Entries from July 2018 ↓

Mayday

Oops. Odds of another rate hike this sizzling summer jumped Tuesday with the latest economic data. Seems millions of indebted, rabid beavers can’t stop borrowing and spending money, buying stuff and goosing economic activity. Plus oil’s been on our side.

The result: in May the economy grew a half a point (that’s big) and year/year the advance is 2.6% (a change from luke to hot). So the chances of another Bank of Canada increase have doubled. Meanwhile last week’s boffo GDP stats out of the US (“unthinkably” massive, according to Trump) laid to rest any doubt where the Fed’s headed.

This is rotten news for the 12% of Canadians who have well and truly pickled themselves in debt. They owe about 350% of what they earn – twice the national average. Most live in the GTA or the Lower Mainland and of those who have bought real estate worth $1 million or more, the debt-to-income ratio is 450% or more.

The unravelling of personal finance, if it comes, will be tied inextricably to the deflowering of residential real estate. Look at the Westside of Vancouver, for example. Sales of expensive houses ($6 million or more) have crashed 66%. There is now a 10-year supply of mansions for sale in West Van. The crumble that started at the top is filtering down through detached homes at all levels.

Meanwhile the stress test and rising rates are distorting the market at the bottom end. Prices for condos (that’s all many people can afford now) have been pushed up so much that holes in an average high-rise rabbit warren now cost what a detached did in YVR four years ago, and six years back in the GTA. As mentioned here a few days ago, the typical new-build condo in Toronto commands over $750,000.

So, expensive houses are being decimated but still remain unaffordable. Cheap houses have been swarmed and are no longer affordable. Sales overall have plunged. The Bank of Canada has raised rates four times. Household debt is unsustainable. Now more rate hikes lie ahead.

The next big shoe to drop: a serious and widespread drop in the equity of all houses (only 5% of people buy or sell in a year). That’s big news if you happen to have most of your net worth in a single asset. Or carry a fat mortgage.

By the way, while the economy has been expanding, real estate’s been going in the opposite direction – down 2.7% in a month, the fourth decline in five months. There are even leaner times coming for realtors as falling sales decimate their bloated numbers.

Buy a house if you want, can afford it, and your marriage depends on it. But understand clearly that in most markets if you wait, you’ll pay less. Anyone buying on the Westside last year, for example, just blew through a million. Or more.

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Since writing a dismal, depressing and dark piece on POAs a couple of days ago, my inbox has been brimming with notes from folks wanting to pass on their experiences. Apparently, everyone dies – which is, like, wow.

Nothing seems to blow families apart like the decline and demise of parents, which is why a will’s so important, along with the choice of a proper executor. Accompanying that is ensuring you have a power of attorney to look after things if you need caring for, and that the person you choose is not a dickhead.

And that brings us to Carol.

Hi Garth I have been a follower of your blog since its inception as well as an avid reader of your  books.  My husband and I are presently caring for an aging parent suffering from dementia.  My father recently passed away leaving all property, financial assets etc. to my mother.  Neither of my parents were financially literate in the ways of investing. All their trust was placed in the hands of [email protected] Needless to say all of their investments – over $450,000 – are in GICs. The POA for my mother (my brother) also is not aware of the many investment options available and is also a fan of GICs – so called safe investments.

My mother is 86 years and other than the dementia is reasonably healthy. My brother is proposing that we start collapsing the investments and distributing them equally between 8 siblings on an annual or semi annual basis. His worry is that if we wait till my mother passes the CRA will also be a large benefactor. Due to the fact that many baby boomers such as myself and my husband are also dealing with similar issues I thought it might make for an interesting topic on your Blog.

Carol’s mom chose poorly. Her son, as POA, has a legal and fiduciary duty to place her interests above his own, that of the family, or anyone else. Just having power of attorney does not give him the right to give away her funds or spend money in any fashion that does not support her, regardless of age or health. In fact, it is a criminal activity if he does. Mom could live for another decade and easily require all the cash.

Once she passes her will dictates how the remaining money will flow to beneficiaries, and mom’s estate will be taxed accordingly. Of course, a few hundred thou sitting in dead-end, no-growth GICs will hardly attract much CRA attention, so this sounds like a ploy by the misguided son to get money for a new Ram truck.

A POA’s highest and only duty is to look after the person who bestowed their trust. Failure to do so earns you a special place in the flames. Bro is on his way.

