Shared stupidity

The GTA is a huge place. Six million captives. There are hundreds of thousands of rental units in Canada’s biggest hunk of urbanity. Currently 99% of them are unavailable if you happen to be looking for digs. That vacancy rate of just over 1% is bad, but last year it was 0.3%.

Fewer rentals means higher rents, despite rules designed to keep costs down. And although tens of thousands of new units are in plans or in construction, condo prices have jumped four times faster than single homes.

Why is it so hard to find a rental in such a big place? Why do they cost so much to rent ($2,400 for the average one-bedder)? And why have condo prices escalated when single family homes have been in a torpor?

One word: Airbnb.

Almost four in ten condos in the GTA are owned by investors. About half of all new sales go to people with no intention of living there. Some of those are rented out to long-term tenants. A load are not. They get Airbnb’d. Currently more than 21,000 units are listed on the company’s site for Toronto.

Do the math. It’s a helluva lot more lucrative to rent out a downtown condo for $200 a night than get $2,500 a month from a tenant. Plus tenants have rights. They’re needy. They can refuse to move out. They can haul your LL butt before a tribunal. They can wear-&-tear your place with abandon. They can stop paying you, and still stay. Even an expiring lease is useless in getting rid of a melonhead. In contrast, Airbnb guests are quickie cash. They come. They go. They pay big. Badda-boom.

Of course, short-term rentals are a social scourge. They put hotel employees out of business. They seriously damage the hospitality business. They take tens of thousands of rental units off the market. They skew the economics of property values, as residences are turned into businesses. In big cities they crash the vacancy rate and raise rents. In small towns they suck off rare rental accommodation and leave streets dark in the off-season. They’re antipathetic to local economies – grocery and hardware stores, dry cleaners and bank branches – that rely on a stable year-round population. And they help lift real estate out of reach for locals.

Yes, Airbnb lets homeowners collect cash they would not otherwise get and, yeah, it’s cheaper to rent a condo in downtown Toronto for three nights than to stay at a hotel. But the societal costs are staggering. So what just happened in T.O. is a good thing.

It’s been a two-year fight. Landlords and the booking site have resisted every step of the way, and refused to voluntarily comply with municipal regs. For more than 20 months the issue has been before a tribunal, and now the decision’s been made. City, 1. Airbnb, 0.

All those units bought to rent out by the night (usually against condo board rules) are now illegal. Short-term rentals will be allowed only inside a landlord’s principal residence, and for no more than 180 nights s year. Homeowners can rent a max of three bedrooms, and not for more than 28 days at a time. No rentals will be allowed in basement or secondary suites. Landlords need to register and pay a fee plus a 4% accommodation (hotel) tax on revenues.

Of course by registering, landlords also join a database which is shared with the CRA – so anyone not declaring Airbnb (or VRBO) income is probably asking for an audit.

The expected result – about 5,000 units will be returned to the long-term rental pool, which is good. Says the lobby group out to geld the short-term landlords: “Commercial hosts are real estate investors who commodify our residential housing stock. They operate anywhere from two to many dozens of so-called entire homes, be these houses, apartments or condo units. They use residential housing stock as hotel inventory in buildings that were not planned, zoned, approved and built as hotels, but as residential buildings.”

Toronto joins Vancouver in trying to reign in the Airbnb beast. In YVR landlords have to secure a business license and can only operate out of a principal residence. Owners also have to pony up provincial sales and tourism taxes, which are collected and remitted by Airbnb. The city says over 70% of the 4,700 short-term rentals listed are legal, but suspicions remain a lot of other landlord are operating under the radar.

Meanwhile Airbnb continues to accumulate bruises for allowing ‘party house’ rentals to be listed and turning a blind eye to the incredible neighbourhood problems which short-term rentals cause – from North York to Venice.

Okay, kids, I know this is all part of the sharing economy. Like Uber. Or Rover. We’re all supposed to be collaborative now. Owners get cash for the bedrooms. Guests get a deal. Hilton gets zip. It feels good in an iconoclastic, screw-da-man kind of way.

But it’s not really sharing. More like stealing. From yourself.

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Don’t do it

There was a good reason 65 was set as the retirement age for a government pension back in 1935. Life expectancy at the time was 61. Surprise!

Well, lots has changed. Now you can apply for your CPP at age 60, if you want (and you should). The average dude lasts until 80 and the girls clock in at 84. Increasingly people say they want to retire at 50, or 55. That means three decades of life after you bring in the last paycheque. If you’re one of those crazy FIRE kids, you’re gunning to stop work at forty. So, four decades.

Therefore, we have a problem. Too long life. Too little money.

Stark evidence of that this week as yet another scary survey was published, this one by Sun Life. If you ever doubt at least half the people on your street are pooched – whether they know it or not –  just check out the stats.

Almost half (47%) know they’re going to run out of money before they die. Of those already retired, almost three-quarters say it sucks (“not what I expected”). Among people working, 75% say they have zero financial plan and close to half expect to still be working in their late sixties – of necessity.

