assume in the process. It would be like if drug addicts were investing in crack. Guess what?! They are going to buy, and the price doesn’t matter. Everything is too expensive because most people don’t really care about finance relative to what they want. Before she says yes to the dress, I have to say yes to the debt.”

Matt gets it. Real estate is Canada’s official religion, at least in those big cities where houses still trade at nosebleed levels. Politicians, the media, economists, the banks, your mom and (natch) the realtors all think it’s a cool thing when prices go up. Every real estate board report with bloated numbers is called positive news. When prices fall, it’s a disaster. What a fail.

BBoomers When you think about it, swelling houses most hurt the very people who keep the market alive – first-time buyers (now 49% of all sales). They hurt move-up families who need bigger homes and must assume more debt. They benefit only the people cashing out to downsize or rent. In other words, this is the country’s biggest-ever transfer of wealth. The Boomers (at least the smart ones) get the money. They kids get the debt. Plus all the risk.

A few days go the IMF got into the act, saying Canada’s housing market may have a soft landing, but only if the feds tighten the rules and if the nation can avoid an external shock. Of course, it’s too late. Given a federal election in less than a year, the guys in government lack the political will to act, while the opposition members are busy diddling each other. Sigh. And the external shocks are materializing – the collapse in oil revenues, plus the coming US rate increases.

Surely Matt’s GF can see that. If she looked. But like most people, she’s not.

One of the nastier boom-and-bust housing episodes took place in California, where dumbass politicians let the economy become far too real estate-dependent (but not as much as ours now is). When property values sank from inflated highs, so did state revenues. Bankruptcy loomed for a region with roughly as many citizens as Canada, and an economy to match.

Writing in the LA Times a few days ago, Michael Kingsley said a house is worth only what someone will pay for it. “That number has two components: one is the value of occupancy — that is, the privilege of living in the house, mowing the lawn, calling the plumber and so on. This should roughly equal what the house would rent for. The other component is the investment value — how much you think the price of the house will go up when you sell it.

  “Any investment value greater than zero (or zero plus inflation) is suspicious because it depends on the greater-fool theory. There is no physical reason why a house should become more valuable at all. It is not growing like a crop. It is not producing anything that you can turn around and sell, like a factory. It just sits there. It becomes more valuable because people believe that it will become more valuable. Worse, since the general assumption that it will become more valuable is already reflected in the price you paid, you need a buyer who believes that it will become more valuable even faster than the general consensus.”

Greater fool. Exactly. This has been my caution for several yers now, as people in 416 or Van or (more recently) Calgary pay ever-inflating prices for the same property based on the assumption it has inherent value and future buyers will shell out even more. It’s rank speculation. Like the idiots buying stock in a profitless Internet company, basing the inflated price on the belief the next guy will be hornier than you.

Doubt me? Then ask yourself: would you pay what you believe your house is worth today?

But you expect someone else to. And that’s the greater fool trap.

The big losers in the correction to come will be those who entered the market recently, who paid the most, put the largest amount of capital at risk, or assumed the fattest debt. They can only come out of this intact if they decide to sell before this event, and find that greater fool. Since our economy was wobbly and house-centric even before oil fell into the ditch and interest rates restore, there’s no reason to believe real estate will continue to ascend.

Matt’s babe may not get this. In a heartbeat she’d trade a mill for a house.

She’s the normal one. So, get ready.


TAT modified

In a moment we’ll get to Peter and Christa’s reproductive issues. First, a brief folo on yesterday’s collapse in the price of oil and the moaning and gnashing that ensued.

Friday was worse. Crude tumbled an astonishing 10.3% in a single trading session. That means a loss of more than seven bucks, taking a barrel down to the $66 mark. So, a big drop in gas prices next week. It also means oil has given up 38% since the summer, which is a total capitulation in anyone’s books.

Meanwhile our petrodollar was creamed, off eight-tenths of a cent, now down to 87 and a half US pennies. Plunging energy issues (Canadian Oil Sands stocks has bled out 40% since June) had the TSX down again – this time by about 180 points.

