Entries from November 2019 ↓

The sure thing

The big blue bank pays 1% on its high-interest savings account. That’s half the inflation rate. Fail. But RBC will pony up a 2.5% yield for the first 90 days. Meanwhile Laurentian Bank has rattled the market with a HISA delivering 3.3% – bizarre, since that’s almost a third point higher than the rate charged on the bank’s five-year mortgages (which deposits fund). So, this is a gimmick. Won’t last.

Given the wussiness of millions of Canadians, bank deposit rates are important. Despite returns that are negative (after inflation and taxes), lots of people don’t understand or trust other financial assets. So they stick with [email protected] and GICs or savings accounts destined to deliver pathetic but predictable results.

As you know, about 80% of TFSA money is stuck in these things. Languishing. While stock markets are up 20% this year and balanced, diversified portfolios have delivered an average of 7% over the last eight years, most people plod along giving the banks their savings in return for one per cent or less. So the Laurentian offer rocks. (Meanwhile its stock is paying a dividend of more than 5.6%, with a tax credit to boot. Go figure.)

But wait. How safe is this?

One appeal of chartered bank savings accounts and GICs is that they’re covered by deposit insurance, through the CDIC – a federal agency. It’s massively unlikely any Canadian bank will fail, but this coverage is worth understanding. Just in case. And it’s free.

Most people believe the insurance tops out at $100,000, which is less than half the protection Americans get at their banks. But it’s possible to seriously expand it by spreading money around within an institution. The key thing to remember is that only the boring, low-growth stuff is insured – chequing and savings accounts, term deposits and GICs, mostly. No mutual funds, stocks, preferreds or ETFs.

So the feds will cover a hundred grand in a variety of categories (seven, actually), and extend coverage to you and your spouse/partner/squeeze separately. This mean you and s/he could have separate GICs, a joint GIC as well as ore GICs in your RRSP, RRIF or TFSA, all covered. That could end up being the better part of a million.

But remember only certain assets are protected. So if a TFSA contains a $20,000 GIC and forty grand in ETFs and stocks, only the twenty would be insured. Not the whole TFSA.

You can also magnify coverage within one institution by keeping assets in various parts of it. The bank. The bank’s trust company. The bank’s mortgage corporation, for example. And there’s nothing preventing you from opening multiple accounts at different banks, having four non-registered GICs, or five HISAs or tax-free accounts at a few places containing savings or investment certificates. All is covered.

Of course the cost of insurance is performance. Interest-bearing investments have paid subsistence returns now for almost a decade while investors in other financial assets have seen their portfolios essentially double. Also remember that outside of a TFSA, an RRSP or other registered account earned interest is treated the same as income, with every single dollar subject to tax. That’s punitive when compared with the break on capital gains or dividends.

So what protection do investors have, as opposed to savers?

The depends on what you invest in, and where. In-house proprietary funds, or pooled funds created by some brokerages may not be covered, and not tradable. Ask. Portfolios of ETFs, stocks, bonds, REITs, preferreds and other negotiable assets are liquid and can instantly be turned into cash. If your broker were to go kaput, you still own all that stuff. It’s yours. The value is not protected, but the assets aren’t lost.

As for cash balances in brokerage accounts, there’s CIPF insurance, which is industry-funded and covers up to $1 million per person. That’s a million for all general accounts combined (non-registered plus TFSAs) plus another million for registered retirement accounts (RRSPs and RRIFs) plus another million for an RESP – and more millions for your spouse’s accounts.

Comparing CDIC and CIPF coverage is like choosing between a fish and a socket wrench. You can’t. They do different things. Bank insurance means you don’t lose your principal if the place goes down, but you own no-growth assets. Brokerage insurance means your securities and cash are safe in a failure, but there’s no shield against market losses.

The rule remains: if you already have enough money to finance the rest of your life and need no growth, no tax-efficiency nor cash flow – only capital preservation – stick with GICs and maximize insurance coverage.

If you’re normal, however, that’s a bad idea.

