Category: Accounting tips

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

But back to policy. What should leaders do?

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

Well, Mike knows better.

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

…and had this to say:

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

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

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

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

Ah, but this is just the start.

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

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

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

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

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She lived a couple of doors away in our townhouse complex in mid-town Toronto. One day yellow CAUTION tape went up around her front entrance facing the common courtyard. In the underground parking garage the guy living beside us had some information. “SARS,” he said.

She was dead a week later.

That was 2003, and the last time anything like this coronavirus now flooding every newscast (along with a deceased basketball guy) was top of mind. Some people say the Chinese government’s unprecedented quarantine of 50 million people is beyond extreme. Others fear the authorities are still trying to cover up a pandemic. In the middle of a developing problem – and in a world where nothing’s remote anymore – nobody knows.

SARS was briefly terrifying. But the Toronto subways kept running. Nobody wore face masks. Ontario declared a state of emergency, but only hospitals were affected. In the end 44 people died in a city of six million. By comparison, about 3,500 are swept away each year by flu in Canada (eighty thousand Americans died of influenza in 2018). No headlines about that.

Well, investors have been taking few chances. The Dow opened 525 points lower on Monday, oil swooned and Chinese prospects dimmed along with the yuan. Stocks have been flirting with record highs of late, so risk is taken off the table quickly when uncertainty arrives. If you’re a day trader, this spike in volatility is what you live for. If you’re a normal person, though, what now? One terrified guy emailed me at midnight Sunday saying he was turning his paper assets into bars of silver. What a disaster that’ll turn out to be.

Well, here’s what we know. The virus is spreading and will continue to do so. Until it stops. Fewer than a hundred are dead globally. That may reach into the thousands. Perhaps it could be hundreds of thousands. In 1918 the Spanish Flu killed more than 20 million people after infecting a third of the world’s population. But that was then. Lousy, spotty health care. No vaccines. No global response. No containment. And a world exhausted and impoverished by WW1.

The new coronavirus could end up being like SARS. Unlikely to be worse, but there’s absolutely no telling. What we do know is history. As a Scotiabank report stated Monday about the SARS crisis: “Arguably the biggest economic lesson from that experience is that fear is the biggest risk to the outlook.” If the 2003 experience were repeated now, the bank figures, our economy could be slightly impacted and the biggest result might be a Bank of Canada rate cut to counter it.

The real issue is China. In a globalized world a plop by the No.2 economy would ripple across the world. It’s now the engine of the planet, like it or not. That’s why oil prices have dropped, anticipating a potential slowdown, along with copper, nickel and iron. No country, let alone the second-largest, can wall off 50 million people, extend national holidays, suspend tourism and shutter its financial markets for a week, without having an impact.

So, stocks down. Bonds prices up. Yields down. Oil down. Gold up. Risk off. And this week brings with it a host of corporate earnings reports plus central bank announcements. Yes, turn off BNN, even if Ryan is broadcasting. It’s all just noise. In fact street vets who’ve seen this kind of panic over and again call it an opportunity. Buy the dips, they say. We’re in a strong, fact-based uptrend with strong market momentum and this shall pass. Like SARS. Iran. Brexit. Hong Kong. Impeachment.

But for most people the best course of action is to do absolutely nothing. Certainly not go to cash. Or buy precious metals. Or a Glock. Or bury your retirement savings in a can in the garden (when it thaws). In fact make sure you’ve topped up the 2020 TFSA contribution, and start saving money for the annual RRSP deadline at the end of next month. If you have new money to buy assets with, a drop in major equity markets would make those ETFs even tastier. “It’s way too early for fear a global pandemic,” says one analyst. “Should it happen, however, we would see markets down 15%, give or take.”

Markets that soared 30% in 2019 and have continued that incredible climb this year are ripe for a pullback. What better excuse for profit-taking than some weird, animalistic, Twitter-hyped mutant Asian flu bug? It came unexpectedly. It will peter out. Meanwhile corporate profits are solid, central banks have been supportive, the US economy’s hot and everybody’s making bank.

Just don’t watch ‘Contagion’ tonight on Netflix. And wash your hands a lot.

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  By Guest Blogger Sinan Terzioglu

Like millions of others I’m a big fan of Warren Buffett.  One of his most famous sayings is “Rule number 1: Never lose money.  Rule number 2: Never forget rule number 1.”  I think about these rules often.

Most investors should not hold individual securities, at least until they have built a balanced and diversified foundation to provide pension-like retirement cash flow.  How large that foundation should be depends on goals and circumstances but a good starting point is to aim for 30 times annual expenses.

