Category: Accounting tips

Enough clucking from the wrinklies in steerage about their fat real estate gains, dividend torrents, thirsty underwear and dangerous conservative urgings. Welcome to Millennial Wednesday here at GreaterFool. Today let’s muse on some of the things the kids are worried about, which means the oldies can spend this valuable time washing their Def Leppard T-shirts and swilling Rogaine.

First up, Patrick the urban dude. “I participated in your various surveys, so I understand the majority of your audience is much older than myself. I’m a 26 year old business professional (CPA by trade, but now working as a strategy consultant) living in downtown Toronto, and making a better-than-average pre-tax salary of just north of $100,000 with no assets and roughly $45k in my TFSA,” he reveals.

Like many younger audience members of your blog, I am renting a place for $1,350, which is a very good deal for the area that I live in. I made the choice to move downtown when I had the option of living with my parents, so that I can take advantage of the downturn in the rental market. I hope to become a homeowner – hopefully – by the time i’m in my mid-30s (which to me sounds reasonably ambitious).

My questions: (1) For higher-than-average income earning younger adults, when is the right time to open up my RRSP? Should I be allocating a good chunk of my income to RRSPs instead to get some tax benefits this year?

(2) What is the best way to manage capital allocation for different goals? Right now I have a well-diversified self-managed TFSA account. I myself am confused as to what this is for (retirement?). Does it make sense to open up a TFSA/RRSP specifically for buying a home with a less risky portfolio (assuming I’ll cash out in ~10 years)? Otherwise I would have to take a big chunk of my saving in the one TFSA account to fund a house, which I realize opens up more contribution room, but not sure if there is a better way to plan out my finances. Writing this email in between meetings, so apologies for any confusion.

First, P, if you’re living downtown for thirteen hundred bucks a month, paying nothing for a car, commuting, property tax, condo fees or property maintenance and saving most of your salary, why stop? The moment you decide to become a real estate owner will immerse you in debt, immobility, recurring costs and (sadly) adulting. Enjoy this time. Use it to build. As you are.

Now, RRSPs are meaningful and much misunderstood by the moister class. These are tax-shifting vehicles more than retirement accounts. You can chunk 18% of your earned income in there, use that to reduce taxable income, grow the money without paying a cent to Justin (even if you like him) then suck it out cheaply during a year of sabbatical, layoff or transition. Moreover, it’s the perfect thing to feed if you do end up succumbing to house lust.

The Home Buyers’ Plan allows a $35,000 withdrawal from the RSP for a deposit. No tax. You need not start making repayments for two years. Then you have a long 15 years to put the money back into the fund (if you miss a year that portion is added to income). In the year of purchase ensure you make the max contribution at least 90 days before using the HBP, so you’ll also have a tax refund to spend on new appliances.

As for establishing a separate registered, low-risk, account for a real estate buy ten years away, bad idea. You do not want to be all in bonds or wussy funds – stay balanced. Roaring Twenties, remember?

Here’s Ann. Simple question.

I am a new Ontario teacher and would like to start investing my salary since I live with my parents and I refuse to enter the crazy condo game. I have about $25,000 so far, but will add 50k every year. How do you suggest doing this for a small amount like this?

Other than hooking you up with Patrick, the first thing to do is stuff your TFSA. Teachers have enviable DB pensions (defined benefit), which means a sizeable portion of pay is directed into that plan, reducing RRSP contribution room. Besides, if a teacher retires with a sizeable RSP, when it is eventually turned into a RRIF (after age 71) the forced income can push you into a higher tax bracket. Nasty outcome.

But a giant TFSA in retirement can pump out a steady stream of cash flaw and not a single dollar will be counted as taxable income. So, start there. Load up that sucker, then spill the extra income into a non-registered account (B&D of course). In retirement this will also provide tax-efficient income, thanks to dividends and capital gains. And are you paying your parents rent, Anne? Do it.

Now, Brian is 28, works in construction, and understands the incredible benefit of the MSU. “Your blog has changed my life!” he says. “I recommend it to everyone I meet who brings up financial talk.”

My partner took my advice (all from you) and in a year went from $10,000 debt to $9,000 in a TFSA and $3,000 that’s going in an RESP for our newborn. Thank you so much! I make 55-75k a year with a net worth now of 36k.

Jan is on mat leave – she makes 45k a year now but as her seniority in her union goes up it’s 100k+ a year in 6-8 years. We just had a baby boy and rent a basement suite outside Vancouver for $1,200. I see so many people in the emails you share grovel to you and say your advice has helped them and then they ask some dumb ass question about how can they work out buying this house they NEED.

I am not gonna ask you that. I want to know how to get my partner and I’s net worth to 250k! I was wondering if everyone at my age is getting these huge mortgages and overleveraging is it not the smarter thing to try and get an investment loan? Is it smart or worth the risk for my partner and I to try and get loans to stuff our TFSAs full right now and let the gains grow while we make the payments ? And will they loan us even half of what people get in a mortgage? Thank you for your time and devotion to guiding Canadians financially.

Don’t do it, Brian. Borrowing money to invest seems seductive, but the rate on a non-secured loan would be high and using the bank’s capital would just ratchet up the stress level, maybe encourage you to seek higher gains by absorbing more risk.

Steady work, good prospects, new baby, low rent, no debt, solid relationship – you are far wealthier at this moment than so many others your age who lose their way. Be proud.

About the picture: “This is Marley,” writes blog dog Peppy Sue. “She’s our 12-year old chocolate Lab, an independent, sweet girl who loves showing off her toys to friends and strangers alike. We sometimes refer to this as ‘babies on parade’. She is much loved and adds joy to every day.”

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We talk much about the real estate bubble. It’s real. And dangerous. Fueled by emotional buyers, greed and fear.

