Entries from September 2016 ↓

Worry time

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Four giant men in red track suits jammed onto the small elevator, and all looked down at the same time. Bandit looked up. ‘Vut nationality ees dog?” one of them asked.

“Chow,” I responded. “Chinese breed.”

“Oh, China.” They all grunted in approval, and reached way down to give the pooch a pet. Four hours later these players for the Russian national hockey team were skating off the Air Canada ice in defeat. The bomb-sniffing dogs had finished checking out the big bus parked outside the door Bandit and I use, and they were airport-bound. Just another day in the downtown hotel where we hang out.

Actually Dorothy, mutt and I occupy a condo here, in the beating heart of the city, a few steps from the ungodly-tall office tower where I’m often held captive. The historic hotel has three floors of condo conversion, a lobby full of marble downstairs, plus employees who are paid to pretend you matter. And monster hockey players. Room service and maids, too, if you want.

Anyway, I rent here. The monthly cost is 50% of what ownership would entail. Condo fees and taxes alone on my little unit add up to $1,300 a month. But I don’t pay them, plus there’s no equity on the table. No financing. Full mobility. Lease as long as I want. No risk.

I mention this because we’re entering a tough time for real estate, whether it’s in the Toronto core, in Vancouver, or the outlier boomlets of Victoria, Hamilton or the 905. More people should rent. Fewer should assume the past will have much to do with the future.

Here are four things homeowners should worry about:

Chinese Dudes Tax, Ontario Edition

Bad enough the BC government slapped a 15% tax on the value of all properties being bought by non-Maples, without consulting the industry, and then chortling about the crash that resulted – but other politicians are applauding the move. Finance Minister Bill Morneau likes it. Ontario premier Kathleen Wynne likes it. And we are likely just weeks away from it being implemented in that province or, at the least, in Toronto and the GTA.

As you probably know by now, the BC tax sent out a message strong enough not only to scare off the foreigners responsible for about 10% of all trades, but to shut down the locals, too. Once the irrational fear of being priced out of the market by house-horny Chinese was removed, sales collapsed. Prices followed. A market that was already seeing huge cracks was given the push it needed to rupture. This is what happens to assets in a bubble. It ends with a mess. Everyone gets wet.

The “Hey, we were Only Kidding’ Mortgage

So, remember this picture that a blog dog snapped a few weeks ago, which was then featured here on this pathetic site?

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Sure you do. It was those fun bankers advertising the fact they’re happy to give out residential mortgages to foreign students (and other non-nationals) so long as they have a chunky 35% down payment. And no income verification required. Honest.

Well, not any more. After pressure was applied to the feds, and Minister Morneau made a few phone calls, the banks are taking it all back. “We’re pleased,” he told reporters on Monday, “that they are taking a look at the risks that they have in the market and taking action that they think is appropriate.” So add it up – fat taxes on non-Canadians buying property here, an abrupt reversal on long-standing lending practices to foreigners, and now a tax in Vancouver on people who buy homes and don’t occupy them. Gasbag, meet pricks.

Coughing it up in the GTA and VYR

On Friday the country’s top financial regulator dropped a hammer on the mortgage insurance business, taking special aim at the delusional locals in Vancouver and Toronto. If proposed changes happen (they will) then come the first of the year, mortgage insurers must beef up capital requirements to deal with the added risk inherent in those markets. It means borrowers will be under increased scrutiny over creditworthiness, including details of the loan size, credit score, outstanding debts and the time left to repay the mortgage – as well as the location of the home.

Think you always automatically qualify for mortgage insurance if you qualify for a home loan? Think again.

This is the cream of the USA?

The Hillary-Donald slugfest Monday night is a precursor to weeks of angst for the most important country in the world. The Dow had a triple-digit dump just thinking about it. The odds of more volatility between now and election day are probably 100%. If the Trumpian forces win, then the period from November 8th to the inauguration on January 20th – which will include a key Fed rate decision (Dec. 14) – could be a wild one for investors and markets. This includes the real estate market. Yes, in Canada.

At no time in modern history have Americans faced such a difficult choice between a political hack with trust issues and a scary billionaire rebel who thinks in Tweets. Uncertainty means more risk, especially with a president threatening to rip up our key trade agreement. Could be a rotten to time to have the bulk of your net worth in one asset, with an epic mortgage, in a country best known for house porn TV series.

So, think about it. Renting’s always a risk-free option.

By the way, Bandit was rooting for Ruskie victory. And room service. He got neither.

Critics

condoms

Sometimes I wonder, why bother? Sigh.

Late last week this pathetic blog offered a guide on how to build the fixed-income (safe stuff) portion of a balanced portfolio. The advice was simple. Own some bonds to reduce volatility and counterweight inevitable plops on the growth side. Mix the bonds up between federal, provincial corporate, high-yield and real return (if you have enough dough). And embrace preferreds, with their 5% tax-reduced yield and potential for capital gains as rates eventually rise.

