Author: garth turner

Four years ago four babes in their 60s and 70s moved in together in Port Perry – rural Ontario. That broke the rules in a municipality where unrelated people are not supposed to co-own and co-inhabit a single-family dwelling.

The gals protested mightily and eventually won the blessing of the provincial human rights office. The local government backed off and the ‘Golden Girls’ became celebs as champions of affordable seniors’ housing. Three years later the Ontario government adopted a private member’s bill preventing discrimination against people who want real estate co-ownership. Bill 69’s short title is The Golden Girls Act. And now it’s law. “Solving Ontario’s housing crisis is going to take new and innovative ideas,” says Steve Clark, the housing minister.

The women – Louise Bardswich, Beverly Brown, Sandy McCully and Martha Casson – are currently the poster hotties on the cover of Ontario’s newly-minted ‘Co-owning a home’ guide  which enthusiastically promotes alternatives to one family-one house.

Meanwhile in BC, co-ownership is hot stuff, especially since huge CU Vancity started offering its weird ‘Mixer Mortgage’ allowing up to six people – not formally related to each other by family or romance – to finance property. There are now realtors specializing in co-ownership, and a breathless new media story appears every few months. The latest features a $1.8 million butt-ugly house which, “may be out of reach for a solo buyer. But it’s already been divided into four suites. If four people or families split the cost, each would be paying $400,000 and $500,000 for a home of their own in one of the city’s most desirable areas.”

The Mixer Mortgage, by the way, can offer multiple owners different loan amounts, varying rates, amortizations and cover a portion of ownership ranging down to 2%. But they all have the one property as security. Buyers can be roomies, buddies, brothers or strangers. Says the company:

“We have the ability to split mortgage terms. For example, if two people or two couples are taking on half a million dollars of debt, and $200,000 is earmarked for one person and $300,000 is earmarked for the other, those people could potentially pick different terms, different rates and different amortizations that are more applicable to them. So, while everyone who owns the property is still responsible for the debt, they can earmark their own debt and pick their own repayment terms.”

In Ontario, by the way, the lenders of choice for co-ownership seem to DUCA credit union and Meridian, whose ‘Family + Friends’ mortgage allows for up to four owners. So far the Big Six banks have eschewed this, but with passage of Bill 69 that could change.

Okay, so you round up four or six people and together buy a property that none of you could ever dream of purchasing individually. You live there and pay the mortgage like rent, then make a tax-free killing as the property escalates in value. What could possibly go wrong?

As it turns out, lots.

Married or common-law owners form economic unions. They bring responsibilities. That’s what family law is all about. Inescapable obligations, whether for whelping or real estate. But unrelated co-owners are, well, unrelated. The BFF you bought a house with could go broke, lose her job, split for Nevada, get married or die. An unrelated owner could simply stop paying their portion of the mortgage, or property tax, utilities, insurance or maintenance. This could potentially trigger a mortgage default, foreclosure, power of sale and misery. It could force a sale of the property, legal bills, an unwelcome move and lost equity. The risks are palpable.

So, don’t even think about co-ownership without (a) understanding everything financial about your potential co-owners. There are no secrets allowed. Net worth, ex-spouses, income, job security, gambling debts, assets, addictions – everything should be on the table. Then, (b) you need a good lawyer and a great partnership agreement. It should set out the space each person occupies, responsibilities, division of expenses and, above all, procedures for dealing with unexpected events. Like job loss. Or (in the case of the Golden Girls) a visit from Mr. Reaper.

The agreement also needs to deal with dispute resolution. There will probably be some. Maybe a lot. And what happens if one person just wants out? Will there be a financial crisis if the remaining owners cannot find a replacement? Remember it’s easy to put a few names on title – and lenders are happy to do that because each person individually could be responsible for 100% of the debt – but it’s hard to make co-ownership smooth and workable.

So, careful. This has the potential to bite you. And it breaks one of the cardinal GreaterFool rules: never buy real estate with someone you don’t sleep with. Pooch excluded.

$     $     $

Well, they did it.

T2 & Chateau Bill have started to dismantle the mortgage stress test in a giant concession to moisters – and about the worst possible thing they could do to affordability.  On Tuesday afternoon the announcement came that the qualifying rate will be dropped by about a third of a point – from 5.19% down to 4.89%, using a new formula.

“This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions,” says the government. Maybe so – after all, five-year loans are available at less than 2.9%. But what the move means is more borrowing and more price pressure.

Says mortgage broker and blogger Rob McLister:

Will a looser stress test stoke the market? Absolutely.

While it might boost buying power by just 3% or less (depending on what the new benchmark turns out to be, come April 6), the psychological boost will be material. Homebuyers—particularly younger buyers—are already worried about prices running away from them, given the double-digit gains of the last 12 months. News of an easier mortgage stress test won’t help.

And just in time for rutting season.

Railway blockade? What railway blockade?

Source

These are transformative days, n’est-ce pas? The biggest generation is into a shared economy – Uber, AirBnB, gig jobs and co-ownership. The hot word is ‘collaborative.’ Rugged individualism is out. Confrontation, too. Those who disagree with the consensus view, whether on climate, taxes or treaty rights, are paleo. Reactionary.