Aside from the much higher risks in holding individual securities is the downside in holding these securities in registered accounts like RRSPs and TFSAs. We only get so much room in these, so they should be managed with a lot of care.  Most people lack employer pension plans so the responsibility is theirs to create and responsibly manage their own pension-like retirement portfolio.  Of course nobody buys individual securities thinking they’re going to lose money but the reality is the odds of suffering a loss are significantly higher than most realize.

I was recently asked: “I bought a marijuana stock a couple of years ago and it fell over 50% and now it’s bounced off the lows but I’m still down a fair bit.  I should average down because it’s so much cheaper and it has to go back up, right?”

Questions like this worry me.  Averaging down often results in throwing good money after bad and compounds the loss.  Most are better off to cut their losses and move on especially if a position has already become a decent portion of their portfolio.  Over the last 20 years, we have seen a handful of Canadian stocks that briefly became the most valuable companies listed on the TSX only to suffer catastrophic losses.  Twenty years ago Nortel Networks was the darling of the Canadian market before causing billions in losses.  A decade later Research in Motion (now Blackberry) fell from stardom and more recently Valeant Pharmaceuticals (now Baush Health) crashed, along with a countless number of energy and mining stocks.  When you lose 50% on a position you need a 100% return just to get back to even.  Think about the lost opportunity cost of the missed compounding.  That adds up to big money over the long term.

The odds of success holding individual stocks is a lot worse than most think.  Professor Hendrik Bessembinder of Arizona State University studied data on ~25,300 stocks listed in the U.S. for the period 1926 through 2015.  He found only 4% were responsible for the overall net gain in the U.S. market over those 90 years.  The other 96% collectively matched one-month Treasury bills over their lifetimes. 57% of stocks failed to even match one-month Treasury Bills.  More than half delivered negative lifetime returns.  Building and holding a diversified portfolio not only significantly reduces your odds of suffering losses but also significantly increases the chances of owning some of the super stocks that create incredible wealth over the long term and carry the indexes higher.

A new investor asked: “The markets are at an all-time high.  Do you think it’s a good time to be building a portfolio right now?”

Fact is, it’s never been a bad time to start investing when your time horizon is many years out.  When markets are hitting all-time highs one should certainly be cautious about valuations.  Twenty years ago when the tech bubble burst, valuations were astronomical.  Many outfits were not even profitable.  There are some tech companies trading today that remind me of that euphoria but I’m not concerned as the main drivers of the US market are by far the most profitable corporations ever, now trading at very fair valuations given their growth.  In 2019, companies in the S&P 500 index bought back nearly $1 trillion of their own shares.  Over the last five years Apple bought back ~US$250 billion worth.  That equates to consuming all of Royal Bank, TD and CIBC stock with just five years of free cash flow.  This is not a time to be fearful of owning index ETFs that hold a basket of cash cows like this.

Another client asked: “Do you think I should cash out after this run up?  The recent geopolitical tensions and now this coronavirus really scare me.  I just feel like it would be prudent to take risk off and go to cash.  If we get a pull-back I can buy cheaper and if we don’t I can always just buy back in”

Yes, we live in an uncertain world and must manage risk at all times.  From a portfolio perspective we start with balance, diversification and position sizing.  But the biggest risk is ourselves.  Over the years I have seen many investors get in their own way and attempt to time the market.  Most need to grow their savings at a rate that outpaces inflation and the best chance one has of achieving that goal is to craft an investment plan and stick to it. Time in the market is by far more important than timing the market.  The most successful investors know that patience and maintaining a long term perspective is critical.

By the way, a little over 40 years ago BusinessWeek published this:

The market was weak for a few years after this was published but then started an incredible run. Including dividends, the S&P 500 advanced 7,000%. Now imagine you were in your 20s, 30s or 40s in the 1980s and held off investing after seeing that publication.

Anything can happen in the short term but over a few decades the equity market has always produced very significant gains including periods of war, countless recessions and economic shocks. The best financial advice you can give to your children, grandchildren, nieces and nephews is to start as early as possible, stay invested and continue buying over time.  Maximize tax advantaged accounts and stuff TFSAs with growth ETFs.  Most importantly don’t lose money.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.   

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  By Guest Blogger Doug Rowat

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Say the words “hedge fund” and an impression is evoked of ultra-sophisticated investment products available only to the most well-heeled investors which virtually always achieve stellar market returns.

Dr. Douglas R. McKay, writing for the Canadian Society of Plastic Surgeons, highlights the hedge fund cliché:

Hedge fund managers are portrayed as the super-elite of the extravagantly wealthy who garner enormous bonuses as a result of wild double- and triple-digit yearly returns.