This is compounded now by life expectancy. Unless every kid in school starts vaping, males will hit 84 and females 87. The fast-growing group is already wrinklies over 100 and in North America 11,000 Boomers retire every day. In 35 years an even larger number of Millennials will be doing the same – if climate change doesn’t have everyone sunburned, drowned or chasing bugs.

So we’ve never been in this space before, with longer lives, stretched finances, substantial debt, a record-low savings rate, a demographic bulge – and the death of pensions. Sure, the CPP and OAS exist, but that’s gas and grocery money. Disappearing are defined benefit plans and also corporate pensions with payouts people can depend on. Seven in ten of us (like me) have no employer-organized plan of any kind.

How much do you need to retire? Depends on what you plan to spend, of course. Surveys show most people think $750,000 would do it, but the average family has saved $180,000 (better than in the US, but public pensions there are twice as generous as ours). So – given the current savings rate of less than 1% – it’s a recipe for disaster. Also recall that 80% of all the money in TFSA sits in GICs or savings (making nothing after inflation) and most people believe stocks are satanic and condos divine.

The inescapable conclusions: retirement won’t happen for large numbers of people who will have no choice but to work until they drop. Second, lots more houses will come on the market since liquidation will be the only salvation. Not good for valuations. Third, don’t count on an inheritance. You might have to take mom in, actually. Fourth, it’s impossible for governments to live within their means given the tsunami of old geezers in need of support and health care. Fifth, taxes are going up. A lot. And, six, we have a big collective failure on our hands – when half the population is unable to care for themselves after living for sixty or seventy years. What the heck were they thinking?

As this blog has told you repeatedly, there are simple ways to ensure you’re not cannon fodder in the war on stupidity. Putting $100 a week into a TFSA and staying invested in decent ETFs for 35 years will net you about $800,000. The tax-free income kicked out will be close to $50,000 (at 6%). Add in CPP and OAS (which would be undiminished by the income stream) and you end up with nearly seventy grand in annual income and basically no tax payable. That compares with the median income of $57,600 for Canadian retirees now.

So is saving/investing a hundred bucks a week an economic hardship? Apparently it’s out of reach for half of the families in Canada, who average $200 or less a month in disposable income after paying regular overhead. The overwhelming reason is simple. Property ownership. The historic cost of acquiring and maintaining real estate in Canada has wiped out household savings, gutted earned incomes, torpedoed the savings rate and now has 47% of people convinced they’ll be croaking penniless.

So if there’s one overarching lesson for the next gen of moisters, it’s this: look at the financial failure your parents are turning into. And don’t do it. He who’s liquid will get the last laugh. Or maybe wheeze.

 

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Fear of heights

As 2019 began Bay Street legend David Rosenberg told clients falling show ticket prices on Broadway were reminiscent of 2007, and they should get set for “the high (and rising) risk of a recession.” Like, move to cash.

Since then the Toronto stock market – despite an utter collapse in weed outfits – is up 19%. The US market (despite the trade war and you-know-who) is ahead 24%. Boring balanced & diversified portfolios are clocking in around 12%. Bond prices are down, yields are up, the inverted curve thingy is history, corporate profits are A-ok and there’s no recession. Not even close.

But fear sells. The people who pump gold and crypto depend on it. [email protected] with her bevy of GICs and HISAs thrives on scardey-cat investors. Same with the insurance floggers and their segregated funds – sucking off massive fees so investors can have a guarantee of getting their money back in a decade. (There hasn’t been a decade yet when it was required.)

Now, some people say today is different and it’s completely understandable to be frightened poopless. Trump is unpredictable. Hong Kong’s a powderkeg. Syria-Turkey-Kurds-Iran, whew. What if Brexit happens? Or Wexit? Or Putin’s nuke cruise missiles blow up again? Or China starts its world domination?

Others worry about debt. We’re pickled in it. Nobody has any cash. Interest rates are a joke. How can this last? And what about governments? After all, Washington alone accounts for a third of the entire world’s government debt and there are zero plans for reining it in. If the States goes down, we’re but a dustbunny in the global Hoovering. Look at this chart form the scary bear dude at Wolf Street. Yikes.

So are stock markets which have hit new highs and handed double-digit returns to investors now financial IEDs? Do they need to blow because they’ve inflated so much? Is the prudent thing to take money off the table – or is this another Rosenberg moment when doing so results in a serious loss of wealth?

I asked my suspender-snapping, Porsche-driving, trophy-wife, prodigy-children, omniscient portfolio manager buddies Doug and Ryan for a few words on this topic, which will be followed by the only investment advice you will ever need.

The first point Doug makes is that highs are meaningless since 77% of the time markets go up (like the economy). How can you beat those odds? For example in 2017 the Dow hit a new high 70 times. If you’d sold in fear when it touched 20,000 (as Rosie suggested), you’d have given up 40% since it now sits at 28,000. Besides, markets get momentum. This one continues to push ahead.

