Category Archives: debt

Swimming in debt and bursting with confidence

Low energy prices are a bit of a bummer for a country like Canada, but we’re not worried, we’ll always have real estate!

According to weekly polling by Nanos Research, the share of respondents expecting higher real estate prices reached the most since December 2014 last week, or 38.7 per cent. That pushed the Bloomberg Nanos Consumer Confidence Index to 54.7 last week, the highest this year, from 54.5 previously.

“The main positive driver for the forward look on the economy was the view that the value of real estate would increase,” said Nik Nanos, chairman at Ottawa-based Nanos Research Group.

The only potential downside is that young Canadian families are ‘swimming in debt.  Read the full article over at the Financial Post.

Who wants a 50 cent dollar?

With rumors of another rate cut, Rob Carrick points out 8 reasons he thinks that’s a bad idea. The very first reason? The Looney will fall even further against the US dollar.

For eight years, the Bank of Canada has been trying to encourage economic growth by lowering interest rates. It’s so not working.

In fact, lower rates are hurting a lot of people more than they’re helping. We have to at least acknowledge this as speculation of yet another rate cut grows. It could come as soon as Wednesday, which is the date of the next rate announcement from the Bank of Canada.

The central bank considers the entire economy when it sets rates. Now, let’s look at things from the point of view of everyday people. Here are eight reasons why the Bank of Canada shouldn’t cut rates any lower.

1. The dollar will fall even more: The most disruptive force in personal finance right now is the falling dollar. That’s because it’s hitting us all in a vulnerable spot – our grocery bill. Helpful for exporters, a weak loonie is a tax on families and snowbirds who must change Canadian dollars into U.S. currency. Last week, the dollar fell below 70 cents (U.S.) for the first time since 2003. A lower dollar adds downward momentum.

Read the full list over at the Globe and Mail, although a number of them are directly connected to a dropping looney.

The one group that a dropping looney should help are exporters as their products get cheaper for foreign buyers, but Jayson Myers, the head of the countries largest exporters association says don’t bother.

“Interest rates are low already. A little bit of dollar stability would be better.”

As an interesting aside, in 2002 when the CAD was hitting record lows Treasury Board President Scott Brison said it was

“a pay cut to every Canadian, a drop in our standard of living and a reflection of the fact that Canadians are getting poorer as Americans are getting richer under the watch of the government,”

Scott Brison is now a key cabinet minister and top economic aide to Trudeau.

 A hat-tip to southseacompany for the links.

Hating the mortgage-free

This is a weird story.

Guy buys a house in Toronto and pays off the mortgage in 3 years by working all of the time, living in his basement and spending little to no money.

And people are angry?

But after CBC News reported Cooper’s story late last year, reader comments flooded the internet, either praising or reviling the 30-year-old’s financial achievement.

“What is he going to do next, buy a car and sell one of his kidneys to pay for it?” snarled one reader.

An era of cheap interest rates has helped ignite an escalating and troubling household debt binge. The topic has become such a touchy one it can spark polarized opinions, finger pointing and even contempt.

Read the full article here.

Resolve to make 2016 the year of the Emergency Fund.

What’s in your emergency fund? Do you have cash on hand to get your through unexpected lean times?

Rob Carrick over at the Globe and Mail think’s it’s time to focus on building your emergency fund in 2016.

Now seems an opportune time to return to the emergency fund theme. The Bank of Canada indicated last week that it would consider using negative interest rates, an extraordinary measure already in use in some European countries, if the economy worsens significantly. Governor Stephen Poloz believes the makings of a recovery are in place, and he doesn’t expect to have to resort to negative rates. And yet, oil prices last week hit their lowest point in six years.

I took a look at our household emergency fund recently and decided we needed to up our game. How about you?

Definition of an emergency fund: Money sitting in a high-interest savings account at a bank or credit union. These accounts are insulated from the ups and downs of the stock and bond markets, and easily accessible online. Interest rates are pitiful on these accounts, but the emphasis is on safety over returns.

Read the full article here.

3.5% Fed rate in 2017?

Here’s a prediction:

“US interest rates will rise – and hit 3.5pc by the end of 2017”, The Telegraph UK

“A momentous change looms large in the US. It seems highly likely that the US Federal Reserve will raise interest rates this week.”

“What makes the probable rise in interest rates so significant is not the size of the increase. The rate rise is likely to be a mere 0.25pc. But this would represent the first rate increase for nearly 10 years. Moreover, we all know that once rates have begun to rise, usually the process does not stop after only one increase.”

Does anyone believe we’ll see a rate increase by the Fed from 0.25% to 3.5% in the next two years?

Why so negative?

As long as our economy remains strong it shouldn’t be necessary to implement negative interest rates.

A link from southseacompany:

Bank of Canada: rates can go to -0.5 percent, but no need now

“The Bank of Canada estimated on Tuesday that it could if needed set its benchmark interest rate as low as minus 0.5 percent, but stressed that the economy was recovering as expected and it did not expect to use such unconventional monetary policy.”

