The way out?

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. [email protected] 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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The failure

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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Canard, Part Deux

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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The canard

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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Healthcare plans

RYAN 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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Kids

I have no kids. Forty-nine years ago I married Dorothy to be with her. Not to have a family. She was good with that. If you get through this life with one true, forever friend, she once told me, you’re lucky. I got mine.

Why do most people have children?

Historically, it made great sense.  Farming families needed hands and backs. Having children was like creating loyal employees you didn’t need to pay.

Tribes and cohesive societies needed to thrive, protect their turf, survive. Numbers were critical. Children give us a way of passing on culture, values and purpose.

Religions need fresh adherents. Size matters to the faith leadership. So organized religion has always made motherhood and parenting godly.

Mostly though, people have kids just because they want to. They replicate and relive their own experiences as children. They’re wired to reproduce. Nature is all about the propagation of a species. In case you were not so inclined, the divine powers made sex. It’s fun.  And guess where that leads you?

Of course people love their offspring. Sacrifice for them. Turn parenting into a life-long job. It gives many their sole or greatest sense of meaning and accomplishment. Not a week passes I am not astonished at the lengths parents will go to in order to cushion their offspring from the realities of life.  Look at the legions of young adults at home these days. It’s historic. We coddle and protect our spawn even when they’re far from youth.

Children are expensive. Zero to 18 costs about a quarter million, all in, studies show. But it’s not just daycare, clothes, food, sports, toys, programs, bail and schooling. Many maternity leaves are unpaid. Lots of new moms decide nurturing their child trumps a paycheque. People buy houses when they have families, even if the kids don’t care. They load up on needless insurance out of hormonal guilt. They eschew mobility and job opportunities because they don’t want a six-year-old to leave her friends. They eat into retirement savings to keep a 28-year-old cocooned at home. The economic sacrifices are endless.

On a larger plane, human reproduction has forever changed the earth. When I was born there were a little over two billion people. Now we’re pushing eight billion. My parents had four kids, which was normal. Now the fertility rate is 1.6 per woman, and the average family is 2.5 people. As women have become universally educated, more critical to the economy and equal in all regards, motherhood has waned. This is most evident in the developed world. As a vibrant middle class explodes in developing nations, the same trend emerges. The fertility rate in China now equals ours, and births are falling by two million a year.

So humans evolve. Now that we’re all talking about climate change, living in a world where half the animals have perished over the course of my marriage, that must be good. Eight billion cannot become twelve or sixteen without dystopian consequences. Why would anyone wish to birth children into a dying world? Perhaps we have turned that corner. If so, it will be an improving global standard of living, more education and economic opportunity that does it.

By the way in Canada we have a negative birth rate. The population would be steadily declining, were it not for immigration. Look at government policies. We pay people – actually quite a lot – to have children. The child benefit has helped remove millions from the tax roles. Kids are as good for the economy as they are tough on family assets.

In fact the decision to have a son or daughter is probably the most profound financial one people ever make. It ripples through every aspect of daily, professional and matrimonial life, and lasts decades. And yet it’s the one that’s most emotional, least logical and often taken as granted. Like breathing.

If you have a family, consider this advice from a guy with no skin in the game: plan for it. Utilize the tax-free growth of an RESP. Collect the free grant money. Don’t go out and load up on the wrong kind of insurance. Don’t buy real estate you can’t afford because of junior. The kid can be a happy renter. Try not to helicopter. Don’t forget your own financial well-being and retirement savings. Ask adultlets at home to pay rent, or the utilities. Good training. Only fair. Move if your family will be stronger financially. Kids adapt. Realize that having a big educational nestegg for your child is worth more than annual trips to Mexico. Teach them what schools don’t. Ethics and (of course) finances.

There. You’re all set.

By the way, Dorothy told me I’d be a complete moron if I wrote this blog. “I’m trying,” she said, “to save you from yourself.”

What’s your best friend for?

 

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The news

And now for the news. Sit, stay and pay attention.