“Now, you can argue, as many bears do, that it’s different this time. For example, valuations have become richer. (My rebuttal would be that valuations almost always exceed long-term averages in bull markets.) However, whether it’s truly different this time or not, is not the point. It’s a mistake to isolate one arbitrary fact as proof of a future outcome: “Markets have done well, time to sell.” This is not a defensible argument.”

As you know, Ryan goes on BNN so I’m not sure about him anymore. But I do agree with his key point – bull markets don’t die of old age. Instead they’re always murdered – by central banks (rates rise) or some external shock (like a housing crash)

“Keep it simple. Last year markets were weighed down by Trump’s trade war and Federal Reserve interest rate tightening. This year markets are rallying on Fed cuts and the growing prospect of a trade deal between the two largest economies in the world. If they finalize a deal (Phase 1) this will remove a major risk to the global economy and equity markets. Then we’re left with a US/global economy, while slowing, is still growing at a decent clip, and very well could accelerate in 2020 if the trade war subsides. This could then lead to higher earnings growth in 2020, which could be the driver for further gains in 2020. With an accommodative Fed, an economy that is neither too hot nor too cold, the prospect for stronger earnings in 2020, and confirming bullish technical trends, as evidenced by the new highs, we remain bullish and see further gains. But we temper out bullish outlook by currently investing in lower risk equities such as low volatility stocks, REITs and blue chip dividends stocks just in case one of the risks (Trump’s trade war, Brexit, Hong Kong etc.) were to materialize and derail this ongoing economic expansion.”

Yes, debt and turmoil surround us. But investors continue to make bank, based largely on the prospects of the US economy, supportive CBs, easing trade tensions, money-making corps and an ocean of cash that is departing the safety of bonds and cash and flowing back into equities. Yes, corrections are inevitable along with economic slowdowns. But they’ve always been temporary and relatively short. Even during the 2008-10 meltdown, investors who stayed invested and ignored the storm with balanced portfolios did just fine – averaging +5% a year, while those who bailed lost a bundle. Fear is an emotion, not a strategy.  It comes with a price. Don’t pay it.

And here’s all you really need to know: Invest when you have the money and stay invested until you need it. All in between is but noise.

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The moaning

During that godawful election campaign the cowboy premier argued the mortgage stress test is unfair to Calgary and Edmonton. “One of the reasons why homes are less affordable in Alberta today is because of unfair rules imposed by Ottawa to deal with the overheated real estate markets in Toronto and Vancouver,” thundered Jason Kenney.

The federal Cons agreed. Andrew Scheer promised to ‘modify’ the rules setting minimum mortgage hurdles. And so the Conservatives swept the West. Once again real estate got real political.

So what’s the situation? Are Alberta houses unaffordable? Would gutting the stress test for certain regions of the country make houses accessible? Is Trudeau likely to do this to help keep the prairie Liberation Army at bay?

Hmm. The latest numbers tell a different tale. New house prices in Calgary are falling – down about two and a half per cent over the past year. Resale prices have been on the decline for five years. Sales of detacheds year/year is negative. But that hasn’t halped sales much – they’re at a 23-year low.

House starts have fallen in Calgary. Off 16% from last year. In fact the real estate board says that’s okay since there are already too many houses. The market is oversupplied, and so the value of homes drops – and will continue to do so. Says one realtor in counseling vendors: “If you’re selling your house, you have to take a deep, deep breath and you have to lower your price to probably well below what you thought your house was worth. And even then, you’re in for a challenging time.”

Yes, prices for single-family homes in the Canadian energy capital have now declined for nine straight months. Valuations peaked in the autumn of 2014, and have held a decline of about 10%. Currently the average detached house goes for $459,000, which is 7% cheaper than last year. Of course that amount of money buys you a crappy one-bedroom apartment one hour’s commuting distance from downtown Toronto, or a single-car garage in Vancouver. Well, actually, a garden shed.

“We should all get comfortable in the market we’re in,” realtor Tanya Eklund told some local media. “We’ll likely be in a very similar situation into 2020 and possibly into 2021 unless we start to see some huge migration numbers of people who are employed.”

And Edmonton? Crickets. Prices are stuck at the lowest point in six years. The average is now $316,000, or thirty grand less than in Halifax – a city with 30% less population and sitting in an equally regional, economically-challenged zone. Overall houses cost 9% less than five years ago. Factor in inflation, and it’s closer to a 20% plop. The average detached, at $421,000, is $16,000 lower than way back in 2015.

Says the head of the real estate board: “Our market has been down over the last number of years and we haven’t seen a significant increase in the market, and we’re not anticipating a significant increase soon. The stress test is making it difficult for buyers to be financed, even though in theory we’re in a buyer’s market. Consumers are just saying, ‘I’m happy to go out for dinner, I’m not happy to spend half a million dollars on a new house.’”

Well, there you go. After jumping into bubble territory a decade ago, the Alberta real estate market corrected, and has since stabilized. Here’s the chart for Calgary.

Stable prices: how is this a bad thing?