While Dr. McKay emphasizes that this impression is often inaccurate, the fact that he’s writing on behalf of the Canadian Society of Plastic Surgeons probably does little to dispel the view that hedge funds are only for the “extravagantly wealthy”. Indeed, Dr. McKay goes on to highlight that “some of Canada’s best-known hedge funds carry $3 million minimums to get your foot in the door.”

So, do hedge funds deserve the hype, and are wealthy investors really gaining an advantage over every-day investors by owning them?

The answer is an emphatic no.

The ineffectiveness of hedge funds (and, as a corollary, the effectiveness of low-cost ETFs) was highlighted by—who else—Warren Buffett in 2008 when he made his now-famous US$1 million bet against an asset manager at Protégé Partners arguing that a simple S&P 500 Index fund would outperform a hand-picked selection of hedge funds over the coming decade. Buffett, of course, won the bet with his ETF gaining approximately 126% versus only a 36% gain for the hand-picked hedge funds.

So, who really got rich from the hedge fund investment? The fund managers. Buffett estimated that they took home “60% – gulp! – of all gains.” (Buffett’s winnings from the bet went to charity.)

Buffett’s win and the underperformance of the Protégé picks wasn’t an anomaly. Hedge funds collectively have a shameful long-term record versus the broader US equity market:

HFRX Global Hedge Fund Index (white line) vs the S&P500 (orange): A decade of horrendous underperformance for hedge funds.

Source: Bloomberg

Because of this dismal performance history, the hedge fund industry is badly suffering. 2019 was particularly tough. Bloomberg highlights as much:

The pain kept coming for hedge funds in 2019: if they weren’t being killed off, they were bleeding cash or wringing out dismal returns.

The industry is now on track to record more closures than launches for a fifth straight year, a blow to a market that once minted millionaires at a heady pace. More than 4,000 funds have been liquidated in the past five years…

So, it’s much more likely that the plastic surgeon driving past you in their brand new Porsche got that car not because of the performance of their fancy hedge fund, but simply because they’re charging exorbitant amounts for tummy tucks and face lifts.

Don’t worry though, the manager of that fancy hedge fund driving past the plastic surgeon in an even nicer Porsche? Well, they’re probably out looking for work.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

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In the course of healing the nation this week, a certain pathetic blog made some recommendations about our house lust. For example, there would be less of it, and far more attractive, affordable, long-term rental units, if we stopped giving people a 100% tax break on real estate profits.

This is the reason why, today, I’m announcing I will not run for leader of the Conservative party. I’m unelectable. Dead meat.

Actually there are lots of reasons. Is the nation ready for a political leader who uses words like ‘moister’ and ‘horny’? I think not. Or who would rather have a dog than a kid? And admit it? That’s just weird. Or who’d parade his chiselled abs and washboard physique at media briefings? Off-putting, to say the least. Besides, I‘ve already been thrown out of the party once for being a bad robot, trying to create digital democracy and bringing average deplorables into the political process. Nobody in Ottawa wants that. And I’m, like, ancient. I remember when Kevin O’Leary had hair. When Justin Trudeau was born. When phones had wires. When conservatives were compassionate. This is the age of the new, new thing. That’s ain’t me.

So, liberated from having to be nice to anyone, let me get back to this week’s big topic: why we’re pooched.

Real estate is killing us. It’s been the case since this blog started. This week The Economist came to the same conclusion. By sucking most of the net worth of most people into a single asset in one city, on one street and using 20x leverage to get it, housing has caused households to become unbalanced and undiversified in their financial lives. We’ve ended up with historic levels of debt, at rates which will only rise in future. We’ve eschewed savings and investments for particleboard and glue. Moreover, we’ve grossly inflated the price of real estate and infected the kids with property desire, leading the next gen into an even worse pickle. Shame on policymakers. You have failed us.

There’s no way out now, it seems. Nobody’s going to vote for an iconoclast with facial hair, cowboy boots, a used bank and a Chow dog who says we must cure this affliction. It seems everyone wants to feed it. Even the Ploz.

This week outgoing Bank of Canada governor Stephen Poloz gave an end-of-career interview in which he mused how people in this nation might deal with the fact average families can no longer afford average homes. The solution, he says, is to share equity. To allow third-party investors to own a piece of people’s homes.

The Poloz idea: a family buys a portion of a house (maybe 50%), but occupies it fully. They pay a mortgage for half the value. The rest of the property is owned and financed by a speculator who receives a fee from the family, plus half the profits when it’s sold. The benefit to the family is living in a place they could never otherwise afford. The benefit to the investor is money. Profit.