So, I said to Dorothy, whaddya think about me blogging on the railroad blockades?

“Don’t be an idiot,” she said, giving me that don’t-be-an-idiot look. “This isn’t a debate anymore. It’s black-and-white. You’ve got nothing to gain. Drop it.”

She’s right. So I’ll keep this post short. Maybe she won’t notice…

The T2 government has decided not to provoke the few Mohawk band members who have blocked CN’s main line in Ontario, choking off rail service in the eastern half of the country. The railway has laid off 1,000 workers as a result, so a thousand families will be without paycheques for a while. Containers are piling up on the dock in Halifax, and ships have stopped being unloaded. Supplies of everything from foodstocks to chlorine for hospitals, grain, manufactured goods and propane for home heating are halted. The economic losses are estimated to be $60 million to $100 million per week, and mounting.

The minister responsible for indigenous issues travelled to the blockade, legitimizing the civil disobedience there. He came to negotiate and possibly reopen an ancient treaty, to give the protestors some of what they demanded. After nine hours of talks, nothing. In fact details of the meeting were secretly recorded by the Mohawk participants, then released. Things had not gone well. Demands, no compromise. No end to the illegal blockade.

The protestors burned a court injunction that CN received to have them removed. Neither the RCMP nor the provincial police force have acted to uphold the injunction. The Trudeau government indicated it does not support any aggressive action to have the blockades removed, and prefers an open-ended process of exhaustive talks, leading to the possible rewriting of former agreements granting more land and money. The Ontario natives say they won’t move until indigenous lands in BC – where controversy over a gas pipeline rages – are cleansed of “red coats and blue coats.” In other words, no policing by federal or provincial governments.

The issues are complex. Many indigenous people in BC support the oil and gas industry with its superior-paying jobs. Some don’t. But then unanimity within any group is elusive. Usually democracy prevails, unless you believe in hereditary chiefs, accountable to themselves.

In any case, this has become a national crisis. An economic and financial one. Canada’s reputation as a reliable supplier is being tested. People are losing their jobs. Houses in the east will soon go cold, in February. The federal government looks paralyzed and dazed, seized by the political ghosts of Oka and Ipperwash. After Trudeau spent so much personal capital on indigenous issues, there is so little to harvest in return. Not enough good will or trust to deal with a relatively small number of rebels camped on the tracks.

As Dorothy reminded me, this is black-and-white. Supporters have turned it into a climate crusade, seeing the hereditary chiefs – and their Mohawk colleagues – as oppressed defenders of the earth, water and sky standing bravely against a rapacious, resource-hungry, wasteful society. It’s classic left-right warfare. No air in the middle for talk.

The resolution? Concessions or enforcement. The majority must concede, or we send in the cops. Given what the prime minister’s said so far, the outcome is clear. Collaboration.

You may have another word for it.

Source

A day or two ago a mainstream media outlet wrote once again about houses and Millennials. People over 50 find this as interesting as gum surgery, but apparently the kids can’t get enough of it. There’s comfort in the collective notion moisters are being pooched by a system rigged against them. That’s media-trendy now. Like supporting the outlaws who shut down the trains.

I found this paragraph was interesting. Interviewed was an Ontario university student who thinks her generation is financially dumb and politicians should do more to support young house-lusty adults.

“You need to be financially literate to have money work for you and not working for money,” she said. “Every person comes with a different financial background. The government should implement interest rates based on our earnings to encourage millennials to become homeowners.”

It’s alarming an educated lass would believe the government sets interest rates, which they can be dialled up or down, and that Mills should get bigger investment returns because they have less to work with. Because they, like, want houses.

But wait, it gets worse. Here’s a headline form the Toronto Star business section last week. In a bid to stay relevant and not perish, as so many news organizations have, the country’s largest newspaper has gone hard-core moister – with meaningful features on how to save for your wedding.

And this…

Seriously, it said that. ‘Pay’ an RRSP, like it’s a mobile phone bill. Worse, the article states (a) Mills should never put money away for retirement until they’ve paid down a mortgage, because (b) this will just make you pay more tax when retired and (c) your folks will croak anyway, giving you an inheritance. So just keep up with the condo payments. And the Cuba trip.

Remember that pithy little post here last week about oldies? Sure you do. People without DB pension plans retire with median savings of $3,000 and incomes averaging $31,400 (that includes all forms of government pogey). People with pensions are now averaging $55,400 a year – better, but hardly enough to make the most of the last two or three decades of life. At the same time we know at least two-thirds of these folks have houses, almost all paid for.

The conclusion: fail.

Real estate costs a ton to buy, close, own and sell. We’ve just been through a decade of historic asset inflation, yet people retiring with heaps of housing equity have hardly enough to pay the monthly bills. Once into their 60s or 70s a lot of the wrinklie old weenies are too settled and creaky to contemplate moving. So they sit on piles of money that could be providing them a far better quality of life. Now the next generation seems intent on making the same mistake. House-rich, portfolio poor.

By the way, a five-year mortgage is currently available all over everywhere for less than 3%. Even the Big Five banks are down to 2.89% – even better if you tell TNL@TB about your cat. Inflation in now running at 2.4%, and real estate values have jumped nationally by low double-digits as listings wither. So why would you divert cash flow to pay down a mortgage at almost the cost of money when the asset financed is rising in market value?

