Family Formation & Housing

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.

A Look into Tax Debt in the United States

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By Mike Brown

Special to the Financial Independence Hub

Despite the financial harm it causes to many, tax debt, or the difference between taxes owed and paid, is an issue that does not receive much coverage compared to other forms of consumer debt like student loan, mortgage, or credit card debt. 

At the end of fiscal year 2018, the Internal Revenue Service (IRS) reported that there were 13.1 million delinquent taxpayer accounts. The combined tax debt in the United States is an estimated US$527 billion, with US$381 billion of that coming from federal taxes and the rest from state-based taxes. 

If a tax debt case goes unresolved, the consequences can be severe, including things like wage garnishment, asset seizure, or an international travel ban. 

Even with its considerable size and consequences, tax debt goes under-reported, but hopefully a new report published by LendEDU and Solvable will help raise awareness. Analyzing over 75,000 unique cases of tax debt, LendEDU’s report broke down tax debt by state, in addition to the most common reasons for tax debt in each state.

New Mexico posts lowest average Tax Debt, Vermont the highest

The national average tax debt was US$16,489, and 16 states had a figure below the average, while 29 states and Washington D.C. had higher-than-average tax debt.

New Mexico’s average tax debt of US$13,878 was the lowest in the country; following closely behind New Mexico was West Virginia ($14,325), North Carolina ($14,657), and Louisiana ($14,731). 

On the other end of the spectrum, Vermont’s average tax debt of US$28,862 was the highest and was in the same neighborhood as North Dakota ($23,671), Wyoming ($21,095), and South Dakota ($21,071). 

Regionally, states in the Northeast, Midwest, and West generally had very high tax debt, while states in the South had average tax debt figures on the lower end. 

Main Reasons for Tax Debt include Back Tax Penalties and Divorce

A consumer can fall into tax debt for a variety of reasons, like underestimating how much in taxes he or she owes or not accounting for income made as a freelancer. Continue Reading…

Bank of Canada ends 2019 with a Rate Hold. What does this Mean for borrowers in 2020?

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Bank of Canada

By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The final rate announcement from Canada’s central bank has come and gone: and it appears that the cost of mortgages and other forms of variable-rate borrowing are to remain stable well into next year.

The Bank of Canada (BoC) opted to leave its trend-setting Overnight Lending Rate (which consumer lenders use to set the pricing of their variable mortgages and lines of credit) at 1.75% on December 4th.  The rate has held status quo since October 2018, and makes the BoC somewhat of an outlier when it comes to monetary policy; many central banks around the world, including the U.S. Federal Reserve, cut interest rates this year to counter growing U.S.-China trade tensions, as well as the growing threat of recession.

A positive take on the Canadian economy

However, the BoC has maintained all year that while global economic instability remains a key risk, it feels confident enough in both the international and domestic economies to avoid adding stimulus. Of course, tweaking interest rates is a key tool the BoC has at its disposal in times of economic need; by keeping the cost of borrowing lower, it encourages continued consumer spending and helps avoid a credit crunch.

While a number of economists and analysts anticipated at least one downward rate cut in 2019, that never materialized. In its December announcement, the central bank stated, “There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years.” It also adds that while the risk remains, a potential recession has become less likely, and that there is reason for optimism as Canada’s economy is stabilizing.

The December report outlines that end-of-year growth has progressed largely in line with what was forecasted in October, with consumer spending rising 1.3%, as well as upticks in business investment and wage growth. As well, the BoC’s most important metric, core inflation, stayed near its 2% target, and is expected to remain in that range over the next two years. As long as that remains the case, it’s unlikely the BoC will be prompted to cut or hike rates in the near future.

Lower rates to spur Housing demand in the New Year

With little chance of rate movement in the short term, what does that spell for Canada’s housing market? In what is somewhat of a self-fulfilling prophecy, the BoC included strengthening real estate activity as one of the main contributors to economic growth, further supporting its platform to keep rates at their current historical lows. Lenders have been able to keep their variable-rate offerings deeply discounted, while fixed mortgage rates have been kept down by especially low yields in the bond market.

That’s led to a boom in cheaper credit and mortgages over the course of 2019, which has fueled growing home-buyer demand; while the federal mortgage stress test did help tamp down some borrowing activity by requiring applicants to qualify for higher rates, the shock impact of the measure has largely been absorbed.

