Is It Time to Buy?

Before we get into this post, I just want to thank the readers who contacted me about the comment verification plug-in failing. I've installed a new verification plug-in that seems to work well and is easier to read than the last one. Comments are back!

Canadians love housing! For nearly two decades now, housing has been the economic story in Canada. Thousands of us have become fantastically rich on paper as prices of tiny lots and chipboard went to the moon.

Of course ridiculous amounts of leverage helped. Prices have only about doubled in the past 10 years, but at a 19:1 leverage ratio the gains on equity appear enormous!

The real estate pushers got really rich! With billions of dollars of housing changing hands each year and 4-5% of that for grabs in sales commissions, these folks have made hay.

When times are good, thanks in large part to horrible government policy, the pushers celebrate the rising "natural" condition of the market.

When prices begin to fall, thanks again in part to horrible government policy, these same middlemen furiously point fingers.

An Update on the Market

Well, at the end of summer 2018, prices and sales volumes are falling in nearly every major Canadian housing market. Things are not looking good at all for sellers or people who extended themselves to buy real estate.

Toronto and Vancouver, the two big Canadian market movers, have seen a massive sales collapse in their single family markets. Sales=to=listings ratios have exploded. We are now in what the pushers call a "buyers market". But that doesn't mean it's time to buy!

Prices are slowly falling alongside, but the real reckoning hasn't started yet. The condition of these big markets reminds me of the Prairie markets back in 2015. Eyes have not been opened yet.

For example, the largest Prairie markets, Calgary and Edmonton are continuing their multi-year price slide across the board. The slide began with low volume and isolated good deals, particularly in the condo space. But it has spread and the price concessions are growing rapidly.

Although the house pumper MLS numbers seem to paint a rosier picture, units in my townhouse complex are selling for almost 20% lower than their brand new price seven years ago! Single family houses in Edmonton that sold for $500,000 ten years ago are now selling for $400,000.

Factors Driving Real Estate Prices

As I've stated before on this blog, house prices are primarily the result of interest rates and household income. With a dose of consumer optimism or pessimism to extend the market one way or another.

Household income needs to expand over time to see an increase in house prices beyond the normal rate of inflation (1-3% per year). In the short term, a fall in interest rates can expand borrowing capacity leading to higher prices while a rise in interest rates leads to price compression.

If the Canadian real estate markets were solely dependent on household incomes, the price of a house would be around $290,000 today. That's if Canadian households spent 20% of their income on mortgage costs (the historical long-term average).

Higher income regions like Toronto, Calgary, and Edmonton would see higher house prices. Same goes for areas that appeal to high net worth individuals, certain areas in southern B.C. for example.

However, it does not explain an national average house price of $630,000. These insane valuations are not economically justifiable in our current circumstance.

No region of Canada is even remotely comparable to the world's higher priced regions like Hong Kong, New York, San Francisco, Singapore, or London.

These are the finance, culture, and industry capitals of the world, filled with millionaires and billionaires who can afford expensive homes. And they are not millionaires just because their houses have increased in value, I'm talking real financial assets with the representative income.

Where Things Are Going

Our house price explosion is purely due to a combination very ominous factors. Record household debt and leverage ratios, extremely relaxed borrowing standards for over ten years, reckless government policy support, and a population that is convinced housing is a get-rich scheme rather than a roof over your head.

These big, long-duration parties come with nasty hangovers, and don't be fooled: no party lasts forever.

Over the past few years an untold number of Canadian families have taken on mortgages of $500,000 or more. The monthly payments are approaching $2,700 at today's best discounted rates. As rates creep up over 4% (yes, it seems to be happening), those payments will balloon over $3,000 a month.

Did I forget to mention, that is after-tax money. If you are earning in the 40% tax bracket, you need to earn a gross income of $5,000 just to pay the mortgage.

Those who took on these monster mortgages when the 5-year fixed rate was less than 2.5% will be shocked when they renew at the end of their terms. They will have a choice of paying at least $500 more per month for the same mortgage, or, if they are lucky, refinance and stretch out the term to keep the payments low.

Already a few years ago, deep-diving economists were raising alarm bells about borrowing. There are more than 1.8 million households with monthly mortgage payments exceeding 20% of their net household income. This group has an average savings rate of -13% of their household income.

The evidence suggests at least hundreds of thousands of households across Canada are perpetually dipping into household equity, or accumulating other debt. Canada might not be the U.S.A., but it turns out people are behaving the same here as the Americans in the 2006-2008 period.

