Entries from February 2023 ↓

Pumpers

“We renewed our mortgage in 2021 for the next 5 years,” says Patti, “with the amortization of 10 years and we chose variable rate.” Ouch.

“Today, as you know almost half of our monthly payment goes toward the principal and the other half goes toward interest. Should we switch to fix rate or should we stay with variable till 2026?”

How to borrow is as important as knowing how to invest. The allure of variable-rate mortgages a year or two ago was irresistible when money cost less than 2%. But today the cost has tripled. Every time the effective rate rises (with each Bank of Canada increase) more monthly goes to interest and less to debt repayment. Lots of people have found 100% of their payment is eaten by interest – that ‘trigger point’ at which uncomfortable choices must be made.

Should Patti switch from a 6.5% VRM to a 5% fixed and lock in for five years? Or float with the prime rate until renewal?

Well, switching to a longer amortization would immediately drop the monthly payment but, of course, delay paying back the principal amount or reduce the interest overhead. Converting to a fixed rate would slightly chop the payments but lock P in for years.

Maybe the best option: do nothing. The Bank of Canada macho-man tightening cycle is on pause at the moment, and may well remain there – even if the US Fed isn’t quite finished goosing things in America. Without more BoC hikes there’ll be no more prime rate increases, which means VRM rates have topped out.

Meanwhile the CB has said it expects inflation to be back down to 3% within six or seven months, and hit the 2% target next year. Mr. Market believes that will bring a rate cut of half a point. Relief. It’s also realistic to think the banks will be nipping mortgage rates as much as possible over the next year because new loan originations have been circling the drain (and OSFI is about to bring down da hammer). As this happens, VRM costs will fall and the debt repaid quicker.

We are not returning to 2%. Nor are we headed for 7%. The worst is over. The Mills and Zs still hate you.

Now, where is this market going?

Stehen Glaysher is, of course, a real estate shill. That’s his ob. He’s a big-time rockstar agent in godless Toronto. But facts are facts and he points out that so far in February (yeah, one week) 50% of all sales have been for above-asking. So is this a harbinger of the rutting season, which officially kicks off in about ten days?

“There is a real debate right now amongst peers in the industry that we are about to see a pricing spike despite all the recent interest rate hikes,” Glaysher says. “The logic being that there is a pent up demand to acquire real estate due to buyers sitting on the fence over the fall, coupled with the decreases in pricing and the massive increases in rental prices and competition we have seen in the rental market over the same time

“There is a legitimate reason to believe that the recent increase in listings selling above asking price is a precursor to this becoming a reality and I tend to agree! Couple this with an increase in new listings and this could be the “calm before the storm”.

As stated, he’s a pumper. But something is happening. For example, months of inventory in the GTA have gone from 4.3 in mid-January to just 2.3 now. Supply is shrinking as sales volumes increase, which helps explain Glaysher’s claim of rising prices. The big questions are whether a gusher of new listings will erupt over the coming month, and if the CB will actually stay on pause.

If listings swell and rates rekindle, the 23% decline in detached prices could well deepen, perhaps surpassing the all-time correction record of 27%. But if sellers are slow to return, the rate pause holds and Spring hormones flow, the opposite occurs. “Why wait for multiple offer bidding wars?” Glaysher asks potential buyers. “Let’s find the perfect “motivated seller” at the perfect time!”

Many on this blog have been perplexed about how real estate values can rise when houses are more unaffordable than ever. Even when mortgages were 19%. After all, we’ve been bombarded lately with stories of failed buyers, rising foreclosures, mortgage delinquencies and a coming tsunami of forced sales. Doom is endemic. The houseless kiddos are apoplectic. How could we possibly have a robust Spring market when 80% believe a recession looms and the damn stress test if over 7%?

Well, the recession was cancelled. The CB has throttled back. We are now at the end, not the beginning, of a historic tightening cycle. The labour market is robust. The central bankers say inflation will be down by half in six months. Winter will end. Sales volumes can remain sharply lower than in previous years, and yet prices can still rise – especially if fear keeps oodles of sellers on the sidelines.

At this moment it would take a deep, dark, troubled, job-sucking recession to bring a 50% real estate correction. It’s not coming.

About the picture: “This is my pet.  I love dogs,” writes Brent, “but have this little guy instead.  Maybe you could use him when times are slow ( markets etc..)  you’ll get what I mean. His name is Apollo.  Ten years old and should live till 60.  He doesn’t do much so I don’t know what else to tell you about him.  Haha.  Thank you for all your advice.  I never miss a day reading your blog.”

After work

What do people want to talk to me about the most? (Other than marital advice or canine obedience?)

Retirement, natch. When can it happen? Will I have enough? How can I prepare and still have a life now?

My experience: (a) People who work at companies with defined-contribution plans (shared RRSPs usually in crappy mutual funds) are the most stressed. They just know trouble looms. (b) Those with DB (defined benefit) plans are the worst savers and investors. Teachers top the list. (c) Self-employed folks make up in confidence what they usually lack in money.

So this year the TFSA limit has finally increased a bit, to $6,500. The RRSP max has now swelled to almost $31,000. As you know, the tax-free savings vehicle is the most democratic and universal one we have (which Trudeau attacked). The retirement savings plan is based solely on income and skewed to assist those making the most money (which Trudeau ignored). Go figure.

Unless you have a DB plan, you need these vehicles topped-up and churning out growth. After all, CPP and OAS won’t cut it, especially in a world like this where prices romp, houses and rent cost a stupid amount and taxes are only going to swell. Soon the FHSA will join this trifecta. Not maxing out tax shelters, or filling them with near-cash assets, is a blot on your future.

Will you have enough income to stop working? How soon can you pull this off? How do you integrate this massive change with the other elements of your life – like kids, spouse, house, health and personal bucket list? Basically, how do you get ready and how much will you need?

A bank survey out this week was stark. People said, on average, that $1.7 million in savings is required to stop working, wear your jammies until eleven and drive around aimlessly (major retirement goals). This was up 20% in the past two years, when the goal was $1.4 million. The bank attributes it to inflation, higher interest rates and less confidence in the economy. Only four in 10 believe they can accomplish this goal, however. Bummer.

As you know, most of us have most of our net worth in residential real estate. A home is nice, but it does not generate income and costs a lot to maintain. These days it’s also falling in value. That’s why advisors are always yakking on about balance and diversification. You need liquid assets. They need to grow. Tax shelters are the best way of getting there.

By the way, that survey found 53% have no idea how much they really need to exit work. Do you?


The poll has closed – Results in Thursday’s blog.

About the survey: Responses will be accepted until noon ET on Wednesday, February 8th. Results will be posted here on Thursday the 9th. Multiple entries will be auto-rejected. 

About the picture: “This is our family dog,” writes Andrea, “a 2 year old English Lab named Rosie. We pass by this tree engulfing the Private Property sign everyday so I thought I’d snap a pic for you. Thanks for your blog and free advice, we’ve been reading your blog since 2008!”