“That’s complicated but that’s a solution to the affordability issue,” Poloz said in a media interview. “I’m thinking of it that way because it kind of gives me a clue of the sorts of things we could try to do to at least begin to address the affordability problem. We will not address it by wishing it away, or somehow building more houses.”

Alas, this is why we’re in such trouble. Our leaders have helped turn houses into investable assets and done all they can to increase demand – with first-time buyer credits, cheap mortgage rates, CMHC insurance allowing 5% down, the RRSP home buyer’s plan, tax-free capital gains, property tax deferrals and now the shared-equity mortgage. The Bank of Canada boss’s fix is appalling – increasing the demand for houses by pushing the agenda that they’re tradeable assets, not homes. A market in residential equity would soon result.

Nah, we need some bold thinking and leaders willing to hold back the tide. The reason Ottawa is giving families $22 billion a year in child support payments, has removed 40% of them from the tax roles and if therefore facing a sea of deficits and future taxes is directly related to the cost of housing. Real estate is killing us. An indebted nation needs this lifeline to survive. And it’s an anchor on all.

So, Mr. Poloz, just retire. And put a cork in it. We’re done here.

The two reasons your daughter can’t afford a house? Interest rates kept too low for too long, inflating asset values and permanently indebting the middle class. Plus, a tax regime that fuels real estate speculation. By making house prices free we’ve encouraged a massive over-investment in a single asset class by citizens who now see it as their only hope and salvation.

Of course, you can never turn off a tap once it’s on. Every single benefit people receive from government becomes an entitlement. This is why we’re pooched. Leaders no longer lead. They sniff the wind and follow.

Right over the cliff.

Hence today’s bitter, shocking announcement. It’s a game I cannot play. Stephen Harper wanted zero down payments and 40-year mortgages. I fought. I lost. His boot print is still on my butt. At least I was right.

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So if half the people on your street are within $200 a month of insolvency, they must be morons, right?

Nah. Of course not. They’ve just made bad choices. They have kids, cell phones, cars, houses, Netflix and jobs. They’re getting by. Taking vacations. Going to the mall. Timmies. Hockey. Living a life. Doing what they think they should. And it’s all damned expensive. Running out of month before you run out of money is a big win. Even if it’s by two hundred bucks.

Yesterday I opined, as a wounded, narcissistic, entitled, coy little blogger, that the words published here (all 2.7 million of them, so far) had fallen on deaf ears. Financial failure surrounds us, I said. We’re awash in debt, deficient in assets and steaming towards a retirement iceberg. House lust has been the fatal flaw leading to the point where, yes, just paying the bills is an achievement.

“I was a little taken aback when you wrote that your blog is a failure for not reaching enough Canadians to reverse their financial fortunes,” blog dog Bill says, trying to staunch my bleeding ego. “ I would say that is completely inaccurate.

“Your blog is reaching all corners of Canadian society and having quite an influence. There is a reason it is the top financial blog in the country. As such, I suspect that influence is likely now a political force large enough to not be ignored. It would not surprise me if the central bank governor himself drops in for visits, or any of his deputies.”

But this is more than just a MSU. Let’s actually talk about how the average schmuck can be helped to get off the debt treadmill, build some solid net worth and look forward to life-long financial security as a wrinklie.

“I didn’t write you to point out the obvious, but rather to ask if you could write a few blog articles about what our future governments can do to avoid financial disaster regarding the wave of “retirees” that is entering the system present day,” Bill continues. “Don’t sell yourself short, I know you are the person responsible for the introduction of the present day TFSA.  I had one idea – raise the non taxable level on RRIFs and not receive the OAS in return, as an example. No losers in that, since no Canadian has to pay in to it.  I’m sure yourself or the blog dogs will have better ideas than mine.”

Actually, I have a few suggestions to add. Hey, Chateau Bill and Poloz, you guys here today?

First, let’s help people make better decisions about money, spending, investing and borrowing.

• Teach financial literacy as a mandatory course in high school.
• Don’t allow car loans longer than the bloody car lasts
• No more pay day loan outfits. They prey on ignorance and misfortune. Vultures.

Second, we must find ways to stomp down house-horniness and reduce the risk from concentrating on a single asset. Real estate.