Bad advice.

But that doesn’t necessarily mean it’s a mortgage or an RRSP. Actually Mills should be totally focussed on maxing TFSA contributions, getting that money into growth-oriented assets (like equity ETFs), and letting the magic of tax-free compounding happen. By retirement this can yield about $650,000 after three decades for someone just starting now at age 30. With CPP and OAS that’ll provide a base income of more than $60,000, with no tax. If you have a company pension or make RRSP contributions (which don’t need to be accessed at all until your 70s), bonus. And if you’re parents kick, well, it’s all good. The Star said so.

Seriously… we as a society are heading for a wall. Despite Google, Siri, Alexa and Garth – and the fact that life without enough money is misery – financial illiteracy surrounds us. Nowhere is that being manifested more clearly than in this myth: the goal of life is to get a house, and financial security comes from paying it off.

If that were so, old people would be happy. I rest my case.

Source

   By Guest Blogger Ryan Lewenza

.

Readers of this pathetic blog know that we have chiseled abs (well Garth anyways), prefer dogs to cats, and to our core believe in balanced 60/40 investment portfolios. The thinking is pretty simple. We invest 60% in growth assets (i.e., stocks) and 40% in safer things (i.e., fixed income). Through this mix of stocks and bonds we’re able to generate decent portfolio returns while minimizing portfolio volatility.

For decades now this strategy has been a big winner producing returns of 7-8% annually before fees. However, there are some now calling for the end of the 60/40 balanced portfolio with interest rates hovering near all-time lows. Bank of America was one of the first large US banks to make this bold prediction in their report “The End of 60/40”, with other firms like JP Morgan piling on to this investment thesis. In this week’s post I push back against their criticisms and remind readers why we believe the 60/40 portfolio is still the way to go.

Reading through some of these reports the key points to why the 60/40 is dead in their view are: 1) with interest rates at record lows there is only one way to go and that’s up, which would result in negative returns on bonds; and 2) the long-term negative correlation between bonds and stocks will begin to break down, thus bonds losing their portfolio hedging characteristics in downturns.

Let’s begin with the first point: bond yields are destined to rise resulting in negative returns from bonds in the years ahead.

Below is a very long-term chart of the Government of Canada 30-year bond yield and you can see how it has declined steadily since the early 1980s from 18% to just 1.4% today. So the simple thinking is we’re at record lows and they can only go up from here. But can they?

Long-term Chart of GoC 30-Year Bond Yield

Source: Bloomberg, Turner Investments

For some years now I’ve been in the lower-for-longer camp with respect to interest rates. In fact, I believe developed regions like the US, Canada and Europe will experience a similar fate as Japan where interest rates could remain stubbornly low for years if not decades. Here’s why.

First, the long-term drivers of economic growth are population growth and productivity gains, which are both on the decline. We’re just not producing enough babies these days (that’s one reason why immigration is so important). For example, US population growth has slowed from 1.7% annually in the 1960s to just 0.7% today. Similarly, productivity gains continue to diminish, so as these drivers decline so should economic growth. Historically, the US economy has grown an average of 3.3% annually, but I see this downshifting closer to 2% due to these macro trends. If correct, this lower economic growth should keep interest rates well anchored around these low historical levels.

Second, governments simply can’t afford higher interest rates given all the debt in the world. At last check the US has US$22 trillion in debt outstanding. If interest rates were to rise meaningfully the interest expense would skyrocket, which would put huge pressure on the US government’s balance sheet, and either lead to higher taxes and/or large spending cuts. In short, rates can’t rise materially or we’re all screwed.

US Government Debt is at US$22 trillion

Source: Bloomberg, Turner Investments

So, given I see interest rates staying lower-for-longer, I don’t see major losses from bonds in the coming years. Now I don’t see major returns either, which is why we view bonds more as a shock absorber for portfolios rather than counting on them for gains.

The reason we continue to view bonds as a shock absorber in portfolios is their negative correlation with stock prices. This can be seen visually in the chart below.

I show the rolling correlation of US Treasury bond and stock prices. For over two decades now the correlation has been negative (currently -57%) between the two, which in laymen terms means that when stocks decline bonds move higher and vice versa. This is critically why we continue to recommend investors hold high-quality bonds. And, given I see government bond yields remaining lower-for-longer, I see this relationship continuing to hold.

Correlation of US Treasuries and S&P 500

Source: Bloomberg, Turner Investments

Finally, while I disagree with BoA and other firms that the 60/40 is dead, I do agree with them that in this low interest rate environment we need to adjust portfolios to make up for the lost income from government bonds. We do this by including more corporate bonds, which pay higher yields, dividend-paying stocks and preferred shares.

In fact, preferred shares provide a great hedge in case we’re wrong about interest rates remaining low. If BoA turns out to be correct, and rates move materially higher, then our preferred share ETF will greatly benefit from this, as preferreds do well in a rising rate environment. And this hits home an important point: from time to time some of our calls will not work out and this is why we structure the portfolio using a mix of bonds, preferred shares and stocks. Each one is driven by different factors and by including a mix of these different assets it ensures we always have something that is working even if something else is not, and this is how we’re able to provide fairly consistent long-term returns for our clients.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

Source

Buying a house is the ultimate human cocktail.

