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May 28, 2018 | Insatiable

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.

Lost in the fog of taxes, ageism, generational warfare, eat-the-rich, house lust and moister-bashing is the reality of debt. If we should all worry about one thing (other than drowning polar bears and who the hell mows Kim Jung Un’s hair) it would be this. Debt accumulation has the potential to wreck families and governments. Yet, nobody cares.

The Ontario election is a case in point. The poor province has the largest sub-national debt on the planet at over $340 billion, and taxpayers fork out $12 billion a year paying only the interest. But, nah, nobody cares. The Dippers are on the rise promising ‘free’ child care, ‘free’ pharmacare and vastly more spending on health and education. The NDP says it would add to the debt in order to pay for this stuff, plus “make the richest pay a little more.”

In fact the top tax bracket would rise 2%. So, would that cover the extra billions?

There are 272,000 1%ers in Canada (earning over about $220,000). In the GTA, about 1.6% of the population falls into this cohort – about 95,000 people in six million residents. Two-thirds of Ontario’s population lives in the region, so in all of the province there might be 150,000 rich guys. The average 1% income is $380,000, and the average tax they pay is $170,000. So if they all pay 2% more (not all of that would go to the province) the grand total is $510 million. In other words, this is enough to pay the interest on the existing debt for 15 days.

Hmm. The Dippers, however, plan to spend $5.3 billion more annually, rising to $15.8 billion extra (per year) in five years. So where does the money come from? Well, up to $670 million of that shortfall within a few years, the party says, will come annually from new taxes on real estate – a copy of BC’s ‘speculation’ tax, which is not about speculation at all, but a tax on people with more than one property. If you think raising taxes on houses will lower their cost, then go ahead and vote NDP. You are a perfect match.

Anyway, let’s forget the fools running the place and worry about ourselves. The bottom line of the current drift left in Canada will be more services, higher taxes, lower disposable incomes and no change in housing affordability. The wealth gap will grow. As the funky little chart in yesterday’s blog showed, it’s those at the bottom 90% of the income scale who carry the lion’s share (74%) of the debt. As taxes and interest rates rise, guess who is whacked most?

This week a new survey from the financial consulting company MNP helps answer that rhetorical question. Almost 60% say their income would have to rocket higher to get along without relying on debt. The average raise required: 37%, which ain’t gonna happen in this economy.

“It used to be that people would save for big purchases and have some money tucked away for emergencies. Now Canadians look straight to HELOCs or credit cards or other forms of debt when it comes to paying for unexpected car repairs, home maintenance, and even basic household expenses,” the company concludes.

But, alas, most people don’t save. They just spend, and a growing number finance that with debt. The household total is over $2.1 trillion, bigger than the whole economy. Two-thirds of that is mortgages and another big hunk is HELOCs. Speaking of mortgages, it’s interesting to note that a fifth of Canadians bought their houses prior to 1990 and still haven’t paid them off – almost 30 years later. And in 1990 the average place cost $147,000. Now imagine how long it will take someone putting down $970,000 for a slanty semi and starting a family to surface, as interest rates drift higher at every renewal. Financial illiteracy is apparently alive and well.

These days more than two million households have home equity lines of credit, and almost all of them are demand loans. As TD showed the other week, a lender can send a letter any time informing you the rate’s rising – sometimes dramatically – regardless of what the Bank of Canada’s doing. You have three options: pay up; don’t pay and have your debt grow larger until it tops out; or give all the money back.

Speaking of HELOCs, this thing from the National Bank is interesting…

Now we find out that the number of households over the age of 65 with HELOCs has quadrupled. Meanwhile the proportion of younger households (to age 44) with debt has increased to just under 90%. The median debt has doubled in recent years. And half of Canadians tell pollsters they probably can’t get through the next year without increasing their level of debt.

See? The NDP got its inspiration from us.

Did I ever mention how this ends?

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May 28th, 2018

Posted In: The Greater Fool

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