• Increase the mandatory minimum downpayment for CMHC insured mortgages to 10%. That would turn 20x leverage into 10x.
• Tax capital gains on personal houses the same as personal investments – speculation is the enemy of affordable housing, and this ridiculous, historic tax break has turned us into a nation of speckers. Sure, phase it in.
• Don’t gut the stress test
• Don’t cave and bring back 30-year amortizations
• Do not introduce 30-year mortgage terms. More debt and higher house prices would result.
• Require the Canada Child Benefit money to actually be spent on children, not the mortgage, property taxes or hardwood flooring
• Ban Airbnb. It turns houses into businesses, jacks up prices, sucks off rentals
• Ban reverse mortgages. They Hoover off a punitive amount of equity, destroy the wealth of retired people, and reduce available real estate for younger families
• Instead, allow retirees selling houses to grant VTBs (vendor take-back mortgages) and enjoy tax-free interest payments.
• Legislate that HELOC and LOC payments be amortized – not interest-only – so they’re actually repaid instead of hanging around for years.
• Abolish the Bank of Mom.

Next, let’s clear up some of the misrepresentation that confuses and misleads people.

• Federally regulate everyone calling themselves a ‘financial advisor’, mandating standardized training and titles. TNL@TB is a salesperson, not an advisor. Insurance floggers are not advisors. Mutual fund reps have the same level of training as realtors. And look where that got us.
• Let’s have full transparency on how financial people are paid. No hidden, high-cost MERs on mutual funds. No trailer fees. These things kill investor returns.
• Ottawa should stop spending big bucks on TV and elsewhere advertising CDIC insurance. It’s pointless. If a major bank fails (won’t happen) we’re all pooched. This scares people away from investing. And that’s just stupid.

Finally, how do we mitigate the retirement storm now gathering on the horizon? What do people with no savings or investments think they will live on?

• Bill’s suggestion is a good one: allow people to opt out of OAS in return for lower or waived taxes on RRIF withdrawals. Should be revenue-neutral.
• Incentivize companies with lower corporate taxes to enhance their employee pension plans and up matched contribution limits
• Make fees paid to manage RRSPs and TFSAs tax-deductible to encourage saving, investing and avoid the dumb mistakes most people make with their money.
• Restore the TFSA limit to $10,000. The US limit for IRAs is $7,000 a year – and tax rates are much lower there. In the UK, people can put the equivalent of $34,000 a year in this kind of account.
• Don’t raise the capital gains inclusion rate or diddle with dividends. Encourage people to invest instead of taxing them more on money their after-tax funds earn.
• Goose CPP contributions by employees (not those of employers since that kills off jobs) and flow them into enhanced benefits. The feds have started this, but more guts are required.

So, there are a few ideas. Some would work nicely. Others have hair all over them. But clearly this is a discussion we need to have, while our political leaders fiddle.

Something to add? I’m listening. So will they.

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Alas, this blog has failed. Perchance it’s time to pack up the kibble and squeaky toys, the ETFs and the spreadsheets, and scamper off into the ether. After all, what’s the point? The nation ain’t listening.

We have several reports. Be strong.

A week ago the central bank released a survey of what people anticipate is coming. The bottom line: Canadians want to increase spending more than expect incomes will rise. That suggests more borrowing. We’re already at a record level. Ouch.

Now, worse, comes the latest Consumer Debt Index (MNP) with this shocker: 50% of people are now within $200 a month of insolvency – unable to pay the bills. Forty-nine per cent say they’re not confident they can cover expenses without adding to their debt (which, of course, increases expenses). Says the company: “Our findings may point to a shift among some Canadians from debt apathy to debt hopelessness. Feelings of hopelessness can make people feel like giving up on ever paying down their debt or, worse, ignoring the debt as it piles up higher.”

Let this sink in. If half your neighbours are barely making ends meet, how are they saving anything for the future? Retirement? Kids’ educations? A crisis? And if 70% of Canadians own houses, what in Dog’s name are they thinking?

There’s more.

How many first-time homebuyers do you figure are being pushed into real estate they can’t afford by their parents? Well, in BC it’s 90%.

A survey of BC notaries found nine in ten young buyers are being financed by their families – up from 70% five years ago. And while it’s laudable Mom & Dad want to see Squirt buy his first condo and become a fully-functioning indebted adult, the reality is such buyers are not worthy. They need a handout just to make the downpayment – stark proof they’re taking on an obligation which is beyond them. Odds are if the Bank of Mom didn’t exist, buyers would dry up and prices cascade lower. We are fools.

And speaking of condos in Vancouver, here’s another reason people are failing financially.

Last month the average concrete box in YVR sold for $667,875. So if you bought one a year earlier, you lost $52,000. Plus $12,000 in closing costs and another $34,000 in realtor commission if you bailed. That would be a hit of $97,000, or 13%. Plus strata fees and property taxes. In this scenario, renters win. Owners pay.

