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June 15, 2016 | Dog Mail

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.

BARKS modified

Trump. The Fed. China. Hillary. ISIS. Poloz. Brexit. Screw it – let’s talk about you.

I’m an avid reader of your blog!  I wanted to get your opinion on the viability of the federal government pension plan for federal employees…specifically, do you think that it will still be solvent for someone who won’t start drawing on it for another 20 years and might draw on it for 20-30 years after that?

My wife and I are both senior federal civil servants ($275K combined income, I’m 38 with 15 years in, she’s 42 with 13 years in, and we have three young kids, none in school yet).  We aren’t currently saving anything due to child care costs ($4K a month) but I keep telling myself that’s ok due to our federal government pensions (which together we pay in to around $24K a year for the employee contribution portions).  So is this a foolish move, putting all of our eggs in to this single pension basket at our age?  I figure if the federal government can’t pay its pensioners down the road then economic collapse across the board might be the reality anyway, in which case any other investments I make might be hooped anyway.

We also own a $1M dollar home in Ottawa (overlooking the Rideau Canal near downtown) and owe around $400K on it…I’m also hoping/assuming that due to the location that in a housing downturn it will have minimal reduction in value…also, in general, Ottawa hasn’t had any major price corrections since WW2. So am I an idiot or not so bad? Thanks, Colin.

Idiot, actually. Yes, the federal government pension plan is strong, well-funded and backstopped by all the other jealous taxpayers who don’t have one. But that’s today. Forty or fifty years from now there could be a radically different economic and financial environment. The odds of a pension plan collapse are probably zero. The odds of seeing benefits reduced are not.

In a low-growth, low-inflation, low-yield world where some bond yields have gone negative, with life expectancy shooting higher, pension plans are destined to struggle. Especially one as rich as Ottawa’s.

You two earn almost $300,000, live in a million-dollar house, have saved nothing and are gambling your entire future on political whims. Now you’re asking a pathetic blog if you’re okay? Please tell me you’re not a deputy minister.

Hi Garth, I had a question which you could use for your blog if you see fit as long as you use a pseudonym. Like Rufus. I’m 40 with a house in the 416 that I bought 8 years ago as a rental property. My wife and I live in the top floor, and we rent out the main and basement. It’s worked out very well, and we now have about $300k in diversified, liquid investments with $200k combined. House is about $900k with $350k remaining on the mortgage.

But now we have three rugrats and a dog and need more space. I proposed selling and renting, but the spousal acceptance factor is low. So the options are move (with $100k of transaction costs) or renovate and take over the whole house (with $100k of renovation costs).

I could liquidate TFSAs to do this, or take out some combination of home equity loan and HELOC. My questions are, how stupid is it to plow more money into residential real estate, and if I accept this stupidity, how should I finance it? If I use TFSA money to do the reno, can I top them back up on Jan 1 of next year using HELOC money and write off the interest?

Rufus? Seriously? This is a simple one. If you’re happy there, stay there. Obviously you and your wife find it a romantic, productive spot. Besides, the dog has friends in the hood. So why not just take over the main, remodel the upper and keep the moldy person in the basement?

Financially, if you’re remodelling the entire house to retain an income-producing component, there’s an argument for saying the loan interest can be deductible from your hefty income. In that case, borrow the money instead of draining out those valuable TFSAs. With more than $500,000 in equity, you can easily draw on a secured LOC at prime plus a half point – 3.2% – and then write off half the interest, taking it down to just 1.6%. Damn near free money.

I’m a lowly software developer and have no economics background so perhaps factor that into this equation, which kinda goes like this:  why are interest rates near zero and stagnant?  Why the need to go so low for so long, and the mere discussion of raising them is causing so much fear.  When I succumbed to the house lust myself in 1999/2000 rates were just over 8%.  My old man instilled the fear of God in me about tales of the ’80’s and double digit rates, so I had my bank give me a chart showing the prime rate since, well, ever.  It showed a few bulges (short-lived) and a few dips and averaged out to about 7%.

Can you explain for us wide-eyed, panting, pathetic bloggers how central banking works, and why rates are what they currently are?  And why, in some European countries they are actually negative?  And, oh yeah, Poloz mentioned a potential plan for negative rates himself. Dana in Alberta

The worst economic crapstorm since the 1930s took place in 2008-9 when the US economy and financial system imploded, triggering a global credit crisis. The fix was a coordinated effort by central banks to flood the system with liquidity, bail out shocked industries, crash borrowing costs and hope like hell cheap money would stimulate demand, encourage consumer spending and business investment – leading to job creation.

It worked. We narrowly avoided deflation, and worse. But this has been the slowest recovery in economic history and central bankers have been terrified of normalizing rates for fear of dampening demand and starting the show again. The downside is cheap money has created asset bubbles, like YVR real estate, since people have no discipline. Meanwhile trillions in worried money has flowed into government debt, pushing prices up and yields down. The whole Brexit thing is now exaggerating it, as you can see with negative German bond yields.

However, we’re near an end. Rates will stay low by historic standards, but they’ll continue to creep up in the US, and eventually here. Far more worrisome is the epic overhang of debt that’s been created. We have just raised a generation of people who fear it not. What a surprise lies ahead for them.