What about a financial bubble? Is that real? Also a looming risk?

Lately equity markets have been at record levels. The Dow. The S&P. The tech-heavy Nasdaq, even Bay Street. New York markets are up more than 40% year/year. The TSX has gained 35%. The recovery from the pandemic has been exactly twice as fast as the trip back from the 2008-9 credit crisis, despite being deeper, wider and a lot slimier.

Balanced and diversified portfolios are stable, growing and have gained a year’s worth of ground in a couple of months. Bond yields surged, then stabilized. P/E ratios (the relationship between a company’s stock price and its earnings) are at an historically high level, leading some worried people to believe things are bubbly and wobbly. They also point to the incredible amount of stimulus that has been thrown at markets and economies since Covid arrived – $20 trillion in fiscal spending by governments around the world, plus crashed interest rates and massive bond-buying by central banks.

This, they say, makes financial assets just as imperiled and gossamer as a $1.8 million suburban particleboard palace.

But wait. P/Es are high for a reason. Mr. Market is expecting big things. In fact, it sees the Roaring Twenties.

Is this rational? Aren’t we in the middle of a Third Wave with lockdowns, quarantines and desperate health care workers? Why would investors and markets be so blindly optimistic? And if financial assets are going parabolic, why can’t house prices do the same?

First, some of the reasons Mr. M is so aroused these days.

Look at the latest jobs numbers. In the States almost a million new hires (916,000) in March – the most since August. It was 50% higher than anyone expected. The jobless rate is back down to the 6% range. One year ago – April of 2020 – that number stood at 14.8%. This is an unprecedented labour market recovery. Ditto in Canada. We added 303,100 jobs last month, atop the 259,000 regained positions in February. It means of the three million jobs Covid incinerated, all but 296,000 have been recovered – even with the travel, tourism and hospitality sectors still  hobbled. Our unemployment rate has dropped from 13% to 7.5%.

Next, vaccines. They have changed, or will change, everything. The US is jabbing up to four million people a day in an inoculation campaign that has rocketed ahead with the Biden administration. In Canada we 21% of  beavers are now dosed (at least with the first jab) and our supply of vax is ramping up fast. Herd immunity in both countries should be achieved by late summer. Reopening fully will, the market believes, be upon us by autumn.

Next, profits. Expectations for corporate performance in the coming months are blazing. The latest guess is a jump for the first quarter of this year of about 18%, and for Q2 of between 45% and 55%. This comes on the back of surging consumer confidence, a record heap of cash in personal bank accounts and central bankers that will start to ease up on stimulus but promise to keep a lid on rates.

Meanwhile inflation is a threat, but remains low. April is a traditionally strong month for financial assets. The pace of vaccinations will explode higher over the next eight weeks. In the US Biden is spending huge gobs of money – $4.5 trillion more between the Covid bill and the infrastructure program – while in Ottawa we’ll learn next Monday how much more spending the T2 gang has planned. Expect a lot.

The Vix (that measure of fear and market volatility) has cratered over the last year, now at the lowest point since February of 2020 – when you never thought about virus. WFH will start to dissipate by the end of 2021, and the reopening trade in urban areas will be a major economic wave next year. Currently almost all of the 11 subsectors of the S&P 500 are flashing green. The latest factory data is awesome. Business activity, new orders and wholesale prices are all increasing. It’s the Biden Supercycle. The Roaring Twenties.

In short, invest. Stay invested. Be balanced and diversified. Try not to be a cowboy. Stop reading doomer websites. Wash your hands, keep the mask on, get a shot, focus on your dog and look forward to what’s coming.

Now, what about real estate?

Yup, the gasbag isn’t done yet. Cheap rates, WFH, nesting, suburban flight, tawdry realtor tricks and now FOMO & speculation have created a sad outcome.

But, wait. Economic reopening will eventually bring higher rates, which always impact housing. Absurd prices will narrow the universe of potential buyers. The enhanced stress test will reduce the amounts newbies can borrow. The winding-down of WFH (it won’t disappear, but seriously diminish) will hit suburban and rural values. The recent rapid rise in household debt has used up much future demand. And as markets stabilize, then correct, FOMO will be so gone.

It’s always good to remember what a bubble is. It’s created by a surge in prices driven by exuberant market behavior. In a bubble, assets sell for a huge premium over intrinsic value. And therefore, it never lasts.

We have one bubble now. It’s not stocks.

About the picture: “Blog dog Robin here, to introduce my little gal Lola, from Mexico.  Approximately 6 yrs old and possibly a Jack Russell/Beagle X,  Lola thinks she won the dog lottery when she met me and immigrated to Canada from the streets of Cabo 2 years ago now. Feel free to use her photo in your wonderful blog.  Thanks for all the advice and humour.  I never miss a day.”

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There will be no capital gains tax inclusion rate increase in the budget next Monday. No creeping tax on realized home equity, either. And no wealth or inheritance tax.

That’s the will of the Liberal grassroots, as expressed in the policy conference just completed. Add to that comments by the federal housing minister (‘no capital gains on residential real estate) plus a major TV interview by Ontario MP and housing policy dude Adam Vaughan (‘we can’t penalize homeowners counting on their houses for retirement’) and the conclusion is inescapable….

The feds intend to let the market run hot. They’re also scared about whacking investment capital or the TSX during a nascent post-bug recovery. So accountants everywhere can stop fretting.

But, but, but. The odds are large for a new tax bracket Hoovering off more from the high-income crowd, boosting the top marginal to 55%. Maybe a tad more. Just listen to that giant sucking sound. By the way, no hike slated for overall corporate tax rates, as the Third Wave crashes hard into employers. However, count on a lot more spending, continued deficits and a relentless increase in public debt (not that anyone cares any more).