According to analyst Dane Eitel, this will deteriorate further. Check it out, kids:

We forecast further price losses in 2020, with prices likely breaking downward out of the current divergent trend. That will result in some volatile price movement, with a high probability of seeing prices test the $600,000 threshold.

Ultimately before the market settles at the bottom. Eitel Insights forecasts that the Greater Vancouver Condo market will test the $525,000 threshold. Which would signal a price correction of 30% from the peak.

Pity those who did not bail when the delusion was at its highest. How could so many actually believe an asset would rise in value forever, when none have done so before?

Meanwhile some people want to make our real estate and debt affliction worse. Like the CD Howe Institute, and even the current Bank of Canada boss, Stephen Poloz.

The idea: bring 30-year US-style mortgages to Canada, where most people now take only 5-year versions. The Interest Act, which makes loans payable after 60 months, has prevented long mortgages with fixed rates, but Ottawa is being urged to change that. The proposal: loosen the stress test. Make it easier to pass for those taking out multi-decade loans, willing to extend their debt obligation much further into the future. And a lower stress test barrier means more can be borrowed. House prices go up.

Well, that’s just this week’s news. But it’s enough. Are we on the wrong path as a society? Sure feels like it. The goal of life is not a house, but we’ve made it so. Real estate lust is directly responsible for a plunge in savings, a leap in debt, a cash flow crisis for half the nation and a looming retirement crisis. And because this is a democracy, rest assured the bad choices of many will become the bane of existence for the few. Like you.

Only the foolhardy will fail to keep their head down, or stop blogging about it.

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Andy Seliverstoff photo

Yesterday we brought you news that the dude in charge of Canada’s housing agency thinks real estate is a fat canard. We’re obsessed with it, says he. Realtors are drunk on their own excess. Society is nuts for glorifying the SFH. We’ve made renters into second-class citizens. Worse, even. Losers.

Well, here are some interesting numbers. Sixty per cent of Millennials (18 to 37) have no savings. Zippo.  The other 40% have precious little – between zero and $25,000. And yet of those between 26 and 37 more than four in ten own real estate. Of that group about half got help from the Bank of Mom, and 92% have mortgages.

So, obviously, the kids couldn’t care less what some crusty bureaucrat thinks. The obsession continues. And people are willing to do whatever’s necessary – looting their families and indenturing to the bankers – to get it.

Now let’s compare that to the United States where, unlike here, everybody went through Houseageddon a decade ago. Real estate then lost 32% of its value (70% in some places). The mess was precipitated by the serious financial troubles of one in twelve homeowners who defaulted on mortgages they could not service. Mortgage-backed investment assets, stocks and entire banks cascaded soon afterwards. America teetered on the edge of a financial black hole.

That experience altered behaviors. For five years after the event, surveys showed a majority of young adults wanted absolutely nothing to do with mortgages or houses. Renters abounded. It was hip to lease. Smart. Prudent. Real estate values languished. Investment companies moved into cities across the country and scooped up thousands of foreclosures and distressed properties.

Now, as the Mills stare at the big 4-0, married and breeding, things are changing. But the gap between Boomers and this cohort at the same age is stunning. In 1990, at an average age of 30, Baby Boomers owned a third of all real estate in the States. Today’s Millennials (average age 31) own just 4%.

The outcome of this disparity between moisters in Canada and the US? Simple. Our kids possess way more real estate and owe a ton more debt. Young adults in America have fewer assets but more money. The Canadian savings rate has plunged to 1% while in the Land of Trump it’s jumped from sub-6% in 1996 to plus-8% now. Three-quarters of US mills have a savings account, and a UBS survey found this is the most financially conservative generation since the Great Depression. On average, they’re putting almost $500 a month into retirement savings – while so many moisters here are stretching to service debts.

So what’s the best approach?

The upside of real estate, even when you have to scratch and sacrifice to own, is forced savings. Paying an amortized mortgage slowly builds equity and reduces debt. So long as the capital value of the property doesn’t plop, you build wealth over time. People who build it ultimately spend more of it, which is an economic good. Also, if you’re lucky (and smart) real estate can be liquidated when retirement rolls around. Moreover, if the experience of the last ten years is repeated for another ten, you da man!

This, of course, is how the Boomers made a ton of dough. But it was during a time of expansion, growth and inflating asset values. Today, not so much.