Now, let’s ask: why is this a problem? The market is drifting sideways. Modest inflation is eroding prices. Affordability has been enhanced over the past half-decade, not decreased (as in Toronto, Montreal or Vancouver). The stress test is still in place to ensure buyers aren’t squished in the future when interest rates rise (and they will) – in other words, to keep people from becoming over-extended. The real news is the average detached in Calgary or Edmonton costs $1 million less than a similar hovel in Van.

So modestly, gently declining real estate values in Alberta are good. Not bad. We should all be so lucky.

The problem is our cult society in which ‘good’ real estate markets means constantly rising prices and sales. Anything other is called – by the media, politicians and (especially) realtors and lenders – ‘poor, ‘declining’ or ‘struggling’. We’ve fallen for this ruse. We’ve come to equate general economic health with rising property values, even when that robs, debilitates, impoverishes and indebts families.

In reality, the ability to buy a fine house for less than half a million should be a big positive feature of life in Calgary or Edmonton. These places are not outposts. Calgary has 1.4 million people, the fourth-largest metro region in the country. An equal number live in Edmonton. Real estate that people can actually buy is an advantage. Not a disease.

Gutting the stress test so the Albertan housing market can inflate, become over-extended and create more risk for the people living there is just as dumbass as thinking the province can exit Canada. But, it comes from the same people. Figures.

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They shoot stocks, don’t they?

DOUG  By Guest Blogger Doug Rowat

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When I started in this business prior to the dot-com bubble I had some vague sense that share values declined, but I had almost no concept that a company could actually go bankrupt. This was the late 90s and share prices simply didn’t just go to zero.

Naively, I assumed that if a company was publicly listed and that millions of investors had ownership then the company had legitimacy and therefore wouldn’t fail. I also assumed, even more naively, that for a company to be publicly listed it must have been thoroughly vetted. Was I ever in for a wake-up call.

Below is the dramatic rise in Internet company failures as the tech sector became irrationally speculative. Sadly, I would have owned a few of these.

Internet company failures

Source: Michael Mauboussin (“More Than You Know: Finding Financial Wisdom in Unconventional Places”)

To a much lesser extent, I received another reminder of bankruptcy dangers as the wildfires raged this fall throughout California. The big westcoast utility PG&E, which was recently forced to intentionally black out most the San Francisco Bay area because of the forest-fire danger, has seen its share price plunge 69% y-t-d. It now sits on the cusp of complete failure. But, amazingly, PG&E has already filed for bankruptcy once this year and did so as well in 2001 in the wake of the Enron scandal. It’s already a two-time loser. No pun intended, but how many times will investors allow themselves to get burned? PG&E was removed from the S&P 500 earlier this year.

According to a recent Innosight report, the average life span for a company in the S&P 500 has been about 33 years. However, by 2027 this number will fall to just 12 years. In fact, S&P 500 company life spans have been steadily declining for decades.

Now, naturally, some of this longevity decline is due to factors that may be favourable for investors such as takeovers, but the reduced life spans are also frequently a result of bankruptcies—a rapid failure of companies to adapt to new, disruptive market forces. The rise of Amazon, for instance, continues to wreak havoc on the retail sector. According to the same Innosight report, at least 21 US retailers filed for bankruptcy protection in 2017 including chains such as Toys R Us, The Limited, Payless, and Gymboree. And a recent BMO report further highlights that there were more bricks-and-mortar store closures (as measured by total square footage) in 2017 than in 2008, which, of course, was the heart of the financial crisis.

Bankruptcies are always a fact of life, but if you over-concentrate in the wrong sectors then your investments are in even more danger. Are you listening cannabis investors?

The overall number of bankruptcies obviously increases during recessions, but what investors should be aware of is that there’s a constant randomness (if that can be considered a phrase) to bankruptcies even during strong economic periods. In fact, even when the economy is good, bankruptcy levels can spike for seemingly no reason. It’s just part of the natural cycle of the economy. In other words, don’t be lulled into complacency with your stock portfolio just because the economy is stable. Your odds don’t particularly improve in terms of avoiding a complete corporate failure just because the economy is doing well and the overall market is trending higher (see chart).

Bankruptcy landmines lurk everywhere and overall economic strength often doesn’t reduce their numbers. Bankruptcies have a life of their own.

S&P 500 (orange line) vs the Bloomberg Bankruptcy Index (white line): Even with the economy and markets humming along, bankruptcy levels can spike at any time

Source: Bloomberg

Remember this if you’re trying to make a living through speculative stock-picking. A broad-based ETF, in contrast, doesn’t even skip a beat if an individual company goes belly up because the ETF will own many more companies that have weathered the storms, handled the competition and succeeded.

If you want to more easily step over the dead bodies strewn throughout the corporate world, own an ETF.

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

 

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Seeing red

Well, there ya go. The indy PBO (Parliamentary Budget Office)  has confirmed what this cerebral but athletic blog told you. Trudeau fibbed. The federal deficit will be bigger, and your need to do something about it more urgent.