The Liberal rabble wants a UBI, which is doubtful. They also want a free drug plan for everybody (more likely) and universal cheap child care (a certainty). Our finance minister has declared this a ‘shecession’, called the loss of female jobs because of Covid ‘dangerous’ and pledged to have the state far more involved in kiddie welfare.

In short, the budget on Monday next will raise little in new revenue, commit to a huge amount of new spending, kick the can of debt/deficit down the road so Gen Z can deal with it when they stop watching TikToks, probably guarantee a nice house in a decent hood slides further from reach and sets the stage for a federal election in the autumn, right after herd immunity arrives.

Oh, one more thing…

“I’m an irritating millennial living in Vancouver,” writes Allison. “I earn well above the median household income in this self-important village of a city. I’ve been looking at buying a condo for the last 3 years and haven’t pulled the trigger because (1) everything I can afford as a single person sucks; and (2) my rent-and-invest strategy is working out pretty well.

But – I live in a crappy rental apartment that is hundreds of dollars below market. If I want to move I will pay at least $700 more per month in rent. That’s a big dent in what I can invest each month. So why do rents feel like they are increasing so much faster than income is? How is the grotesque real estate situation influencing or not influencing that? How can rents possibly be limited by local incomes when median household income is around $75k? I would love for you to write a post that digs into how rents are or aren’t related to real estate craziness and local incomes and what it means for the finances of the average person.

Actually, Ali, renters are subsidized, coddled, supported and made special by politicians who suppress rents, ban evictions and hassle landlords. The costs of home ownership far exceed those faced by tenants, even in an age of cheap mortgages. If it were not for emotional market gains and tax-free profits, renting would be the totally valid choice. There’s no other compelling reason a young, single female (or male) would accept hundreds of thousands in debt, plus monthly fees and expenses to live in a place they could rent without care or obligation, investing the difference.

But we’ve lost our way. Real estate’s a cult now. Governments have fostered and helped create that. Prices are extreme and homeowners have become the elite. The maiden Chrystia budget will not have the stones to tax windfall capital gains, but it might just throw a bone to rising voters like Allison in the form of a rental tax credit.

The logic: if people buying real estate get a massive wealth advantage by completely avoiding taxation on gains which were handed to them by Mr. Market, renters should not be penalized just because they cannot afford to buy. So it’s only ‘fair’ the government levels the paying field by allowing a portion of rent to be deducted from taxable income.

Yeah, more government dependence and debt through reduced revenue. The T2 hole deepens.

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As of this week the word ‘master’ will no longer be allowed in Toronto. At least not as part of real estate listings. Toronto realtors have decided to follow the lead of CREA, the national organization, and cancel the word forever. From now on no master bedroom. No master ensuite, either. The politically-correct word is ‘primary.’

Why?

Master is “largely associated with terminology rooted in slavery and/or sexism,” the realtors say. It has “offensive undertones”, is an “outdated term” and inhibits “productive communication between real estate professionals and their communities.”

Of course, if there is a ‘primary’ room in a house it means the others must be ‘secondary’ or worse. That seems a bit hurtful, exclusionary, elitist and smacks of privilege. How will the people sleeping in those diminished places feel? Perhaps they need compensation.

Anyway, it’s progress. The Mills love it. And this jives with the loss of other innocuous but banned words many grew up with, like “Dominion” or “fisherman.” Could there be a master plan?

Oops.

About the picture: “Our Holly is our 16-month-old Sarplanenac,” says blog dog Sue.  “She is a Yugoslavia Mountain Dog.  They were bred to guard flocks cattle and sheep.  We are sheepless so she guards us.  She’s loveable and beautiful. You are welcome to use her photo.”

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   By Guest Blogger Ryan Lewenza

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The four most common questions I receive from clients are: 1) will the equity markets and my portfolio be up this year; 2) how I can pay less in taxes; 3) how do you maintain your boyish good looks and chiseled abs when you’re so busy looking after clients; and 4) where is the Canadian dollar headed. I look forward to the thrashing I’ll receive on the third question in the comments section but today I’ll address the last question on where the Canadian dollar is headed.

The Canadian dollar has been on a tear! Since bottoming around 69 cents to the US dollar last March, it’s rallied over 15% to roughly 80 cents currently. The strength in the Canadian dollar can be attributed to a few key factors.

First, oil prices have come back strongly since going negative for a day last March (that’s one for the books!). Second, the Bank of Canada (BoC) has announced that it will start winding down its emergency bond buying program in the coming months, being the first major central bank to end these emergency programs. And third, general weakness in the US dollar versus most currencies with the Federal Reserve keeping the ‘pedal to the metal’ by continuing to inject massive sums of monetary stimulus through their bond buying programs.

But stepping back the Canadian dollar has been largely range-bound for over six years now. Since oil prices collapsed from over $100/bl in 2014 it has taken the Canadian dollar down with it, falling from par or $1 to a low of $0.685 in 2016 (there was a re-test of these lows in March of last year). So from the chart below you can see the CAD has been range-bound between roughly $0.70 (technical support) and $0.80 cents (technical resistance).

Question then is: is the CAD on the verge of a big breakout or is it set for more range-bound trading?

Canadian Dollar Has Been Range-bound for Years

Source: Stockcharts, Turner Investments

Let’s start with oil prices.

While there are times when the relationship between the Canadian dollar and oil prices will disconnect or weaken, over the longhaul, oil prices still play a prominent role in where our dollar goes. As oil prices have come roaring back, in large part, due to expectations for higher demand when we get control of Covid, this has helped to drive our dollar higher as well.