Emotion boils. Because real estate is a social marker, everybody wants some. Since most people are financial illiterates, property is the ultimate and only strategy. It’s the one asset the bulk of people even know how to buy. Culture factors in, too, creating an irresistible parental pull, despite the cost. Add in recency bias – we’re had a decade of house inflation, therefore people think it will rise forever. So greed looms large. Plus, the sheer ignorance of words like ‘rent is throwing away money’ are repeated, even as owners flush away fortunes in interest, property tax, insurance, repairs and transaction costs.

Real estate is the nation’s religion. It’s made some people considerable money. It has led millions into historic levels of debt. As house prices go up, our savings rate falls. Now the median nest egg of retirees without a corporate pension is merely $3,000, and their income under $30,000. They probably have a house, but the result is a few thin final decades of life.

Well, this blog won’t change the mentality of millions who think life’s goal is property. But it will always tell you to keep a balanced life. There is utterly no shame in renting. Only shame on those who make you believe so.

Thus, when it comes to that decision – usually faced in marriage – about how much house one can afford, confusion reigns. Even among the chosen few we know as blog dogs.

Like Chris:

My question is on the topic of what constitutes a reasonable amount of house to purchase? I know you’ve talked about your rule of 90, and buying if you can afford it, but there seems to be a myriad of different information/opinion about what “affording it” actually entails.

I’ve heard of spending 30% of your income on housing, but there seems to be no clear consensus on if that is gross income or net income? When I run the numbers with a handful of mortgage affordability calculators they tell me we can afford a house ranging from ~$970,000 all the way to ~$1,600,000. So I’m curious as to your opinion. What would be reasonable? A mortgage of 4x our household income? Spending 30% of our net income on housing? Or is there another way you recommend to assess reasonableness. The last thing I want is to overextend ourselves and be house poor. As always, very much appreciate you and your daily blog for all of the help and advice you provide.

Plus Adrian:

I’d really like to thank you for the daily dose of sanity. I landed in this beautiful country three years ago at 27 and have been reading your blog ever since. It is a breath of unbiased air with views on everything from dogs to macro economics.

Since you’re doing a piece on How much real estate you can afford tomorrow, I thought I’d write to you. That’s a question I’ve been mulling over for some time now.

Work in finance. Started at $60k but have worked my way up to a job that pays $150k a year including bonus. Wife (30) is employed as well and brings in about $50k a year. We’ve been renting a 1 bed room condo for $1,500/mo in the suburbs of GTA for over two years.  Over these years, we’ve maxed out our TFSAs at about $45k. I’ll be topping up my RRSP to $35k. In addition, I’ve about $65k sitting in cash. (I know I lost all your respect here)

Like any other immigrant, I’m planning to bring my parents here, start a family and get a bigger place. Any decent house I find is going for $750k-$800k even in the suburbs. The monthly carrying costs of these properties is going to be at least $3,500. I don’t plan on touching my TFSA. I can use $35k from the RRSP, $55k from my cash and the remaining $80k I can get as a loan from my family through their line of credit.

Now the ultimate question. How much can I really afford? I don’t want to jeopardize my finances and put all my money into four walls just so that I can call it my own when it actually belongs to the bank. One last thing, two years ago, I drove by the Belfountain store in the summer and saw you tidying the place up. Should’ve stopped and said hi but I was too reluctant. Biggest regret.

Well, gentlemen, there’s no single answer to this eternal question. It’s all a matter of how much risk you want to swallow, how much leverage you’re willing to shoulder, and what you think the benefit is from doing so. The economic answer is not the emotional one. Here are some considerations…

1. A house is not a financial strategy. You have no control over where the market goes. At some point in your life you may have to turn it into income. Trading a $1,500 rental for a $3,500 monthly nut – and a pile of debt – is a huge move, especially when it means you stop saving.
2. Have kids? Want them? After that decision’s made, family is your highest financial obligation. Children care not if you rent. But they do care if you can’t afford to help them get educated. Never buy a house because you’re pregnant.
3. Real estate costs a ton to buy and own. Far more than renting. Owners are gambling the asset will rise in value and cancel out those additional costs. This is a risk you must accept. Doesn’t always work out.
4. Understand the tax rules. If you flip, gains will be taxed as income. If you rent property out, profit will be taxed as capital gains. If you reno and lease a portion of your home, you could lose much of your tax exemption status.
5. The ‘how-much-can-I-afford?’ question is not just about cash flow. It’s about the future. Do not put so much into real estate that you can no longer save or invest. That is a total toss. Ultimately we all need income more than a roof.
6. Follow industry formulas for cash flow guidelines. The total debt service (TDS) ratio should be 42 or less. To calculate add all payments (house, car, loans, utilities, insurance, taxes) then divide by gross monthly income and multiply by 100. Rule of thumb – keep house costs to 30% of net income.
7. Don’t be fussed about paying off a cheap mortgage with money that can be invested for far greater growth. Almost all published advice is wrong on this point. In a low-rate world you’re better off to grow investment accounts and use gains to pay down a home loan principal upon renewal.
8. Adhere to my Rule of 90 for life guidance. The amount of total net worth in residential real estate should equal 90 less your age. That means young people can afford more leverage. Oldies should have way less. The rest of your net worth should be liquid.

