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Have we lost our way?

Silly query. Of course we have. Utterly.

Yesterday we reviewed household mortgage debt – rising by $400 million per day,  now sitting at $1.76 trillion. That’s 1,760 times a billion. We also yakked about rates. Those five-year loans at 1.99% are gone. Now they’re 2.59%. In a year or more they could be 4%. Then the amount of interest paid doubles and principal repayment hits the brakes. The renewal risk to new buyers is spiraling higher. Do they even realize it? Do they know that traditionally house values fall as loan costs rise?

In short, this could be a really, really bad time to load up on 20x leverage to grab an inflated property, especially if you don’t have financial assets to fall back on if things go south.

But wait. Not in Langford, BC, where an alternative universe has been created by Mayor Stew Young and his buds on council.

 This burg of about 40,000 people sits on bucolic Vancouver Island not far from Victoria, where the average SF house now commands $1.1 million, up 25% year/year. Ouch. But Langford is a more suburban-kinda commuter sweatpants place where you’d expect to pay less. And you’d be wrong. The average detached on the fringe is $900,000 and it’s a mill closer to downtown.

‘Wait’, says Stew to the jilted newbies without savings but whose hearts teem with house lust, ‘I can save you!’

Here’s the deal. The mayor is taking a few million dollars of taxpayers’ dough and giving it away in down payment cash. The “Attainable Home Ownership Program” will hand over 75% of the funds required to buy real estate using twenty times leverage to couples with an income of just under $100,000. So on a $1,000,000 purchase the buyers would need only $12,500 in actual savings. That, of course, increases the effective leverage to 80 times. Yahoo! Let ‘er rip! At this ratio, all the buyers’ equity would be wiped out if the house declined just 1.2% in value.

How do you qualify? Live there for two years. And – just to ensure there’s maximum financial risk to all the kids – buyers cannot possess more than $50,000 “in household assets.” Like savings, or TFSAs and RRSPs, presumably. In other words, a minor real estate correction (very possible as rates rise) will put buyers deep underwater without a boat. Even a rubber ducky.

It’s hard to believe a local government would so this. “We don’t see other municipalities taking on the challenge of providing attainable housing in any meaningful way the way Langford is doing,” says the mayor. And, of course, there’s a damn good reason for that.

“Between Bank of Mom, the Liberal’s under 40 TFSAthingy, and a Santa Clause mayor,” says local blog dog Shawn, “how can prices go anywhere but up as interest rate risk rises in lock step? Crazy.”

Now, let’s flip over to the mainland, home of unicorns, magic mushrooms, supercars, equally-questionable politicians and (of course) Generation Squeeze. In Vancouver, Mayor Kennedy Stewart is being true to his NDP roots by wanting hoods of expensive single-family homes to be opened up to the construction of six-plexes. So each house now could become home to six families, presumably increasing housing stock and providing more affordable accommodation.

What could possibly go wrong?

Well, suddenly every SFH lot would become worth more, realtors point out. If an owner can convert a property into six separate sales, or unload to a developer willing to erect the multi-family structure and find six buyers, the dirt becomes more valuable. So much for affordability.

It’s also a recipe for conflict. Folks don’t pay two or three million to live on a quiet, leafy VYR street only to have twenty or more people move into the lot next door, with six dogs, ten vehicles and five tattooed boyfriends. It’s a fine example of what capricious change can mean when you live in a weird place, have most of your net worth in a single asset, or elect naïve idealogues with no skin in the game and defined-benefit pensions.

Lost. Our. Way.

*     *     *

Okay, time for the Investment Question of the Day. Here’s Terry:

Long time follower and fellow dog lover here. When setting up a balanced 60/40 portfolio, how are the following “fixed income” sources accounted for: CPP, OAS and a government pension? These three sources supply me in retirement with a “fixed income”. Should my investment portfolio then be less than 40% bonds?

Good ask. You are correct – those sources of retirement income are stable, well-funded, indexed and function just like the safe portion of a B&D account. So, in a sense, they are equivalent to fixed income, and this leads many people with DB pensions to take crazy FAANG/Tesla/BTC flings with the rest of their portfolio.

But holding ‘safe’ stuff like a few bonds and preferred shares is not done merely to quell volatility. As we have mentioned, prefs will augment smartly as interest rates increase, plus provide a steady stream of income and also hand you a dividend tax credit. More importantly, a B&D approach to investing is intended to defeat human emotion. When things go up, people clamour for them. When assets fall, investors panic and sell, fearing zero’s coming. Both are mistakes.

The Covid crash of 2020 proved exactly why this approach works. Downside protection (bonds rose as stocks dropped) and quick recovery. Investing is not a race. Outsized returns are not the prize, when they come with higher risk. My personal goals are (a) don’t lose money and (b) get a reasonable return.

If you share them, be balanced. Unlike, say, the mayor of Langford.

About the picture: “Here is a photo is my 3-year-old, Mayu,” writes Sebastian. “Her mother is a ticketed Canadian Inuit Dog, an intelligent breed with an colossal amount of energy. In the winter she loves pulling me around on skis. The photo is unedited, capturing her posing by a bonfire under an Arctic night sky. She smelled like smoke for three days afterwards.”


Source: https://www.greaterfool.ca/2021/10/22/lost-3/


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