MOMS BUSTED: Yup, the cops moved their squatter butts out of that house in Oakland, California during a morning operation. It took several sheriffs, some guns, 30 SWAT guys and a mini cop-tank to do it, but the Moms4Housing are now kaput. There were four arrests. Supporters milled around. The media showed up. Outrage ensued. And the house, finally vacant after three months of illegal occupation, was boarded up by the corporate owners who will reno, sell and donate the proceeds to charity.

Is housing a human right? Not in California, obviously. You can’t squat and stay. But in Canada, thanks to the current government, it is now a human right. At the same time, Canadians have no constitutional provision to own property. Keep your eye on this.

THEY DON’T CARE: Like you didn’t know this, but a new survey makes it official. Many lenders in Canada, like opioid docs, don’t really care about the impact of their loans. Incredibly, over 40% of financial institutions admit their operations are sales-oriented instead of customer-focused, and clients ‘don’t understand the financial products they purchase.’

Yikes. No wonder close to half of all Millennials would rather deal with an app than a banker, saying they avoid contact with financial types. And no wonder we’re drenched, saturated, pickled and drowning in debt. This survey comes from a credit union (DUCA), so it’s self-serving, but revealing. What is all this debt doing to us?

“Nearly half of borrowers surveyed report that personal debt has impacted their ability to save and build wealth. The report shows a significant number of borrowers surveyed experience stress due to personal debt and are driven to unhealthy behaviours as a result, including trouble sleeping, and poor lifestyle choices like skipping meals, eating unhealthy foods and spending more time alone.”

We knew it. Over-eating, fatigue, criminal behaviour and sexual frustration – it’s all the fault of [email protected] who made us borrow. Bad, bad bankers. When the revolution arrives, we’re coming for you.

SURPRISE, KIDS: The current rage is MMT – modern monetary theory – which says since governments have the ability to print money, why not crank out enough to pay for all of society’s needs? Education, health and a guaranteed income, for example. Of course the more money, the less all existing money is worth, so the greater the inflation. The other option for spendy governments is to borrow wildly – which is what Ottawa’s chosen to do.

A new report says the Trudeauites added $56 billion to the national debt between 2015 and 2018, and this is set to explode higher. Another $26 billion year. Another $28 billion next year. In fact, there is no timetable whatsoever for the borrowing to stop. Despite coming tax increases, Ottawa will be spending far more than is takes in.

Where does it end?

With future generations, says the Centre for Productivity and Prosperity in Montreal. If interest rates rise a little (will happen) then today’s youth will be tomorrow’s pooched. “All it will take is a few percentage points and the situation could deteriorate quite quickly,” it says. ”The day an economic shock occurs, we’ll have bought ourselves trouble by accumulating a more-or-less useless debt.”

So if you think taxes are high now when national debt service costs equal 7% of federal revenues, just wait and see what happens when they hit 30%. Like the credit union people (above) said, nothing good comes of binging.

OF COURSE YOU CAN: And we have time left for a quick MSU plus a burning question:

Good day Garth, you helped me out a few years ago when selling my house in Ft Mac). I literally made zero money on owning it, and now looking back in hind sight, my sale was an early trigger to a declining market which would only get worse (even before the fires). Thank you for listening, thank you for responding, and thank you for your blog. Anyways, I’m hoping in your infinite wisdom (obligatory sucking up taken care of), you may be able to help me out as Mr. Google hasn’t really been able to directly answer my question.

I have about $40k in no-foreseeable-use-for-it cash currently sitting in a Tangerine account right now. I figured that I’d give it to my wife for her TFSA, but will either of us pay any taxes on that, even if I officially loan her the money and charge her interest? I keep reading that I can gift money to her tax free, but then if she uses that money to invest, I’d be on the hook for the tax bill, but what about if it goes into a TFSA? This is what I can’t find an answer on and I’m hoping you can help me out? I’m assuming the tax man would eventually discover my deposit one day and her transfer to her TFSA the next day. What would you recommend we do here? Thanks! Freezing in Alberta – Chris

Relax. It’s all good. You can certainly fund your squeeze’s TFSA and a spousal loan structure is not required. Just move the funds into her hands (a bank account) then she can put them into a TFSA and invest in growthy assets. There will be no attribution back to you, since all gains will be free of tax within the plan. Remember to make each other ‘successor holder’ (not beneficiary) of each other’s accounts.

