Entries from September 2015 ↓

First world problems. That’s what this pathetic blog is all about, of course.  So why should we start getting serious now? Social justice, world peace and tree health is for wusses. Fortunately – to keep our eyes firmly trained on our navel – we have Charles. He’s beset with FWPs.

“Garth I enjoy your blog, read it regularly and need your serious help. I’m 44, my wife is 42 and hot. Lovey is a stay at home Mom, we have two little girls 8 & 3. We have a dog who is a black hole of emotional need, he’s around 8, also no job.

I have my own company, underpay myself and make about $250-300K/year in US$. I have around 350K in RSPs/TFSAs. We have very little consumer debt – we run a small deficit if we have to.

Now it gets tricky …We own a house that we owe under 400K on. We bought for 469K about 6 years ago. We live in a ‘hood that everyone would like to live in, and the batshit crazy “investments” that have been made around here are nuts. Tear downs sell for at least 500K and up to 650K. New houses sell for 1M or more. If I listed my house today, I’d ask $700K and I’d probably get it. There are 2 new houses behind us – each selling for 1.4M.

We have finished plans to do an addition to our home and I have cold feet.  We owe 400, add 300 we now owe 700K .  If you believe the crazies, I could list my house post reno for 1.4M as it’s a fair comparison to the house listed behind me now. Lovey wants this house done. Yesterday. She sees it as an immediate life experience upgrade, a workable house and she believes it has a lot of equity, and that even though a crash is coming, we are safe.

I have managed to win a round or two, delay the project and if the crash would cooperate and show up on time  I’d be looking like a genius.

Options: I can do nothing and make due with a house that needs some $ spent and has a kitchen just big enough to make a drink in. I can move – I’d have to move to a new part of town, we don’t want to do that and anything I buy here is going to cost 850-900K.

I can rent – I have lobbied for this but for now it’s a no go – there isn’t enough to rent (yet) and we are not quite at condos. I can do the reno and live here for years. Kids are little, school is at the end of the street, high school is right over there and ride it out, taking comfort in my desirable neighborhood and proximity to downtown etc.

Am I over-thinking this?”

Is the Pope cuddly? Is Joe Oliver actually a Styrofoam cut-out? Does Tom Mulcair love mortgages? Of course you’re overthinking this, and missing the most obvious option: borrow three hundred grand, do the reno, list for $1.4 million, sell, net $700,000. Then move Lovey, the screamers and the emotional-black-hole into a new $900,000 house across town with a mortgage 50% less than the one you now have. Better house, half the debt. More equity to borrow against for your business, creating a tax-deductible mortgage while removing the proceeds tax-free if you have a big outstanding shareholder’s loan. (Most owners do.) And happy wife.

Fundamental to this, Charlie, is the fact you stand to make a big capital-gains tax-free profit from the stupidity bubbling around you. Rapid, mindless and unsustainable price appreciation is a gift, even to a downtrodden, problem-plagued 1%er like you. You can benefit from it – by harvesting the windfall and using it to trash debt and liberate equity – or you can double down and play the same game as the delusional neighbours.

Fundamental to this is the fact that in your forties with four dependents, no pension, making serious money, you’re behind the curve. Three hundred thousand in liquid assets is not stellar when you have a mortgage larger than that and only $70,000 in real estate equity. By doing the project and moving you’ll end up with ten times the equity, which can then be removed to add to your liquid net worth. Given your income, tax-deductible interest expense will be halved, meaning you can borrow at 1.5%. Invest in a balanced and diversified portfolio for retirement inside your TFSAs and a non-reg account averaging 6% or 7% over the long-term, and Lovey will think you’re a genius.

So why isn’t everyone doing similar – cashing in on property the gains that dumb interest rates and dumbass politicians have wrought? Two words. Recency bias. It turns normal people into gamblers or losers.

