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August 30, 2017 | The Rich & the Rest

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.

Forget all of the class warfare, the anti-business sentiment, the sniping between bosses and workies and the anger people feel about their financial struggles. Here’s the big question: why’s there such a disparity of wealth?

It’s endemic now. This eat-the-rich sentiment has allowed the Trudeau government to punishingly increase taxes on the successful (people making over $225,000 a year), gut the TFSA (because only the rich can find $10,000 a year to invest) and now propose draconian new levies on small business people, docs, lawyers, IT dudes and entrepreneurs who create half the jobs.

If the comments on this pathetic blog again yesterday indicate anything (God have mercy if they do) a broad swath of society believe anyone making decent money, income-splitting with their spouse, driving an Audi, owning two houses or operating a company is the enemy. The solution, they say, is to tax the crap out of them. There should be no advantage given to anyone who trades risk, pension, health benefits or security for more cash flow. Drop the hammer, Justin.

So where did this come from? Just to our south, rich guys are celebrated. They elected the ultimate one to be leader. He’s about to cut corporate and personal taxes, including for the wealthy. And the deplorables cheer.

Seems Canadians are different for a few reasons. It’s estimated that 55% of Americans have exposure to the stock market, for example, whether through direct equity ownership or assets like ETFs. The thing of choice for a 401k (the main US retirement saving vehicle) is a stock or equity fund. In Canada most money in RRSPs and TFSAs is cash or GICs. Only 19% of Canadians have stock market exposure. But, of course, 70% of us own houses. For the Boomers it’s closer to 85%.

Homeownership rates here have been inching upwards for a generation, even as houses get stupid expensive. In the US the proportion of people owning has fallen to a 25-year low of barely over 60%, even when houses cost (on average) half what they do here. In the decade since the American real estate market blew up, the divide has sharpened with Millennials there preferring to rent, while the Moisters here stay ravenously house horny.

As a predictable consequence: Canadians have never owed as much money, and debt continues to grow at three times the inflation rate. US household debt has been steadily decreasing. In Canada, it seems, we equate mortgages with wealth. Leverage is smart. Real estate’s riskless. And we trust nothing but dirt. And debt.


Now here’s the point of distinction, which governments conveniently ignore. It’s the nature of wealth that is widening the gulf between the 99% and the 1%. The masses are addicted to real estate in a cult-like trance, fed by cheap rates, abundant credit and pro-housing policies. But over the course of a lifetime – any lifetime – growth assets like equities have outperformed housing as a generator of wealth, with more liquidity and far less cost. Canadian real estate has appreciated over the past thirty years by an average of 3%. Stocks have advanced more than 7%. The cost of buying and selling real estate is huge compared to financial assets. And the massive leverage required (we have $2 trillion now in mortgages) means exaggerated losses when markets decline, as they now appear poised to do.

Has housing made some people rich with windfall gains? Of course. In a limited time, and in isolated markets. But unless those properties are sold, at the correct moment, releasing the gains, the wealth is trapped – providing no dividends, interest or distribution cash flow. In other words, this is wealth not creating more wealth, and 100% prone to market fluctuations. Risk, risk, risk – especially when purchased with credit credit and during times of asset inflation.

Meanwhile wealthy people have adopted a different approach. Instead of owing the debt, they own it.

Wealthy people – the 1% in terms of income (above $225,000) and assets (over $1 million in liquid wealth) – own a disproportionate amount of financial assets. Stocks, funds, preferreds, bonds, trusts plus business equity. Unlike the middle class, where the bulk of net worth is buried in one asset on one street in one city – subject to market volatility, interest rates, the economy, local employment, zoning, property taxes and buyer emotion – this provides a far broader diversification, plus balance and liquidity. Over the sweep of adulthood, it forms a more predictable, effective, efficient and predictable way to grow wealth.

In other words, the rich hold assets, the rest have debt.


That chart above is the work of US economist Ed Wolff, who found that over 70% of the wealth 1%ers have is in financial assets, while for the middle class the number is 12% (and more than 60% is in one place – a house).

Because broad economies always grow (with recessions being the rare but predictable exception), yet real estate markets are massively influenced by local factors and irrational hormonal sentiment, the wealthy have experienced a steadier, more predictable rise in net worth. Moreover, keeping your dough in liquid financial assets means you can gain exposure to global growth, and are not locked into local conditions as with a house. It’s also possible to generate cash flow, usually tax-advantaged, which can be invested in more stuff.

Compare that to middle-class Canuck households, where surveys tell us 50% live paycheque-to-paycheque and a third are already hurting because of a minor quarter-point interest rate bump. Yup, lots of them are ‘wealthy’ because of the equity trapped in their homes, but they have debt and little money. Not a stable long-term strategy.

All forms of investing carry risk, of course. But not the same kind. As indebted homeowners in Toronto (and soon Vancouver) are discovering, there’s a reason they don’t feel rich any more. They never were.

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August 30th, 2017

Posted In: The Greater Fool

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