Last year I predicted that oil prices would recover back to $60/bl where we currently stand. I’m getting more bullish on commodities as demand and inflation pick up (commodities do well in an inflationary environment) so we could see oil prices move a bit higher (possibly hit $70/bl this year), but I do not see oil prices hitting $90-100/bl any time soon so upside is fairly limited from here. As such, this should help to limit further upside in the Canadian dollar.

CAD Strongly Correlates With Oil Prices

Source: Bloomberg, Turner Investments

Next up is the ‘interest rate differential’ or the difference in government bond yields between Canada and the US. If our interest rates are higher than the US (as they are currently) then this is bullish for the Canadian dollar.

With the BoC announcing that it will be winding down its bond buying programs well ahead of the Federal Reserve, this has led to an increase in Canadian bond yields and our interest rates being higher than the US, which is supportive of the dollar. However, the BoC will still likely stay close to the Fed’s policies since they can’t risk hiking rates ahead of the US and our dollar moving much higher. Given this view I don’t see our interest rates moving materially higher than the US, so this should also help to limit further upside in the CAD.

Lastly, based on these factors (oil prices and interest rates), I developed a financial model that helps forecast ‘fair value’ of the Canadian dollar. Based on my expectations for oil prices and interest rates, my model suggests fair value at 81 cents, very close to its current level. Once again this suggest limited upside in the CAD from current levels.

Canadian Dollar Model Suggests Fair Value of 81 Cents

Source: Bloomberg, Turner Investments

Ok, time to bring it on home!

Based on my expectations for the factors discussed above, my financial model that suggests limited upside, and the range-bound trading pattern of the Canadian dollar, odds are we’re closer to a short-term top than a major breakout to the upside. Given this view we recommend investors/clients to stick with their US dollar investments and you may want to consider buying some US dollars for that vacation that you’re likely to go on next year as Covid begins to retreat.

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.

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Was that just a first warning shot over the realtors’ bow? Or the only volley?

Yesterday the federal bank cop upped the stress test rate, effective June 1st. Now anyone seeking an uninsured home loan has to prove the ability to carry payments at (a) the market rate +2%, or (b) at 5.25%, whichever hurts more.

Here’s what it means:

• About 5% of first-time buyers will have to borrow less or live under a bridge.
• Tighter credit limits may mean a harder time getting a HELOC
• The crazy almost-two-month-long warning may goose real estate sales and prices between now and the end of May.
• The feds smell trouble. “The current Canadian housing market conditions have the potential to put lenders at increased financial risk,” says the regulator.
• This is protect the banks, not the borrowers. “Lenders can experience losses both through the potential inability of borrowers to meet their debt obligations, as well as through declining values of the real estate properties pledged as collateral in mortgage loans,” says Ottawa
• The authorities are getting ready for a significant bump in mortgage rates once the pandemic is over (whenever the hell that may be).

So it’s something. But not a big thing. The feds are starting to acknowledge way too many people have taken on far too much debt. Mortgages which are not CMHC-insured pose a special risk to banks (of course) and this was the original reason the stress test came into being after the last bubble episode, in 2017-8. But since then things have just become more flaky, squirrely and scary.

These days real estate prices are totally out of control (a property in Renfrew, of all godforsaken places, just sold for $1 million over ask), household mortgage debt increased by $118 billion in the last 12 months and the percentage of people in the danger zone (loans surpassing 450% of income) is almost 25%. “We will continue to monitor housing market conditions across the country,” says the finance department. “To inform potential steps the government may take, we will closely examine the results of the consultation announced by the Superintendent of Financial Institutions.”

Hmm. That was suitably turgid and thick.

So what does it all mean?

Baby steps. Ottawa is clearly betting (a) house lust will eventually ease and FOMO-addled brains will repair, maybe; (b) mortgages are going to cost a lot more when Covid leaves and interest rates move back into a more normal zone; and (c) the last thing the T2 gang wants is for real estate to deflate, even though this is crashing family budgets and crushing affordability. Now that the slimy little pathogen has killed off tourism, travel and the service sector, housing matters. Nesting Millennials, be damned.

The announcement this week does little to chill the market and may in fact heat it up for the next six weeks. It may also signal the feds would rather see regulatory curbs used instead of policy changes to prick the bubble. And maybe it tells us that, ultimately, they like the gasbag just fine.

So will the first budget in two years be silent on real estate?

Beats me. No hints have been made. No balloons floated. At any time Chrystia could have dropped the market temperature with a warning about speculation and excess. She chose not to. They’re letting this thing run hot – following the lead of the Bank of Canada, stoking inflation, feeding expectations and now just easing up a little on the supply of tawdry debt.

It’s no surprise then this change was announced just a few days before the big reveal in Ottawa. ‘Toughening up’ on mortgage lending by the bank cop gives the politicians some cover for doing little or nothing more.

The perfect storm continues. Cheap money. Five million in WFH mode. Lockdowns and quarantines feeding the nesting instinct. Speculation, flipping, FOMO, spring and willing lenders – all fanning the flames around us. The move this week is to shelter the banks. It’s not to help your kid leverage a house, or shield her from herself.

That’s your job

About the picture: “This is Andy, the Welsh Springer Spaniel,” says James. “He lives in the Gulf Islands of BC. He turned five last week and is a deeply loved member of our family. Feel free to use this on your blog if you want. Thank you for all the great advice. Keep going.”

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Up or down? Better or worse? Should we party or turtle?

The numbers seem bewildering. Seven in ten own real estate, which is going insane. The personal savings rate has not been this high since I had black chest hair (thick, manly, be envious). Stock markets and financial assets are galloping. Portfolios plumping. The US economy and corporate profits are on the verge of a melt-up.