BAD 1 modified

As a 30 year old living in Toronto with just my income, I probably already could afford a townhouse out in Oshawa or a condo in the city downpayment wise, and it would stretch my monthly budget to cover mortgage and costs but would be doable. Yet,  I am paralyzed with fear against jumping in at the wrong time due to the many reasons you point out. And its not that I am crazy about houses as an investment. I just want to live on my own. Ive had enough of roommates who leave puddles of water in the bathroom, throw out my orange juice because they want fridge space etc. But it allows me to pay rent and save money.  Renting my own place within a reasonable commute time, saving would be tough. And while i can stomach the thought of paying a higher portion of my monthly budget to build my own assets, stretching my budget to pay rent and not be able to save or build net worth, I cannot.  So i think i can stand roommates for a while longer.  Thoughts? Jen.

There’s a big space between rooming with ignorant, puddly people who throw out your food, and jumping into home ownership with a mortgage. Just rent a place on your own. Way cheaper than owning, with lots of flexibility, no condo fees or property tax, no closing costs, no debt. Sounds like you can’t afford to buy, anyway. But you can probably afford your own fridge. Start there.

My wife and I are late 20s. Our household income ranges from 70-90k, with very secure jobs now, both with defined benefit pensions. We bought a house nearly 4 years ago for $259k with 5% down and 25yr amort. When I renew at the 5 yr mark, I’d like to amortize at 18 years rather than 20. We’re about 90 mins southwest of the GTA. When the bubble bursts like I expect it will, do you think we’ll be up shit creek or will it be less of a hit out here in the boonies? I never thought about getting out of the market until I began reading your stuff. I follow what’s going on in the marketplace mostly as a hobby but I’m no finance major.

We’ve discussed upgrading to a place with an in-law suite to consolidate with my folks, who are definitely lower income. But it would help both us and them long term, I would think. Any thoughts on this situation? Thank you. Ryan.

There’s a two-region bubble in Canada – the Lower Mainland in BC and the Golden Horseshoe – but beyond that, it’s mostly crickets. Halifax, Montreal, Edmonton, Ottawa, Calgary, Winnipeg are all stagnant, despite insanely-low mortgage rates. Ditto for most rural areas, small cities and towns, which means if the GTA blows up, you’ll be largely (but not entirely) immune. If you like it there, relax. If you’re looking to sell and take in the parentals, then best go to market now. The issue in rural Ontario is not whether prices move much, it’s finding a buyer. Your enemy is illiquidity.

As for shortening the amortization, you’d be better to take your extra money and invest it for growth. That way you use the bank’s cheap money, achieve more diversification and have a larger lump sum to put against the mortgage when it renews. A one-asset strategy makes even less sense in Hicksville than it does in the Smoke.

Hey Garth, thanks for the ongoing financial education.

We live in a small community north of Vancouver seeing unprecedented housing price increases in the last year, and although we were highly leveraged (10% down), we decided to buy a new townhouse last year when rent prices leaped above mortgage costs.  We will take possession next month and the value is up 200k.  If we sell, we will still need to find a rental that will likely cost as much as servicing our mortgage, including strata fees. I departed from your advice on housing when I saw the local conditions forming, but unsure what to do now.  We have a moderate household income of 90k/year, growing small business investment, no real liquid assets, but no real debt. Kids, dog.  Thanks, Tyson.

So you’ve made $200,000, tax free, for doing nothing. And this is equal to three years of working, right? And you’re wondering if you should take this once-in-a-lifetime windfall, or move in and shoulder a mortgage equal to rent. Are you nuts?

Take the money, put half in your TFSAs, and don’t look back. In two decades of sitting in a balanced portfolio it will turn into about eight hundred grand, and form the nucleus of your future financial security. Or, you could have a 20-year-old townhouse. Duh.

Emotions modified

We currently live in a two-bedroom apartment in Toronto, paying about $1,700/month.

Recently, my beau started his research and raised the idea of moving to a house in Hamilton, Ontario. From his perspective, based on the size/price of house that we would aim to purchase (around $200,000), the carrying costs for a mortgage on a fixer-upper in the Hammer would be around $1,000/month at current interest rates.

We are both employed full-time, one of us with a defined benefit pension and the other with employer-matched RRSP contributions. Our combined gross annual income is about $115,000. Total savings/RRSP are around $50,000. Debt is minimal (one very small monthly car payment).

He believes that we can buy a place that needs a little work, renovate it and possibly rent out apartments in the house to tenants to help cover the mortgage payments. Beyond the fact that the areas we could afford wouldn’t really be attracting Hamilton’s finest, I am hesitant on what purchasing a house now, just as interest rates are set to rise, will do to our bottom line. There seems to be a general belief amongst many friends, colleagues, etc. that Hamilton is on the up-and-up and that investing in property there will yield profits down the road.

I can also see how, from his perspective, $1,000/month in mortgage payment is FAR LESS than what we pay for our place in the Big Smoke. I need some advice on how to break down the true risks of housing as an investment in a way that dries up the HGTV-related moistness and allows for thoughtful, balanced and pragmatic discussions about our future housing. Any ideas on how to engage in this conversation without coming off as an asshole? Thanks for all you do! Susan.

What a plan… move from safe rented digs in metrosexual hipster-haven T.O. into a broken, beater house in a dodgy part of Steel City where you can rent rooms to losers who’ll share your bathroom and sleep a few feet from you. What could possibly go wrong?

Besides possible death and dismemberment, remind your squeeze that with a total net worth of $50,000 you two can’t really afford a nice garden shed from Rona, let along spending $200,000 on a house that will end up eating money. Oh, and have you ever tried commuting from Hamilton to Toronto? Being killed by a vagrant in your shower is slightly preferable.

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June 15th, 2016

Posted In: The Greater Fool

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