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August 28, 2018 | No Easy 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.

Pete asked me this week about dollar-cost averaging after he got a honkin’ big refund from the CRA for moving expenses. “Man, they took forever to respond,” he says, “but now I have this money and wanted to ask you if I should invest it in chunks to avoid making a mistake.”

DCA, of course, is gambling. By withholding money from a portfolio, where it can be doing some useful work, you hold it back in a gamble assets will get cheaper. But if they rise in value you pay more, or continue to sit on cash. So you might win, you might lose. If history is any guide, this strategy’s a fail. Especially lately.

In the past 12 months the Dow has gained 22%, the S&P 500 is ahead 21% while the tech-heavy Nasdaq (despite Facepalm) has surged 29%. Even the laggard market on Bay Street has added 12% since this time in 2017 – which is more than you can say for houses in the same city.

Markets don’t go down just because they go up. The conditions which led to the gains have to change. So far, when it comes to equity markets (especially American ones), no change. In fact this week investors are feeling frisky.

Stocks made new highs on news of the Trump US-Mexico trade deal. As mentioned here yesterday, the betting is Canada will join in. In fact, we have no choice. Failure to do so will result in punitive auto tariffs and tumbleweeds blowing through the empty streets of Oshawa and Windsor as unemployed CAW members shuffle hollow-eyed towards the water. A new NAFTA, called something else, is a done deal.

But the political cost to T2 could be excruciating. Trump has a hate-on for supply management. If Trudeau punts the dairy industry he’s toast in much of Quebec – where a majority of the 75 federal seats went red. This might also fry young Andrew Scheer, who won his Conservative mantle in part with the support of the milk guys (over Max Bernier, who just stabbed him). Losing Quebec means losing government for the Libs. Thumbing Trump, however, is perilous for the entire economy. And the government. No easy choice here. The deplorables are storming the gate.

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The latest from Victoria: Sales are down so far in August by 21.5% (over last year). The number of listings is up 32%.

In Calgary sales in August are off 8%, listings are up 22% and the time it takes to sell a house has advanced 24%.

Vancouver is a mess.

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“I’m a big fan of your blog – I usually read it out loud each night to my wife before we go to bed,” writes Julius. This worries me.

We are both 30 and sold a home in Ottawa in 2014 when I was transferred to Toronto. We had around $225k in equity after the deal was done and attempted at that time to purchase in the Big Smoke, eventually giving up after losing several bidding wars. We ended up renting a loft (ya I know…millennials) that we thought would just be a holdover for a year or so, but we’re still here 4 years later. We both work downtown and we would like to start a family in the next couple of years and our loft, although great for us now, is definitely not a place that we can raise a baby.

We invested the equity from our house and as a result, have about $350k in accessible investments. Over the last couple of months, we’ve been moving to a cash position on roughly half of that amount to be prepared in case we see something we want to buy (and because of volatility fears due to the orange man in the white house). In addition, my wife has a defined benefit government pension and our gross combined annual income is around $225k/year.

We’d like to buy a house soon, ideally in our neighbourhood (Leslieville/Beaches). We have recently reached out to our agent  (who is a family friend and someone we trust) and started looking for houses. Like our agent, we truly believe the value the of homes in our area is steady and will outpace the rest of the GTA market. I don’t see commuting times getting better and think people will be willing to pay a premium to live in houses near the core (albeit in a tiny semi). Although I religiously read your blog, I can’t help but have a FOMO feeling. Despite trends in the GTA market, when I look at the TREB data for these specific neighbourhoods, prices are continuing to rise with relatively low average days on market and many sell over asking with multiple offers.

We expect that if we do proceed with a purchase, that we would live in this house for at least 10 years – which should give us enough time to ride out any short term correction. But…the price-tag to get something in this neighbourhood (a semi) that will work for us will be in the order of $1.2M. We would put down 20% to retain some of our investments in our TFSA’s (I figure there’ll be about $50k) and feel comfortable with the monthly payments that come with a mortgage of this size.

I know this seems very much like we will be putting all of our money into a singular asset, which from reading your blog I understand is a big mistake…but I don’t think we’re quite as bad as some of the cases I’ve seen you write about. Maybe I’m kidding myself? But if we can’t do it in our financial position, then who is buying these houses? I’d love to know your opinion.

Please feel free to use any or all in your blog.

If you actually recite this blog to your sweetie in bed (A really. Bad. Idea.) be careful. Lysistrata, dude. It’s out there.

First, what’s the motivation for buying, taking on a $1 million mortgage, gutting your investments and morphing into your parents? A baby, apparently. But baby won’t know or care if you live in a loft for a year or two, nor require its own room during that time (or so I’m told). This urgency is totally manufactured.

Is it FOMO then, fear if you don’t buy now you never will?

Illogical, since we know the conditions that created stupid prices – record-low rates, sloppy lending practices and rampant speculation – are now behind us. Do not fall victim to realtor self-interest (and never hire a friend to buy a house or invest money for you). Ignore the media. Use common sense. Do you really want to spend a decade in half a house in an intensely urban area inhaling the neighbour’s pot smoke, raising a young child?

Financially, this could be a disaster as much as a boost. Your wife’s DB pension might go poof if you decide to have a couple of kids and eschew day care. Could you survive – house overhead, a seven-figure mortgage, the costs of raising children while saving and investing for the future – on one income? What about job loss for you? If you have a million-dollar mortgage and less than a hundred grand saved, where’s the Plan B?

The bottom line seems simple. You’re free, earning lots of dough, with growing investments, living in a place you like with no borrowing or responsibility. Your life has flexibility and liberty. Your work sounds full of promise and meaning. If you stayed on the present course your net worth would be at least $4 million by age 60, providing an eternal income of two or three hundred thousand.

But you want a baby, a semi and debt? Ugh.

This is why nobody should ever read this blog in bed.

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August 28th, 2018

Posted In: The Greater Fool

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