Entries from February 2021 ↓

The last gasp?

Pete and Julie called to ask if they should list their Mississauga detached house (after eight years) this summer. “I figure it’s worth about $1.6 million now,” he says. “We can hardly believe it and, man, we sure need the money.” Covid stole Pete’s food importing business. No surprise since three-quarters of his clients were restaurants. Now all closed. Julie only works half-time these days in the office at the dental clinic.

“So,” he queried,” is this a good plan?”

No, I said. List now.

It’s becoming evident the market cannot sustain its velocity. Things are too nuts. The world is changing too fast. Even our vastly out-of-touch and wooden central bank boss, Tiff Macklem, is starting to get it. Here’s what he said yesterday: “We are starting to see some early signs of excess exuberance. What we get worried about is when we start to see extrapolative expectations,” he said. “That’s when homebuyers believe that past strength will carry on indefinitely.” You bet. However he then added: “but we’re a long way from where we were say in 2016, 2017 when things were really hot.”

Really, Tiff?

Let’s review recent detached home sales in Toronto, for example (and things are even more torrid in Woodstock, ON, Kelowna, Oshawa or Halifax). This chart from Scott Ingram, account and property guru, clearly shows the volume of properties selling for over the asking price in 2021 is running neck-and-neck with the insanity of 2017 – that brought down emergency government action.

We’re doing a GoFundMe page for the Tiffer so he can get some new glasses. Are you in?

And, yikes, are you watching what’s going on in the steamy bond market?

Traders are dumping debt because they smell inflation. That’s jacking yields and ensuring mortgage increases are closer at hand. There’s no mystery why this is happening. Commodity prices are shooting higher (there’s serious talk of oil at $100 again); we’re on the precipice of a major inflow of vaccine and mass inoculations (the US has now romped far ahead of schedule); the Biden White House will soon have a $2 trillion Covid stimulus package in place; the infections/deaths/hospitalizations have plunged across North America; over 70% of US companies are beating earnings estimates so far this season; when it comes to profits our banks are crushing it; demand for borrowing has hit a crescendo.

All these reasons combine to deliver this…

The bond market sees what’s coming…

That’s what five-year Government of Canada bonds are doing at the moment. The yield has almost doubled so far this year- and it’s still February. The same is happening with long US Treasuries, where a tripling is within sight. (Inflation and rising rates are one reason tech stocks got thumped recently and poor Tesla was road kill.) All this means it really doesn’t matter if the Bank of Canada says its key lending rate will stay low for the next two years, because the bond market has already rung the bell. Up she goes. Canadian fixed-rate mortgages are not set by the CB but rather by the commercial market, so increases seem inevitable. As we told you, the days of 1.5% (or less) five-year home loans are doomed.

Some smaller lenders have already started to swell their rates. “Others are threatening to hike rates imminently,” says mortgage broker/blogger Rob McLister. “There’s still no sign of increases from the big guns (major banks), but if this yield climb persists, it’s just a matter of time.”

And there’s one more chart the Pete and Julie need to consider. It plots the extent of house lust in our nation, showing conclusively that the Boom of ’21 is far more dangerous than that of ’17 because families are chowing down on record debt at rates we now know are destined to rise. Ouch.

…while Canadians chow down epic mortgage debt

During a time of global pandemic, recession, double-digit unemployment and no inflation Canadians added almost 8% to overall mortgage debt. Between home loans and LOCs we now owe $1.97 trillion, equal to the entire Canadian economy. It’s the fastest rate of debt accumulation in a decade, and the first time ever we embraced over $100 billion in a single year in fresh household debt.

This is why Peter and Julie can probably get $1.6 million. Now. Most people will never read the 700 words above. They think houses will go up forever because rates can’t rise. They see swelling prices. They get FOMO. They panic buy. How can you blame them? It’s a cash cow.

But don’t feed it. Milk it.

Hitched

Let’s get personal.

After a dozen years of blissful cohabitation (sans kids). Tim & his squeeze are getting hitched. September, maybe, depending on the you-know-what. If all goes well, 150 people. Maybe a trip to Europe. The full Monty.

