For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.
Rising interest rates are causing a lot of unhappiness among bond investors, heavily-indebted homeowners, real estate agents, and others who make their livings from home sales. The exact nature of what is happening now was unpredictable, but the fact that interest rates would eventually rise was inevitable.
Long-Term Bonds
On the bond investing side, I was disappointed that so few prominent financial advisors saw the danger in long-term bonds back in 2020. If all you do is follow historical bond returns, then the recent crash in long-term bonds looks like a black swan, a nasty surprise. However, when 30-year Canadian government bond yields got down to 1.2%, it was obvious that they were a terrible investment if held to maturity. This made it inevitable that whoever was holding these hot potatoes when interest rates rose would get burned. Owning long-term bonds at that time was crazy.
One might ask whether we could say the same thing about holding stocks in 2020 when interest rates were so low. The answer is no. Bond returns are very different from stock returns in terms of unpredictability. We use bond prices to calculate bond yields; one is completely determined by the other. The situation is very different with stocks. Even when conditions don’t look good for stocks, they may still give better returns than the interest you’d get if you sold them to hold cash. All the evidence says that most investors are better off not trying to time the stock market.
Most of the time, investors are better off not trying to time the bond market either. However, the conditions in 2020 were extraordinary. Long-term bonds were guaranteed to give unacceptably low returns if held to maturity. This was a perfectly sensible time to shift long-term bonds to short-term bonds or cash savings.
Houses
The only way house prices could rise to the crazy heights they reached was with interest rates so low that mortgage payments remained barely affordable. Fortunately, the government imposed a stress test that forced buyers to qualify for a mortgage based on payments higher than their actual payments. This reduced the damage we’re starting to see now. Unfortunately, there is evidence that some homeowners faked their income (with industry help) so they could qualify for a mortgage. This offset some of the good the stress test did. Continue Reading…
In my latest for MoneySense, I look at the affordability battle in Canada. Home prices are falling at the fastest clip in the last 20 years. But borrowing costs are also increasing. Mostly, it’s a wash. Even from the bubble peak in February of 2022 to July 2022, things have not improved for homeowner wannabes. Real estate is the most interesting and ‘exciting’ sector in 2022. Have a read of the real estate affordability battle in Canada.
Higher rates take on falling home prices on MoneySense.
In this post I will offer up a few of the important charts, but check out that MoneySense post for the wider perspective.
Average home prices down 22% in July
Home prices are falling fast. After a strong COVID-inspired real estate run, prices are now in a free fall. After peaking at $816,720 in February 2022, the national average house price fell 18.5% to $665,850 in June. The average price fell again in July, settling at $629,971—nearly 22.9% below the peak.
The average national home price in August increased to $637,673.
CREA
The national average price is heavily influenced by sales in Greater Vancouver and the GTA, two of Canada’s most active and expensive housing markets. Excluding these two markets from the calculation cuts $114,800 from the national average price.
Real estate ridiculousness
And here’s some longer term history using average Toronto home prices as an example. It was a crazy run.
Average Toronto home price in 2000: $243,255
Average Toronto home price in 2010: $431,262
Average Toronto home price in 2021: $1,095,336
Rates are going up, up, up
In that battle against runaway inflation, central bankers are raising rates. Borrowing costs mostly follow suit. Here’s the path in Canada for fixed and variable rates mortgages.
And of course, on Wednesday September 7, the Bank of Canada increased rates another 75 bps, or 0.75%. Variable is getting more expensive.
A 5-year fixed will now run you about 5.04%.
A 5-year variable will increase to about 4.90%.
The B0C offers that they’re not done yet. There are more rate hikes to come.
Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.
Bank of Canada
Variable rates will automatically follow Bank of Canada rate hikes. Fixed rates will follow the bond market, and the bond market will make a guess about the near and future path of rate hikes. The rate hike on September 7 was mostly already priced into the bond markets.
The money chart on affordability
In the MoneySense post you’ll find the telling table comparing costs for variable and fixed rate mortgages, for 10% and 20% down payment scenarios. Here was the working copy table. Continue Reading…
Billy and Akaisha Kaderli on Lake Atitlan, Guatemala
By Billy and Akaisha Kaderli, Retireearlylifestyle.com
Special to the Financial Independence Hub
In January, 2022 we began our 32nd year of Financial Independence. Few people can say they have 30 years of self-funded retirement by the age of 68 and have a higher net worth after spending and inflation than when they started. This is something of which we are quite proud.
As we have aged, one thing we have learned is that long term is getting shorter every day. Life is to be enjoyed now, not someday: the older we get the more we appreciate that view. Life is continuously full of opportunities and we want to take them.
Opportunities abound
For example, a couple of years ago we were approached by a startup company which sponsored us for several months in Saigon, Vietnam in exchange for sharing our past experience in the restaurant and service industry and for exposure to our readers through our popular website and blog. That was a fabulous trip, and it got us back over to Asia again.
Then we were approached for a partnership, offering tours to Europe and South America. Can you imagine? There are always opportunities!
These are just two examples of why we say that life is full of chances to grow and learn something new if you want to take them. And neither of these recent options could have been presented to us if we were still working.
Portfolio getting stronger
Since the 2008 financial meltdown the markets certainly have performed well, thereby increasing our portfolio. And for a longer term view the S&P 500 closed at 312.49 when we retired in 1991, producing a better than 8% annual ride plus dividends. So, our advice is to get invested now and in a couple of decades looking back you will have wished you had invested more. Probably a lot more.