Dog talk

Bow-wow. Time for a Blog Dog update on some of the sordid, lamentable and usually nauseating topics this site loves to wallow in. Pull on the hip waders. Here we go.

Siphoned seniors, going in reverse:

So the amount of money being sucked out of houses by old people is reaching astonishing levels. Reverse mortgage debt is just a few Cybertrucks short of $4 billion, according to the federal agency that worries about such things. The rate of growth is staggering – 26% in a year, or more than $800 million over that period. Needless to say the wrinklies have never swallowed this much debt before.

And it’s sad. Reverse mortgages are giant money-sucking proboscises thrust into the livers of the financially illiterate, the naïve or the unprepared. By borrowing against their equity with open-ended loans at huge rates of interest (currently well over 6%), these innocents end up owing more money every single month. The only way out is to sell the place and placate the parasite or croak and hope the kids don’t hate you too much.

Thinking of a reverse mortgage? Then stop. Sell the house, invest and rent, or set up a simple-interest HELOC. Get your spawn to make payments as a deposit on their inheritance. Only fair.

We told ya this was coming:

Yesterday the topic was rain tax. The offspring of the carbon tax. And the message is simple – liquid wealth can be shifted around in the name of tax avoidance. Real estate, however, is a sitting duck. Utility costs are mounting. Rental income is being targeted. Transactional costs are ridiculous. Storm runoff, sewers, water consumption, garbage collection – all taxed as user fees abound. There are taxes for leaving a house empty. More taxes if it’s a second property. Extra levies if it’s worth a lot. And the relentless march higher of property tax.

Poor Van owners just got shellacked with a local boost of 8.2% – four times the rate of inflation and double the average increase in family incomes. And there’s more – a 9.4% jump in the cost of service fees for water, sewage and picking up the trash. The dudes running the city have increased their budget more than 7%, to $1.6 billion. “It is about tackling the big problems that everybody wants us to tackle,” says a long-serving councillor, “getting more affordable housing, dealing with the opioid crisis, making sure we are combating climate change.” More to come. Get used to it. Or get out.

What? Realtors lie? Who knew?

In the Kingdom of 416, this kind of statement appears just about every month when the local real estate board releases its questionable stats: “We will likely see stronger price growth moving forward if sales growth continues to outpace listings growth, leading to more competition between home buyers.”

Ah yes, competition. Also known as FOMO – the fear of missing out that whips young buyers into an orgiastic frenzy of desire so they pay whatever’s needed to get a home before all properties have been snapped up, and they find themselves bedded down on pizza boxes under a bridge. Have you seen those ‘Sold Over Asking!’ stickers than realtors love to slap on their signs? Pure Viagra.

Well reality is something else. A study released this week found more than 70% of the sales in a hot area of Toronto went to buyers who paid less than asking. Yes. Less. That included detacheds as well as condos.

What does that tell you about the market? And realtors?

What comes after the Boomer boom. Bust.

A moister lament is that the Boomers stole all the good jobs and houses. True, maybe, but it will come to an inevitable end as the Stones generation fades and eventually pfffts. If Canada is like America (it is) then about 60% of all the houses are currently owned by wrinklies. Real estate outfit Zillow figures Boomer aging will create havoc in the real estate market over the next two decades, potentially whacking buyers now paying peak prices.

The estimate is that almost a third of all the homes in America will come to market – about a million per year by the end of the 2020s. Hardest hit there will be the retirement destinations like Florida and Arizona, as well as the rust belt states where the young left and parents remained. The result will be supply overwhelming demand, and falling values. The good news is houses will get affordable. The bad news is reduced equity for owners.

How about Canada?

Actually our Boomer population is proportionately larger than in the US. We have a higher rate of home ownership. We owe one helluva lot more in mortgage debt. Our savings rate is less. Mortgages reset more often. Our government pensions more meagre. Figure it out, kids. If you’re buying a house today from someone in slippers and a Motley Crue T-shirt, don’t.