Experience has shown me that people think (a) investment-grade bonds are like savings bonds (you buy the thing, hold it to maturity then cash it in); (b) when interest rates move up or down bond yields change along with them; (c) bonds don’t give capital gains, only interest; (d) you only buy preferreds because, like stocks, they might rise in value: and (e) all bond values drop when rates rise.

Actually, not quite true. The majority of people, I betcha, have no idea what a bond is. Or a preferred. Or where to buy some. Those who do (think they) know something about investment assets delight in further poisoning the knowledge pool of the innocent by coming here to dis my words. So, last week the stock-pickin’ cowboys, bullion-lickers and GIC braindeadheads piled on to spread misinformation. I could correct the little peckers, but there’s no real point. They won’t change.

Bonds are debt obligations so when you buy some you’re handing over money to a government, utility or corporation in return for regular interest. But with rates in the ditch, it makes no sense to collect interest, which is fully taxed anyway. Bonds also have prices, so while the yield a bond pays you never changes, the value of the bond does. Prices rise when rates fall and vice versa. So as rates move higher in the future, bonds are worth less. The ‘longer’ until the bond matures, the more its price falls. So bonds with ‘short duration’ (closer to maturity) are safer in these times.

However, bond prices are also dictated by demand. When stocks are scary, money flows into bonds seeking safety, and the price of the bonds pops higher. So when equities tank for a while (like after Brexit), bond prices inflate. If you hold exposure to both in a balanced portfolio, one move helps cancel the other so overall volatility is sharply reduced. With less volatility you’re not so inclined to run around screaming, sweating profusely, scaring animals and pounding your keyboard with ‘sell’ orders.

So there’s a role for bonds. Government ones are the safest (federal or provincial), followed by utilities and investment-grade corporate bonds. Also have some managed high-yield debt (sometimes called ‘junk bonds’) in the portfolio – money owed by less creditworthy debtors (like Air Canada or Ford Credit – hardly big risks) who are willing to pay several times the interest. And real-return bonds increase their effective yield every time inflation spurts, and are government-backed.

As for preferreds paying more than 5%, sending cash into your portfolio every 90 days and offering a dividend tax credit at the end of the year, why would you not want to own some? Sure, the value of rate-reset preferreds declines when interest rates are cut, but I think we all know this is the bottom (or close to it) of the interest rate cycle. While prefs paid a juicy return last year, their capital values were whacked when the Bank of Canada chopped rates twice.

So now you have the best of both worlds – a far bigger yield than a GIC produces (without locking up your money) plus the potential of capital gains as rates inexorably creep higher over the years to come. Together with the bonds, the fixed-income part of your portfolio should be delivering a 4% return – twice that of any GIC, with 100% liquidity and less taxation (plus reduced volatility and the potential for capital gains).

The way to do this? Through ETFs, not via individual bond purchases or by buying the preferreds of any one company. When you do, pay attention to the duration of bonds, and the kind of the prefs in the exchange-traded funds, as well as the embedded fees and the liquidity. Ensure the bond debt lives inside an RRSP so interest is sheltered, and the prefs go to your non-registered account, generating the tax credit. Then rebalance as required by markets and events. If all that’s too damn much work, hire an advisor.

Here’s Kyle with a good question (after the obligatory suck-up):

“I have not missed a blog post for nearly 3 years which is a testament to my outlandish lifestyle. I am a millennial (27yo) and own 2 dogs, a golden retriever named Harvey and a lab/retriever mix named Dexter. They are also big fans and get up early with me to look at the pictures you include in your posts.

“Where I get lost is asset allocation. Assume a $300k portfolio spread over registered/unreg accounts, maxed out TFSA’s, wiggle room left with RSP’s and about $140k unregistered. All your loyal readers are aware of basic allocation strategies, 60/40, rule of 90, keeping interest bearing investments (lol) in registered accounts etc. Where I get lost and other novices I am sure, is how to allocate based on the type of the account. For example, is a 60/40 split referring to the entire portfolio or each individual account? Obviously growth stuff in a TFSA makes sense but to prevent myself from rambling, I think it would be a good idea for a post as it nicely compliments the main narrative of your blog. A response would be awesome.”

That’s easy. The 60/40 portfolio mix should apply to your entire portfolio – the cash account (always make it joint with your squeeze), RRSPs, tax-free accounts, plus any LIRAs from previous jobs or RESPs for the kids (never put GICs in there). The point is to ensure a holistic approach to your finances – to blend performance with tax avoidance, and ensure your finances are overall balanced, diversified and liquid. Don’t segregate pots of money – such as for retirement, house money or escort services – since volatility will swell and you’ll end up screaming and sweating.

Reading this blog has essentially the same effect, of course. But you came here.