The downside of real estate for the young is debt, entanglement and risk. Buying a property and swallowing a mortgage brings an inherent loss of personal flexibility and mobility. People tend not to chase a better job in another city, for example. With mortgage payments, property taxes, condo fees and insurance premiums to worry about, they may feel trapped in a job or career choice, instead of training for something more appealing.

Sticking all your net worth in one thing at one address in one city means no diversification. So if a market turns down, rates rise or the economy stumbles, you can get whacked far more than with a broad portfolio of assets. For Americans who remember the real estate crisis, this is a burning fear.

What to do?

Rent and invest, if you can stand the shame and possess the discipline. This is, by far, the cheapest way to live.

But if you do buy, be cautious. Buy what you can afford (my Rule of 90) and buy what you can sell later (nobody will want a loft with a creepy concrete ceiling in a few years). Don’t eschew investing – make sure you’re at least topping up your TFSA routinely. Don’t spend stupid money on a house, like adding a hot tub or even a swimming pool. Be very, very careful about condos. They’re turning into insurance timebombs.

Most of all, accept that reward (a house worth more than you paid) comes with risk (a recession could put you underwater fast). Meanwhile politicians have real estate in their tax crosshairs.

Canadian Boomers dodged a bullet. Your canard could end up being a dead duck.

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Are single-family homes a waste of space, a crime against Greta, arrogant, egocentric, bourgeoisie and a hateful, hedonistic social extravagance? Duh. Of course they are. At least governments are now thinking that way, and the consequences are piling up.

BC and Vancouver have declared war against detacheds, as you know. As a result, valuations have taken it on the chin (even condos are following now). Second homes are taxed extra, just like those the state thinks are under-utilized. Digs in expensive hoods get a property tax penalty, while in Toronto we’re just days away from a new uber-land-transfer-tax on top-end homes. The GTA may also soon have a vacancy tax, along with an 8% increase in municipal levies. (Van is going up 7% this year.)

The latest vitriol against single houses comes from Evan Siddall, the boss of CMHC who’s just unloaded on the nation’s realtors as he prepares to leave his post. “Our dream of home ownership is static and regressive,” he says. “We need to call out the glorification of home ownership for the regressive canard that it is.” And this: building more SFHs is ‘wrong’ and the real estate industry, “is drunk on its own excess.”

Wow. But 68% of Canadians own houses, and a recent poll of Millennials aged 28 to 32 found 72% of them are salivating to buy. In the US a similar study of the moisters found 63% of renters want to own and 83% of owners think they’re geniuses.

By the way, that survey also discovered the kids justify over-spending on real estate not for spouses and kids, but for dogs!

Here’s the issue, though:

(a) Houses cost too much. Prices have been inflated by cheap money, pro-housing policies, easy credit and rampant speculation.

(b) The result has been epic, historic levels of debt and the need for massive mortgages.

(c) Wage inflation hasn’t kept up with price inflation and new buyers are at risk as never before.

(d) The economy’s in the 11th year of an expansion and so we’re overdue for a reset, so

(e) any downturn would absolutely nuke first-time buyers with mucho debt and poco equity. Therefore,

(f) maybe dudes like Siddall are right. Building 2,000-foot suburban houses on forty-by-100 feet of former fields with $300,000 in materials so two people (and a dog) can live there and drive a minivan on a divided highway to work an hour away is insane.

But, that’s the dream. It’s everywhere, and being challenged. Look at the UK for example. Eerily similar to us here in Meghanlandia. In 1991 67% of young adults in Britain owned a house. Not it’s 38%, and falling. The average UK property costs eight times average income – same as Toronto, but way lower than YVR. Half of buyers there need the Bank of Mom. In London it’s two-thirds. A million more 18-to-24 year old Brits live with their parents than in 2002.

In the US experts say the real estate market would likely crash if it weren’t for obsessed young people taking on big debt. Inflated house prices in places like California have led to serious social upheaval, as the Moms4Housing episode has shown. Working people cannot afford to own, and yet owning remains the dream Siddall is talking about.

This sense of disenfranchisement is leading us to a new place – as governments are asked to ‘level the playing field.’ That could mean letting squatters take over Oakland houses that are sitting empty, having Toronto and Vancouver level a vacancy tax, jacking the property taxes owners have to pay with after-tax dollars, busting up protective neighbourhood zoning or taking $53,000 for nothing every time the average GTA detached house changes hands.

There’s a pattern developing here. Surely you can see it. If the bulk of your net worth is in residential real estate, challenge that. You’ll soon be the enemy. You might even consider what Phil did. Here’s his Sunday email to me.