The most important rule: stop emailing me seeking financial justification for something your spouse, your guilt, your mom, your friends or your hormones is making you do. I almost don’t care.

Source

Okay, snowflakes, so it’s a stunt. But there are worrying political aspects of a manifesto this week – from Millennials – calling on Ottawa to immediately create a wealth tax, higher marginal tax rates and the closing of all tax breaks for the top 10% of income-earning Canadians (that’s anyone making $80,400 or more).

What do the kids want? “Full pharmacare and dental, full coverage of assistive devices for disabled people, free transit, affordable childcare, affordable housing, reparations for Black Canadians, and land repatriation for Indigenous nations, plus climate justice and a Green New Deal in Canada.”

The irritating moisters behind this call themselves the “Resource Movement” and claim to have 200 members  from rich families, “who are in the top 20% of wealth and/or income.” The demand is that the T2 budget – due now in a few weeks – bring in a wealth tax that would, for example, suck about $4 billion per year from the Thomsons. The kiddo crusaders also want the top marginal tax rate jacked above 55% and enough legislative changes made to “stop the accumulation of wealth by the top 10% of Canadians.”

Say they:

“My family is in the top 1%,” says Ben Waitzer, one of the campaign’s organizers. “Over the course of my life, I’ve seen critical services, things like pharmacare and affordable housing go under-funded. I know that our society has more than enough money to fund the critical social programs and services we need. But right now, it’s just in the wrong hands.”

The wrong hands – in other words, the hands of the people who created that wealth. And so it seems the Bernie Sanders school of Hipster Marxism has arrived in our tundra. Two hundred misguided silver spoon socialists who want free everything and endless social justice, despite the cost. How noble. And cute.

But wait. Look here:

Resource Movement is a project on Tides Canada’s shared platform. Tides Canada is a national charity dedicated to a healthy environment, social equity, and economic prosperity. The shared platform provides governance, HR, grant and financial management for leading social and environmental initiatives across the country. Tides Canada maintains full legal and financial responsibility for Resource Movement.

Don’t talk about Tides Canada near AB premier Jason Kenney. His head will explode. The group has been accused of using tens of millions of dollars (mostly from the US) to actively undermine Canada’s resource industry while employing the cloak of climate change action to ensure our nation’s natural resources stay locked in the earth. You know the pipeline protests now illegally blocking rail lines and snarling cities? Yep. Same guys, working with their indigenous allies.

Whether you support this or not, it’s worth understanding the connections between the wealthy Mills, Tides, Ottawa and Mr. Socks. Part of that link is Sarah Goodman, who a few weeks ago was appointed as a special advisor to Justin Trudeau, working within the Prime Minister’s Office (PMO). Actually Sarah’s been rubbing shoulders with the boss since the fall of 2018, first as a policy advisor, then the PMO’s deputy director of Cabinet and Legislative Affairs. She moved up the ladder when disgraced chief of staff Gerry Butts  was incinerated by the Lavalin affair. Now Sarah’s the Senior Advisor on Climate Action and Sustainable Economy. It’s a key position within the inner circle.

Sarah Goodman and Justin Trudeau sharing time in the PMO.

.

And before that? Sarah Goodman has a long history of social activism, and for almost five years was Senior Vice President of, yes,  Tides Canada. She’s roundly considered by critics to be part of the nation’s anti-oil elite.

Now, this may mean nothing. It may mean something. But our prime minster has a senior advisor with direct links to a group that wants to tax the poop out of people making more than eighty grand, create an inheritance tax to Hoover the Boomers and scare off the wealthy folks who do silly things like create thousands of jobs (the Irvings employ 18,000 people; the Westons have 140,000 workers).

Does this hint that a wealth tax could be on the agenda? An inheritance tax? A higher marginal tax rate than the current 54%? Or how about free drugs, free transit, affordable housing for all, and more money for the goofs who are currently blocking the nation’s rail lines? And, hey, why’s the prime minister surrounding himself with anti-resource warriors?

Beats me. I just come here for the dogs.

By the way, where’s the official opposition?

$    $     $

Okay I know today’s post was billed as a guide to how much real estate a person can afford without committing financial hari-kiri.

That will come. Relax. Put the knife down. Step away from the keyboard. Hang up on your realtor. We need to talk. Tomorrow.

Source

Two years ago blog dog Jeremy bought an ugly house in a North York hood where most of the houses are, well, ugly. He paid $855,000 for a pile of bricks on a 25-foot lot.

This week a virtually identical house, also ugly, came to market. Twenty-five feet of dirt, renovated but with a leaky skylight (says our guy), plus cracked basement and lopsided floors. The price was $949,000, considered to be slightly below-market and engineered by the listing agent to create a bidding war among FOMO’d desperados.

It worked. There were 19 bids. It sold in a day or so, for $1,342,000.

“Has the world gone crazy?!?” Jeremy asks. And we know the answer. It appears to be starting. All. Over. Again.

