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June 7, 2019 | The Yogateers

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.

Did you see the big headlines about jobs? Another 27,000 last month. The unemployment rate at a 43-year low. Just 5.4%. Over 450,000 new positions in the past year. And this atop 106,500 hires in April.

Economists were slack-jawed, having forecast only 5,000. Some people muttered stuff about interest rates going up again, with a wage-price spiral.

But wait. Not so fast.

Turns out the number of people with actual jobs last month went down. The ranks of the ‘self-employed’ swelled by more than 61,000. In other words, the economy shed over thirty thousand positions with employers providing stuff like pensions, benefits, sick days and tummy rubs, while twice that many folks became consultants, freelance yoga instructors and professional dog walkers.

Aren’t stats fun?

Meanwhile in Trumpland, the stock market celebrated weak employment data. Just 75,000 hires, the fewest in three months and a giant tumble from month-prior numbers. And this tepid performance was even before the latest round of Chinese tariffs clicked in (or the Mexican news), which increase input costs and kill jobs.

Why were investors happy? Because the crappy stats put more pressure on the Fed to nip interest rates later in 2019, maybe even starting with its next decision day in July. Markets like cheap money because it’s the crudest, purest, most immediate form of economic stimulus. People borrow and spend more. Houses get a little more affordable. Corporate borrowing costs fall. Everybody’s happy and the debt goes away. Or increases. But who’s worried about that?

The Dow is above 26,000 again. All that misery last Christmas is kaput. Now just 3.5% from its all-time high. Up about 12% in the last five months. Yes, and your GIC rate is probably going down again.

Never bet against America.

Whiny Millennial Letter of the Day:

“Mandatory sucking up!  I have been reading your Blog since I was just a Young moister shipped out from Toronto to Calgary to handle my first promotion.  At the time I was about to buy a Condo in 2009 when I found your Blog and your words of wisdom, and have been loyally getting my “daily garth” ever since.  At the time I decided to rent frugally and save and invest rigorously.  I am currently 36 and my wife is 35.”

MSU’s okay. You may proceed.

“I never thought it would be me writing about the possibility of getting into the housing market but here we are:

1)      As mentioned, Met my wife in Alberta, we moved to the big smoke for a couple years, decided the west coast was for us, spent three years in Vancouver, and my wife was fortunate enough to secure a position as a Nurse late last year.
2)      We are expecting our first little one in December

“Our Financial Picture:  $380K in RRSPs, ~105K in TFSA, another 35K or so in unregistered investments, and about 80K in Cash (currently preparing for a down payment which we would also tap the RRSP for First Time Homebuyers and the TFSA to get us to 20%). My wife also is a Nurse so we have the pension as well that is accumulating for the future.  My income is  ~175-200K as a Director at a Multinational Organization, and my wife is at ~70-75k as a nurse.

“We are thinking of building a place in valley, having watched re-sale market soften and the developers and builder looking to make “deals”.  We are ok losing some equity at first (I expect a 4-5 year melt here) but would have the ability to build exactly what we want in a home, and still aggressively save for our future.  The build we are looking to do would be ~$1M.

“I think making the decision fits all the boxes.  If you believe we are making the wrong decision here please let me know.  It would be roughly 4:1 house to income ratio, and would fall short of the 90 rule you have spoken of for value of equity in housing.  The reality is we are here for the long haul and money is real cheap! Thanks as always for your insights. – Scott & Jules.”

Mid-thirties, starting a family, renting with $500,000 in liquid investments. Good for you. But let’s not forget why you have a half a million bucks, nor that if you’d bought property in Calgary ten years ago your situation today would be far different. Far worse.

So the question is, does it make sense to go from $0 in real estate to $1 million, all at once? What’s the impetus for this? Your baby? If so, don’t get too bathed in hormones. The kid won’t care if you own or rent until she’s old enough to get a phone. Then watch out.

The considerations: first, the valley is overpriced, inflated, full of realtor sharks and, yes, the Van correction is going to spread like measles through an anti-vaxxer rally. Be prepared to lose equity the day you move in (sounds like you know this).

Second, building is a silly thing to do. The cost of new construction is far higher than buying a resale and modifying it. People who build always seem to forget the pricey extras which range from a driveway to landscaping, decking, window coverings and appliances. All that comes basically for free with a resale. Dollar-for-dollar you’re way ahead picking up an existing structure.

Third, moving into a $1 million house with no existing equity means you end up with an $800,000 mortgage and $300,000 in liquid assets, as opposed to $0 in debt and $500,000 in the portfolio. That’s a helluva change. Monthly living costs will be at least $5,000 (mortgage, property tax, insurance, utilities). If you decide to expand your family, it means another mat leave, reduced wages and more overhead. You will be, in other words, on a trajectory of decades of payments and obligations. Male pattern baldness and a minivan are close behind.

Some people are okay with that. They want predictable lives with physical and psychological walls around them. If that’s how you see the trip from 35 to sixty-five, go for it.

But, dammit, be sure.

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June 7th, 2019

Posted In: The Greater Fool

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