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February 16, 2018 | Self-Inflicted

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.

“My former student,” says Jon, “who is a shift supervisor at Starbucks while studying music education just bought a condo… with her man who she hasn’t been dating more than a year. Don’t know what he does, but he’ll be commuting to it!”

And he adds: “There will always be a greater fool.”

The condo, turns out, is in Mission – an hour and a half drive from Vancouver. And you can bet the only reason she bought way out there is because of price. And here’s the giddy announcement…

A shift supervisor at Starbucks in BC, by the way, earns just over $14 an hour, or about $29,000 a year (if lucky enough to work F/T). But, as Jon suggests, a crappy income as an unskilled coffee-slinger is just one reason this girl’s rolling the dice with her future. Instead of being an unencumbered renter, she now has a mortgage. If she bought with the BF she’s also financially entangled with a dude in a way that could turn nasty. And she’s likely put 100% of her net worth into a concrete box just off the highway in the boonies, in a housing market riddled with risk, one week before the province brings down the hammer.

So why is she so happy? Excited? How did we ever get to the point where kids want to turn into their payment-addled, choice-starved parents? Why wouldn’t this babe want to take that music education and becomes rock legend in LA? If you’ve ever been to Mission, you might wonder.

Plus, she may have raided her RRSP to take the leap. Wouldn’t be a surprise.

The latest bank survey on this topic is dismal BeeMo says 40% of Canadians are sucking money out of their retirement savings (before being retired) instead of putting it in. The average withdrawal is about twenty grand and the No. 1 reason for raiding an RRSP is (of course) to buy a home. The next biggest reason is even scarier – “to help pay living expenses.” And coming in after that is debt repayment.

This ain’t good. Obviously. Money borrowed from retirement savings under the Home Buyers Plan must be paid back within 15 years, but we already know that half the people doing so never return the funds. We also know savings rates are falling and investing in tax shelters is on the decline. BMO asked about that, too. The reason Canadians are failing to prepare for the future is that they’ve screwed up today – 44% don’t have any money to invest with and another 25% must use it to pay debt.

Only 7% of Canadians have maxed their TFSAs, and 80% of the money in tax-free accounts in cash in savings accounts or GICs. Meanwhile kids like Jon’s student are happily Hoovering whatever money they’ve accumulated, plus swallowing oodles of debt, to live in a place they could rent for half the cost – and may well lose money on.

It’s worth noting the Vancouver-area market (like the GTA) has split into two. Experienced move-up detached-house buyers are staying away in droves, while the moisters continue to pile into condos – presumably because that’s all they can ‘afford.’ Just look at the sales-to-listings ratios in YVR. For detached homes it was a dismal 11.6%, but rockets to 57.2% for condominium apartments. The impact on prices is clear, with condos pushing ahead 27% in the past year, a three-fold increased over detached.

The same experience is playing out in the GTA, where overall sales (and prices) tanked in January.  The price of the average detached house crashed by $90,000, or 9.1%, while condo prices jumped 14.6%. And let’s put this into a national context – where monthly sales just fell by the greatest margin ever recorded – over 14%. The reason given: first-time buyers were rushing to purchase in November and December to ‘beat’ the new stress test, which then knocked prices lower. Sorry, kids.

So long as leveraged real estate is viewed as a riskless way to make easy money in a world where music majors work at coffee shops, this recklessness will continue.

Prepare now for when it ends.

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February 16th, 2018

Posted In: The Greater Fool

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