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September 26, 2017 | What Were You Thinking?

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.

Much of the hate oozing from the very pores of this pathetic blog yesterday was about pensions. These days it’s estimated 70% of all workers have no corporate plan with any kind of defined benefit (like government workers, teachers and the prime minister). Instead most people have crappy group RRSPs which are stuffed into even crappier mutual funds run by an oft-crappy insurance company. If you’re lucky, the boss kicks in some cash.

And folks change jobs, of course. Sometimes they get to drag behind a portion of a pension as a locked-in retirement account (LIRA). Sometimes not. In any case, registered pension plans run by employers are, on whole, massively inadequate for a world in which people retire at 60 and croak at 90.

The CPP and OAS? Fine, if you live on Cape Breton and like mac & cheese. Every day.

The kids know this. Ask a Mill if she’ll get a pension at 65 and you can watch her tats jiggle in response. Even people on the public payroll who are under the age of 40 have serious doubts about the sustainability of the system. Already funding public pensions is a massive ongoing liability for Ottawa, and every year it augments. As mentioned here yesterday, the annual top-up alone to keep the system stable is more than $400 million. Meanwhile nobody’s topping up private sector pensions. In fact, Mr. Morneau is about to tax the poop out of small business earnings set aside for retirement. And his boss already gutted the TFSA. Seems like we have two sets of rules. No?

Anyway, let’s move on from the hate and dive into the pity.

To make up for the death of corporate pensions (more are murdered weekly), plus their own disastrous lack of self-discipline and silly desire to do stuff like have kids and seek happiness, tons of Canadians have gambled everything on their house. It is their financial strategy, their savings vehicle and their retirement plan. For the few who are now cashing at, or near, peak house, it worked great. What a ride. For everybody else, massive uncertainty.

Here are some scary numbers (thanks to the Ontario Securities Commission):

  • The home ownership rate in Ontario among those 45 and older has hit 76%. Astonishing. And a record number of people own multiple properties, says Scotiabank.
  • Half have a mortgage, half do not.
  • Half have saved nothing.
  • 45% say their home is their pension plan. They’ll have to cash out to retire.

Says the regulator’s report: “Findings suggest a large number of Ontario homeowners, 45 plus (particularly pre-retirees) are replacing retirement planning with the belief that home equity gains will finance their retirement. This approach to retirement planning can be sustainable so long as residential properties maintain or increase in value. However, to the extent Ontarians 45 plus are overestimating their ability to finance their retirement using their homes, or if there is a downward pricing correction in Ontario’s housing market, a number of Ontarians 45 plus may be at risk of not meeting their retirement savings goals.”

And if this is the case in Upper Canada, where a nice house only costs a million or so, just imagine the mess personal finances have become in YVR and the Lower Mainland, where the spending rate is 108% of the average income and properties are extreme. Don’t people understand a one-asset strategy is the ultimate definition of risk?

Nope. Absolutely not. It’s led to a pile of household debt which, at $2.1 trillion, is bigger than the entire economy. People have net worth without any wealth. They make payments to own stuff. It’s absolutely unsustainable.

So the Fed will raise rates again this year and the Bank of Canada will follow. Our central bank rate will have tripled in six months. There’s another full 1% to come in 2018, so mortgages that were 2% will end up being 5%, just as credit is restricted thanks to new lending regs at the banks. This may not cause a housing crash (although Toronto prices are already in a bear market), but we don’t need one to screw things up. With a 76% home ownership rate and scant liquid savings, diminishing pensions plus rising longevity and epic debt, people require house prices to escalate annually – and hold at those levels until the day they need out.

And what are the odds of that?

Right up there with Justin calling me for advice. But I’m ready.

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September 26th, 2017

Posted In: The Greater Fool

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