If you have money for her to invest in a non-registered account, earning income at her lower tax rate, a spousal loan is the best option. The rate is just 2%. It’s deductible from her taxes. No attribution to you. Just be nice to her. Like always.

Okay, back to watching Animal Planet now. No bankers there.

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Mom money

Ruth is 72. Spry. Her kid, Marion, is 44. Worried. Harold, husband and father, checked out eight years ago. Dead. No pension, but he left his wife of forty years a nice house.

“I’ve pleaded with her to sell it,” says M, “and even suggested she read your pathetic blog, but nothing works. This week mom told me she’s got a reverse mortgage for some ridiculous amount – like $500,000 – and I should mind my own business.”

So mom has no income other than government OAS pogey (she never worked, no CPP) and lost her part-time job at the library. In other words, she’s broke – living in a million-dollar place which she can’t afford to heat. Or pay the property taxes on. But it’s home.

Ruth ain’t alone. Thousand of wrinklies are making exactly this choice – deciding their best option is to dig into real estate equity to compensate for a dearth of savings, investments or pension income. In doing so they reap the fruit of housing inflation at the same time taking on debt that will eat its way through their net worth and their kids’ inheritance.

It’s time for a reverse mortgage update because, well, the old hippies are going nuts over them.   The amount of debt taken on in the last five years has tripled – to about $4 billion. Back in 2014 it was just $1.3 billion, which makes reverse mortgages the fastest-growing form of borrowing. For example, five years ago HomeEquity Bank (the CHIP people) was handing out about $300 million a year to the Geritol set. This year they expect to hit $900 million in new originations. And there’s competition, too, since Equitable Bank got into the RM business a couple of years ago.

Here’s the deal: people over 55 can borrow up to 55% of the equity in their homes and use the money for whatever. No payments. No repayment until they sell or croak. The funds are not taxed. It seems like a dream since they get to stay in the same house and can stop sharing meals with the cat

But it’s debt. Debt costs money. In this case the rate of interest is extreme – 5.6% or twice the cost of a conventional five-year mortgage. Since no payments are being made, the debt grows and grows with all of the accumulated interest added to the outstanding principal. So a $150,000 reverse mortgage becomes a $200,000 obligation after five years. Plus there are substantial set-up charges when the deal is arranged.

Why would someone opt for this when a conventional mortgage is cheaper or a HELOC can be arranged with much lower simple-interest payments and no increase in the debt?

Simple. It’s the new reality for wrinklies – the majority retire without pension plans, without adequate savings or investments and too much reliance on the public purse. People vastly overestimate the amount they’ll get from CPP or OAS and figure if they stop working and have a paid-off house they’ll get by – no matter what.

But houses cost a heap. Maintenance, utilities, insurance, property tax – everything’s getting more expensive, and meanwhile all that equity is producing zero income. There’s also the stress test in place, preventing people who are house-rich and income-starved from qualifying for traditional mortgage financing. Outfits like HomeEquity and Equitable Bank are exempt from that test when they hook new clients. All that matters is a piece of real estate with value in it that can be Hoovered out.

Of course, once the debt is in place, it stays forever. Seniors having a hard time buying home heating oil or groceries are unlikely to ever pay down a reverse mortgage. So when they sell or, more likely, die, their estate is responsible for it. Surprise, kids!

The lenders think they have an outstanding business opportunity, given the fact there are 9.6 million Boomers in Canada. At the same time only 25.3% of all working Canadians have a defined benefit pension – one that will yield a known and continuous income stream in retirement. Worse, a record number of retirees are now going into their post-employment years with consumer debt in place. Many have real estate, lousy savings and poor income. So, what are they thinking?

Mortgage debt in Canada is rising by about 5% a year. That’s a worry since we already owe $1.2 trillion. But reverse mortgage debt’s increasing at 25% every 12 months. And every single borrower is (a) no spring chicken and (b) doing it because they have to.

What should Marion do?

