Entries from January 2020 ↓

The dodgy idea

So remember that crazy idea outgoing central bank boss Poloz was selling in a recent interview? In order to make houses more affordable, he asked, why not let private investors easily buy a hunk of other people’s equity? Families could live in homes they had less-than-100% ownership of (and lower costs) then hand over a share of the profit to an investor when they sold.

This echoes Ottawa’s current mutual-equity mortgage, of course, in which CMHC shares a deed in return for footing part of the down payment (more on this turkey in a moment). The benefit is that people can move into houses they could not otherwise afford. The downside is this increases demand, further turning houses into investment assets, pushing prices.

Anyway, Poloz is apparently just aping an existing reality in the US.

Check out Unison.com, a San Francisco outfit which is doing exactly this – both for new homebuyers and existing owners. By the way, SF is like the GTA or the LM – home to some of the most expensive residential real estate on the planet, where Mills have been totally shut out as prices appreciated wildly. So, no coincidence this is Ground Zero for the shared-equity experiment.

Here’s how it works: Unison will match a buyer’s down payment up to 20% of the property’s value, or a max of $500,000 (US). The buyer then gets a mortgage for up to 30 years from one of the partner lenders, paying an origination fee of 2.5% plus the usual closing costs. After three years the owner can request an appraisal and buy out Unison’s share of the house. The option is to wait until it’s sold, or 30 years – whichever comes first – before handing over the company’s share of the appreciation. There are no payments to make on the loan. No interest, either. And because the down payment was twice the size the buyer could afford, the mortgage is smaller. If the house goes down in value, Unison takes the hit with you. If you pay them off earlier, the company collects what it originally invested.

There’s more. The company will also take over 17.5% of an existing owner’s equity, up to $500,000, in exchange for cash. It’s like a reverse mortgage, but without interest piling up, making the debt ever-larger. Upon a sale, or after three decades, Unison gets its share. To play, you need a debt-to-income ratio of 50% or less, and at least 20% equity in the real estate.

The downside, of course, in making expensive houses easier to buy is that they will stay expensive. In fact, they’ll probably get even more unaffordable. That’s what happens when demand is facilitated. By opening residential real estate to its investors – mostly pension funds and university endowments – Unison helps commoditize residential real estate, turning it into a truly investible asset. Hard to see how this ends well.

Meanwhile whazzup with T2’s vaunted shared-mortgage thingy?

You may remember it as a centerpiece of the Libs’ housing policy in the last campaign – goosing the upper price limit to $800,000 in a program designed to provide moisters some free down payment money. The budget allocated was $1.25 billion. In return for giving over the deposit, CMHC would take equity and a share in the real estate gains.

Well, the kids ain’t buying it. There were only 3,000 applications for the so-called incentive program last year, for $55 million in funding. Veteran mortgage broker and blogger Rob McLister tells us why this was a truly bad idea…

  • It helps almost no one buy a home (due to the overly strict qualification criteria)
  • was ill-conceived (with virtually no industry consultation)
  • was a government subsidy for already qualified homebuyers
  • was hard to understand for mortgage advisors and consumers alike, and
  • made it difficult for borrowers to quantify the benefit (largely because CMHC didn’t initially launch a useful calculator for people to run scenarios).

Worse, it makes houses cost more. Just another example of politicians trying to increase demand for real estate at a time when too much of it is chasing too few listings. Mr. Market would sort a lot of this out if left on its own, especially if we stopped letting people buy houses with 20x leverage and taxpayer-funded insurance. Yikes.

Whether it’s San Fran, 416 or YVR, the idea of sharing residential real estate equity is a dodgy one. We don’t need more stimulus. And now Liberal MPs are getting restless about gutting the mortgage stress test. Will Chateau Bill hold firm, or cave to his leader and caucus?

Are you kidding?

Maybe the feds should do something about this, instead: TD will next month become the first bank to charge interest on interest. If you fail to pay all of your credit card bill, including the interest charged on unpaid balances, The green guys will levy new interest charges (at godawful rates) on that outstanding interest.

