Entries from January 2019 ↓

Only a matter of time


Yesterday’s vivisection of a profligate doctor on this site, complete with blood, guts and goo was, yes, an extreme example. Many people wondered how a $500,000-per-year couple could have stuff, but no money. Others understood it completely. What the doc/yoga lady gave us was a vivid reminder of how screwed up society’s priorities have become. Big hat, no cattle.

But what about the rest of us? Average incomes are far south of a hundred grand. The typical house costs less than half a million and the jobless rate’s at a 43-year low. Surely most people, unlike those crazy 1%ers, have their heads screwed on right?

Not so fast. Let’s check the stats.

Last month the inflation rate was 2%. Not only did that mean all the money in your high-interest savings account is losing money, it’s also bad news for most families. They’re falling further behind in a country where incomes are moribund. Despite a tighter labour market, employers are cautious and stingy. The average annualized wage increase in December was a mere 1.49%. The month before, just as bad – 1.46%. In fact since peaking briefly in May (3.9%) incomes have eroded steadily, compared to the rising cost of living.

Debt? Going in the other direction. Household debt in total increased 3.5% last year, to more than $2 trillion. The debt-to-income ratio hit 178%, a record. In Vancouver it’s over 250%. Among people buying million-dollar houses in Toronto, it’s over 400%. Despite higher mortgage rates, several Bank of Canada increases and tighter lending regulations, we actually increased our overall borrowing. Incredible.

But here’s why.

House Prices relative to Incomes

Source: The Economist

If this doesn’t make you reflect on what’s coming, well, you’re thick. Or preoccupied. Or house horny. Despite the best job market in forty years, with tame inflation and low rates, families are so financially stressed they’re borrowing more just to get by. Incomes are too low to buy houses, or houses cost too much relative to wages. Either way, it’s unsustainable. So, houses have to deflate or salaries mushroom. Guess which is more likely?

This underlines the greatest financial risk in a nation where 70% of people have exposure to one asset class – usually constituting most or all of their net worth. In the five months between July and the end of November last year, while real estate markets wobbled in terms of sales and prices, Canadians added $17.1 billion to outstanding mortgage debt (to $1.54 trillion). This took place even as the pace of new mortgage borrowing at the banks cratered, showing the dramatic impact of house prices which have become detached from reality.

Face it. We’re buying what we cannot afford. So long as we keep at it, the danger grows. Just imagine the devastation that would take place in, say, Vancouver if prices toppled as they did in Phoenix or Los Vegas. Certain postal codes in those cities (which experienced explosive price growth during the preceding boom) saw assessments plunge  70%. That’s extreme. But possible. And far more likely than a wealth-stealing plop by global equity markets.

We’ll say it again. The goal of life is not a house. Having one is cool, but there are options, like renting. You can live a fine existence without real estate, but not without income, especially when you get old. If properties cost three or four times a family’s annual income, we wouldn’t be having this discussion. But in most places, they don’t. Wives and husbands are financially gutting themselves to obtain one, which is clearly shown by the billions in new debt every single month, while incomes stagnate.

Did you see the new polls on Monday?

Two-thirds of Canadians fret over their financial futures. A third worry they’ll go further into debt this year. An equal number claim they may not be able to maintain monthly payments. And 14% believe recent mortgage increases are unaffordable. “If debt levels don’t come down,” says Credit Canada, “and people don’t start to get serious about paying off their debt, it’s only a matter of time before we’re in major trouble. You can only bury your head in the sand for so long.” Meanwhile MNP has found that almost half of us (46%) are $200 or less away from financial insolvency at the end of each month. Over 50% report higher interest rates are hurting them. “Many have so little wiggle room that any increase in living costs or interest payments an tip them over the edge,” the company says. “That’s what we’re seeing happen right now.”

But most people will never heed this message. They won’t change. They don’t come here. They never heard of me, or this blog. The Trivago guy’s more popular.

But you’re here. And you know what’s coming.


He’s an anaesthesiologist. She teaches yoga. Household income this year, “a little under five hundred,” says Trevor (85% of it is his). Savings and investments? “I’m a little embarrassed to tell you this,” he says, “but we don’t have any.”