But whoa. Most of Canada’s in a serious Covid lockdown. Household debt is growing by a fresh $10 billion – per month. The average family can no longer afford the average house. And here’s the latest Misery Index: extreme. The doomers at MNP have revealed 53% of us are just $200 or less each month from insolvency – unable to pay regular bills.

This is the worst in half a decade and represents a fat 10% jump from four months ago. Of the 53%, a third are already pooched – zero money left at month’s end.

Says the debt agency: “The anxiety Canadians are feeling about making ends meet – or already unable to do so – tells us we may eventually see an avalanche of households falling behind on payments or defaulting on loans, mortgages, car payments or credit cards.”

By the way, of those surveyed here are some ugly facts:

• 25% have taken on more consumer debt during Covid
• 20% are depleting savings to pay regular bills
• 14% are using Visa & MasterCard to make bill payments. 10% are using a LOC or bank loan to do so.

Now, how do we possibly square this with Ottawa having just sent the better part of $100 billion directly to people during the pandemic? Or $108 billion sitting in personal savings accounts? Or detached house prices in both Toronto and Vancouver averaging $1.7 million? Or a cottage Bill was looking at in the Kawarthas with electrical problems being listed at $995,000 and selling this week for $1.5 million? Or, of course, puppies costing $5,000?

Because we have cleaved. The people doing okay – WFH, on salary, employed, saving in the pandemic, buying houses, building equity, growing assets – are living in an alternative universe from the rest. In that other world a huge mess of people are out of work, mostly in the retail, food service, hospitality and tourism sectors. A disproportionate share are young, women and minority. The Third Wave lockdowns in Ontario, BC, Alberta, Saskatchewan and Quebec are making it worse. Big job gains we saw in the winter are being erased again. These are the people who apparently will never own a house or retire secure. We are building two Canadas.

There’s no easy fix for this. But rest assured the federal government will try, starting with the budget in ten days. The ‘have/have not’ disparity will be the impetus for more public spending and higher taxes.

The right-wing CD Howe Institute this week is calling for a 2% jump in the GST, reform of public pensions, dumping first-time homebuyer help and lowering corporate taxes – along with subsidizing both wages and child care costs for lower-income families.

Most of the big banks are calling for cold water to be thrown on the dumpster fire called the real estate market. Lefties in the Libs and NDP want no-cost pharmacare and a UBI so nobody has to worry about paying their cell bill ever again. Accountants are telling clients to prepare for a higher capital gains inclusion rate plus a new tax bracket for the over-$400,000 income crowd. Some people want speculation and capital gains taxes on residential properties. US-based tech giants and social media platforms are preparing to be whacked.

Of course the budget on the 19th will be geared for an election later this year once the vaccinations have rolled out fully. If the T2 gang wins, the 2022 plan will be the one you need most worry about – if you inhabit the Have world. There is no way the status quo remains unchanged in that scenario, with federal finances shattered by pandemic spending, tax revenues curtailed, public debt on its way to 100% of the economy, real estate unaffordable and structural unemployment upon us.

Prudent people who wish to pay their fair share and no more need to understand this. And act.

First, shelter assets. Canadians have not used 80% of the RRSP room they’ve earned, for example. Not only can you chop taxable income with a contribution, but you effectively remove those assets from anything Chrystia the Impaler comes up with – at least for years. Ditto for TFSAs. On average we have filled less than half the potential amount granted. Worse, the bulk of these funds are sitting in savings accounts and GICs paying less than inflation. Fix that. Third, open an RESP for your kids. Invest the max each year and get a grant. This is the easiest 20% you’ll ever make.

Worried about higher capital gains taxes? Then realize gains now. Any change in the inclusion rate (currently 50%) is unlikely to be retroactive. This goes for investment real estate as well as financial assets. In fact, given the certainty of higher taxes and the unsustainability of the property market, is there a better moment than now to bail on real estate? Sell high. What a rad concept. If you think that over the long term government will allow hundreds of thousands in taxless, unearned profits on a house while so many people can’t pay for food, you’re dreaming. That ship sailed when Covid arrived.

Consolidate. Shelter. Keep your head down. Yes, live quietly among the masses.

Maybe they won’t notice.

About the picture: “This is Islay,” says blog dog Brock, in BC. “She is a 3 year old Eurasier. Queen of her castle in the backyard, for now. She is also a victim of this housing market. Her castle is being put up for sale by the landlord and we most likely will be evicted with the new buyer.”

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  By Guest Blogger Sinan Terzioglu

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As equity markets have recovered significantly over the last year and are making new all-time highs, some are taking on more risk to supercharge their returns.  Whether it be by purchasing individual securities like GameStop, utilizing leverage or speculating in crypto currencies and derivatives, risk management has increasingly become looser. The last few months remind me of the early 2000s as the tech bubble was forming.  Free trading apps like Robinhood and WealthSimple have made it all too easy for people to speculate and engage in dangerous behavior.

Leverage
Borrowing to invest is risky.  Some have achieved great results with leveraged investing over the long term but many have not.  Markets inevitably test investors, so if you don’t have a long term mind-set, leveraged investing is definitely not for you.  Those who have succeeded did so by not overleveraging their equity and developing a plan for turbulent times.  Most importantly, they invested in high-quality productive assets where the risk of a permanent loss of capital was low.

We all know about the success of Warren Buffett and his right-hand man Charlie Munger, but few have heard of Rick Guerin, once considered a super investor after achieving market-beating returns in the 1960s and early 1970s.  Guerin had worked with Buffett and Munger on a number of deals.  Buffett supposedly said Guerin was just as smart as he and Munger, but the big difference was simple: Guerin was in a hurry.  Heading into the market downfall of 1973 and 1974, he was levered with loans and got margin calls he couldn’t meet. Thus, he had to sell his Berkshire Hathaway shares to Buffett for under $40 a piece.  Today those Berkshire shares are trading around $400,000.