The consequences? A big tailwind for consumers, especially in the US where each cent reduction in a gallon’s price adds over $1 billion to incomes – just in time for Christmas. In Canada the effect is welcome, but more muted, given the fat tax component built into each litre of go-juice. In fact, as I mentioned yesterday, the collapse in crude will on balance be negative for the nation, since oil shipments form a huge part of the export income upon which we rely. This also puts oil sands investment plans on potential hold, and is the worst possible news for drillers, engineers and real estate in Alberta, Saskatchewan and northern BC.

The consequences are unknown, since it’s unclear how long prices stay depressed, or how much further down they might travel. As I mentioned last night, the OPEC guys can pump a barrel for thirty bucks, while some US frackers need $80 to break even, and oil sands producers are having a cow at current levels. It’s safe to say, however, that between Canada Day and now, everything has changed. It may take months for this to percolate through the housing market, but when it does the impact could be life-altering for those fools who thought it was different this time.

Of course, it never is.

But try telling that to Pete and his bride.

“Please don’t make fun of us too hard or tell us we’re too poor to have kids ??,” he says in his desperate email to me. “But, if we are too poor to have kids you got to tell us man ??.”

You bet. Here goes.

“My wife and I need your help: I have a combined $36,000 in two RRSP’s (one for retirement/paternity leave/house, one for education), my wife has $27,000 in her RRSP; we also have roughly $3,000 in shared equities (stocks) that we prefer not to sell.

I have no credit card debt, she has $18,000 on visa (10.99% interest) and we share $20,000 (prime+3.5%) on a credit line. We rent at a reasonable $1500 with a dog in Vancouver. We’re both 35 and are thinking about starting a family, part of which is fertility treatments approximated at $12,000 to freeze embryos.

We are both semi-professionals with a combined income of approx. $110k on a normal year, but only about 60k this year. My wife has been on disability for calendar year 2014, and therefore, has almost 0 taxable income. Should my wife withdraw her RRSP to pay off the Visa? Can she withdraw from RRSP without paying taxes since she hasn’t worked this year?

In your opinion would it be better to take the money from RRSPs or just borrow more on the credit line for fertility. We are expecting to get $15,000 – $25,000 in 2015 from a settlement and could replace the withdrawal from the RRSP with these funds. If we withdraw the RRSP, are we better off paying back the RRSP or putting settlement in a TFSA or some other investment vehicle.

We are unable to wait for the settlement to start fertility treatments. Should we keep drowning in our current debts and add to it, or pay off things and possibly drown in debt during retirement (due to lack of RRSP’s)?”

Well, where to begin? First, you have assets of $66,000, almost all of it in taxable RRSPs. The debts stand at $38,000, and are costing you a bundle in interest. You are devoid of other assets, and live in a stupidly expensive city. Now you want to borrow another twelve grand, or draw it from your registered funds, for fertility treatments, which may or may not work. And your wife has no income.

So, your net worth is a little north of zero. Yes, the money coming next year will help, but if she does get pregnant, this is only the start of more expenses to come, plus a maternity leave even if she gets back to work. Are you sure you want to do this?

As for your questions: You can’t ‘replace’ RRSP funds as you can with money taken from a TFSA. Contribution room has to be earned with new employment income, or borrowed from unused contributions in the past. No, you can’t take money from an RRSP without withholding tax, although your wife could get much of this back next spring after filing her 2014 return. Pay down the 11.99% Visa? Of course. Why haven’t you done it already, since you have a 6.5% (still hideously expensive) line of credit? If the RRSP money is sitting in some dead-end GIC or bank account, then it might make sense to use those funds to trash the card (then cut it up),

But, of course, there’s no good outcome. If the fertility stuff must proceed then sell the stocks, since they pose the greatest financial risk at a time when you can’t afford to take much. Put the rest on the line, then pay this off with the funds coming next year. Invest the money you have properly, as I have instructed. And obviously there’s much you’re not telling us. Like why your spouse is too disabled to work, but not to have a baby. And why it has to happen now.

Petey, life’s about choices. This one will probably change everything. Just pray you end up with a child rock star.