Wednesday, March 17, 2010

Recommended Reading

I recommend you read this and heed the implicit warning.


The idea that Canadians are fiscally prudent is a farce to anyone in-the-know. Most Canadians live paycheque to paycheque, have no savings, overuse their credit cards and HELOCs and are overleveraged on their real estate assets. The collective 'we are better than the US' mentality is a joke since the average Canadian's personal balance sheet looks just like their American cousin's balance sheet from 3 years ago.

The only thing fiscally prudent about Canada is that our banking system was never 'transformed' to the US / European model back in the 90s, with no small protest from the banks. Because of the high reserve ratios that the banks are required to maintain and with no small help of taxpayer backed mortgage loan guarantees via CMHC, it is not surprising that Canadian banks are phenomenally profitable. Mind you, in a credit contraction, bank earnings will be far from stellar.

In a related note - Canadians need to save more - according to David Dodge

Canadians need to save between 10 per cent and 21 per cent of their pretax incomes each year – if they save consistently for 35 years – to have comfortable retirement incomes, according to a new report by former Bank of Canada governor David Dodge.

The report says many Canadians are unaware of the high savings levels they need for their retirement years, and may believe they are saving adequately when they are not.

The report, co-authored by Alexandre Laurin and Colin Busby and published by the C.D. Howe Institute, calculates various savings scenarios based on assumptions that Canadians aim to have annual retirement incomes between 50 per cent and 70 per cent of their preretirement incomes.

“Our findings provide Canadians with a ‘reality check' about the saving rates required to meet their retirement goals,” Mr. Dodge said in a release Thursday.

14 comments:

mohican said...

How do you save 20% of your gross income when you pay 40% of your gross income to service debt?

That's right folks, you can't.

JimTan said...

?????

Isn't a mortgage described as a form of forced savings? Doesn't a portion of your mortgage payment go to principle repayment?

Isn't RE in some markets a good long term investment?

(Shake of head!)

mohican said...

JT - you know very well that Mr Dodge is not referring to mortgage principal paydown as 'savings.'

A long amortization mortgage sounds more like forced slavery than forced savings to me.

Additionally, why don't you do the math for us and work out how much principal a person actually pays off during the first 10 years of a mortgage. Ignore the fact that many people refinance and plunge themselves into an additional 10 years of amortization during that period.

If you aren't too busy with that you can also work out for us what the approximate rates of return on various real estate markets will be over the next 30 years so we will know where to buy investment property.

Yes, I believe 'owning' your own home to be a good 'investment' long term as it provides family and lifestyle stability in addition to allowing a family to save the equivalent of rent each month once they have the home paid for. This doesn't work if they pay much more than the equivalent of rent in interest costs when they sign up for the mortgage.

jesse said...

Not to quibble too much but paying down mortgage principal in itself counts as savings. It is incorrect to take on an unsecured debt then claim you are saving in net by paying it off. The question is whether or not taking on a mortgage is secured or unsecured, as this will eventually impact total savings.

That's the big thing in my mind. If prices are in a bubble, much of the debt a borrower takes on is effectively unsecured (from the borrower's point of view, not necessarily the lender's).

RentingSucks said...

Check out this article. Ireland had lots of similarities to Canada before it imploded including the perception of fiscal prudence. We already back our banks liabilites via CMHC but they were forced into it.

http://tinyurl.com/ykxtbwe

patriotz said...

We already back our banks liabilites via CMHC.

Correction: CMHC backs the banks' assets. CDIC backs their liabilities.

;-)

jesse said...

CDIC backs depositors' assets. i.e. the backup is directed towards the holder of the asset in the event the holder of the liability defaults (in this case the bank, in the CMHC case the borrower).

春天來嚕 said...

I love readding, and thanks for your artical. ........................................

JimTan said...

"That's the big thing in my mind. If prices are in a bubble, much of the debt a borrower takes on is effectively unsecured (from the borrower's point of view, not necessarily the lender's)."

I'll just reply to Jesse, till Mohican gets his mojo back. I'm not sure what you mean by secured?

To me, it's simple. That are two decisions. The savings decision determines your current lifestyle. The investment decision determines your future lifestyle.

As long as Vancouverites are willing to use 40% of their income to service their mortgage (they value home ownership more than holidays or a new car), there will be buyers. I do not think that anyone has the right to tell others how to spend their money.

Bear in mind that there will always be someone who buys at the top (and someone who sells at the bottom). The important investment decision is to join the trend. The trend is your friend. Those who invested in Vancouver RE in the last 25 years did well.

Will Vancouver RE be a good investment in the next 25 years? The forecasts suggest that population will grow substantially in Canada and Vancouver.

I am sick of hearing about how Canada is like America and Vancouver is like Miami. Fact: Vegas rental vacancy rate is 16% vs Vancouver 2%. Now, someone is trying to compare Canada to Ireland! (double shake of the head) The Dublin office and shop vacancy rate is +20%.

Might I suggest that you investigate the analogies carefully before you blow your trumpet? Thank you!

http://www.irishtimes.com/newspaper/ireland/2010/0306/1224265705094.html

buff_butler said...

"Isn't a mortgage described as a form of forced savings? Doesn't a portion of your mortgage payment go to principle repayment?"

Theres two sides to this; It is a deficit of labour on one side and sidelined cash on the other side.

The problem with this model is labour is deflationary due to ever increasing labour efficency whereas cash is inflationary plus all the other exits cash can take. Given the market is not zero sum not everyone can retire on these "forced savings" (ex rental yeild) without ever expanding credit given a static labour pool.

A collary to this. We have a very understated retirement problem right now. Houses existed back then too (gasp). I wonder what went wrong.

"The forecasts suggest that population will grow substantially in Canada and Vancouver."

If you look at demographic distribution I believe Vancouver is at a peak participation rate right now. Some cities are better off.

"I am sick of hearing about how Canada is like America and Vancouver is like Miami."

As a so called 'investor' shouldnt you be considering everyones opionions rather then just being convinced your the smartest guy in the room? Honestly if i got a dollar for every 'investor' I met that had fallen in love with a stock and has the exit strategy "when i haz the monies to buyz me a grill." I guess every FTB is a diet donald trump.

jesse said...

"I'm not sure what you mean by secured?"

A person takes on debt to buy a house. As he pays off this debt it counts as "savings". However if he later sells the house for less money than he anticipates, a lot of the money he "saved" won't be there.

vibe said...

I think ``forced savings`` refers to the bank forcing you to give them your savings. :)

JimTan said...

"As a so called 'investor' shouldnt you be considering everyones opionions rather then just being convinced your the smartest guy in the room?"

Dear Mr. Butler,

I do watch the world 360 degrees in order to avoid surprises. Indeed, I respect a strong argument that forces me to reconsider my views.

That said, experience has also taught me to quickly identify the flawed/false/irrelevant arguments. Even a superficial acquaintance with Irish news will tell you that Ireland is not Canada.

Irish population is 4.3 million. Surplus homes is 345k. Please calculate the home vacancy rate (not just the rental vacancy rate). Possibly in the region of +20%. They are in much worse shape than the Americans. It may take them +10 years to absorb the oversupply.

patriotz said...

As he pays off this debt it counts as "savings".

But the interest part of the mortgage payment is consumption, i.e. income not saved. As are all other costs of ownership.

If the total costs of ownership exceed rental value, the owner is throwing away income that could otherwise be saved.

So someone who buys a house at an excessive price is actually engaging in forced dissaving, not forced saving.