Reddit Stocks
One of the most traded stocks recently on the WealthSimple app is the theatre chain company AMC.  This security has a large short interest and has been one of the most talked about securities on the online chat forum Reddit.  Most individual investors should not be purchasing a security like this as there’s the real possibility of the company going bankrupt.  AMC owes over $5.7 billion and some of the debt has taken on over the last year bears a double-digit interest rate.  Over the last 12 months AMC has paid more in interest than it earned in operating income in each of 2017, 2018 and 2019.  Of course it is possible the company can turn around but its share price could significantly fall in the meantime as the company works on changing its operating model.

If you are going to invest in highly speculative securities like this at the very least don’t hold them in registered accounts like TFSAs and RRSP since all of the contribution room for these accounts should be handled with care.  Once lost you cannot get the contribution room back.  Speculative securities should only be held in a non-registered account so you have the ability to utilize capital losses to offset future capital gains.

Crypto Currencies
I am often asked about crypto currencies like Bitcoin and why we don’t invest in them.  There is no denying digital currencies will increasingly become a part of our lives but our view is that this is not an investible asset class.  While the price gains have been spectacular no one can value something like Bitcoin because it produces no cash flows and therefore lacks an intrinsic value.  That is not to say the price cannot continue climbing because it certainly can but without the ability to calculate an intrinsic value you are simply speculating on what others will pay.  One of the most important things when striving for long term investing success is to not lose money and since we cannot value crypto currencies there is no margin of safety.

Some argue that if you allocate 5-10% to crypto currencies this provides diversification benefits to a portfolio.  While that may be true for a period of time it still does not reduce the risk of permanently losing capital.  From a technical perspective, I wouldn’t bet against BTC right now but fast forward a year or two and I would not be any more surprised if Bitcoin doubled in price or lost 50%.  So if you have conviction and are ok with the speculative nature of this asset class than good luck to you but at the very least position size responsibly.

Derivatives
Recent news about a US family office blowing up after using swaps to leverage their equity by over 5x has once again highlighted how dangerous derivatives can be. History is full of disasters like this where a recent streak of success led to increasing greed and ridiculous amounts of risk.

Over the last few months there have been many stories of individuals buying call options on GameStop and making boat loads of money.  They have shared their profit screens online and this has led to others to bet big on call options as well.  As GameStop jumped from $20 to over $440 per share this produced enormous gains for those lucky few but as the stock dropped like a rock from its highs to $40 a share there is no doubt many lost significant amounts of money.  This is no different than taking most of your money and spending it on lottery tickets.  The options market is very complex and unless you are willing to put in the time to learn and manage risk most individual investors should stay away from it.

Always Think Long Term
You will greatly increase your probability of achieving investment success by adopting the mind-set of getting rich slowly.  Being patient is key.  What made Buffett and Munger so successful is that they have been patient investors for over 2/3rds of a century.  Earning a reasonable rate of return is important but longevity is significantly more important.  You must ensure you stay in the game and continually evaluate your risk and behavior.  As Buffett once said:

“It is not necessary to do extraordinary things to get extraordinary results”

By developing and following a long term plan you significantly increase the odds of meeting your financial goals.  Investing intelligently is about controlling your expectations, your risk and your tax implications.  Most importantly, intelligent investing is preventing yourself from being your own worst enemy.  Until you have achieved a portfolio that will be able to provide a pension-like income stream for several decades most should not even consider investing in individual securities.  This takes time and the earlier you start and invest in tax-advantaged accounts the sooner you will achieve your financial goals.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

About the picture: “I’m recently retired, have lived and worked all over the world in the last 20 years – Dominican Republic, Cuba, France, Hong Kong, Singapore, Brunei, Indonesia, Thailand, Abu Dhabi and South Korea,” says blog dog Carole. “Amazing expat life of adventure, but happy to return to live in Canada (expensive but worth it). Picked up this “desert shepherd” from the streets of Dubai while working in the UAE. Maybe you can use this photo of Peepster. I’ve got a great diversified diy portfolio of equities (dividend stocks, etfs) and am grateful for direction gleaned from your blog. Thanks again.”

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A survey by Merrill has found that 70% of Americans now own equities. Stocks. Funds. ETFs. Financial assets. The typical 401k (equivalent to our RRSP) is stuffed with liquid, publicly-traded, negotiable investment assets.

And here?

In 1991, 64% of us owned real estate. By 2016 that grew to 67.8%. And it has now touched 70%. Peak house.

US household debt has gone down in the last decade. Ours has soared. Now there’s every indication we beavs are on the cusp of a supernova real estate gasbag that will (a) eat the entire country and render seventy per cent of us landed gentry millionaires, or (b) blow up and end badly. Guts, spleens, mortgages everywhere.

How can there be middle ground, at this pace of events?

