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January 15, 2018 | Carefully

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.

Jamie has a problem. Actually it’s his MIL’s issue. But being a husband, son-in-law plus a dude,  it’s on him to solve.

“She is 63,” he says, “with no savings at all and has struggled through her life. Likely won’t qualify for much CPP. She was nannying her son’s children for a number of years for free, but now she’s moved on and has found a contract job.

“I heard she was going to invest money with her day trader friend and was planning to buy some property so I quickly sprang into action based on the lessons from this site. Now we are going to set up a self-directed RRSP and TFSA. We will maximize RRSP contributions to ensure she pays no taxes over the next 3-5 years that will be her last working years. Also we will put as much as possible including tax refunds into her TSFA. I have emphasized that buying is a terrible idea as it will eat up her cash flow and she won’t be able to make tax/utility payments. But how do we invest carefully for a person who can’t afford to lose anything?”

J’s note came in on Monday about the same time news broke that we’re all pooched. Just two days before the Bank of Canada is likely to jack rates for the third time in a few months, there’s fresh evidence what housing and debt have done to us. An Ipsos survey found 33% can’t make their regular payments – 8% more than four months (!) ago. Scarier, about half of people – 48% – say they have less than $200 left at the end of the month, and pray nothing happens. Four in ten moan that they borrowed too much.

“The results highlight just how financially vulnerable Canadians are,” it says. “Even small interest rate increases result in escalating financial strain and anxiety.”

There’s more. One in five have a credit card balance larger than their life savings. An equal number say they over-spent on the last vacation. Almost 70% of those between 18 and 45 say their finances suck – all according to another poll (by Leger).

Okay, so I get it. This is January and lots of financial people are trying to scare us into making an RRSP or TFSA contribution. These kind of surveys crop up every winter, and there are more to come. But this year, it’s different. Worse. Epic.

Following the real estate binge, people are obviously swimming in debt. Mortgages hit $1.5 trillion, bloating along with the homeownership rate and condo sales. But now, that’s over. The stress test in 2018 will take a big toll, shutting tens of thousands out of the market. A homebuilder-exec buddy of mine in the GTA says his company (one of the giants) has gone from selling 500 new low-rise units a month last year to 5 this year. “Five!,” he said, holding up as many fingers. “There is no market. It’s dead. And we’re expecting a lot of people to walk away from their $150,000 deposits.”

And rates. Jeez. The third increase is 48 hours away, it seems. Two more after that during the year. Mortgages went up last week. Renewers are in for a shock, and more than 40% of all mortgages come up for refinancing in 2018. US rates have risen four times in a year. Odds top 80% for another increase in a few weeks. Bank regulators urgently tell the too-big-to-fail financial institutions they must increase capital reserves and deal with $300 billion in outstanding lines of credit. Those are obligations people have taken against homes, which may soon decline in value. Most of them are demand loans. Do the borrowers even know?

Savings? Forget it. Over 90% have not maxed their tax-free accounts and most of the money in there sits in ‘high interest’ savings or pay-nothing GICs. It’s why governments have been in a panic to pad the CPP (although nobody now over the age of 20 will benefit) and to push through that staggering minimum wage increase. The over-housed, forever-indebted, cash-poor and largely pensionless population is an economic timebomb. As the gulf between the 1% and the rest yawns ever wider, it seems politics has failed us. Governments helped create this imbalance – with low rates and housing incentives – and now as interest rates normalize, it’s the 99% who get whacked.

Well, Jamie, good on you for helping mom who has lived for 63 years but saved nothing. Starting from scratch, she doesn’t have enough to build any kind of ETF portfolio with, and will never get ahead with a savings account, bond or GIC. Best pick a low-cost balanced asset, like one from TD efunds (1.2% fee) or the fruit people (1.07%), then switch over to a self-directed exchange-traded fund basis when the number warrant. Make sure she applies for early CPP immediately, by the way. And tell her day-trading, property-pumping friend you will geld him upon sight.

Well, this is not good – if you considered waiting until the spring market to list your house. Toronto broker Alex Prikhodko has some mid-month January stats for us, and they suck. Could it be the B20 stress test is already starting to have an impact?

In the whole region a mere 77 detached sold in the last two weeks, with prices down $91,000, or 9.6%. Ouch. And it’s not even Wednesday yet.

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January 15th, 2018

Posted In: The Greater Fool

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