Last week we told you about the battle between FOMO (fear of missing out) and FOSC (fear of selling cheap). This has resulted in a serious paucity of listings. Homeowners are apparently vexed. (a) They understand they cannot sell their home, no matter how big the windfall, and buy a better one in the same city because of price escalation. (b) Tons of people own houses worth a lot of money but they lack the income to pass the stress test in order to finance another one. Trapped. And (c) it’s all about greed. If prices are going up, why not wait and sell for more later?

Listings have plunged. In Toronto, Montreal, Vancouver, Ottawa. Meanwhile Covid-19, that pesky little pecker of a virus, has upped bond prices and dropped yields. So mortgages are cheap again, just in time for rutting season. This has some people thinking Spring of ’20 is going to smell a lot like that of 2016. FoMo-20.

At least, so says RBC (which, coincidentally, sells mortgages). Here’s its latest report:

Are Toronto home prices sky-bound again?

It’s looking more and more like early-2016 all over again for the Toronto housing market. This is not a good sign. Those were the days when things started to heat up uncomfortably, propelling property values sky-high in the ensuing year. January real estate board-level statistics show low inventories and further price acceleration… we could see the benchmark price (which rose at the annual rate of 8.7% in January, up from 7.3% in December) increase at a double-digit pace within the next couple of months if the market tightness persists. .. Worse, if supply shrinks even further, prices could spiral upward like they did in 2016 and earl 2017. The last thing the market needs right now is any policy move that would tighten things up even more—be it by restricting supply, or more importantly, by stimulating demand.

Hey, Chateau Bill and T2 – did you read that? Don’t goose demand, guys. No loosening up of the stress test. No new tax credit, moister-loving, newbie-buyer incentives. In fact, don’t even talk about it. And tear up that mandate letter from the PM to the Finance Department insisting mortgage rules be made “more dynamic.” Maybe ”more toxic” would be a better phrase.

Now, we know Toronto, southern Ontario, Montreal, Ottawa and places like London and Halifax are hot – low listings, bubbling demand and rising prices – but what about Vancouver, that socialist, tax-riddled paradise? Eitel Insights, the local property analyst guru, is forecasting average detached prices will sink further and soon take values back to 2015 levels, despite a big jump in January sales.

But the bank sees it differently, saying recent soft prices in Van are not because of a trend. Instead, it’s snow.

Weather was a big factor in January in Vancouver. Although the Real Estate Board of Greater Vancouver reported a significant 42% jump in home resales from a year ago, we figure activity fell materially (perhaps as much as 15% or 20%) from December on a seasonally-adjusted basis due to major snow storms that hit BC’s Lower Mainland region. So last month wasn’t a good read of the underlying trends, which we continue to view as strengthening. The benchmark price was still down (-1.2%) in January from a year ago but that’s about to change soon.

Wow. Sounds like the country’s biggest lender is blowing hard on the fire. Nothing like flames, conflagration, sparks and billowing smoke to fuel the FOMO. The result is 19 offers on a dodgy North York house fetching $400,000 over asking.

Of course all this adds to the steamingly monumental pile of debt we’ve accumulated. And it’s interesting the proportion of highly-indebted borrowers is exploding. That’s people with debt equal to at least 450% of what they earn. You know – the hip urbanites buying $900,000 houses for $1.34 million, who think they’re smart. Soon one in five borrowers will be in the club.

Source: www.Ratespy.com

Remember way back to yesterday’s post on retirement realities? The more debt piled on, the greater the debt service charges, the less people have for savings and investing for future cash flow. At the end of the day we all need income more than a roof. Leveraging up residential real estate when markets are hot might feel genius, but a one-asset strategy is rife with risk. Only buy real estate when you can afford it.

When’s that? Come back tomorrow.

Source

Twenty-five years ago, ricocheting from my first political career, I wrote a cheeky little volume called “2015: After the Boom.” My publisher, Key Porter Books, was struggling at the time (unbeknownst to me), so when the thing went on to sell more than a hundred thousand copies, I was an office god. (The Internet eventually killed Anna Porter’s creation. And I became a pathetic blogger.)

Anyway, the ‘boom’ referred to in the title was the Baby Boom. The book’s thesis was that my cohort was truly screwed if people didn’t start investing and stop believing their houses would save them. They had two decades to prepare for a retirement crisis – to create an income – and over that time financial markets would gallop. (Turns out stocks went up an average of 7% per year since then.)

So here we are. Junior boomers are 56. Senior boomers are 76. Every week another 5,000 of them retire – that’s a quarter million annually. Every four years it equals the population of Edmonton. Wrinklies everywhere. It’s an epidemic.

What are the financial facts? A Ryerson University think tank has just summarized them for us. And, oh yes, we are s-o-o-o pooched.

• Of 19 million working Canadians only 6.2 belong to some kind of company pension plan. Two-thirds have nothing.
• The median savings for those families entering retirement without a pension plan: $3,000
• The median family income for those households, including CPP, OAS and GIS: $31,400.
• The median income for the lucky minority with a pension: $55,400

But wait. It gets worse – especially if you’re not retired and pay taxes. As I predicted in the 90s (when most Millennials were playing with their toes) we have a demographic time bomb on our hands. Look at this:

In 1986 there were twice as many kids under 15 as oldies over 65. Now, reversed. There are more seniors than children. And it just gets more intense for the next few decades. It’s been almost 50 years since we had a birthrate (2.1 per woman) that replaced the population. Yes, we have more immigration, but not enough to alter that chart above.

