Entries from February 2019 ↓

Stressed out

On Monday we vexed about the byelections. Done now. Results as expected. GTA went Con. Montreal to the Libs. BC now NPD, sort of. In Burnaby only a third of voters showed up. Sad. Of those, 60% didn’t vote orange – which means the Dipper won. The fact he’s party leader just made the win more lackluster. And let’s throw some disbelief on this: 10% of the ballots went to the Mad Max candidate – the one God talks to about media gigs. Sheesh.

Well, on to the election. You can count on a Moister Housing Strategy at the heart of the Lib campaign. The question, then, is how disruptive will this be to Mr. Market? For months real estate has been in corrective mode. Sales have been squishy, prices in a slow decline in most cities, detached houses hardest hit and a swell in rental demand as many prospective bidders give up and lease. Mortgage rates have stabilized and it looks like the Bank of Canada will hike again, reluctantly, once or twice in 2019. That could be the end of the current tightening cycle.

The stress test has reduced credit among those who don’t actually deserve it. Mortgage and HELOC debt levels just increased again. Household borrowing at over $2 trillion sits in record territory. Wage gains trail inflation. The savings rate is almost down to zero (0.8%). Yes, more people are working but family finances grow more perilous monthly. This is an environment in which real estate values need to fall in an orderly fashion until an equilibrium is reached. Supply and demand. Not FOMO and fear.

But will T2 and Bill Morneau crumble in the face of Moister malaise? Will the tireless industry campaign against the stress test succeed?

There was more of it this week, as the Financial Post gave over space to Re/Max to publish this:

“After more than a year in play, it is now apparent that the stress test is causing more harm than good, effectively closing a door in the faces of first-time homebuyers. The time has come for policy-makers to consider how to incentivize homebuyers in Canada, not penalize them.

“Ten per cent of Canadians no longer qualify for a mortgage with banks. The stress test has cut first-time homebuyers out of many markets in Canada and caused a ripple effect through every tier of homebuyer. It has affected move-up buyers needing larger homes to accommodate growing families. It has created a frenzy in the rental market, since those who no longer qualify for a mortgage are opting to rent. The bottom line is that the Canadian government needs to find ways to support, even incentivize, homebuyers in Canada (especially first-timers who are facing challenges entering the market) rather than penalize them.”

It’s a moan repeated by real estate boards and the entire building industry, as well as the mortgage lobby. And now that real estate-related activity accounts for about a quarter of the entire economy (more than oil and factories combined), it resonates with Ottawa. Especially in an election year. And especially with the Libs, who counted on weedy Millennial support to grab power in 2015.

Now here’s the problem. The stress test was created by the bank regulator to shield the Big Five from an erosion in their mortgage portfolios. By forcing all buyers – even those not looking for CMHC insurance – to pass the test, it ferreted out the Bank of Mom grifters who were actually credit slouches. The goal was to ensure all high-risk bank loans were properly insured.

But the real estate/mortgage/builder cartel sees it differently – as a politically-motivated blunt instrument designed to burst a housing bubble that no longer exists. In fact, Bill Morneau himself has walked into that trap. Last week he said, “We wanted to make sure that prices were not escalating in some markets at a pace that was unsustainable.” But the stress test is the child of OSFI (the regulator, who says this isn’t about house prices) and not the government. Or is it?

Mortgage guys are consequently flipping out, arguing the stress test may be a “politically-driven seat-of-the-pants rule-making.” As broker and industry spokesguy Rob McLister writes, the test has “prevented borrowers—who would have previously qualified in 2017—from benefiting from home ownership, driven up rents, pushed people to non-prime lenders with higher mortgage rates, kept people from consolidating debt and lowering their interest rates, and hampered competition for renewers, among other things.”

So which is it? A bank protector, or a bubble-pricker?

Both, actually. But don’t expect it to last.

Fighting scandal and slipping in the polls, the federal government fears losing the critical moister vote. When it comes to staying in power or doing the socially responsible thing, it’s no contest. So get set for a package of changes which will ‘boost affordability’ and end up making houses less affordable. Diddling with the stress test will be a part of it.

The only question is, when? The answer is March 19th.

About the picture...

Shawn in YVR writes: “I instantly thought of you when I saw this on my commute today. The handwringing is a great visual for everything you’ve been preaching since I’ve been reading your blog for the last few years.”

 

The wave

“Hello Garth,” Lady Jane writes.  “I have been reading your website for a few years now and can’t recall seeing a scenario similar to mine. So I’m writing for myself and all the other single ladies over 70.”