• As forecast a few days ago, the GTA numbers have turned out to be epic. Scary. Historic. Sales of 15,652 properties in a single month, a 97% increase. Average property price is up 21.6%, to $1.1 million. Remember two months ago we were musing when the million-dollar mark would be hit? So quaint.
• 416 is ridiculous. 905 is ludicrous. Sales in the burbs and little weensy hick cities surrounding the Big Smoke exploded 111% in March and prices jumped 31.4%. That was the most, ever.
• Pollster Nik Nanos confirms the obvious – it’s FOMO fueling this rocket. His latest survey of consumer sentiment was taken just as Ontario went into a new month-long lockdown and as Covid was romping through BC, Saskatchewan and Quebec. It found 67% expect house prices to keep inflating. To put that number in context, the average has been 38% for the past 13 years, and it never before exceeded 60%. We are smitten. Obsessed. House lusty.
• House prices have now outpaced appraised values. And that’s a problem. Blind auctions, bidding wars and delirious buyers have pushed sale prices past established market valuations. It means a growing number of people face a come-to-Jesus moment when they go to arrange financing and lenders balk to giving them enough to close the deal. Consequences of that are coming.
• First-time homebuyers are officially pooched. The average price  (nationally) for entry-level digs is $433,000, says BMO, but given the typical income of newbies, the most they can afford with 5% down is a home selling for $248,000. In Toronto that’s about one-third of a garage. The average Canadian house value, by the way, is $678,000 which is 25% higher than a year ago – and during that time official inflation has been 1%.
• Okay, so first-timers can’t buy. People who own homes can’t afford to sell them and repurchase. Fresh purchasers often can get financing because of bidding wars. Meanwhile sales are up a hundred per cent and prices are rising 12-15 times faster than the cost of living increase.

Conclusion: unsustainable. Impossible to continue. Irrational. Risk and danger.

The last time we had these conditions was in 1989. The market exploded over a couple of years. First-time buyers were shut out as a result. That fuel for the fire disappeared at the same time mortgage rates started to rise. Things collapsed. Prices were 32% lower within a year, and it took 16 more years for the average house to be worth what it had been in ’89.

Is there a catalyst for this to occur again?

Maybe. We’ll see. It could be a measure in the budget to tax speculators, punish investors or restrict mortgage credit. It might be rising interest rates as vaccines defeat the virus and the US economy explodes higher. It could be as simple as prices plumping to a point where even the most house-horny, desperate, FOMO-addled moister just gives up. Or it could be a withering of supply as existing homeowners realize it’s impossible to get back in after they’ve checked out.

In any case, current conditions cannot last. History tells us panic buying is a harbinger of collapse. Prices always shoot higher, faster just before the end. When a majority of people are absolutely convinced the party will never finish, it does. When average folk have no hesitation in swallowing excessive debt, risk is extreme.

So, kids, this isn’t my first rodeo. I kicked this dirt in 1989. And I know what’s coming.

About the picture: “This was the greatest Doberman of all time,” says William. “Champion Norry’s Dusky Shaitan (short name, Shai). My family’s champion show dog was a joyful companion for 14 years. My dad was a veterinarian so she enjoyed VIP care in his capable hands. The Oldsmobile 88 in the driveway, my bell-bottoms and Adidas all date the photo as a fond memory from 1972.”

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Louis, sadly, came here and read Friday’s blog post. What a drag

You might recall that the topic was the tsunami of wrinklies currently being unleashed upon our nation. Over the next decade and beyond, this rabble of aging Hippies, disco freaks, deaf former heavy-metal fans and people who actually remember dial-up Internet and cars with 426 cubic inches of displacement will get old and gnarlier. The amount of OAS and health care they’ll suck up will be epic. Governments will be cowed. The point of the post was to remind you in a world with shrinking pensions and voracious oldies, happiness is a fat retirement nest egg. So get cracking.

“After reading Friday’s post,” says Howard, “I thought that I would reach out for a possible opinion from you on the subject of hiring/retaining the services of an agency such as a bank for estate management and executor services.”

Whoa. Death. Howard obviously missed the memo about Boomers being eternal. However, this is something worth discussing, since most people utterly blow it when they write wills and name people to carry out their final (often weird) wishes. Maybe it’s time for a refresher.

“I ask because my wife and I, although still in our fifties, have tried to plan such issues as far in advance as possible,” our prepper blog dog buddy writes.

We have wills, POAs, Medical POAs and all funeral arrangements made and paid. The only thing we haven’t yet decided on is an executor for the will of the last of us to pass. Our current executor is an older friend, and I am hesitant to make our daughter executor simply because of the complexities involved in discharging the duties of an executor. My wife and I learned this from personal experience.

I have confirmed with our bank (the Penguin bank) that they offer professional executor services for a flat 4% fee, and this on the surface seems fair and reasonable especially noting that all of our banking & investing accounts are already with them. Any opinions on the subject or other options that you are aware of would be greatly appreciated.

First, everyone reading this should be like H & squeeze. Prepared. You need a will – even a quick holographic one (written by hand). You also need a POA, and typically spouses declare each other as such. Fine. Makes sense. The person granted power of attorney can make responsible and ethical financial or personal care decisions for the grantor if they’re sick or incapacitated.

But the executor role is different. It’s complex, complicated, technical and duties can go on for months or years. Most people make the wrong decision, which is to give the job to a child or other family member, simply because they know and trust them. Big mistake.

First, your kid or sister is (hopefully) going to be distraught and devastated at your passing. So why give such a massive and byzantine task to an emotional basket case? Second, being an executor  means shouldering the legal responsibility for an estate, including meeting all government and CRA requirements. This personal responsibility can last (depending on your location) for years. There have been many instances when a well-meaning but incompetent or sloppy executor ends up owning tens of thousands in back taxes for the person who croaked. Third, if the family member you choose happens to move to another province or out of the country, there are major issues. You need local. Fourth, what if that person gets old or sick or distracted or, fifth, turns out to be utterly unable to file your terminal tax return, to solve squabbles among beneficiaries, deal with the CRA in disposing business assets or lacks the accounting, tax and financial acumen to preserve the estate?

Can your adult son, the electrician with three kids, a full-time trade, two employees and zero spare time do this job? Is it fair to even ask?