The pressure this will put on government is huge. But a string of prime ministers – Trudeau1, Mulroney, Chretien, Harper, Trudeau2 – have completely ignored it, despite the inevitability. The 5.8 million Canadians now collecting OAS will grow to 9.3 million in ten years. Life expectancy has jumped, and so will health care costs. Already the government needs to run a massive deficit to get by. What will happen to taxes in twenty years? What’s the plan? Do we cut the old people off, or expect the working people to fork over more?

After all, the Boomers’ kids (and their kids) complain bitterly now that life’s tough – real estate is unaffordable, incomes insufficient, taxes onerous and saving impossible. Plus, of course, most have no pensions. So without big housing equity, investment portfolios or corporate retirement benefits, what’s their plan for when the career ends?

Pooched. And we need to do something about it, say the Ryerson researchers in a paper released this week.

So here are the discussion points that have been raised, and the questions thrown out for debate. Give your thoughts. I‘ll pass them on.

• Should all employers, by law, provide a pension plan or a forced-savings scheme to their employees?
• Should employees be allowed to opt out of such a plan?
• Should the retirement age be raised, as Stephen Harper did (to 67) or was Trudeau right to drop it (to 65)?
• Should government be responsible for financial literacy and financial wellness among Canadians?
• Should people be encouraged to work well past the traditional retirement age?
• How do we increase the savings rate for low or middle-income earners?
• Boomers will croak soon anyway, so why not just take all their stuff? (Don’t answer that one.)

By the way, in case you didn’t know, current government pension support is not – repeat, not – enough to live on. It was never designed to be. OAS (paid to everyone at 65) is about $7,000 a year. The GIS of ten grand annually goes only to those in desperate need (under $18,000 income) and the CPP averages $800 a month. Recent changes will increase that to a maximum of about $20,400 a year – but not until 2065, when the average Millennial is 75. (Please make a note to return here at that time, and I will update the stats.)

Now you know why I wrote that book a quarter century ago. Fat lot of good it did. But I’m apparently too naive to stop trying.

Source

Chinese authorities welding shut the door of an apartment building containing infected people. Screaming citizens being dragged against their will into ambulances. A woman without a face mask being killed by police as they drag her from a car. Stories of five million residents of the most affected city escaping the quarantine, spreading coronavirus everywhere.

This is the stuff on Twitter feeds, in my email box and buried in a slew of comments made to this blog. The pandemic is apparently a great new way to dis Chinese and trash the totalitarian state. How much is fabricated is unknown. How much is true, also a mystery. Is coronavirus peaking, to be just a memory by July? Or is this 1918 again?

No idea. But let’s look at the financial fallout.

First, Mr. Market has decided this is a thing, not a crisis. Despite a few days of doubt, North American equities have barely budged off their record highs. That’s despite the fact Chinese production of everything from car parts to iPhone guts and pharma ingredients is basically kaput. There’s confidence this will all reignite, and soon.

Commodities aren’t so sure. And bonds are doubtful. Oil dipped below fifty bucks on Monday despite big efforts by producers. And money continues to pour into government debt, with bond prices higher and yields lower than they used to be. So somebody’s blowing smoke.

Scotiabank economists threw out a new virus report Monday. The historic quarantine measures taking place in China, “will likely fuel a sharper slowdown in China in the near-term with effects already spreading beyond travel and retail to production and export activities,” it said. This comes despite a boatload of liquidity that Chinese authorities are throwing into the market, as they try to keep Asian investors from freaking out.

Not much doubt the Chinese economy will crater in the short run. GDP growth, expected to be 6% in this quarter will likely hit 4.6%, says the bank, then rebound. For the year as a whole anticipate growth of 5.4% – which is a disaster for Beijing. The regime needs about 7% to keep all the wheels turning.

In the US now there’s noise this virus might tank real estate. Unlike here, Americans want, court and enjoy big Chinese investment in property. Buyers from China took title to $13.4 billion worth of American homes in the last year, which was less than half the amount invested in 2018 – thanks to the Trumpian trade wars. Now, just as that battle is winding down, the virus has frozen travel and investment. Washington has banned all foreigners who have been to (or live in) China from entering the States.

“You have less incentive to buy real estate if it’s unclear if and when you’ll get to visit the property,” says realtor economist Danielle Hale. “In the short term, the virus could dampen sales further.”

Meanwhile the Scotia guys say coronavirus will shave a little – not a lot – off our GDP. Unless, of course, it gets worse. Or if my Twitter feed isn’t just delusional, manufactured, scare-mongering, alarmist, prepper, race-baiting poop. Let’s see in July.

On a somewhat related note, a trip now to Vancouver where locals know houses would be affordable and unicorns roam freely in Stanley Park, were it not for the Chinese. The belief ‘satellite families’ and baggy offshore investors were holding thousands of properties empty for speculative purposes was a genesis of that city’s historic empty houses tax.

So for the past couple of years people who own real estate but do not live in it full-time or have long-term tenants, are required to pay an extra tax. It hoovers about $38 million a year and is intended (the lefties running the place insist) to force vacant properties onto the market, dropping the vacancy rate (and maybe rents as well).