You may recall during the election campaign that the T2 guys admitted (a) they have no plans to balance the budget, which means spending will exceed revenues and (b) we’ll therefore be borrowing one mother of a load of money. The shortfall last year was $14 billion. Next year it’ll be $27 billion. In fact Mr. Socks forecast a deficit north of $20 billion every year during the Lib mandate.

But, says the PBO, not so fast. Deficits will actually average $1.6 billion above that, and likely a lot more if one of two things happen (and both will). First, the economy slows at some point during the next four years and, second, T2 clings to power by sleeping with Singh. NDP demands to keep the minority government afloat are expected to include some version of its pharmacare program, social housing initiatives and (yes) increased taxation on the rich people who some to this pathetic site and should know better than to be successful. The PBO admits it did not include Trudeau’s campaign promises in its projections, either. So throw in some extra billions.

Trudeau could roll the dice, cuddle up to the Bloc and avoid taking on some of the NDP baggage. But that would involve caving to another set of demands, while making Jason Kenny’s head explode. There’s no getting away from the economy, however. Growth is expected to be anemic – well below 2% for the next few years – and any expansion of the current global trade wars would shiv us. Plus, just imagine if oil prices remained low and we didn’t build that pipeline. More of Jason’s brains going airborne.

As we’ve warned you for some days now, the greatest impact of this federal spending agenda will be more taxes. Yes, residential real estate is a target. And so are incomes and investments, as well as the equity and retained earnings of small corps. The first de facto coalition government budget is about 90 days away, and may not be pretty. Unless you’re one of those commie moisters with tats, a vape pen collection, three degrees, airpods, a transit pass and a big chip, then consider going defensive.

Let’s review some of the top suggestions…

First, capital gains. The odds of the inclusion rate rising are elevated. This would be a moronic move, but under active consideration. Instead of letting you keep 50% of a gain with no tax, that might fall to 25% with the remainder being added to annual taxable income. Bummer. If you have an asset that’s grown substantially – like a family cottage or secondary rental property – it might be wise to crystallize that gain before the rules change. In terms of financial portfolios, hiking the rate would also be a negative but probably not a good enough reason for most people to cash out.

Income splitting. If one spouse makes less than the other you have a great vehicle for saving tax. Open a spousal RRSP, for example. The higher-income earner makes contributions into it and claims the full deduction from income. After three years the money becomes the property of the other spouse and can be removed at their lower rate.

Spousal loans. No brainer. Just lend whack of extra money to your squeeze and let him/her use it to invest. So long as you charge interest (the required rate is just 2%) none of the investment gains will be attributed back. Your partner can even claim the interest paid as a deduction against the investment gains.

TFSA gifts. Another way to income-split within a household. Give your spouse or adult children money they can use to invest in their tax-free accounts. There is zero attribution back to you, and all of the proceeds accumulate free of tax.

Pay the family expenses if you earn more. Let the less-taxed spouse be the family investor at their lower marginal rate. Also have a joint non-registered account. That way half the gains will attract less tax and additionally, if the cat kills you while sleeping, all of the money becomes your spouse’s property without probate or delay.

Small business dude? Don’t pay yourself only in dividends, as so many do. There’s no real tax savings plus you earn no RRSP room. For entrepreneurs without pensions and with potential creditors, registered retirement savings are a key tool for deferring and shifting tax. Also remember that Libs hate you, as demonstrated last year. The assault on retained earnings and passive income will continue so abandon that plan of stashing retirement savings inside your corp. They’re coming for you.

We’ll continue this on future days. Apparently voting has consequences. Imagine that.

Federal gross debt, 1870-2019 (in 2019 dollars)

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Naked

The creep continues.

It started with the mandatory reporting of any real estate transaction on your annual tax return – whether you made bank on it or not. Then it spread to the CRA as revenuers tracked down condo flippers, renospeckers and amateur landlords. Then they came for the basement suiters who collect cash rent. Then followed the foreign buyer taxes in BC and Ontario, and the empty-house tax, the special property taxes on high-end houses plus that crazy spec tax on second homes. Now the Trudeau gang is crafting one on non-residents who own here. And Ottawa’s started to disallow tax-free capital gains on properties people altered for rental units, while forcing developers to hand over the list of precon condo buyers.

Notice a pattern? You should.

Without a doubt the next big revenue source for desperate governments will be (and is already becoming) residential real estate.

In the election campaign the NDP (now in a powerful Parliamentary position) advocated for a wealth tax, embracing the value of real estate holdings. The Greens campaigned on a financial transactions tax which would hit the cost of mortgages, HELOCs, purchases and sales as well as home insurance. The Libs tried to deny it, but the powerful Ontario caucus endorsed a policy which would start taxing residential real estate profits on a sliding scale, based on length of ownership.

Also during the election Trudeau vowed a 1% annual tax on the value of housing owned by non-residents. This represents the first time in Canadian history the senior level of government has moved into the area residential real estate to raise revenue. Now all three major levels of government – local, provincial and federal – are gunning for money from the hides of owners.

Given what’s going down in Ottawa, this is a pale beginning.