Recency bias means thinking what has happened recently is more important than history, and determines what will transpire next. So, when stock markets go down (like in 2008, or last week), people assume they’ll continue to fall until they hit zero and the dead rise out of the ground to pursue us. Similarly, when houses go up, your mom tells you they’ll go up forever so you’d better buy now or buy never. Recency bias, in other words, is why people always buy high and sell low.

Logic dictates that when equities or preferred shares are cheap (like now) you should buy some. Logic says when the market adds a fat premium to your house, tax-free, you should grab it. However, most people do the opposite, selling decliners and buying advancers believing current events are now permanent. So when the trend lines inevitably change and markets revert to the mean, poof.

Of course, you can always write to some guy on the Internet and seek advice, thinking any of this really matters more than climate change or ISIS. But that would be lame.

In June of 2002, three years before the US housing market collapsed in an event which nearly brought the world down, President Bush issued America’s Homeownership Challenge. The ownership rate spurted as a result of tax breaks, generous lending and government support. In 2004 it peaked at 69.2%.

Homeownership, said George Bush, “is the cornerstone of America’s vibrant communities and benefits individual families by building stability and long-term financial security.” Not long after, middle class families had lost trillions in net worth and faced personal crisis as real estate shed 32% of its value. No stability. No security. Many tears.

Since then, the rate’s crashed to 63.4%, the lowest since 1967 – almost four decades. Government, it turned out, pushed on a string, appealed to emotion and greed, encouraged excessive debt and helped create the worst financial crisis since the Great Depression. All for the love of a house.

On Tuesday, in a distant Toronto suburb, Stephen Harper wielded a nail gun, gave a presser and said this: “Homeownership provides Canadian families with financial stability and strengthens our communities.” The home ownership rate in Canada is 70%, thanks to historically low rates and an epic mountain of mortgage debt. The Conservatives have now pledged to push that to an unprecedented 72.5%.

Why? A party backgrounder lays that to rest. This is not so much about families, but trying to rescue the economy. “This target would support residential construction and local job creation. Nearly half a million Canadians are employed directly in the residential construction industry, a sector that largely employs local workers and contracts with small and local businesses. Expenditures in this sector are more than $100 billion per year and account for more than 6% of Canada’s GDP.”

The condo economy – encouraging more family debt and further inflating housing –   has blown up economies in the US, Ireland, Spain, across Europe and now threatens China. Mr. Harper wants 700,000 more households to buy real estate, pushing them to invest in assets which have never been more costly, at a time when interest rates are at low tide and posed to ascend.

He’s trying to out-Bush the Yankee president with a 40% increase in the amount people can suck out of their retirement funds to buy property; a permanent home renovation, get-a-hot-tub, tax credit; permission from CMHC to allow fatter mortgages for people with rental suites; and, in a sop to the xenophobes, a census of foreign buyers. Of course, the others guys aren’t much better. The Libs would allow people to dip into RRSPs to buy real estate with each live event, repeatedly, while the Dippers will give amateur landlords capital gains tax relief.

But, still, 72.5% is off the charts. A new benchmark for excess. And nobody should be foggy about the potential outcome.

Just this week we learned people have been gorging on loans like this was the Last Supper. New monthly mortgage debt is now increasing at the rate of 7.5% on a year/year basis, and already stands at more than $1.2 trillion – having doubled since the Tories came to power. Borrowing is the highest it’s been in almost three years, while the savings rate has declined and 51% of Canadians report they’re already living paycheque-to-paycheque, saying they couldn’t survive missing a single one. Is there any other government in the world so actively encouraging people into a one-asset strategy amid record debt and bubble prices?

Well, there used to be. That turned out well.

The homebuilders, framers, realtors, mortgage lenders, plumbers, developers and especially the bankers want this. Given the highly-conclusive but massively-maligned GreaterFool poll last week, it appears this is exactly what we’re going to get. Thus, we can all expect a systemic rise in real estate risk – Canadians thinking they can be safe and secure selling each other castles, on borrowed money and time.

I wonder. Has that ever worked before? Anywhere?