Mind her own business, of course. Like mom says. It’s her asset to squander. Being old doesn’t make you right. Just a tasty target.

 

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The gig

Last week ended with news of 35,000 jobs created in December. Big relief after a disaster the month before. As it turns out, Canada churned out 320,000 jobs last year – one of the best performances since the lights went out back in 2008.

Who’s working?

Well, almost all new jobs last year came in the services sector. The number of people who actually make stuff (including oil & gas production) fell by 50,000. The ranks of those who serve stuff grew by 367,300. Wow. And a big chunk of those were in the FIRE sector – financing, insuring or selling real estate.

But wait. It seems about two million people are now a part of the gig economy. That accounted for more than 8% of the workforce in 2016 and is estimated at 10% now (no official stats are available). A gig job is just what it sounds like. Here’s the definition: “self-employed workers who enter into various contracts with firms or individuals to complete a specific task or to work for a specific period of time.”

The biggest gig is IT. Nobody seems to want a full-time tech guy hanging around earning vacation time, getting dental benefits or contributing to a crappy group RRSP. And yet without robust technology, most corps would be dead in the water. Weird.

The proportion of gigers has doubled in the last 15 years. Think Uber. It includes free-lancers and baristas, musicians and roofers. Corporations would much rather have some incorporated dude come in and fix machines than have another employee costing payroll taxes and being impossible to lay off without grief and money. As labour regs and minimum wages become more onerous, the gig economy grows. So do the ranks of workers who never get paid, get sick, take time off to have babies, go on vacation or come to work looped.

Walmart gets it.

The world’s biggest retailer has just announced robots will be added this year to 650 more stores, bringing the number of locations to over a thousand. These machines prowl the store aisles, scan shelves and take inventory. Information is sent immediately to human employees who then order stock. What once took actual people two weeks to accomplish is now done twice a day.

Consultants McKinsey & Co. estimate half of all retail jobs will be automated away. And look at the banks. My office is a perfect example – I’m writing this sitting in an historic stone palace that Bank of Montreal operated out of for more than 100 years before they replaced it with an ATM next door and gave the place to me. Bank tellers are going. So are travel agents. Canada Post delivery people. Printers. Then realtors. Almost all newspaper and magazine jobs. Cashiers. Even soldiers.

The nature of work is changing daily. Selling stuff is going online and major corporations strive to shed costly, unpredictable and needy humans with robotics, automation and apps. This is a big reason why the gig economy is growing, full-time employment is more precarious and 70% of people no longer have corporate pensions.

Says McKinsey: “Activities most susceptible to automation involve physical activities in highly structured and predictable environments, as well as the collection and processing of data. In the United States, these activities make up 51% of activities in the economy accounting for almost $2.7 trillion in wages. They are most prevalent in manufacturing, accommodation and food service, and retail trade, and include some middle-skill jobs.”

Think about that. Half the jobs likely to go. The bulk of them in the service sector – which created all the new employment in Canada last year, and accounts for 70% of the American economy. Stats Canada, in detailing the gig economy, hints at the huge social impact this brings. Those in the bottom 40% of the income ladder are twice as likely to be shut out of full-time employment, as robots and labour cost-cutting prevail.

Okay, what does this mean?

First, everyone gets a vote. So expect more political upheaval as it becomes more difficult to find employment which is (a) full-time, (b) has benefits and (c) a career path forward. Already happening, as you know, which helps explain why Mills have been forming families a lot later than those promiscuous, lucky Boomers did.

Second, politicians catering to this angst and proffering solutions will get elected. So the inevitable outcome will be (a) more taxes, especially on property owners, (b) the embracing of some form of modern monetary theory allowing for much greater deficit spending by governments that will offer (c) a guaranteed annual income.

Third, bad news for housing markets. Prices will inevitably trend lower over time regardless of the level of interest rates. Also bad news for rich people, since we’re likely to see a wealth tax plus an inheritance levy.