Nope. Bad idea. Stop being emotional, and get rational. Your executor should be professional – institutional and eternal. It’s best to appoint an organization (law firm, for example, but better a trust outfit) that understands what ‘duty of care’ means – acting solely in the interests of your estate. A trust company does not get old and distracted. It has the professional in-house resources to deal with taxes and government filings. It’s objective and can carry out your wishes without emotional baggage, favouritism or soggy feelings. A trust company (for example – and all the major banks have a trust division, as do many financial brokerages) can deal with your will regardless of location, and executor duties are not wrapped up with one person – so no need to have a back-up appointed.

Why would you not do this?

Yup. It costs money. Howard is right – it’s typically 3% or 4% of the value of your estate, plus some other fees that can be waived or altered depending on the size of your stash. Is this outlandish? Robbing your heirs?

Hardly. For that you get complete peace of mind (always a good idea when you’re dead), certainty that your wishes will be carried out in a legal and timely way, assurance there’ll be no tax or regulatory nasties for your family, and confidence all the legal, accounting and investment help needed was in place, and paid for.

This is no time to be cheap. What are you saving it for?

About the picture: “Here is a picture of our Australian Shepherd, Blue Merle variety, named Sophie,” Leigh says. “She lived a full dog’s life to the age of 13 and passed away a few months ago. She always found the best in any situation and it was usually a mud puddle . Hope you can use this in one of your blogs.”  (If you have a canine to share, email me: garth@garth.ca)

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Planning on buying a home this month?

Don’t. You’ll probably pay too much.

Real estate analysts, economists, aficionados, experts and key players are now all expecting the same. Bubble, meet prick. The federal budget on Monday the 19th will either set up a blow to the housing market to be delivered by CMHC, or do the deed that afternoon. Either way, it’s coming. The result, says mortgage broker/blogger Rob McLister is clear: “They’re running scared because they’ve fallen behind the curve. They’ve got to do something to counter market psychology and the melt-up in home prices, and they will.”

More on what’s coming in a moment. First, here are the fresh stats, demonstrating without a doubt that Canadians are in the midst of a giant group pooch.

Vancouver’s on fire. So are Delta, Squamish, Whistler and points in between. “Activity reached unprecedented levels in March,” say local realtors, shocked. Regional sales are up 126%. Delta-South deals surged 195% and Whistler sales were up 196%. Detached houses in Van surpassed $1.7 million – and that is the muted Frankenumber, not even the average. It’s a hike of 18% from last year. And, incredibly, things are even worse in Kelowna and across the OK.

Sleepy Victoria? No better. The average detached house price is now more than $1.1 million and demand for real estate, says the local board, “is overwhelming.”

The sales increase was 93% in March with condo deals in a 112% moon shot. Listings have plunged by almost half as more and more owners figure they can no longer afford to sell, then buy. Average prices have risen 10%, but in a worrying explosion, values jumped 2.2% in March alone – an annualized 26%.

On the other side of the country, more astonishment. “Numbers continue to shatter records,” says Halifax agent Jeremiah Wallace. “Both weekly average and median sales are well above any recorded reports this week, and just look at the weekly average sold prices!!” Indeed. The typical SFH is going for $520,255 (cheap by national standards), compared to $357,000 one year ago. Yes, that is a 45% increase. The sale-to-list ratio in the HRM is now 108% while the DOM (days on market) has crashed by two-thirds.

And, wow, look at Calgary. Lots of virus, too much unemployment, commercial real estate market in the toilet, fighting the political green agenda – and now residential real estate leaping irrationally. Sales in March jumped 277%, say local realtors. New listings also coursed higher, but not enough to satisfy demand. As a result the average price has jumped in the last few days to more than $534,000 – up an incredible 32.6% from year-ago levels.

No stats out of the GTA yet – those will come in the next day or two. They will be epic. But look at the story in southwestern Ontario. In blue-collar Windsor sales swelled almost 40% over March, 2020 levels and are ahead year-to-date by a third. Meanwhile the average price has blossomed even more than in Halifax – from $355,000 to $531,000, or 49.4%.

Does this sound sustainable to you? It doesn’t to anyone in the biz, including major lenders like the banks. Over the last few weeks, as chronicled on this pathetic blog, economists for RBC, BeeMo, TD and Scotia have decried the FOMO sweeping Canada, warning the hammer will drop. Even the Bank of Canada and the Pollyannas at CMHC, as well as the house-humpers in hot zones like the GTA are now convinced Ottawa cannot fail to act.

The nation is still in recession and pandemic. The largest provinces are in lockdown. We just passed one million Covid cases. Unemployment is unacceptable, tourism and travel are dead for another season while tens of thousands of small businesses – restaurants, hair salons, gyms, retailers – will not survive. And now housing is being pushed beyond the reach of average families with average incomes.

The result? People are gambling. Stretching. Exposing themselves to any economic shock by borrowing excessively to ride a market they believe is racing past them. It’s classic end-of-bubble behaviour. “Never before have so many homebuyers been so leveraged,” observes broker McLister. Look at the number now taking loans exceeding 450% of their incomes. Truly scary.

Source: OSFI. TDSR – Total Debt Service Ratio.  LTI = Loan-to-Income ratio.

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So what happens?

Wait and see. It could be a drop in acceptable loan ratios, higher downpayments, a spec tax or restrictions impacting investors. But it will be something, and could hit the market broadsides.

Do you really want to have just ‘won’ an emotional, excessive bidding war and handed over your certified $100,000 deposit cheque to buy a property whose worth could be torpedoed by Chrystia the Impaler at 4:30 pm ET fifteen days hence? Will the appraised value drop? Will the lender balk at financing what you need? Will you be trapped? The greater fool?

These are days one looks back upon, asking, ‘How did I not see that coming?’

About the picture: “This is Maina,” says Martin of La Conception (near Mont Tremblant), “in a picture taken on this beautiful Easter weekend. She is 17 years old now. Thank you for your awesome knowledge-sharing blog!”

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