Going, going…

Mr. Market giveth. He taketh away.

And so we have the story of star-cross’d lovers from the GTA’s exotic exburbs who bought a house from plans in a faraway land (Barrie), then got pooched. File it with the sobs-and-shudders tale of young buyers of Mattamy Homes in the east end of the Big Smoke who came to the same shocking revelation: prices go down! Who knew?

A mess of moisters inflicted with FOMO who rushed into a steamy market in 2017 to buy homes before they were priced out forever are now running to the media because life is, like, so unfair. The latest, Abid and Sapna, paid $639,000 for an unbuilt glue-and-sawdust McMansion north of the big city that is now worth $539,000. Next month it might be less. Meanwhile interest rates have increased, ruining their finances.

And then, oh, that stress test. A&S are moaning to the media this has forced them into the clutches of an ‘alternative’ lender. Yes, they can escape that nasty test by doing so, but the price is a higher mortgage rate.

“I feel badly for people who bought at the peak of the market,” says the local real estate board boss, “but they wouldn’t be complaining if it was up $ 100,000. It’s put them in a tough position.”

Well, a contract is a contract and buyers of pre-construction real estate must understand they’re actually dealing in financial futures. They put some money down now for an asset that won’t be delivered for a year or two and whose value will be determined by market conditions on the day of delivery. Precon buyers did great during the bubble years when prices unexpectedly jacked higher. Nobody complained. Now we’re on the other side of the mountain and many people are being crushed. So they become victims. Not of Mr. Market, but of their own gamble.

The nation’s mortgage brokers raised eyebrows last week with a report slamming the stress test (designed to keep unqualified buyers from buying). At least 100,000 first-timers have been punted from the market, it said, and we are in danger of creating a permanent class of renters. Like that was a big negative. (Nobody has apparently gone to Europe.)

Meanwhile a Conservative MP from Alberta (are there any other kind?) tried to talk the House of Commons Finance Committee, on which he sits, into opening an investigation into the impact of the stress test. But no go. The Libs voted in a block against the motion. No discussion.

All this angst is happening against an interesting backdrop. On Friday came news of a 4% spurt in US economic growth – the best in four years. Unemployment in that country has dropped to 4% or lower, which economists call full employment. Corporate profits are on a tear in both Canada and the States. Stock markets are rolling near record high levels. The Inflation President promises more growth, protectionism, higher living costs and a wage-price escalation. It’s all playing out at this very moment.

Thus, higher interest rates are a certainty. If you think the stress test sucks now, wait. If you believe realtor glop that the market’s ‘stabilizing’ or even ‘recovering,’ I have some Bitcoin futures to sell you. Monthly fluctuations are to be expected, but as the year progresses inventory levels will rise, mortgage rates will increase one or two more times, sales volumes will stay anemic and politicians will find new ways to destroy equity. After a decade of enduring scorn, renters will finally be able to go home for Sunday dinner again.

If you want to buy real estate, wait. By the way, Abid and Sapna foolishly ignored a primary GreaterFool rule. You know which one.

Did you catch yesterday’s blog post on POAs and family turmoil? Paul did. I’d like to share his story. He’s asking for advice, so feel free to dispense it. The hit man sounds like a reasonable option.

Advice: father and mother both in 80’s father needs to be picked up and put in bed then his wheel chair in morning. Has people come in to help with other issues. Sister and her husband seen opportunity so sister moved into house, nice place on acreage, parents are ok financially. Sister demanded payment, which is correct. She gets the auto for all her usage, gas, repairs, nice place to live all she can eat and drink (2 bottles of wine per day), extra cash (like $1,500 to put mutt down) whenever her spend thrift husband living hour away can’t keep up with his $90,000 salary as drug company sales manager. I thought pops should pay her as well say $1,500 per month.

Just found out, the last to know of sisters 3 sibs, that the pair had signed a codicil to the will 3 years ago effectively attaching to the equity of the home at $30,000 per year plus their 1/4 share of remaining assets of parents at the time of father’s death. She has been redecorating the house to her taste at parents’ expense, pushing for increase per year and wants them to put extension on house. 10 year old home. I blew up when I heard this as this could put my mother in a bad way as my sister and mother have never got along and she already runs the house, effectively pushing the rest of family out. Obviously they plan of taking the home, moving in and mother out when father passes. Should I hire a hit man, do it myself or is this a fair and equitable exchange for fathers care?