Says a notice Dorothy received this week. “We are adding your unpaid interest charge to your balance at the end of each statement period. As a result, we will now charge interest on unpaid interest.”

She immediately cut up Bandit’s $50,000 limit Golden Rewards Cashback Classic Insider Avion Special Breed Stud Privilege Affinity TD Visa. He may also pee on the branch.


The clueless

Remember all that political stuff we waded through last week as I announced my shocking withdrawal from the race to become the new Con leader? At least it cleared the way for Peter MacKay on the weekend. Now, barring the unexpected, he’ll be facing T2 in the next general election. It won’t be pretty.

But back to policy. What should leaders do?

High on my list was the need to teach citizens. We are so pooched, thanks not only to the lack of financial literacy, but the house lust and risk aversion that surrounds us. Most people you know don’t own ETFs, but flock to condos or seriously-leveraged houses. They save money instead of investing it. So every single poll and survey finds the same result: we’re getting less wealthy. Four in ten are a hundred or two a month from insolvency. Seven in ten have no assured pension. And yet people think investing in financial stuff is risky. Days like Monday don’t help. When stocks go down 1% after rising 30%, people freak. “See?’ they cry, “it’s a trap.”

Well, Mike knows better.

He passed this window poster of an expectant mom in Vancouver this week – in a HSBC branch…

…and had this to say:

Because when you have two kids and an extra $5000 kicking around, locking it in for 218-days at barely the rate of inflation after a required face-to-face (or over the phone) sales pitch with [email protected] is the best way to take care of your future… Your blog should be required reading before breeding! (Maybe advertise on condom wrappers?)

That idea’s got legs. But what would we call them? (Please do not offer any suggestions. I can only imagine…)

Mike’s right. Great example. The bank is offering to pay 2.18% annually in return for locking up your money at a time when inflation’s 2.2%. But wait. That offered rate is ‘per annum’ and an annum ain’t 218 days, even in YVR. It’s actually 60% of a year, so the real return paid on the GIC’s maturity would be 1.3%. Oh yeah, and unless it’s inside a registered account (and what a waste that would be), the money earned is taxable.

The fact a major bank would post this in their window like it’s a… big thing… is an illustration of how much we need to educate the huddled masses. Why would anyone park their money for less than the inflation rate? Or choose to do it for 218 days? How is this possibly an example of ‘investing in your future’ when the customer will have less purchasing power when it’s over? Is it even ethical, let alone responsible, for a bank to be seducing customers into a losing deal? How did we get to this point?

Ah, but this is just the start.

This week another bank, the green one, reported that almost a third of us have no idea how a TFSA differs from an RRSP. Those confused little beavers said they‘d put money into a tax-free account in order to reduce their taxes. That confirmed exactly what another bank (the blue one) just found. People are clueless. Even a decade after TFSAs were created, and after millions of accounts have been opened. Almost half of us use TFSAs as savings accounts, for example. This is like marrying Jennifer Aniston and keeping her home making casseroles.

For the record, of course, TFSA contributions are made with after-tax money. RRSPs are filled with taxable cash. So tax-free account income in retirement is not counted by the CRA. Retirement savings income, however, is fully taxed at your marginal rate, and can gut government pogey payments.

By the way, bank surveys have found most people are using TFSAs for home renovations and saving for a down payment. In fact twice as many think a TFSA is best, despite the RRSP Home Buyers Plan which allows a couple to take out $70,000 and still collect the tax savings for making their contribution. Most of us don’t know we can put money into an RRSP and let it grow for years without tax, and not claim the deduction until later when our income – and the tax break – is higher. Or that a contribution in kind turns taxable assets into tax-free ones. Or how a spousal plan can seriously split income.

Meanwhile four in ten say they don’t actually understand how a TFSA works, tax-wise compared to the other. Maybe we should do a chart. Put that on the condom, too. Might be lengthy, though.