Entries from January 2020 ↓

The way out?

So if half the people on your street are within $200 a month of insolvency, they must be morons, right?

Nah. Of course not. They’ve just made bad choices. They have kids, cell phones, cars, houses, Netflix and jobs. They’re getting by. Taking vacations. Going to the mall. Timmies. Hockey. Living a life. Doing what they think they should. And it’s all damned expensive. Running out of month before you run out of money is a big win. Even if it’s by two hundred bucks.

Yesterday I opined, as a wounded, narcissistic, entitled, coy little blogger, that the words published here (all 2.7 million of them, so far) had fallen on deaf ears. Financial failure surrounds us, I said. We’re awash in debt, deficient in assets and steaming towards a retirement iceberg. House lust has been the fatal flaw leading to the point where, yes, just paying the bills is an achievement.

“I was a little taken aback when you wrote that your blog is a failure for not reaching enough Canadians to reverse their financial fortunes,” blog dog Bill says, trying to staunch my bleeding ego. “ I would say that is completely inaccurate.

“Your blog is reaching all corners of Canadian society and having quite an influence. There is a reason it is the top financial blog in the country. As such, I suspect that influence is likely now a political force large enough to not be ignored. It would not surprise me if the central bank governor himself drops in for visits, or any of his deputies.”

But this is more than just a MSU. Let’s actually talk about how the average schmuck can be helped to get off the debt treadmill, build some solid net worth and look forward to life-long financial security as a wrinklie.

“I didn’t write you to point out the obvious, but rather to ask if you could write a few blog articles about what our future governments can do to avoid financial disaster regarding the wave of “retirees” that is entering the system present day,” Bill continues. “Don’t sell yourself short, I know you are the person responsible for the introduction of the present day TFSA.  I had one idea – raise the non taxable level on RRIFs and not receive the OAS in return, as an example. No losers in that, since no Canadian has to pay in to it.  I’m sure yourself or the blog dogs will have better ideas than mine.”

Actually, I have a few suggestions to add. Hey, Chateau Bill and Poloz, you guys here today?

First, let’s help people make better decisions about money, spending, investing and borrowing.

  • Teach financial literacy as a mandatory course in high school.
  • Don’t allow car loans longer than the bloody car lasts
  • No more pay day loan outfits. They prey on ignorance and misfortune. Vultures.

Second, we must find ways to stomp down house-horniness and reduce the risk from concentrating on a single asset. Real estate.

  • Increase the mandatory minimum downpayment for CMHC insured mortgages to 10%. That would turn 20x leverage into 10x.
  • Tax capital gains on personal houses the same as personal investments – speculation is the enemy of affordable housing, and this ridiculous, historic tax break has turned us into a nation of speckers. Sure, phase it in.
  • Don’t gut the stress test
  • Don’t cave and bring back 30-year amortizations
  • Do not introduce 30-year mortgage terms. More debt and higher house prices would result.
  • Require the Canada Child Benefit money to actually be spent on children, not the mortgage, property taxes or hardwood flooring
  • Ban Airbnb. It turns houses into businesses, jacks up prices, sucks off rentals
  • Ban reverse mortgages. They Hoover off a punitive amount of equity, destroy the wealth of retired people, and reduce available real estate for younger families
  • Instead, allow retirees selling houses to grant VTBs (vendor take-back mortgages) and enjoy tax-free interest payments.
  • Legislate that HELOC and LOC payments be amortized – not interest-only – so they’re actually repaid instead of hanging around for years.
  • Abolish the Bank of Mom.

Next, let’s clear up some of the misrepresentation that confuses and misleads people.

  • Federally regulate everyone calling themselves a ‘financial advisor’, mandating standardized training and titles. [email protected] is a salesperson, not an advisor. Insurance floggers are not advisors. Mutual fund reps have the same level of training as realtors. And look where that got us.
  • Let’s have full transparency on how financial people are paid. No hidden, high-cost MERs on mutual funds. No trailer fees. These things kill investor returns.
  • Ottawa should stop spending big bucks on TV and elsewhere advertising CDIC insurance. It’s pointless. If a major bank fails (won’t happen) we’re all pooched. This scares people away from investing. And that’s just stupid.

Finally, how do we mitigate the retirement storm now gathering on the horizon? What do people with no savings or investments think they will live on?