The federal Libs said during the campaign they’ll run deficits of $28 billion now, falling to maybe $21 billion in four years. As we know, everyone lies to get elected. The budgetary shortfall will be far larger, especially if the economy takes a cyclical downturn after the 2020 US presidential election. Revenues will fall. Expenses and spending will rise. The river of red will become a torrent. Tax increases are a certainty.

But, since the tax base has narrowed so dramatically (four in ten families pay no net income tax now, and that’s about to become more extreme), the wealthy are already being hosed for up to 54% of earnings and taxes on investment or business income can’t swell much lest we lose capital to the States, guess what’s left? Right. Houses.

The argument for taxing residential real estate gains is simple. Everything else is subject to Hoovering. Why not this? Realistically, the very fact profits on principal residences are tax-free has played a huge role in creating a bubble and rendering property unaffordable to the average schmuck. It’s encouraged a massive flow of wealth out of financial vehicles and retirement savings and into houses. Especially when the government itself will provide the insurance enabling gross leverage to take place. This has resulted in a 70% home ownership rate at the same time half of families routinely report they’re close to broke at the end of each month. What else would you expect with $1.6 trillion in mortgages, increasing at $60 billion a year?

Now, this pathetic, heartless, realtor-baiting blog is not advocating your real estate gains should be sucked away by a voracious government. It’s just telling you it’ll happen. It’s inevitable, at least in part and starting before long. The likely starting point will be secondary properties, including cabins, condos, cottages, hobby farms or holiday homes in other cities. Van’s so-called ‘empty houses’ tax and BC’s spec tax will be the models. Market value property tax assessments in most major cities make a form of real estate wealth tax – on top of property tax – too tempting to pass up.

Besides, the Mills want it. They see homeowners as rich, the recipients of unearned wealth because their elders won the birth lottery. There’s no sympathy among the young for retained equity and, sadly, they now form the largest voting bloc.

If you think the political encroachment on your real estate is unjustified, intrusive and unconstitutional, too bad. In Canada there’s no enshrined right to own property. It’s not in the constitution, the bill of rights nor statues protecting civil liberties. Any level of government can tax your house, the value it represents, or take it with or without compensation.

Twenty-seven years ago I tried to change that – the last time federal politicians had the stones to diddle with the constitution of Canada. The right to own property, and therefore to mount a legal challenge when that right was abrogated, was included in a set of amendments after I lobbied furiously for it to happen. The lefties hated me for it, of course, since enshrining property rights into law makes it way harder for governments to take wealth and redistribute it.

Alas, it went down in flames as part of the Charlottetown Accord (ask you grandfather about it). And here we are. Naked owners. So get ready.

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The F factor

The saga of F has been well documented here. Since he died more than five years ago, Jim Flaherty’s name is rarely heard. Too bad. He had some guts. And while in my final political days he joined the forces repelling and ejecting me, respect is due. The elfin deity left more good than bad behind him.

That brings us to the TFSA. Readers of this blog and its precursor helped me craft a far-reaching report on tax reform in 2007 which was presented to Flaherty. A retirement vehicle modeled on the American Roth IRA was one of the suggestions. F adopted it in the 2008 budget and it became law the next year.

So here we are. Ten years on. Already there are suggestions bubbling up that a collar should be put on this thing. So time for a blunt review.

My original idea was simple: let people put after-tax money into a vehicle where it can grow free of tax until they retire, providing an unreported income stream. Make it democratic. Not linked to income. Everybody gets the same ability to contribute. Because no tax deduction is earned when funds are deposited, the money flowing from it isn’t counted as income. No impact on CPP or OAS.

F changed that a bit. He turned it into a savings vehicle, not a retirement one, allowing withdrawals at any time with the ability to replace them in the future. Not losing contribution room was a good wrinkle. Calling it a ‘tax-free savings account’ was not.

Before he shuffled off this mortal coil, F raised the annual contribution limit from $5,000 to $10,000. The very first act of the incoming Trudeau government was to slash it back, then add some inflation-indexing. This year the amount you can stuff into a TFSA is six grand.

In a decade the contribution room has grown to $63,500, or $127,000 for a couple. Some people, though, have hundreds of thousands in their plans because they threw high-risk growth assets in there. The CRA has chased those who have used TFSAs to shelter day trading, or professional traders trying to game the system – but that’s not the big issue. Instead, this money machine is being used and abused by a nation of investment wusses.

These days over 70% of people have opened a TFSA, which makes them more popular than RRSPs, marriage or Liberals. The average amount held is about $28,000 and last year the average contribution was $4,800. That’s good. But far too many of we little beavers are squandering this opportunity.

Four in ten consider their TFSA just an emergency fund. Eighty per cent of overall TFSA money is in low-interest GICs or savings accounts. RBC found investors 55 or older have 67% of their money in those brain-dead assets, with just 7% in ETFs. The rest is in high-fee mutual funds or high-risk single stocks. Yikes. What are they thinking?