Housing Agency calls for home sales and prices to rise through 2021

That’s a trend that will continue over the next 12 to 24 months, according to several analysts. For example, Capital Economics has forecasted national house price growth will rise at least 6% in 2020 due to low mortgage rates, as well as a growing gap between housing supply and demand. Continue Reading…

Canadians have an Income problem, not a Debt problem

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BoomerandEcho.com

It’s not hard to find a report about the growing Canadian debt problem. Canadians owe $1.77 for every $1 they make. The average consumer owes $31,400 in installment and auto loans, while borrowing for credit cards and lines of credit average $18,500 per consumer. Finally, there are reports that nearly half of Canadians won’t be able to cover basic living expenses without taking on new debt.

Half of Canadians say they have less than $200 left over at the end of the month, after household bills and debt payments. Canadians’ household savings rate is an abysmal 1.7 per cent.

Canadians have a major debt problem! All the warning signs are there. We’re overextended, borrowing to maintain our cost of living, and at risk of insolvency if a recession hits. It’s a crisis!

Our affordability problem

Not so fast. It looks to me like Canadians have an income problem, not a debt problem. Or, put a different way, Canadians have an affordability problem. The median after-tax income for Canadian families is $71,700. Meanwhile, the average house price in Canada is $512,501. That’s an incredible 7x income! For reference, the typical rule of thumb for housing affordability is 2.5x income. That means Canadians should be buying homes worth $179,250.

The discrepancy is even more staggering in B.C. and Ontario:

Avg. house price Median income Affordability
British Columbia $696,115 $72,200 9.64x
Ontario $618,165 $73,700 8.39x

It’s not just housing. Child care costs have risen faster than inflation in nearly two-thirds of cities since 2017. It’s often the single largest household expense after rent or a mortgage. The median cost of child care in Canada’s largest cities hovers around $1,000 per month, with parents in Toronto paying $1,675 per month. The exception is in Quebec, where a universal child care program has been in place for more than two decades (families pay $175 per month for child care in Montreal).

Transportation is the next largest expense for Canadians. On average, we owe $20,000 on our vehicles. The average price of a new vehicle has risen to $37,577. Today, it’s common to see auto loans stretched out over seven or eight years. That helps lower monthly payments slightly, but families are easily paying $500 per month or more on each vehicle (with many two-car families).

Beyond frivolous Debt

All this to say, it’s no wonder Canadians are struggling to get by from month-to-month. We’re accessing cheap credit, in a lot of cases, to fund basic living expenses or cover emergencies. It’s not like we’re out there buying diamonds and furs.

Furthermore, Scott Terrio, insolvency expert at Hoyes Michalos, says it can be misleading to suggest Canadians are so close to insolvency. He says there is a lot of runway between when someone is in financial trouble and when they file a legal insolvency.

“One can be technically insolvent for months, even years, before they need to consider an actual filing. We regularly have clients tell us that they should have come in to see us 12-24 months earlier than they did. That’s because there are all sorts of ways to stave off a legal insolvency.”

Indeed, there are only about 55,000 bankruptcies and 75,000 consumer proposals filed by Canadians every year.

“And there are 37 million Canadians, so you do the math,” says Terrio.

It’s an Income problem

No, we have an income problem that is crippling our ability to save. I’ve seen it firsthand. As a young homeowner, who admittedly got in over his head as a first time buyer, I struggled to pay my mortgage, buy groceries, and service my student loan debt (another issue altogether for young Canadians). Continue Reading…

Is buying a house a good investment? Usually, but here’s a case where it wasn’t

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Is buying a house a good investment? Recently we spoke to the son of one of our Successful Investor Wealth Management clients who has to make a decision about housing, but needs to look at it from a financial point of view.

He and his wife bought a small starter home on a tiny lot in an old part of downtown Toronto. They both work in the north end of the city, so they had a long commute. But they liked the neighbourhood, and a number of friends lived nearby.

New considerations came up after their first child’s birth.

As it happens, a family member owns an investment house in the north end of the city, in an area that’s renowned for having some of Toronto’s top public schools. It’s twice the size of their current home, half as old, worth three times as much, and is in livable condition. It has a driveway that can park three or four cars, plus a garage. In winter, it has room for an enormous backyard skating rink. In summer, it can accommodate barbeque get-togethers with 50 or more guests. The location makes the house an easier commute for both of them.