We suggest people track their spending now, then multiply that number by 25 to get a rough estimate of the portfolio amount they need to retire. Once you know that amount, in simple terms, assuming the same 8% growth in the future and you withdraw 4% for living expenses, this leaves you 4% to cover inflation and growth so you are all set.
The 4% rule is a guide not set in stone and oursbounces around depending on the markets and our expenses, but on average we have been able to maintain it easily below 4%. Our data over 30 years gives us security knowing that if one year it is higher we can make adjustments the following year to correct it. Then again, the markets could move higher helping us out as well, which is usually the case. Plus, we now are receiving Social Security, so payments and dividends cover our expenses. You can read our reasoning behind this decision here.
Practical considerations
Another note is that because we have a good percentage of assets in retirement accounts, when we turned 56 years old we used IRS rule 72T to withdrawal an annual amount close to our estimated Social Security payments, thus creating a bridge until we actually qualified. Now that we are receiving benefits we have turned off that spigot and are letting the IRAs grow once again.
The age of 72 is now coming into our sight and RMD, required minimum distributions, are the next issue to deal with, but we still have time and no one knows what the tax laws will be then.
With that stated, we still maintain a core holding of buy and hold (DVY, SPY, VTI) which sends us a steady stream of dividends in our taxable accounts as well as tracking the market. But in our IRAs, where we have no tax issues regarding trading, we have been more active using market seasonality with the idea of side-stepping larger declines. Some years have been better than others but we have been taking about half of the market risk than being all in all the time and that is comforting.
Where to retire, cost of living and healthcare
We are not alone anymore, with Boomers retiring at 10,000 a day, we see more retirees everywhere! But in terms of the foreign locations that we visit, the retirement community of Chapala, Mexico is growing at a fast pace. The Colonial town of Antigua, Guatemala has also attracted its share of Expats, and there is a solid and active retirement community in Chiang Mai, Thailand and Panama.
We would recommend Mexico, Panama and Guatemala for their proximity to the US and Canada as well as being on similar time zones as family and financial markets in the States. We would say that Thailand is attractive for its excellent medical care, warmer weather and uniqueness. All of these locations offer excellent lifestyle for cost of living. Continue Reading…
It’s about that time in your life when you feel like you need a change of pace and want to move out of your parents’ house. Now, this isn’t as simple as just moving out. There are a lot of steps you need to take in order to be prepared for this new venture in life. Taking on these few tips can help with a smooth transition when moving out of your parents’ and into your new home.
Finding a New Place
Once you’ve decided to move out, you’ll next have to decide if you want to rent or buy a place of your own. Many people lean toward renting since it’s a much quicker and easier way to get a place. Although renting may be easier, buying is typically the more financially responsible route to take.
As a potential new home buyer, you’ll want to do some research on tips for buying your first home. Although there are more hoops to jump through, you’ll be investing your money into real estate and a place to live, instead of throwing your money away by renting someone else’s place.
Before starting your home hunt, ask yourself “how much house can I afford?” Establishing this ahead of time will allow you to know exactly how much you have available to go toward a payment for your new home. Consider working with a real estate agent to help with your home search. They will know the ups and downs of the market and help you find the home that’s right for you.
Decluttering and Reorganization
Many people could agree that moving out of your parents’ house is when the most decluttering needs to happen. You have clothes from all different points in your life, trinkets, and memory boxes galore. Prioritize a day or two to declutter and get rid of the things you no longer need. Then once you start packing you’ll need to move a lot less.
Decluttering prior to your move will also ease the reorganization process in your new place. Researching organization tips can help you find the best ways to do this. Buying organizational cubes, stackable containers, and any storage-type product can help keep all your items in the right place and avoid new clutter.
Developing Financial Independence
Moving out on your own means being financially independent. You’re not relying on your parents to buy the groceries or pay the utility bill. Most expenses are now on you to deal with, and you’ll want to know how you can find your financial independence. Continue Reading…
When the going gets tough and your bank account gets lighter, for many young people, having your parents on speed dial is a go-to solution. But with inflation rates not seen since the 1980s, and interest rates reaching their highest point since 2008, Canadians – including parents – are facing unprecedented financial realities, and may not be in a position to pick up the call. The impact of this for many younger adults and students is that borrowing from the ‘Bank of Mom and Dad’ isn’t the option it once was.
The numbers show that parental support has been significant for their children: a recent study last year found that parents gave over $10B in down-payment help over the past year to younger Canadians in the housing market. With the average cost of a down payment climbing from $52,000 in 2015 to $82,000 in 2021, that help is needed more than ever.
While down payments represent one big ticket item on the spending list, there’s also tuition, rent and other living expenses, etc. all to help young people make ends meet. And in a year that marks a major financial plot twist, those same parents are facing their own challenges to do just that.
According to a new study, four-in-five (80 percent) Canadians have begun cutting back on spending—some ways include trimming discretionary spending, delaying major purchases, or deferring saving for the future. This is up from 74 percent in February, showing that more Canadians are feeling pressure financially.
With less cash to support their kids, sound advice from Mom and Dad may be the next best thing. Below are a few places to start.
Keep ALL your money
Fees are a slippery slope. Whether it’s subscription fees for things you’re not using or day-to-day avoidable fees on things like banking, it’s important to look at the cumulative effect of small, ongoing fees. At Simplii, we offer a no-fee chequing account, with no monthly fee, unlimited bill payments, e-transfers and more. Additionally, you have free access to over 3,400 CIBC ATMs throughout Canada, saving people from paying service fees. When times are tighter, it’s worth looking at every spending category to see where efficiencies can be found. Continue Reading…
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