Rising home prices keep Canadians from starting families.

Bull! Bull! Bull! pointed out this article in the Vancouver Sun.

The ratesupermarket.ca survey of 1,700 Canadians found 52.8 per cent of Canadians overall cannot afford to start or expand their families, with 46.4 per cent of millennials sayings their existing debt was making it impossible, even before considering a mortgage.

Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce, thinks there’s no question household formation is being impacted by prices. “Common sense tells you it makes sense. We have an affordability crisis in large parts of the country. In these types of cases, people either stay in the basement (of their parents) but they definitely don’t buy a house. We know in the United States for sure this happened.”

Infrastructure in cities has not kept pace with density, as evidenced by some Toronto condominium developments posting signs warnings parents that their children might not be able to get into local schools because of overcrowding.

As Bull! Bull! Bull! points out, that’s not really a big deal because Vancouver isn’t a family town anyways:

that’s ok. young ppl can live in condos, ride bikes, instagram their breakfast, experiment with facial hair, smoke lots of pot and generally act like they never moved out of residence. (showers are optional). they’ll be happier anyways.

Read the full article here.

Your vote counts, we’re number 1!

So, you probably noticed some issues with the site over the last few days – mainly the comment voting system was broken.

We’ve got a temporary fix in place, so it looks like you can go back to voting on comments for now.

Meanwhile TD says BC is the most susceptible to economic shocks due to housing:

B.C. has topped TD’s list for the most financially vulnerable households in Canada for 16 years in a row. With the most expensive housing market in the country, B.C.’s households spend the largest share of their monthly budgets on paying debt, devoting 9 per cent of their income toward interest payments alone. The typical B.C. household would have to spend more than half its income in order to afford an average-priced home. Stretched affordability has meant the province has an above-average number of homeowners who are delinquent on their mortgages, TD says. Households in B.C. hold a disproportionately large share of their overall wealth in their homes, having fewer non-housing financial assets than other provinces. On the bright side, those housing assets are considerable given the soaring cost of real estate in the province. Homeowners have also adjusted to high home prices by renting out portions of their homes to cover their mortgages, TD said.

Read the full article here.

 

How big can debt loads get?

It seems like every few months there’s more news about Canadians taking on record levels of debt – a recent story linked to by southseacompany is on this topic:

Evidence Canadians are on a debt-fueled spending spree.

Canada may have spent the first half of the year stuck in an oil-driven recession, but you’d never know it looking at Canadians’ spending habits.

Consumer spending was 6.68 per cent higher in the third quarter of this year compared to a year earlier, payment solutions provider Moneris reported in its latest quarterly report.

British Columbia and Ontario led the way in spending growth, with B.C. up 10.2 per cent and Ontario up 9 per cent.

Even in recession-ravaged Alberta, which lost 2.6 per cent of all its jobs in the past year, consumer spending is up by 0.3 per cent compared to last year.

Any one else getting bored with the repetition? Is it really different here and can Canada pull off this trick indefinately?

Here’s the full article.

Can someone please explain this market?

The following was posted by ‘Whistler or bust?‘ in the comments this weekend:

I will be the first to admit I have been very wrong about the direction of Van RE in the past 2-3 years. That disclaimer said, lets examine some facts to see if there is any upside left:

These are the incomes required to be in each % (Source CBC)

10% of income earners $80,400*
1% of income earners $191,100*
0.1% of income earners $685,000**
0.01% of income earners $2.57 million*

So with the average Vancouver detached home at $1,408,722 (Source Yatter Matters)

A DP of $281,744 is required to buy
PPT is $26,174
Misc Closing $2,000
Total $309,918

Mortgage $1,126,978 @ 2.59 for 5 yrs = $66,072 Annually ( I will note these are record low rates)
Assume 1% Annual Maintenance (This is a standard benchmark over many years) $14,080
Property Taxes – These can vary but lets assume $7,000?

So Annual carrying costs total $87,152 AFTER TAX – I am excluding heating and hydro which vary but in no cases less than $3,000 annually for a detached home

Back to our chart above – Lets assume a 30% avg tax rate for the 10%, 35% for the 1% and 45% for the 0.1 and 0.01%.
After Tax
10% of income earners $56,200* – This house would take up 155% of the after-tax income
1% of income earners $124,215* – This house would take up 70% of after-tax income
0.1% of income earners $376,750* – This house would take up 23% of after tax income
0.01% of income earners $1.413 mil – This house would take up 6% of after- tax income

This is assuming all of these people have $310K for closing. This is assuming they are buying the average house of $1.4 mil. I think we all know what kind of house $1.4 mil gets on the West Side and even on the East side nowadays.

So the conclusion – Even the 1%ers are realistically priced out of the average Van detached home. Only the 0.1% and and above can really afford to buy.

Put another way – 99% of people are priced out. As families combined lets assume 95% are priced out.

So to all you bulls out there, please answer the questions: Is this a healthy market? Is this a market with any upside left?

I think we all know the answer.