I’ve been following you for a long time. We sold the house in 2010 in Kelowna and rented a two bed condo the minute the kids left the house. Our son called and said, “I guess this means I can’t ever come back”, which of course was the point.

We’ve kept all equity and as much as we can in the markets. We retired, at 55, last January and have been playing since then. Currently travelling for a year in a 22 foot camper van. The first three months was a test to a 32 year blissful (really) marriage as we had repeated issues with the camper and getting used to living in a phone booth. The last two months we are back on track. We left in September and I’m writing from a coffee shop in Southern Louisiana…Cajun Country (many oppressed Acadians settled here in the 1800’s). We are sampling the culinary delights of cracklin’, boudin, crawfish, and gumbo. Other than the camper, we are “homeless”. Having a blast.

Home is not a thing. It’s where you are. The dog doesn’t care.

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By Guest Blogger Ryan Lewenza

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Getting older really blows! I’m only 45 so I should probably stop my bitchin’ but things are starting to go. In my thirties I started having acid reflux flare-ups, my lower back hurts from time to time, and just recently I started experiencing “tennis elbow”. As my body slowly degrades it reminds me of a great Brad Pitt quote from the movie Fight Club, “Hey, even the Mona Lisa’s falling apart”.

Luckily I have a job (a great one at that) where my company offers a comprehensive health plan to help pay for drugs, vision care, and all the physio appointments I need to keep me from turning into the Hunchback of Notre Dame. But what about the millions of Canadians who are not so lucky and do not have an extended health care plan to cover all these different expenses? In today’s blog I cover this critically important topic.

First let’s review what’s covered by our government health plan to determine those missing benefits that we need to solve for.

Canada’s universal health care program, which is funded by taxes, covers any necessary hospital stays, any treatment or surgery required, prescriptions drugs while in the hospital, and any visits or treatments from a physician and clinic. What it does not currently cover includes drug prescriptions, dental and vision care, and items like wheelchairs or prostheses. So our universal health program covers all the basics but Canadians then need to address things like prescription drugs, dental expenses and physiotherapy. This is where extended health care plans come in.

Roughly 65% of Canadians have additional coverage through private health insurance plans with the majority of Canadians getting their extended health care coverage through their employer. For example, our company uses Manulife and the benefit plans cover things like eyeglasses, prescription drugs and massage therapy.

According to the Conference Board of Canada, average annual premiums for one full-time employee are $2,102 for extended health care coverage and $1,419 for family dental coverage. So for two parents and a couple of kids the total costs per year would be roughly $5,632 per year. However, the company usually doesn’t foot the whole bill, often covering 70-80% of the plan costs with the employee covering the difference. This can end up costing an employee roughly $1,000 for family coverage.

Now some believe this is their only costs for health care. They forget that a portion of their taxes is going to pay for the universal health care coverage that the government provides.

The Fraser Institute, a conservative think tank, published an interesting report called The Price of Public Health Care Insurance, which attempted to calculate the costs Canadians pay for their universal health care through taxes. They estimate that the average single person pays $4,544 and a family with two kids pays $13,311 per year in health care costs through taxes. So adding the costs of the universal government health care coverage and what a family would pay through their work extended health care plan gets you close to $15,000 per year. While we have a pretty good health care system it ain’t cheap!

Estimated Costs for Public Health Care Insurance by Family Type

Source: The Fraser Institute’s Canadian Tax Simulator 2019

What about those who don’t have an employer health care plan? This would include self-employed, unemployed or retirees.

That’s where private health care plans comes in from companies like Manulife or Green Shield. You can purchase private health care plans that cover the costs of dental, drugs, and other health care expenses. These companies offer different packages that range in costs with the ability to customize the plan through add-ons based on one’s needs.

I reviewed Manulife’s Flexcare plans and for a couple in their 50s who select the Enhanced Plan it will cost $4,312 for the full year. This enhanced plan covers drug costs (up to $10,000/year), dental (up to $920/year), vision ($250 every 2 years) and travel emergency health coverage. For a single person aged 50 it will be roughly half that at $2,100/year.

For these plans you can get add-ons like travel insurance, life and disability coverage, which would take costs for a family closer to $6,000/year.

FlexCare Monthly Premiums – Ontario

Source: Manulife

So the question is, do you believe your health and the inevitable costs that you’ll incur as you age are worth the $4,300 for a family or $2,100 for a single person? Maybe it’s easy for me to say yes since I’m fortunate that I have coverage through my employer, but it seems like an easily justifiable expense, given that our health is the most valuable thing. Sure, having a big investment portfolio is nice to have, but if you’re not around to enjoy what’s it really worth.

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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