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October 31, 2017 | Spooky

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.

On Halloween it’s okay to pretend you’re someone else. What a relief that must be to most little beavers whose real lives are pooched. Tell me, how did we get to be so educated, and still be so dumb?

“My sister and new husband, 28 and 31 years years old, are both full time teachers,” says Angelo. “They just bought a townhouse a month ago against my best efforts to educate them. My question is, should they still be putting aside money every month (firstly in their TFSA’s obviously), instead of putting all their extra money towards extra mortgage payments?

“Let’s face it, they are both going to be retiring with a pretty sweet pension, and the chances of it not being there for them are pretty slim.  My argument for putting some savings elsewhere was just so they didn’t have all of their money in one asset, even if it means they didn’t pay off the house as quickly.  Does a couple in their situation really need to be saving for the future outside their pension though? I can’t even seem to convince them to start with one of their TFSA’s to put some money aside.  It’s absurd to them.  What are some reasons I can use to convince them this is something that would be smart to do, even for people in their situation (sweet government pensions)? Feel free to discuss in a future blog post, I’m guessing some others might be in the same boat.”

Yes, Angelo, teachers are among the worst offenders for spending 100% of what they earn, saving nothing, being financially illiterate, and (most heinous of all) acting smug. In reality, many of them grossly underestimate the money they’ll need to live in a long, long retirement (many teachers check out in their 50s) and overestimate pensions. They also forget 100% of their defined benefit pension payments will be taxable.

So while it makes less sense for a career teacher to have a whack of money in an RRSP (at age 71 it could boost you into a higher tax bracket), TFSAs should be totally loaded for bear. The reasons are simple, spelled out here with robotic regularity. Put $5,500 in there every year from age 28 to 65, invested in a balanced account producing 7%, and end up with $949,000, of which $740,000 is compound (tax-free) growth. That will produce $4,700 a month in retirement (preserving the principal) which won’t be counted as income, won’t push sis into a higher tax bracket nor reduce her government pogey.

If they eschew this $100-per-week investment in favour of paying off a 3% loan on a shoddy townhouse, you have my permission to disown them.

Now, let’s do Becky.

“I am 29, married plus 1 child. Discovered your blog sometime in the summer, and have since been obsessed with it.  My husband and I sold our house in suburban GTA back in March (thank god) and moved to rent even though everyone we know thought we are crazy. Of course they think otherwise now. We are well on our way to our first 1 million in savings. Here’s the problem. My parents. They have a nice townhouse and I advised them to sell it ASAP before the stress test comes out and move to rent until the market bottoms. (They didn’t listen to me back in March but now their ears are wide open.) I am second guessing myself though because perhaps the stress test will push many buyers to the townhouse sector as detached will become unattainable for many next year. This could result in TH values going up. I would be devastated to have given them the wrong advice and hurt them financially. The last thing I want is to gain while my parents loose. I wouldn’t even be able to celebrate my success. Can’t live with that. Desperate to hear your thoughts about this.”

Let’s recap. You told the wrinklies to sell last spring when prices were insane. They didn’t. Ignored you. Missed the peak. Lost a wad of potential tax-free capital gains. And now you’d be ‘devastated’ if they sold at the wrong moment, when prices might be squeezed up?

Sheesh. They’ve done a number on your head, haven’t they? When the world runs out of weapons of mass destruction, there will always be parental guilt.

The best advice is to stop giving it to people who already know everything, and focus on your own family. Yes, you did the right thing with your house. But don’t be too anxious to get back into the market – things could take several years to find a bottom. As for the stress test pushing low-end real estate higher, this will probably happen, newbie buyers being as demented as they are. But it won’t last too long. It’s impossible for price levels to stay elevated when credit is being restricted. The parents should sell, rent and shuddup.

So here’s Linda, in Squamish, which is actually better looking than it sounds.

“First a huge thanks for keeping up your witty entertaining daily blog! It has become part of my morning routine for a few years now! I’m 30, own a cute little condo in the heavily inflated Squamish market and today I could more than double my money on this shoe box… I’d be sitting pretty with a total profit of over 300k

“The problem is rent in this town is close to double my mortgage; unless I’d be willing to rent a room in a shared house. Our town has been directly affected by the YVR market. In response to that there is a huge boom in the condo/townhouse construction, it worries me that soon my market will be oversaturated! Could the new mortgage rules make my condo even more desirable? I’m also worried that with the new mortgage rules buying in again will become more of a fairytale. I understand your strategy and love the thought of living off the interest but most banks nowadays can barely guarantee a 2% how and where could I be achieving these 7% returns you talk about?”

First, Linda, don’t fib. You can rent a 3-bedroom townhouse in Squamish with a double garage for $2,200. Condos are less – around $1,700. This is the amount your $300,000 profit would generate if invested to give you a 6.5% return. In other words, you’d live for free. No mortgage payment. No strata fee. No homeowner’s insurance. And you would have doubled your money, tax-free. How many times in your life is that going to happen?

If you sold and invested you’d have a diversified portfolio instead of all your net worth stuffed in one thing. You’d eliminate the inherent market risk with that stress test about to hit – with unknown effects. You would escape interest rate risk since it’s assured your next renewal will be at a higher rate. And you’d realize a major capital gain, instead of leaving it exposed. Besides, who wants to live in a shoebox in Squamish as a long-term strategy? Yuck.

Finally, if you read this site every morning, how could you even consider giving the bank your condo proceeds in return for 2% of pitiful, fully-taxable interest? Have you learned nothing? Is this blog just a collection of dog pictures and deplorables for you?

Linda, I’m crushed.

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October 31st, 2017

Posted In: The Greater Fool

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