How could this be?

Herewith are the excuses: (a) Trevor’s income comes through personal fees, not a professional corporation and he is now (thanks to T2) in a 54% tax bracket. (b) They bought a $2 million house in Oakville – “which is by far not the best house on the street, so gimme a break.” The mortgage is $1.5 million. Properties taxes this year will be almost $30,000. (c) The nanny’s paid $3,000 a month, in after-tax income. (d) Two car leases. Big insurance policies. Two vacations a year. It adds up. Once the kids head off to private school, tack on sixty grand.

So when a 1%er couple (in terms of income) has stuff and lifestyle but no cash (and no pensions), what does this say about society’s priorities? Too much, sadly. Over-spending and under-saving are twin reasons many people will face retirement shocks, unable to replace their incomes or support their habits.

That consumption has replaced saving is evident. In 1982 people saved (on average) 19% of what they earned, and socked it into high-paying cash assets (mortgages were 21% and term deposits paid 15%) . Over the last quarter-century we managed to save an average of 7.3% of income. And in the last few months, that has collapsed to 0.8%. In fact, in BC (home of the highest house prices and most new taxes) the savings rate is negative. The average family spends 8% more than is earned, using debt to fill in the rest.

As interest rates fell, borrowing and spending rose and savings plummeted. Without reward in the form of high interest rates, people seem to lose all discipline to put money aside. As rates hit historic lows, houses hit historic highs. So did debt. Now a massive amount of family income is diverted into servicing $2 trillion in accumulated borrowing, while the cost of living inches up. At the end of the month, nothing. No wonder every year a new survey finds 40% or more of people could not survive even one missed paycheque. No wonder there’s over $100 billion in HELOCs on which no debt repayment’s being made.

So a nation of house-rich, debt-pickled and savings-poor people every day edges closer to the end of working careers. As this pathetic blog has tried to show, there’s no pot of government money waiting to look after you. CPP is grocery money. OAS is gas money. Neither were ever intended to support people after they finished working, but are rather supplements to a corporate pension and/or personal savings – usually in the form of RRSPs or TFSAs.

How much do you need to save? Sure, 19% is excessive unless you enjoy feeding your kids bugs. But 0.8% is a complete joke. So something closer to the long term average of 7-8% may be about right for most people. Obviously the sooner you get into this habit, the better.

Trevor, of course, thinks he’s okay. Ten years from his desired retirement age he hasn’t really given a lot of thought to income replacement. We did the math. Unless he blackmails Tony Clement online, it’s statistically impossible for him, at age 46 to prevent an income drop of about 80% at age 55. Hell, he’ll have a tough time even affording his property tax and Lululemon Tight Stuff yoga pants on a gross take of a hundred grand. He has simply spent too much and saved too little. The only way out of a retirement jam is to dump the house, and hope the real estate market doesn’t fade between now and then.

How many other people are there with cars, a house, obligations, kids, overhead and expectations, but no actual money? For them, bank account deposits every month turn into debits, and success means they balanced. No surplus. At the end of the day, it doesn’t matter what you make, but what you keep.

If this is you, change things. At a minimum, find $500 a month to stuff your TFSA – then don’t bury it in a GIC. If your company has a pension plan, sign up for it, even if it’s a crappy group RSP. If you have a cheap mortgage, don’t be too anxious to pay it off. Invest instead and diversify your life rather than pumping all your net worth into a single asset. Do a budget, a plan, for your household. Get free government money with an RESP for your kids. Throttle back on holiday trips – your spawn will love you more for helping with university tuition when she’s 20 than a beach trip when she’s six. Consider leasing a car rather than throwing forty grand at a machine which will eventually be worth zero. Invest the money instead. Income-split. Use RRSPs. Get out of high-fee mutual funds. If you have to, lease your basement. Or move into one.

Seriously. Forget more stuff or more debt. Focus on financial assets. When work’s done, you need an income stream. One that can last two decades, and replace much of what they used to pay you. Most people will fail. So, start now.

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After that post, you may need a hug.