- the source for market opinions


July 31, 2018 | Mayday

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.

Oops. Odds of another rate hike this sizzling summer jumped Tuesday with the latest economic data. Seems millions of indebted, rabid beavers can’t stop borrowing and spending money, buying stuff and goosing economic activity. Plus oil’s been on our side.

The result: in May the economy grew a half a point (that’s big) and year/year the advance is 2.6% (a change from luke to hot). So the chances of another Bank of Canada increase have doubled. Meanwhile last week’s boffo GDP stats out of the US (“unthinkably” massive, according to Trump) laid to rest any doubt where the Fed’s headed.

This is rotten news for the 12% of Canadians who have well and truly pickled themselves in debt. They owe about 350% of what they earn – twice the national average. Most live in the GTA or the Lower Mainland and of those who have bought real estate worth $1 million or more, the debt-to-income ratio is 450% or more.

The unravelling of personal finance, if it comes, will be tied inextricably to the deflowering of residential real estate. Look at the Westside of Vancouver, for example. Sales of expensive houses ($6 million or more) have crashed 66%. There is now a 10-year supply of mansions for sale in West Van. The crumble that started at the top is filtering down through detached homes at all levels.

Meanwhile the stress test and rising rates are distorting the market at the bottom end. Prices for condos (that’s all many people can afford now) have been pushed up so much that holes in an average high-rise rabbit warren now cost what a detached did in YVR four years ago, and six years back in the GTA. As mentioned here a few days ago, the typical new-build condo in Toronto commands over $750,000.

So, expensive houses are being decimated but still remain unaffordable. Cheap houses have been swarmed and are no longer affordable. Sales overall have plunged. The Bank of Canada has raised rates four times. Household debt is unsustainable. Now more rate hikes lie ahead.

The next big shoe to drop: a serious and widespread drop in the equity of all houses (only 5% of people buy or sell in a year). That’s big news if you happen to have most of your net worth in a single asset. Or carry a fat mortgage.

By the way, while the economy has been expanding, real estate’s been going in the opposite direction – down 2.7% in a month, the fourth decline in five months. There are even leaner times coming for realtors as falling sales decimate their bloated numbers.

Buy a house if you want, can afford it, and your marriage depends on it. But understand clearly that in most markets if you wait, you’ll pay less. Anyone buying on the Westside last year, for example, just blew through a million. Or more.

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Since writing a dismal, depressing and dark piece on POAs a couple of days ago, my inbox has been brimming with notes from folks wanting to pass on their experiences. Apparently, everyone dies – which is, like, wow.

Nothing seems to blow families apart like the decline and demise of parents, which is why a will’s so important, along with the choice of a proper executor. Accompanying that is ensuring you have a power of attorney to look after things if you need caring for, and that the person you choose is not a dickhead.

And that brings us to Carol.

Hi Garth I have been a follower of your blog since its inception as well as an avid reader of your  books.  My husband and I are presently caring for an aging parent suffering from dementia.  My father recently passed away leaving all property, financial assets etc. to my mother.  Neither of my parents were financially literate in the ways of investing. All their trust was placed in the hands of [email protected] Needless to say all of their investments – over $450,000 – are in GICs. The POA for my mother (my brother) also is not aware of the many investment options available and is also a fan of GICs – so called safe investments.

My mother is 86 years and other than the dementia is reasonably healthy. My brother is proposing that we start collapsing the investments and distributing them equally between 8 siblings on an annual or semi annual basis. His worry is that if we wait till my mother passes the CRA will also be a large benefactor. Due to the fact that many baby boomers such as myself and my husband are also dealing with similar issues I thought it might make for an interesting topic on your Blog.

Carol’s mom chose poorly. Her son, as POA, has a legal and fiduciary duty to place her interests above his own, that of the family, or anyone else. Just having power of attorney does not give him the right to give away her funds or spend money in any fashion that does not support her, regardless of age or health. In fact, it is a criminal activity if he does. Mom could live for another decade and easily require all the cash.

Once she passes her will dictates how the remaining money will flow to beneficiaries, and mom’s estate will be taxed accordingly. Of course, a few hundred thou sitting in dead-end, no-growth GICs will hardly attract much CRA attention, so this sounds like a ploy by the misguided son to get money for a new Ram truck.

A POA’s highest and only duty is to look after the person who bestowed their trust. Failure to do so earns you a special place in the flames. Bro is on his way.

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July 31st, 2018

Posted In: The Greater Fool

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