The family member/owner is willing to accept a yearly rent equal to 1.2% of the value of the home, which is less than his interest cost. He’s even agreeable to making modest improvements at his own expense, since he can write off the cost against his rental income. The house plays a key role in his estate plan, since it’s part of a long-term land-assembly project. He is willing to let them live there for as long as they want, or until he dies, with little if any change in the rent. He just wants a trouble-free tenant.

Is buying a house a good investment? Here’s a specific case where it wasn’t

They asked our advice on buying a house before, and they asked again when this sell-or-hold question came along.

Back in 2015, we told them the same thing we’ve repeatedly told other clients and Inner Circle members. Since the 2008/2009 recession, central banks in Canada, the U.S. and other countries have set off on a unique economic experiment. They have artificially pushed interest rates down to historically low levels, for two reasons: to keep the economy out of recession, and to make it possible to pay the interest costs on extraordinarily high and rising government debt.

Now, with this sell-or-hold decision to make, the situation has changed. House prices and interest rates have both gone up substantially. This means far more potential Toronto-area house buyers have been priced out of the market. In addition, the artificial interest-rate paradise is coming to an end. Interest rates have gone up and our view is that they will keep rising.

Our advice for this particular young family was to accept the sweet deal on the rental house, and sell the starter. They can save the money they’d otherwise pay on property taxes toward a down payment on their dream home. Their incomes are likely to rise, since they are in the prime of their careers, so they’ll have that much more to add to the dream-home fund. When they are ready to buy, here are some tips:

Is buying a house a good investment? 6 key real estate investing tips for Successful Investors

Tax pluses. Homeowners get a tax-free, rent-free benefit of having a place to live. Profits on sales of principal residences are also tax-free. Continue Reading…

Are high rent costs a hurdle to Condo ownership?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The rising cost of rent in markets across Canada has become an especially prevalent issue in recent years, as a sharp lack of supply and steep real estate prices put the squeeze on home seekers’ affordability.

The fact is, rising ownership housing values, exacerbated by the federal mortgage stress test, have kept more would-be home purchasers in the rental market for longer; a total of 31% of first-time buyers say they rented for at least a decade before buying their first home, according to a recent Canada and Mortgage Housing Corporation report.

As well, new data from Rentals.ca reveal steadily rising rent costs in Canada’s major markets: up 0.7% in Vancouver to an average of $1,987 for a one-bedroom, while Montreal unit costs rose 8.1% to $1,285. In Toronto, such a unit went for $2,262 in the third quarter of 2019, according to the Toronto Real Estate Board.

A look at one of Canada’s most expensive rental markets

With more Canadians remaining in higher-priced rentals for longer, could these overall higher shelter costs be crimping their ability to eventually move up into the ownership market?

To see whether high rental costs are limiting Canadians’ homeownership options, Zoocasa conducted a study in Toronto, one of the nation’s priciest markets, to determine the rent-to-homeownership-cost ratio in the city. The study sourced average sold prices for condo units in 35 neighbourhoods across the 416 region, as well as the average lease rates for condo rental apartments in each. It also crunched the minimum down payment required to buy a unit in every neighbourhood, as well as the equivalent number of months of rent.

The rent-free possibilities

The findings essentially reveal just how long it would take to save a condo down payment in each neighbourhood, if the saver didn’t also have to pay any rent; while this may seem a dream scenario for many of the city’s dwellers, it could be a possible approach for the 47.7% of young adults StatsCan says still live within the family home in the city. The numbers also illustrate the minimum financial cost required to own a home in each area, as well as how feasible it would be to make the jump from renting to owning.

For the City of Toronto as a whole, the numbers aren’t too daunting; in order to purchase a condo unit in the city at the average price of $628,074, savers would need to amass a down payment amount of $37,807. Doing so would take a rent-free individual 14.7 months if they didn’t need to pay the city’s average rent of $2,567 monthly. The good news is, there are a number of affordable locales where a buyer could break into the market much faster – within a year in a total of 13 neighbourhoods.

In exchange for this affordability, though, buyers will need to give up their ideals of a central location and convenient commute; the majority of these neighbourhoods are located on the eastern and western edges of the city, with less direct access to public transit route. Continue Reading…