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September 7, 2015 | Get Serious

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Well, blog dogs, time to get serious again. Summer’s done. Get over it. There’s a historic Canadian election in six weeks. The bank rate thingy is Wednesday. The Fed will move the earth this autumn. The stock market correction is behind us. Or not. Beijing says the equity turmoil there is over. If so, oil’s way too low. Could it be that commodity prices at 1999 levels, when the world’s actually expanding, is just a big, temporary mistake? If so, the TSX sure looks cheap, too.

If nothing else, it’ll be an interesting ride between now and Christmas. Just imagine what happens to the dollar if the BoC cuts, or the Big Dipper wins? What happens if it’s Trump vs Sanders? How can Vancouver house maniacs carry on if mortgage rates swell? And how do you choose between a guy who re-mortgaged his house 11 times, a leader who’s ‘just not ready’ and a dude whose candidate pees in people’s mugs?

Oh, my head. It’s all too much. Let’s flee to Asia.

“Hi Garth,” says Brad. “Loved to read your stuff when I was in Canada, then moved to Asia 16 years ago. My wife and I are non-resident Canadians now in Hong Kong but still own a home (high taxes and maintenance costs, 30K a year) on the lake less than an hour from Toronto. Comfortable lifestyle for the summers, but when winter comes we head back to Asia, Thailand, where we bought and sold two villas – sold, as I was uncomfortable with the country’s politics as it affects fluctuating finances and currency exposure.

“Like many of your posts concerning couples with different opinions of what to do about finances, we are no different. Your Rule of 90 is what got me to post to you and I am wondering how to work out the numbers.”

He’s 69. She’s 68. Some dividend income, but their combined income of $38,000 is mostly CPP and OAS. Meanwhile the Ontario house is valued at over $1 million and they’re in a quandary because they may be returning to live in this quasi-socialist paradise.

“I am sure we are breaking your 90 Rule. But she is opposed to selling the house, (will be subject to capital gains hit according to CRA), while I prefer selling, investing and renting a high end home. I believe we can preserve the capital from the sale of the house with reasonable returns, support the cost of a rental and be close to the kids in Toronto. When winter comes, head overseas until it is no longer feasible. Preserving capital will provide support if old age costs increase and if not, provide an inheritance for the kids.

“How can I find support for the argument that holding such a large asset (our home) at our age is not reasonable from a dollar point of view and makes us vulnerable to shifting real estate markets? Appreciate any time you can afford to this given the 2015 economy.”

Well, Brad’s right – this couple is way offside when it comes to a balanced approach to net worth. My guideline is simple – deduct your age from 90 to determine the percentage of your net worth that should be sitting in the single asset of residential real estate. In other words, old farts should lighten up on a one-asset strategy because what they need more than bricks is a stable, life-long income. According to the formula, four-fifths of what they own should be liquid. Now it’s reversed.

Why change it up?

Simple. Risk. Residential real estate in the bubble regions of Canada is unsustainable. Even if commodity prices revive and the economy along with it, this will mean more inflation and the 100% certainty of higher interest rates. Since houses are dear only because money is cheap, this does not favour property values. Especially non-urban ones. That million-dollar house could turn into a $750,000 white elephant fairly quickly.

Beyond that, what kind of sucky life are a couple of 70-year-olds going to have trying to live in the orb of the GTA on just $38,000 a year in a house that costs $30,000 annually to own? Why not cash out, invest the million and enjoy a juiced-up income? Even at a modest 6% a year, that’s sixty thousand extra which can be taken as non-reportable return of capital – more than enough to rent an upscale house for three or four grand a month, avoid shopping at Costco, and still get a new Lexus plus a lifetime supply of thirsty underwear. What’s not to love?

So, Brad should prevail in this argument. And he shouldn’t doddle once he’s crushed his wife’s emotional objections with the unassailable logic this pathetic blog is so reknown for. List now to avoid regrets later, ex-pat buddy. You might not recognize Canada when you get back here.

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September 7th, 2015

Posted In: The Greater Fool

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