Anyway, something predictable has happened. People who understand what a gift the TFSA is – for turning after-tax money into a never-taxed stream of proceeds from growthy assets which will not cause government benefits to be clawed back – have been doing just that. Thick-as-a-brick folks, or those who misunderstand risk or are financially illiterate, have been using TFSAs as savings accounts. Thus a dramatic divide has developed, even though this vehicle has been equally and democratically available to everyone, regardless of their income level. Data shows lower-income people keep most of their savings in RRSPs, which provide scant tax savings and can erode retirement benefits. Meanwhile higher-income people have TFSAs growing like weeds.

It will be only another five years or so before the aggregate TFSA room climbs to $100,000 per person. At that time a couple in their early forties holding the maximum amount and making yearly contributions growing at 7% will have $1.26 million in tax-free accounts at age 65. That will throw off an income of about $76,000 per year in retirement which will not be counted as income, allowing full CPP and OAS collection. In other words, a household income of at least $110,000, with zero tax.

So, this is why some people think things need to change. “The federal government should consider capping lifetime contributions of TFSAs — at around $100,000 to $250,000 — to avoid creating more TFSA millionaires while shortcomings persist among lower-income Canadians,” says Ottawa statistician Richard Shillington. He also recommends that Ottawa start topping up the TFSAs of lower-income people with tax money, like you get with your kid’s RESP.

Is this possible?

Of course. Federal taxation policy and budget priorities have been leaning left for a while, as evidenced by the gutting of F’s annual TFSA contribution. Last year Ottawa launched an assault on the self-employed and professional corporations. Now a change to the capital gains rate and treatment of dividends is being considered. Meanwhile the feds pay people when they have children, and tax them more when they succeed. So a TFSA limit is no stretch.

What to do?

Easy. Max your contribution room. Now. Invest for growth. Put more aggressive portfolio assets in there while keeping the fixed-income ones in your RRSP. Fund your spouse’s tax-free account. And your adult children’s. Make the 2020 contribution in the first week of January. Never be satisfied collecting interest inside your plan. Never take money out. Inflate that sucker to obscene, gargantuan proportions. And harbour not one shred of guilt. This is democracy, at work. F would smile.

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Chow down

What a weird blog. Alberta Liberation Army news. The Greta Report. The Breeders’ Daily (canine division). Fear & Greed on Bay & Wall. The Tax Avoider. T2 and You. Canadian Investment and Conjugal Advice. And, of course, The House Horniness Hotline.

Today some morsels for all blog dogs to chew on. Apparently things are not exactly as they seem…

The Inconvenient truth about Van Real Estate

Dane Eitel is a nerdy statsguy contrarian deeply immersed in Van housing, and an avowed enemy of local realtors. They say the market’s rebounding with a 45% sales jump last month. He says phooey.

“The October data has come in and has been touted as a signal of strength from the Real Estate Board and optimistic analysts. The truth in the matter is prices are down almost 100 Thousand from October 2018. Over 300 Thousand from the peak. In addition the detached market produced an average sales price of $1,533,135, signaling no pricing momentum over the past quarter. Simultaneously falling behind the 10 year uptrend. What this means to us is the market is holding on for dear life.”

What’s it mean? Simple. Don’t buy, unless you like paying too much. Eitel says prices will be $100,000 less by the Spring, taking an average detached down to the bargain-basement level of $1.4 million, therefore affordable to hairdressers and apprentice plumbers across the LM. Some parts of the market have hit bottom (prices down 30%) while others continue to sag. Overall, house values will drop.

So why are sales higher?  “The market is experiencing need-based buying,” the analyst says. Prices 16-18% lower have mitigated the impact of the stress test, allowing those buyers who must purchase to move in.

What’s next? A flood of new listings in a few months. Buyers will be rewarded and owners (who held off waiting for a stronger market) punished. “Sellers are advised to take advantage of the fall market before the spring market is yet another disappointment.”

Stocks 157, Houses 127, Reits – insane

The meme among the chattering classes is that nothing beats real estate for making dough. Especially in a big city like Toronto. In fact it’s depressingly common for realtors to publish self-licking little blogs about stocks vs houses. Equities are rife with risk, they say, while buying a house with 20x leverage is a sure thing!

But it’s a lie, kids. At least in terms of pure market performance. According to BNN (which you should never watch) Bay Street delivered a 157% return over the past decade while Toronto real estate clocked in at 127%. But, the house-humpers cry, you can use leverage to buy a condo! And gains are tax-free!

Sort of. You can leverage a portfolio, too. And the interest is tax-deductible, unlike your mortgage. As for taxless gains, this applies only to a principal residence (no rental or flipped condos), and you pay a heavy price for that in the form of high closing costs, strata fees, property tax, insurance and maintenance, as well as huge selling fees. And while you get to live in real estate, it can also turn illiquid exactly when you want or need to bail.

Anyway, the big winner a REIT investment. Bay Street’s real estate investment trust index grew by 354% (dividends included) over the ten years. These things own and manage commercial real estate assets across the country, giving you 100% liquidity, almost no transaction costs, no ownership fees and no landlord headaches. For years we’ve been telling you to have a hunk of your portfolio in exactly this – and rent.

