Perfect Storm?

Yesterday we talked about the Globe and Mail warning you about rising interest rates in an article that suggested ignoring that threat might be the 'biggest financial mistake you might make.'

Today's good news stories come from Business in Vancouver who tell us about a BMO report that says 'Canadian baby boomers  are significantly short on retirement savings'

Baby boomers across Canada have an average shortfall of $430,000 when it comes to their retirement savings, according to BMO Wealth Institute data released August 28.

This is followed up with the wonderful news that 'B.C. consumers still owe the most as personal debt levels rise again.'

The average Canadian consumer’s debt, excluding mortgages, increased in 2013’s second quarter to $27,131, according to a TransUnion report released this morning (August 28).

High debt? No savings for retirement?  Good thing many of us have been playing the real estate lottery, eh?

Which brings to mind our post back in March 2012 warning about Boomer's dumping their overvalued real estate to fund retirement and subsequent posts from Macleans and BMO who ruminated on similar concerns.

But Flippers don't have to worry about that (unless they've ignored the warnings and are currently caught holding), right?

Not so fast.

We also find out today that Tax auditors have targeted condo sellers in the hunt for ‘flippers’.

Seems that anyone who bought a condo unit pre-construction, then sold for a profit without actually moving in, is liable for capital gains tax, and must also repay the GST/HST refund that residents receive.

Folks who’ve sold condos or houses less than a year after taking possession seem to be the prime focus of CRA auditors so far, but tax lawyers are advising clients they could be at risk of a tax bill for at least 50 per cent of any gains made if they’ve sold before living in the property 18 months to two years.

Isn't that special?

Toss in the array of changing mortgage regulations, the weak global economy and the absence of HAM and surely the logical person can see the perfect storm forming.

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Friday Post #1: Macleans warns about the Boomer Trigger

Back in March we talked about the Boomer Trigger.

Last month the Bank of Montreal (BMO) issued a warning about the danger to real estate and retirement plans the phenomenon represented.

And now Macleans bring the Boomer Trigger to the forefront of public consciousness with an article this week by Stephen Gordon titled: Attention boomers: Why demographics threatens your retirement.

One of the more worrying aspects of population aging is its effect on the prices of assets that many people are counting on to support them in retirement. For example, many Canadians may be planning to sell their house when they retire, buy a less-expensive condo and deposit the difference. The problem is that if a large wave of people retire and execute this strategy at the same time, the flood of new supply on the housing market will depress prices, thus reducing the value of the housing assets that were supposed to finance their retirements.

The run-up in housing prices over the past decade has attracted a lot of attention in this regard and led to worries that Canadian households’ balance sheets might be over-weighted on housing.

In a twist, however, Gordon makes a case that housing isn't as overbought as one might think (and I'm assuming he means outside of Toronto/Vancouver here).

Much of the surge in the 2000s can be seen as a recovery from what was a very dismal market in the 1990s. Housing’s share of household assets did increase sharply during the 2000s, but this ratio still hasn’t recovered pre-1990 levels and remains below what it was in the 1970s.

Gordon then analyzes stocks and see's a danger in that asset from the Boomer Trigger as well:

The same holds for another type of asset: shares. Shares were 10 per cent of household assets for 20 years and doubled to 20 per cent during the mid-1990s, an increase that appears to be driven by higher stock prices, not by an increase in the number of shares held by households.

In the 40 years before the mid-1990s, (real) stock prices fluctuated in what in retrospect looks like a fairly narrow band and without any discernible trend. But something happened twenty years ago that more than doubled share values in real terms. What?

There are many models and theories about the determinants of asset prices, but I can’t think of any whose fundamentals would explain increases of these magnitudes. There was the tech bubble during which fundamentals were abandoned, but the broader indices stayed high and continued to climb after the bubble popped.

The story that makes the most sense to me is demographics. In the mid-1990s, the baby boom cohort started entering its late thirties and forties—prime earning years—around this time, and they began to save for their retirements. This meant buying up assets, either directly (by means of individual plans such as RRSPs) or indirectly (by managers of pension plans). Demand outpaced supply, so prices increased.

But what will happen when the boomers start to retire? Will the process reverse itself, with a wave of selling forcing down prices and wiping out a generation’s retirement savings?

Seems to me that wealthy Asians have a lot of asset buying ahead of them to fulfill the Vancouver dream of supporting our overvalued asset prices.

Riiighhht!

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It's December 7th and we take a moment to remember a defining moment of the last century equal in impact to the one we all remember on September 11th, 2001.

Today is the 71st anniversary of the attack on Pearl Harbor.

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.