Entries from March 2015 ↓

Loaves & fishes

BABY modified

Amanda reads this blog, which means she won’t be happy in a few sentences from now.

“I’m 52, married, two teenagers and live in Ottawa. My husband and I both work,” she tells me. “He’s a contractor (no pension) while I am a secretary (small matched company RRSP). Between the two of us we earn approx $165,000 $/year. We own an almost-new home and owe $250,000 at 2.3% for three more years (paid down more than half of our original mortgage) so I think we’re doing well.  We have a total of $80,000 in RRSPs and TFSAs doing pretty much nothing. Can you help us?”

I get lots of mail like this. It makes me feel like Jesus. I’m constantly asked to turn a few loaves and fishes into a lifetime feast.

Amanda and her squeeze obviously save little, and what they do put aside has mistakenly been channeled into the mortgage. So, they have maybe half a million in net worth, of which about 85% is in one asset. They live in a market where house sales are in decline, and running consistently below the five-year average. Worse, there’ll be a federal budget sometime in the next few months (when the feds find the courage), and with the economy in an oily decline you can count on public sector jobs being sacrificed. Bad news for Ottawa houses. Not only that, but the next mortgage renewal will not be at 2.3%.

Worse, they have kids heading to college with no savings to assist them. And retirement in ten or 15 years? That’ll suck. Scant pension income. Needy children. Still with a mortgage. Hope hubs can still be building decks and hanging drywall when he’s 75.

So, what went wrong? How can these people think they’re “doing well” when they’re headed for a wall?

Simple. They have friends. Coworkers. Relatives. They all drink from the same chalice. To me this is the greatest threat our society and economy faces – the slow sleepwalk into financial torpor and failure.

There are three reasons you need to pay attention, changing your own life if it resembles poor naïve Amanda’s in any way. We have a crisis ahead because:

(a) Public retirement benefits are inadequate and likely to get worse as demographics overwhelms public finances. Already the age for OAS is being pushed out to 67, and I wouldn’t be surprised if CPP eventually follows. If you think you can survive on the government pogey, you’ll end up bitter and sad.

(b) Decent company pensions are disappearing as fast as Target and Future Shop locations. Never think that ‘matched’ taxable RRSP plans with the cash stuck in vanilla mutual funds managed by an insurance company will look after you.

(c) Your house. Society has told you to concentrate your net worth in this one thing because it’s risk-free and always goes up. But society’s wrong. Residential real estate is shelter, not a financial plan. In retirement you can always find a roof, but you can’t easily find cash flow. Our collective house lust has made us spend excessively for reasons of social status. Our financial illiteracy has us focused on paying off 2% mortgage loans, and fearing financial assets when investments earn three times that amount. Our recency bias means we think a housing boom caused by cheap money will last forever, even when rates normalize. Mostly, it’s blinded us to risk. Amanda will understand that when she runs out of money at age 68.

Don’t believe me? Fine. Good luck. But the numbers are stunning.

CIBC says at least six million Canadians will suffer a serious drop in living standards when they retire. People born between 1945 and 1970 will fare the worse immediately, since they’re not putting aside much, and have been feeding houses instead. The savings rate was almost 20% thirty years ago, and today is 3.6%. Only a third have a registered pension plan, and most of those are defined contribution (no set benefits to count on). Our investment habits are awful – 80% of TFSA money in savings vehicles and RRSP contributions fading. Most net worth sits in houses. So imagine what happens when real estate values decline – even slightly.

Scary. But we’re still doing better than the Americans, which is no consolation (as our economy is so dependent upon theirs).

About half of Yanks have zero retirement savings. Yet saving is a chore because wages are stagnant. Of those people within ten years of leaving work, only 60% have money put away – the average being $120,000. Among all Americans with retirement savings, the average is $40,000. Expressed across the entire population, per household it’s just $3,000.

Look here:

RETIREMENT SAVINGS modified

But there’s something American have that we don’t – fatter public pensions. A person who earned $80,000, retiring today, would collect $1,800 a month for life in Social Security, more than double the CPP payout.

Well, here’s the point: both the Canadian and US economies could be hobbled for two or three decades by a demographic bulge of people who blew their brains out on houses, ignored the need to save and invest, have inflated lifestyle expectations and are likely to become crotchety, Kia-driving, Costco-shopping, skinflint, penny-pinching tightwads sucking zillions in healthcare benefits and paying precious little into the system while sitting on billions in non-productive and illiquid real estate.

So, Amanda, you can become one of them. Or you can change everything.

Come to Jesus.

Slimy

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So, remember what I said yesterday about sleazy realtors deliberately listing properties under market in order to create a feeding frenzy? It’s not illegal, or even unprofessional. It’s merely unethical. And it sucks.

But it sure brings out the animal spirits in house-horny buyers. It stokes competition. Makes the lusty do extreme things. Plus, when all is said and done, it sure helps with the Audi lease payments.

