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July 9, 2018 | Your Choice

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.

Money’s everything these days. Most people just don’t have enough of it. No wonder a survey of HR people this week found 43% of Canadians would punt their existing job for another that pays more. Dudes, especially – 45%, compared to the fems (39%).

That sucks for employers. But we’re entering a new phase. Inflation and wages are moving up. The economy’s growing. As a guy who’s hiring right now, it’s evident there may be more professional jobs that applicants.

Besides, everybody needs more income. Real estate has done that. It’s brutalized household finances. New evidence of that surfaced Monday, just two days before the next interest rate hike. “When you look at the staggering number of people who are teetering on the edge, it’s clear that we are going to start seeing a rise in delinquencies as rates rise,” says the head of MNP, whose latest survey had sobering results.

  • If rates increase, 28% said they will probably move towards bankruptcy, unable to pay their monthlies.
  • If rates rise “much more” 42% say they will fear for their financial well-being.
  • Currently 27% say they have no cash left after paying their monthly expenses. No savings. No investments.
  • And 44% claim they are within $200 of insolvency on a monthly basis.

Seriously. In Canada, where unemployment has fallen, job creation has risen, the economy is vibrant, inflation has rekindled, financial markets are advancing and corporate profits are romping. Also, this personal financial disaster is taking place after almost nine years when interest rates were absurdly low, allowing people a once-in-a-generation change to reduce debt, get their personal lives in order and improve personal finances.

Did they do that?

Nah. Rhetorical question. Of course not. They blew it.

Now household debt’s at a record high. There is $2 trillion owed, most of it in the form of long-term mortgages getting more costly. And four in ten say they don’t have two hundred bucks extra. Pathetic. What a fail.

Home ownership has risen to the highest level in history, concurrent with the greatest recorded pile of mortgages and the most aggravated prices. It now takes 88% of pre-tax income (says RBC) to buy a house in Vancouver, 74% in the GTA, and 48% across the country. That is above every lending metric – yet people keep jumping into the borrowing abyss. If house prices reverse for a few years (immensely likely) these folks are pooched. They’ll be pouring income into debt-servicing costs for assets costly to own and depreciating at the same time. That’s been the warning call of this pathetic blog for years. Balance, baby. Seek and maintain it.

Well, the odds today for a rate hike Wednesday are over 80%. All home equity lines and VRMs will go up. So my conclusion, after being in the personal money business for four decades, is simple: the wealth divide will grow more extreme. Most middle-class, middle-income, going-nowhere people are shoveling money into maintaining debts (mostly on houses), while the 1%ers who hold the bulk of their net worth in financial securities get wealthier. Remember the adage: the rich hold assets. The poor have debt.

Here’s the classic evidence, from American academic Edward Wolff. The middle-class obsession with real estate is okay when prices are realistic. But in a volatile housing bubble economy, concentrating your wealth in one single asset seriously augments risk. Combined with big leverage, it can actually make you poorer. If the bubble deflates, equity goes but debt remains.

But, I hear you cry, don’t be a callous dink! Houses cost what they cost. What choice did I have?

There is always a choice. Over and again this blog has proven that for young people renting a condo, for example, is far smarter than buying one. Lower cost. Less risk. More flexibility. Additional cash flow to invest, and you can still live in an identical unit. Why on earth would a 25-year-old single man or woman want a mortgage, property tax bill, condo fees, closing costs, land transfer tax and a potential for loss, all to be in a 600-foot, one-bed room box that they can lease? How did we so lose our way?

Similarly, expecting to live in the same hood your parents did forty years ago within biking distance of downtown (Vancouver, Toronto, Calgary, Ottawa etc) is a fantasy. Populations have swollen, demographics have changed, cities have spread outwards like viruses, transit lines have skewed valuations and urban dirt has become vastly more precious. Meanwhile incomes have failed to meet inflation in any meaningful way. The economics just don’t work for most people.

So, move. It’s a big country.

Or you can obey society, moan, and pay the price.

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July 9th, 2018

Posted In: The Greater Fool

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