Time for an update. The tax was just increased by 20% and homeowners had until a few days ago to declare whether or not their properties are occupied. What’s the status?

Originally housing warriors claimed 25,000 housing units in YVR were sitting empty, and demanded politicians act. Then in 2016, a report commissioned by the city and based on questionable evidence concluded 10,800 homes – most of them condos – were idle. That July the province gave the city the power to tax those property owners, and the new levy came into effect.

“Ultimately, the goal is to get thousands of units back into rental housing at a time when it’s almost impossible to find a rental home,” proclaimed the mayor.

So how many places are void?

In 2017, 1,131 were vacant. This year the number is 787.

There are 310,000 dwelling units in Vancouver, and 600,000 condos in Metro YVR. Do the math. Do 787 under-used properties pose a social threat?

The vacancy rate at the time the tax was imposed was 1%. Today it’s 1.1%. Fail. Rents have gone up, not down. And now YVR has just another tax, on top of the speculation tax, the foreign buyer’s tax and the big-house school tax. Taxes, of course, don’t make things cheaper so in Vancouver there’s just as serious an affordability problem as existed four years ago.

But there is more government.

Source

Condos are the entry door to home ownership for thousands. Hundreds of thousands. Most think they’re investing in real estate, but no dirt’s involved. No property. Owners own from the paint in. The rest of the building is their shared liability. That’s what condo or strata fees are for – to help pay for the cost of maintaining a structure worth millions. Plus insuring it.

If more condo buyers knew what they are buying into, many would freak. They’d bolt. And so they should. A liability disaster may be unfolding.

At first the crisis seemed remote and unique. Condo owners in Fort Mac facing disaster when premiums soared in a community that was attacked by wild fire. Property values plunging to near zero. Owners under water. Mortgages being cancelled.

Then it spread.

Premiums for condo corps in some Alberta centres spiked by 700% or more. Monthly fees escalated wildly as a result. Then last month every condo owner in the province became personally liable for up to $50,000 in potential payments. Condominium corps can now seek recovery of the deductible portion of an insurance claim to that level from any condo owner for damage originating in their unit – whether they caused it or not.

As one lawyer interprets it: “That means that if something happens in the unit and it’s not your fault — the toilet explodes, there’s water loss, water damage goes through to the floors below — and there’s a $50,000 deductible or a $25,000 deductible, the owners are now responsible for the deductible.”

But it gets worse. What if your condo building couldn’t get insurance at all? Then you couldn’t sell your unit. No buyer could get financing. Property values would collapse. Your own financing likely would not be renewed.

Which, as it turns, out, is exactly what’s happening in BC.

Catastrophic loss events like the 2016 Fort Mac fire, the blazes in central and northern BC or the 2013 Calgary flooding combined with climate change projections, changing weather patterns, escalating building and replacement costs and inflated real estate values (thanks to demographic demand and the mortgage stress test) have seriously goosed condo values, and lie at the heart of a liability crisis. Insurers are backing off. Risk has exploded. Most have no idea what may be coming.

In Burnaby, for example, one condo corp has seen the insurance premium escalate from $200,000 a year to over $800,000, resulting in a massive hike in monthly fees. Other developments have been unable to renew their policies at any price, cancelling sales of individual units since buyers can’t get a mortgage in an uninsured structure.

Says Tony Gioventu, executive director of the Condominium and Homeowners Association of B.C., “This will collapse our real estate industry because no one will be able to get mortgages and there will be no buyers and no sellers.” The buildings hardest hit are those where the most expensive units are located, plus any that have had recent insurance claims or where condo boards have neglected to keep up with big maintenance projects, fearing the impact of special assessments on condo owners.

In BC, the provincial government is being pressed to step in and legislate some kind of solution. Nationally the Insurance Bureau of Canada has engaged a risk manager to work with condo boards in finding ways of reducing their exposure. Nowhere in Canada is there any governmental cap on condo premiums, nor are insurers required to get approval for increases.

In Ontario the insurance issue is being called “a crisis’ by the Canadian Condominium Institute as a growing number of boards cannot find insurance, at any cost. The burden which could be imposed on individual condo owners is large as insurers reprice risk in a changed world. Already many of them, as first-time buyers, struggle with financing payments, property taxes, utilities and personal condo insurance as well as monthly corporation fees. The last thing they need is hundreds more a month in charges – or the potential of a huge deductible – as policies jump in cost.

What to do?

In Alberta every condo owner needs enough personal insurance to handle the cost of the potential $50,000 deductible now on their shoulders. Everywhere people with units must prepare for the certainty of rising monthly condo or strata fees, and perhaps a special annual assessment, as boards are hit with premiums they must pass on. It goes without saying as the cost of condo ownership escalates, property values will be impacted. Mortgage lenders know, and are already adjusting their own risk management.

Mostly, if you’re thinking about a condo purchase, think again. Be prepared to accept greater liability and have the capacity to absorb higher fees. Never, ever buy without requesting a status report from the condo board and having your lawyer parse it. That will show the state of insurance and should highlight developing issues. If you already own, ask the condo board for a copy of the current certificate of insurance – it will outline deductible costs.

Sorry, kids. Mom might have been wrong. You should have rented.

Source