Finally, for those with assets they foolishly want to keep, think about reducing real estate exposure and pumping up financial wealth. Houses are just too easy to target, and symbolize social disparity. Fully utilize government tax shelters like RRSPs, TFSAs, RESPs, RDSPs and LIRAs. They’ll be the last to feel political heat. Hedge against the dollar by maintaining about a quarter of your portfolio in US$-denominated assets. Invest, don’t save. What’s coming will stoke inflation and chew through savings.

Above all, live quietly among the masses. Consider driving a Kia. Yes, that bad.

 

 

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Right vs right

Once a radio and TV guy, then a municipal politician, Adam Vaughan is now a federal Liberal MP from Toronto. During the last election campaign the Cons made a big deal of publicizing a proposal from Vaughan to start taxing residential real estate. The plan, as stated, was to charge people capital gains tax on the profit they made selling principal residences on a sliding scale based on length of ownership.

  Vaughan denied it. The Libs denied it. Even though documentation emerged showing the plan had been adopted by the party’s regional Ontario caucus. Voters yawned.

So here’s the sequel.

Vaughan emerged unscathed. He won his seat. He was appointed by the prime minister as a Parliamentary Secretary, which means he works closely with a cabinet minister on policy, legislative matters and implementation. The minister in question is in charge of CMHC, also recently mandated with making housing a basic human right in Canada.

Last June the Trudeau government’s Bill C-97 took effect. Here’s what it says about housing:

It is declared to be the housing policy of the Government of Canada to
(a) recognize that the right to adequate housing is a fundamental human right affirmed in international law;
(b) recognize that housing is essential to the inherent dignity and well-being of the person and to building sustainable and inclusive communities;
(c) support improved housing outcomes for the people of Canada; and
(d) further the progressive realization of the right to adequate housing as recognized in the International Covenant on Economic, Social and Cultural Rights.

As a result of this, Vaughan’s minister, “must develop and maintain a national housing strategy to further the housing policy, taking into account key principles of a human rights-based approach to housing.”

What does this mean, exactly? We have no idea. But it bears watching, given recent moves by governments at all levels to record real estate transactions and heap on new levies. Since affordability is now being touted as a ‘housing crisis’ in Canada, taxing real estate profits would be the easiest, fastest way of squashing prices. And Adam is probably ready to help make that happen.

But this is pure speculation. And let’s contrast it with a drama now being played out in northern California, where this real-estate-as-a-human-right battle has come to a head. Remember Moms 4 Housing? Here’s an update on the mother-squatters who moved into a nice, vacant house and refused to leave.

Interestingly, real estate in that neck of the woods is similar to Toronto. Houses cost a million. Rents are two or three grand a month. The tech-heavy economy is booming and the population expanding. Average wage-earners cannot afford average-priced homes. It’s a story Canadians know well.

Last autumn six women who claim homelessness (but have jobs) broke into and occupied a house which a real estate investment firm had bought in foreclosure for $501,000, intending to reno and resell. They adopted a group name, a logo, embraced a media strategy and had a nice Christmas complete with a tree. Meanwhile the property owners went to court and on Friday a judgment was rendered.

Predictably, the squatters were told to get out, and given five days to do so. They refuse. The home’s owner (Wedgewood Properties) offered to pay the moms’ moving expenses plus their housing costs for two months and donate profits from the sale of the home to a charity. In return the moms declared this was an insult and they face systematic racism (they’re black). Said they: “We never thought we’d win in an unjust system. We’re up against corporations who are willing to put mothers out on the street.” And this: “Wedgewood… is desperate to avoid taking responsibility for how this company has contributed to the housing crisis that is causing families like mine to be homeless and for participating in an industry that has robbed Black and marginalized communities of land and wealth for generations.”

The Moms get support from Oakland mayor Libby Schaaf (left).
.

Well, you can see where this is going. The Moms argued housing is a basic human right, and eviction would be an injustice. But in America (unlike Canada) the right to own property is enshrined in law. The courts ruled for the owner, not the downtrodden. And sometime in the next few days there’ll be a big media circus as the moms are tossed.

So chew on that. In this nation property owners have no legislated right to own property. But people without houses now have the legal right to housing. And Mr. Vaughan has a title.

How would the squatter Moms fare here? I bet we’ll know before long.

 

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