  • Bill’s suggestion is a good one: allow people to opt out of OAS in return for lower or waived taxes on RRIF withdrawals. Should be revenue-neutral.
  • Incentivize companies with lower corporate taxes to enhance their employee pension plans and up matched contribution limits
  • Make fees paid to manage RRSPs and TFSAs tax-deductible to encourage saving, investing and avoid the dumb mistakes most people make with their money.
  • Restore the TFSA limit to $10,000. The US limit for IRAs is $7,000 a year – and tax rates are much lower there. In the UK, people can put the equivalent of $34,000 a year in this kind of account.
  • Don’t raise the capital gains inclusion rate or diddle with dividends. Encourage people to invest instead of taxing them more on money their after-tax funds earn.
  • Goose CPP contributions by employees (not those of employers since that kills off jobs) and flow them into enhanced benefits. The feds have started this, but more guts are required.

So, there are a few ideas. Some would work nicely. Others have hair all over them. But clearly this is a discussion we need to have, while our political leaders fiddle.

Something to add? I’m listening. So will they.

 

The failure

Alas, this blog has failed. Perchance it’s time to pack up the kibble and squeaky toys, the ETFs and the spreadsheets, and scamper off into the ether. After all, what’s the point? The nation ain’t listening.

We have several reports. Be strong.

A week ago the central bank released a survey of what people anticipate is coming. The bottom line: Canadians want to increase spending more than expect incomes will rise. That suggests more borrowing. We’re already at a record level. Ouch.

Now, worse, comes the latest Consumer Debt Index (MNP) with this shocker: 50% of people are now within $200 a month of insolvency – unable to pay the bills. Forty-nine per cent say they’re not confident they can cover expenses without adding to their debt (which, of course, increases expenses). Says the company: “Our findings may point to a shift among some Canadians from debt apathy to debt hopelessness. Feelings of hopelessness can make people feel like giving up on ever paying down their debt or, worse, ignoring the debt as it piles up higher.”

Let this sink in. If half your neighbours are barely making ends meet, how are they saving anything for the future? Retirement? Kids’ educations? A crisis? And if 70% of Canadians own houses, what in Dog’s name are they thinking?

There’s more.

How many first-time homebuyers do you figure are being pushed into real estate they can’t afford by their parents? Well, in BC it’s 90%.

A survey of BC notaries found nine in ten young buyers are being financed by their families – up from 70% five years ago. And while it’s laudable Mom & Dad want to see Squirt buy his first condo and become a fully-functioning indebted adult, the reality is such buyers are not worthy. They need a handout just to make the downpayment – stark proof they’re taking on an obligation which is beyond them. Odds are if the Bank of Mom didn’t exist, buyers would dry up and prices cascade lower. We are fools.

And speaking of condos in Vancouver, here’s another reason people are failing financially.

Last month the average concrete box in YVR sold for $667,875. So if you bought one a year earlier, you lost $52,000. Plus $12,000 in closing costs and another $34,000 in realtor commission if you bailed. That would be a hit of $97,000, or 13%. Plus strata fees and property taxes. In this scenario, renters win. Owners pay.

According to analyst Dane Eitel, this will deteriorate further. Check it out, kids:

We forecast further price losses in 2020, with prices likely breaking downward out of the current divergent trend. That will result in some volatile price movement, with a high probability of seeing prices test the $600,000 threshold.

Ultimately before the market settles at the bottom. Eitel Insights forecasts that the Greater Vancouver Condo market will test the $525,000 threshold. Which would signal a price correction of 30% from the peak.

Pity those who did not bail when the delusion was at its highest. How could so many actually believe an asset would rise in value forever, when none have done so before?

Meanwhile some people want to make our real estate and debt affliction worse. Like the CD Howe Institute, and even the current Bank of Canada boss, Stephen Poloz.

The idea: bring 30-year US-style mortgages to Canada, where most people now take only 5-year versions. The Interest Act, which makes loans payable after 60 months, has prevented long mortgages with fixed rates, but Ottawa is being urged to change that. The proposal: loosen the stress test. Make it easier to pass for those taking out multi-decade loans, willing to extend their debt obligation much further into the future. And a lower stress test barrier means more can be borrowed. House prices go up.

Well, that’s just this week’s news. But it’s enough. Are we on the wrong path as a society? Sure feels like it. The goal of life is not a house, but we’ve made it so. Real estate lust is directly responsible for a plunge in savings, a leap in debt, a cash flow crisis for half the nation and a looming retirement crisis. And because this is a democracy, rest assured the bad choices of many will become the bane of existence for the few. Like you.

Only the foolhardy will fail to keep their head down, or stop blogging about it.