Ask it again: how does this end well?

Blah, blah, blah. Another item on the amount of debt people carry. No matter how many times the warning flares go up, seems nobody’s looking. But at some point the consequences will be memorable. Hopefully you will not be in the blast radius.

Families have achieved a brand new level of stupidity, and now owe $2.24 trillion (a trillion is a thousand times a billion) – which is bigger than the economy. It’s interesting to note there are about 8.5 million families, and in the past 12 months they borrowed another $82 billion, of which $64 billion was mortgages. Total mortgage debt is $1.6 trillion – which is a scary number since 40% of homeowners have no mortgage. Plus, interest rates are near generational lows and won’t be staying at this level, no matter how hard you close your eyes and click your heels.

Finally, we’ve been in a ten-year economic upcycle of rising asset values and expansion – as well as swelling loans. There will be a contraction. Equity values will fall. Debt levels will not. Anyway, nobody cares. So might as end this post…here. Chow.

 

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Lest we ignore

When the wildfires started again, early, in California President Trump blamed the state for not raking enough. ‘The forest is a mess,’ he said. Maybe so. But the region just went through seven years of drought. Meanwhile July was the hottest month, ever, for the Earth. The last five years have been the hottest five in recorded history.

Dorothy and I were chatting about weather on the weekend. It’s snowed in Ontario and been plus 15 in Nova Scotia. Weirdness for November. The discussion moved into our lives, as we’re the same age. When we were born 2.3 billion people lived. Now the population is 7.7 billion. Same planet, 235% more humans.

Since we were married in 1971 (‘Brown Sugar’, ‘Riders on the Storm’, ‘Imagine’) the number of wild animals has declined 60%. After those 48 years there are three billion fewer birds. Nineteen species alone have lost 50 million members. Over the course of history up to 5 species of creatures a year have gone extinct. That’s now has risen to several dozen – a day. Insect mass is falling 2.5% annually. At that rate, in a century, there’ll be none. No natural plant pollination.

The above, as far as I can ascertain, is fact.

Now, has the climate changed because of people, or because of God? Is it actually altered, or just different weather? What, if anything, can be done about it? What happens when there are ten billion people? Or will tech changes allow infinite growth?

The preponderance of science backs the theory people have changed the planet. Predictions are dire. They’ve spawned climate strikes, enviro warriors like little Greta, Trudeau carbon taxes, the EV craze and angst in Alberta. The debate has hardened. Polls show most people believe there’s a climate problem, while a loud minority cry it’s a hoax. Currently the most powerful single man on the planet is in the latter camp. As a result, the global emissions that science blames for climate change largely continue.

People having babies take a leap of faith, of course. The world in thirty or fifty years could be one of dramatically altered weather, rising sea levels, more storms, impacted agriculture and big economic consequences causing wide population shifts and mass migration. Or, on the other hand, nothing will change. Parents need to decide – if they even think about it.

Research suggests climate change will increase the wealth divide. Developing countries with denser populations and more limited resources in areas where temperature may rise the most will be zonked. Rich western nations may do better. It’s a recipe for conflict. The OECD says climate change will reduce the global economy by between 2% and 10% in the next three decades. To put that in context, the 2008-9 economic crash which almost ushered in a deep recession saw a 4.2% drop in America’s GDP.

Well this post is not written to tell you that man-man climate change is real. Or that it’s not just weather. Or suggest you don’t have babies. Nor whether you should believe Greta, the United Nations and most scientists, or Donald Trump and all the people in the comments section below. It merely seems like prudent risk management to consider that the years you have until retirement, or in it, or the lives of your children, could be a lot different. Blackrock, the giant financial outfit, says almost $4 trillion in US bonds could be impacted by a changing climate and the impact on cities like New York.

One of the major hits could involve mortgages. The Fed Bank of SF says long-term (30-year) home loans could simply be unavailable in large regions. Lenders are reassessing the risk in holding real estate as security in areas increasingly at risk for wildfires, floods, violent storms, local economic disruption or drought. In a conference call Friday the bank detailed the risks of an evolving planet. In some places, it said, there will not be a real estate market at all.

“The result: Entire neighborhoods would empty out, leaving cities unable to shore up their crumbling roads and bridges just as severe weather events become more extreme and more frequent. Home values would fall, potentially depleting the budgets of counties and states. For most people, being unable to get a mortgage in a given neighborhood would rule it out as a place to live. But population flight is a best-case scenario when it comes to the financial system.

“If banks don’t recognize the danger of flood risk and keep lending only to have flooded homeowners default on their mortgages, the events could lead to a cascade of negative events akin to the housing collapse in 2008, which set off the worst recession in 70 years.”

Well, as you know, when the US real estate market tanked the global economy faltered. Governments went into the red zone. Interest rates tanked. Debt exploded. Unemployment spiked. Corporations were bailed out to save jobs. That was a temporary event. Could we deal with a permanent one?

Just a thought, as we recall the stunning sacrifices of past generations to save the world.

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