I believe many who already stretched themselves farther than they should have will be forced to sell. If I'm correct, we may be looking at an American-style downward spiral right here in Canada... where no Canadian thought it could ever happen.

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Tax Time: Are You Getting a Big Refund?

It's that time of year again... tax time in Canada. This year every Canadian must file their 2017 taxes and pay any amounts owing by April 30, 2018. That's a little more than two weeks from today.

As most of you know, taxes in Canada are quite complicated. I always do my own tax returns using Genutax. There are other great software programs out there as well: Simpletax, Turbotax, and Studiotax for example. Doing your own taxes is a great way to understand how much tax you are paying and what you can do to reduce that amount as much as possible in the future. Trust me, the nice lady at the mall kiosk doesn't care.

Our tax system is a myriad of credits and deductions at both the federal and provincial levels. Child care, RRSP contributions, medical expenses, education, charitable contributions, union dues, interest costs, pension adjustments, kids fitness, arts, and whatever your government decides is good for you at that moment in time.

After you plunk all those numbers in your tax return, you find out if you get a refund from the government or if you owe them more money than what you already paid. What is the best outcome?

Getting a Nice Refund

Most people are very happy when they get a refund cheque sometime in April or May. However nice this little bonus might seem, it is NOT the ideal outcome. Do not confuse a refund with some form of extra income. Extra income is something like the Canada Child Benefit or Old Age Security--money from the government that is not really paid by you but which you receive on a regular basis because you meet certain criteria. A refund is getting your money back because you paid too much to begin with.

Put it this way... you go to the store and buy a pair of pants that cost $100 but was marked 20% off. The clerk made an error that you didn't immediately notice and charged you $100 plus tax. You paid full amount, stuffed the pants into your backpack, hopped on your bike and were halfway home when the thought crossed your mind that you paid too much. You check your receipt and sure enough the discount wasn't calculated, so you bike back to the store and get your $20 back.

Did you earn back that $20 from the store? Absolutely not! You made the purchase expecting the discount amount so you are simply getting a refund because the store collected to much money from you in the first place. It's actually inconvenient because you wasted your time, effort, and dignity by going back to the store and grubbing for that $20 you never should have paid in the first place. This simple mistake makes you obliged to the store rather than the store being grateful for your business.

Tax refunds work the same way. Your employer follows some standardized criteria to deduct money for taxes from each paycheque all year long. It's not tailored to your personal situation and is actually designed to make sure you pay more than you need to.

By giving the illusion of having the government owe you rather than you owing the government, you are now at their beck and call. You will file your tax return on time, you will appreciate anything they give you back, and if they dispute something you've done on your return, they hold back money which is rightfully yours until you prove yourself innocent.

The government wants to give you a refund because it's insurance. Also, it ensures they get paid first and it gives them an interest free loan that grows all year. If five million Canadians get an average refund of $500 every April, that's an accumulated free loan of $2.5B every year.

If you get a tax refund every year, especially a big one, you are doing something wrong. You should first ask your employer for a TD1 form. This form allows you to direct your employee to adjust your tax deductions lower for things like the age amount, caregiver amounts, education amounts, and disability amounts.

Next you need to look at the T1213 Form. The T1213 must be sent to the CRA after you complete because they must provide approval before your employer can reduce tax deductions. The T1213 allows you to deduct things like RRSP contributions, child care expenses, family support payments, investment loan interest expenses, and many other items.

By completing a TD1 and T1213 accurately, you should be able to drastically reduce the amount of your tax deductions each paycheque and the size of the tax refund every April. The only downside is this must be done every year, however the pay-off is worth the postage stamp.

Pay a Little More Tax

This might sound a little counter-intuitive, but if you are doing your tax preparation correctly every year you should actually be paying the CRA a small amount after your tax returns are done each April. I'm not talking thousands of dollars that you can only pay with a line of credit because you don't have the cash on hand, but a moderate amount that you can afford is perfectly fine.

While your co-workers brag about the size of their refund, calmly cut the government a cheque and understand you are better off for it. Not unlike using a credit card to collect points or cash back, it's alright to be in debt to the government as long as you pay them back when you are supposed to.

Enjoy filing your taxes in the next few weeks and if you are getting a refund, check out the TD1 and T1213 to make sure it doesn't happen again! Of course, if your refund is due to RRSP contributions make sure you put that money into your investment account because you will owe taxes on RRSP withdrawals down the road. If your refund is not because of RRSP contributions, still invest it and put that money to work for your future self!

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.