Just ask Paul Eviston, the agent who listed a $2 million house on E 26th Ave. in Vancouver for $1.6 million. You can imagine what happened in a city where people would rather make offers than have sex. Eight panting couples competed for the ho-hum house with a basement suite, pushing the price skyward until it topped at $2,167,000. Not only did Paul succeed in deliberately inflating the value, but he also squeezed out some useful market-pumping headlines. Like, “Vancouver house sells for $567K over listed price.”

Eviston also defended himself thusly: “If the product’s right, the timing’s right and the inventory is right, it’s the right strategy. I wouldn’t call it underlisted, I would call it strategically listed to garner the interest level that we wanted to get the result that we got.”

By the way, this house – just inside the East Van border where all the poor people live – set a new record for property in that region. The average income in the neighbourhood is $82,020, and about 30% of the people living there don’t work. But they sure can borrow.

Josh is a realtor in Hamilton who reads this blog at night under the sheets on a secret iPad.

“I get a kick out of some of your commentary on my fellow Realtors, many of which are the Audi driving vultures you describe,” he says. “I’d like to think I’m not one of them, I happen to drive a KIA! Granted, its a nice KIA, but its a KIA. And I make about $120-140k a year working more hours than most for the same salary, primarily evenings and weekends.  In the last week or two you seem to have taken a more aggressive aim at my profession and I’m hoping you’ll comment on a few observations of mine.”

On the issue of unethical sales practices designed to draw in unsuspecting virgins for evisceration on the altar of house porn, Josh has this to share with us:

“I agree the pricing low tactic and holding offers for a certain number of days is a tad slimy. I refuse to do it on my own listings despite it becoming the prevailing strategy among my peers. I agree there are agents out there that will fabricate offers to inflate the perceived interest in a property, but to suggest that this is some sort of foregone conclusion I think is ridiculous and, forgive me, equally slimy to suggest.  Multiple offer situations are already regulated by RECO (the regulator), and I’d challenge your assertion that RECO is understaffed (perhaps complaints driven). Any buyer agent can request to confirm the existence of each and every offer by way of form 109 “Offer Acknowledgement”. I’m a professional, as are 90% of my colleagues. I would never portray the existence of an offer if there wasn’t one.”

That’s a relief. Now if only we could get the real estate board to stop secretly altering monthly statistics, as happens in Toronto, or publishing a meaningless market Frankenumber instead of average prices, as in Vancouver, or letting buyers see selling prices, price changes or days-on-market stats, we might feel better. But if you need an honest realtor in the Hammer who actually admits to reading this pathetic blog, lemme know.

Now, I feel duty bound to share with you some words from the Italian Mama whose boy, Junior, I so mercilessly mocked earlier this week. He joined a 13-idiot bidding war for a suburban GTA bung listed for $649,000 which sold for $810,000. His offer was for $785,000, no conditions, and I now learn that Mama gave him big whack of the $500,000 he had in his shorts for a down payment.

She sent me a long letter explaining the family’s inbred house lust. I will spare you most of it, but here is her argument:

“You accused me of trying to make my son into a mini version of me. I have taught my children as my parents taught me…..by example. It is their decision not mine to follow a similar road or choose a different path. In the end it’s what they feel comfortable with. Freedom, fun, mobility might be their choice. I respect that. But you should understand that for some freedom, fun and mobility will come to those who work hard, diversify their investments from a young age and yes, sacrifice for the goal of achieving financial freedom.

“I am not your typical whining blog dog. I have nothing against people who rent but I hope they are still following the same simple steps mentioned above. Save and invest wisely. Sadly most are not. Most people are not disciplined and when you talk to them about financial investments their eyes glaze over. For them a house and a big fat mortgage is their only hope.”

Now, let’s take that sentiment to its extreme.

Back to Vancouver, where Greg’s parents have gone postal:

“My aging parents (65 + 70) are looking to build a laneway house in Vancouver. They have a $1M house (all paid off), and about $400K in bonds/mutual funds, etc. They think their purchasing power is just getting eroded by inflation, and want to put $250-300K in a laneway house, and rent it for $1K a month for the next 30+ years or so. Basically payback is 25 years. They think this is a better investment. I think they’re out of their minds, and can get better returns with less risk by holding a mixed portfolio instead. How do I convince them otherwise? They think Vancouver real estate is only going up, and want to get in again by this path. It’s insane. Let me know how I can convince them otherwise.”

Of course they think that way, Greg, because a house in East Van just sold for $567,000 more than the asking price! It was on TV! Don’t be a dipstick, kid, and get with the program. Your dad has it all figured out – a sure thing winner to start making him some serious money when he’s just 95. If the market doesn’t collapse under its own folly, of course. If mortgage rates don’t move for a decade or two. If the economy survives the oil mess or death by debt. If the feds don’t reign in CMHC. If enough people actually want to live in a laneway with the rummies and ‘coons.

Naturally, Greg’s parents are fools. Taking three-quarters of their liquid net worth to plow back into real estate, so they can make about 3% on their money, fully taxable, while risking everything on a single asset class, now at its most inflated point, is just weird. But telling.

Did I ever mention this won’t end well?