The romance is good. The finances may need some salve.

We currently have independent accounts but are filing our taxes together as common-law.  Ahead of our union are there any steps we should take to better align our finances?  I’ve been a long-time saver / investor.  She not so much but is starting to come around to the idea that retiring with money in our pockets isn’t such a bad idea.  Ideally freedom 55.

So here are the numbers for these 40-year-olds. He earns $110,000, with $340k in a B&D portfolio of ETFs (good boy, Tim) plus $113k in a TFSA, $155k in a non-registered account and a hundred grand sitting in chequing. She makes $65,000 with $75k in a bank mutual fund RRSP, no TFSA and twenty thou in a savings account.

No house. Rent is cheap ($1,700). Two dogs (breeds unknown, but “super cute”), cars paid for, like to travel. “What should we do?” he asks.

Okay, Tim, here’s the reality. You and she are an economic unit. You do not have independent financial lives, since that went out the window once you moved in together. Resisting an integration of your cash flow, assets and investments is a bad idea. You’ll probably pay more tax. You will likely suffer overlap and duplication among the securities you both own. You stand a good chance of not being able to retire with as much money at age 55, nor with an overall portfolio that can provide a steady, predictable and adequate income stream.

It’s always been a wonder that people get married, buy houses, have children and age together – showing immense trust and dependence, except when it comes to their money. Bad, awful habits on each side get carried into a union. Often a woman will be a risk-averse saver with a penchant for no-growth, ‘safe’ assets. Often a guy will cluelessly confuse investing with gambling, buy speculative crap and still manage to swagger. It’s a bad combo.

So how are these two doing?

Combined liquid assets of just over $800,000 put them in a sweet spot. Of course they could blow it all buying a slanty semi somewhere, also taking on a $700,000 mortgage, but they seem too smart for that. The bottom line: if they contributed no more to their current accounts, integrated them and managed to earn 6-7% on average for fifteen years, the pot should swell to just over $2 million by age 55. That would churn out $130,000 a year in cash flow, or about 75% of current working incomes. Add in CPP and OAS down the road and they’d be living on the same cash flow as now. More, actually, if they structure things the right way.

First, $120,000 is way too much cash to sit on in dead-end bank accounts. Get it working. The first place is her TFSA, which needs to go from zero to the current max of $75,500. Keep the tax-free account topped up for every one of the years until retirement, invested in growth-oriented ETFs (this is not a savings account for vacations), and it can seriously boost retirement income without causing more OAS clawback or bumping her into a higher tax bracket.

The remainder should go into a joint non-registered account, along with Tim’s existing assets.

Why joint?

It will save tax. Growth in a joint non-reg account is attributed to the account-holders equally (regardless of the origin of the funds, whatever the CRA tries to tell you), which takes advantage of her lower tax rate. There’s also a strong estate planning component. If Tim croaks before his dear partner, for example (statistically almost certain), everything in the joint account automatically becomes the property of the spouse – no probate, no wills and no waiting. Do it.

Additionally, Tim should stop making contributions to his own RRSP and direct them all to a spousal plan. He still gets the full tax break for doing so, but eventually she can cash portions of that plan in to finance retirement with less tax. In fact, even is she uses some of this money for the next Italian dalliance it will come out (after three years) at her marginal rate – while he got the big tax break.

More… she should dump the bank mutual funds and their high MERs. Converting to low-cost ETFs will help the assets grow faster. They should ensure each other are beneficiaries of their RRSPs and successor holders of their TFSAs. They should get some help – with eight hundred thousand, soon to be a million, a fee-based advisor would help ensure an overall balance and diversification and move various assets around for the best tax-efficiency. Plus draft a plan for four decades of wrinklihood. A joint chequing account is also a basic need. The days of ‘his’ money and ‘her’ money are so over.

Living with someone breeds dependence. That brings responsibility. Each to the other. Failure may lead to a break. Then what happens to the dogs?