Of which, by the way, there are many. Guys are great but they wear out faster, even the ones (ahem) with chiseled abs, furry pates and tight buns. Now as the Boomers move into the Thirsty Underwear Years, the number of wrinklie babes is about to pop as never before. It’s a big deal. Especially since women tend to be more risk-averse (savers, not investors) and therefore unready for a long, long life. How will all these people cope?

Look at the stats, ladies: the oldest Boomers hit 65 eight years ago. In a dozen years there’ll be 5.1 million senior women. By 2061, when today’s Mills are in their 70s with hideously sagging tats, almost 7 million women will be 65+, but fewer than 5 million men will make it.

In short, the population’s aging as never before, with females will be leading the wave. Why?

StatsCan says this:

“Since 1972, Canada has had sustained below replacement level fertility, which from a demographic perspective, means that not enough babies are entering the age structure to replace their parents, leaving the population to grow older. In addition, overall lower mortality rates throughout the life course over the past century has resulted in higher life expectancy for both females and males, meaning that more people are not only surviving to age 65, but are spending many years as a senior.”

In fact there are now more senior chicks (17.5%) than 14-year-old girls (15.5%). The first time that line was crossed was in 2011. It’s an astonishing trend. Look at this chart, and ponder where we’re headed as a society:

Girls aged 14 and under, women aged 65+ and women aged 80+ as a % of the female population, Canada, 1921 to 2061

Forty years ago the old-lady quotient stood at just 9% while the girls clocked in at 29%. But with guys, it’s the opposite (we’re apparently croaking in droves) – 15% are seniors while boys make up about 17%. In the past 30 years the median age of Canadians has exploded by 10 years – to 42. That’s almost four years older than in the US, where dudes die younger (probably Trump’s fault).

Anyway, here’s the problem: a country in which seniors outnumber kids, where women outnumber men, where fertility rates are falling and where the national savings rate is less than 1% is asking for trouble. Without immigration or boxcars of Viagra, plus more financial literacy, we may be headed for a state of poochedness – especially when today’s moisters are tomorrow’s prunes.

Well, back to Lady Jane:

“My financial picture is this, a non-indexed pension of $1,146 per month, plus OAS and CPP which total $2,318 monthly, annual income of $27,816 before tax dollars. I have TFSA’s totaling $41,400, no RRSPs, no savings to speak of. I don’t seem to have any extra to set aside due to increases in strata Fees and levies, property taxes and bank interest, with income tax to pay every year. I am 72 years old.

“I presently live in a North Van condo where the assessed value has gone from $274,300 in 2016 to $480,900 in 2019. It is a 1 bedroom, 600 sq.ft. space, wood construction with an outdoor patio. Rents start at $1,700+ for a 1bedroom unit. A 600 sq.ft. unit is presently listed for $465,000.

“Ideally, I think it might be time to find a rental in a concrete building that would meet my needs until I check out, or switch off, whatever old farts do when they croak. My opinion on diversity has evolved to hating the odour of pot smoke and the screeching banshee boinking noises at 2am. I’m also done writing letters to the strata.

“How bad is my situation? Is there a strategy that would give me shelter for 20+ years and be able to manage financially? I would appreciate your comments. Thanks and cheers, LJ.”

Face it, Your Grace, trying to get by on twenty-seven grand a year in YVR is no picnic. So a first question might be, why not move? Are you in North Van because of family? If not, there are plenty of cheaper places to be, within or outside Canada. Without change, yes, your situation is bad. Escalating strata fees alone will eat into your fixed income. A special assessment could be financially mortal, while making your unit unsaleable. You have lousy back-up finances.

The answer, clearly, is to sell, invest and rent. If you clear $450,000 after realtor commission and invest that for an average annual return of (say) 6%, your income doubles. Even after paying rent to live in the same place you’d be $600 dollars a month ahead of where you are now, and still have $450,000 liquid to support you in case of an emergency (as opposed to almost nothing now). Strata fees, homeowner insurance premiums, maintenance costs, property taxes and the threat of an assessment – all poof.

But, I hear you say, what of the risk?

Without a doubt, portfolios fluctuate month-to-month. Yet with a balanced and diversified approach those changes tend to be minor. Meanwhile the income you take monthly need never change since the advisor’s job is to ensure constant liquidity and a tax-efficient cash flow. Understand that by sinking the money into a GIC or a high-yield account you’ll have to dip constantly into the capital to get by. So the greatest risk is running out of money – which  outweighs the lesser risk of losing some.

Life is long, my dear Lady Jane. It’s expensive. It’s stressful. But better than the alternative. The last thing to do with your precious time is fret over money. Many men would trade theirs for one more morning.