Weekend Reading – Hot real estate edition
Welcome to my latest Weekend Reading – the hot real estate edition.
You can find previous editions and popular articles below:
How can you Beat the TSX Index? (Learn how to earn lots of income and growth in the process.)
A reminder about some RRSP guidance and facts and tips you can use as the RRSP contribution deadline for the 2021 tax year closes on March 1, 2022.
Hot real estate edition
Where do we begin??
Unless you’ve been living under a rock for the last few years, you’ll know the detachment between home prices and incomes in Canada is like nothing any other G7 country has really ever seen.
Don’t take my word for it. See the chart below!
To say that home prices in Canada have grown faster than incomes is an understatement of the last decade+.
Here are some other signs and reasons why the real estate market has gone mad:
Million-dollar homes in former budget towns
As Rob Carrick recently pointed out in one of his articles: “Move over, Toronto and Vancouver. The latest real estate numbers show that there are at least seven more cities or regions in the country where the average resale house price is more than $1-million: Oakville, Orangeville, Hamilton, Mississauga, and York and Durham regions (all in Ontario), plus the Fraser Valley in British Columbia.”
Home supply is limited
According to the Canadian Real Estate Association, home prices broke a 21-year record in 2021 as the supply of homes for sale hit an all-time low. In my province, Ontario, prices were up around 30 per cent year over year. This incredible climb was partially driven by the fact that newly listed homes fell in volume about 3% month over month.
You have to wonder if 2022 is the year our Canadian real estate finally becomes totally unhinged – things become very unstable such that our Bank of Canada will finally act on inflation swiftly (I doubt it.)
The signs to act have been there for years, even before the pandemic hit.
Recent price growth in housing seems to have been aided by a confluence of two very unique almost once-in-a-lifetime factors:
- prolonged low interest rates, combined with,
- pandemic lockdowns that have helped some people move into bigger homes as they stockpile cash savings.
I have no idea where we go from here. I’ve never seen home prices rise this much, this fast, as a homeowner. I’m thankful I have a home to live in. We’re almost debt-free (in just over two years) with the mortgage being dead since rates are likely to climb higher (finally) in 2022 and into 2023.
With inflation running hotter, my advice to any would be homebuyers now is to:
- Ensure you can afford your home – including with any rates that are likely to rise. Lock-in any rate now for the coming 3-5 years.
- Start small – you don’t need to own any forever-home right now.
- Consider moving abroad to Canadian towns and cities that continue to offer some affordable housing – given the trend for the gig economy is rising, the ability to work from home is rising, among other economy shifts.
At the end of the day, just be careful how much debt you take on in any hot real estate market or not, since your home should not be considered any sort of retirement lottery. Even though it feels that way today.
Here is some more reading material before I get to my reader question of the week!
I enjoyed this Morningstar article about retirement planning when “you have enough”. Too often, I read articles from financial advisors and money managers that claim it’s this cookie-cutter index portfolio or nothing.
Flat out wrong.
As the article rightly references: if you have won the investing game, you can quit playing as you wish.
The premise behind this idea is that once you’ve built your portfolio up to a point that it meets your goals – you need not chase additional returns. You can enjoy the cashflow from your portfolio (…a great name for a site, right??) and organize your portfolio in a more income-focused manner without fretting about the hope of capital gains. While any bias to bonds over stocks is not something I would personally do, as the article discusses, I believe looking at your cashflow needs is always the starting point for any retirement planning exercise. Once you figure that out, and include a modest margin of income or cash safety, only then will it be clear how to invest.
Further Reading: Learning to live with stocks.
A great quote for today’s times, from one of my favourite reads every single week:
“The passion for stretching yourself and sticking to it, even (or especially) when it’s not going well, is the hallmark of the growth mindset. This is the mindset that allows people to thrive during some of the most challenging times in their lives.
— Growth and Fixed, Farnam Street Blog
Kudos to investor advocate Ken Kivenko (a fan and contributor to this site) for his work in this open letter: trying to strengthen the complaint handing system for banking customers in Canada.
My partner, Questrade, was once again honoured to have been awarded the 2021 DALBAR Seal of Service Excellence for Telephone Service for the fourth consecutive year.
RRSP contribution deadline tips and reminders
On Cashflows & Portfolios we highlighted 5 big RRSP mistakes to avoid.
We also want to highlight these important posts and case studies:
1. Everything you need to know about RRSPs – Including contributions limits, penalties, deadline and clarity around the RRSP vs TFSA debate! Grab a coffee for this one as it contains a lot of detail!
2. How soon can you retire using just your RRSP? – Check out our analysis in a case study when this millennial couple can retire and with how much! Some investors like to stick with a single retirement account, and the RRSP still remains the most popular (although TFSAs are catching up!). With this case study, using a young couple (age 23) who max out their RRSP every year, we wondered even they can even retire using just their RRSP? They sure can, and earlier than expected! Find out all the details in the post!
3. Can you Have Too Much in Your RRSP? – On the flip side of the above article, it is possible to have “too much in your RRSP”? We have seen RRSP account balances that cover the spectrum in working with clients at Cashflows & Portfolios. With larger RRSP balances, many clients all have a common problem – taxes! While they say that a tax problem is a good problem to have, a large RRSP balance can also impact your OAS benefits, especially if you have a defined benefit pension (DB). Check out our opinion on if you can have too much RRSP!
Via Family Money Saver, here is a great guide to RRSPs.
Other money stuff…
Canadian Budget Binder offered some tips in how to handle money with success.
Dividend Strategy offered some ideas about how to invest during periods of higher inflation, as in now. From his post, a few stocks I happen to own as well:
Million Dollar Journey wrote a monster post about safe withdrawal rates – for any retirement age. Like MDJ, while the “4% rule” basically works; I wouldn’t go all-in on this thinking. Any retirement drawdown must carefully consider:
- The need or want to take on investing risk – see above from Morningstar post.
- Your income needs, including various income sources and the timing of those sources.
- Your timeline.
Otherwise, you might end up not spending any of the money you wanted to enjoy!
Dale Roberts highlighted some ideas in how to prepare for a bear market in his recent Sunday Reads.
Finally, my buddy The Dividend Guy believes dividend investing can be beneficial to younger investors.
Reader question of the week (adapted slight for the site):
I’m very much into personal finance/finance in general but have been intimidated/scared to go the DIY investing route…until now. My husband and I recently sold our cottage and after paying off our consumer debt we want to be smart with the money we have left from the sale and ensure it’s working for us well into our retirement.
We both have TFSA and RRSP accounts that are far from maxed out (lots of room for contribution) and our kids all have TFSA that we max out each year. Based on the research/reading we’ve done, we know we should add as much as we can into the RRSP and TFSAs however, would you recommend putting a lump sum into paying off our mortgage? We have a variable rate that is very low so my gut says to skip putting a big chunk into paying off the mortgage and invest the money instead. Would you agree?
Hypothetically speaking, if you took advantage of the hot real estate market and sold off a property you had what would you do with the money you made if your life situation was what I described above?
(I should mention, any money we’d be putting into our RRSP and TSFAs would be in self-directed accounts (a first for us!)
Thanks in advance!
Thanks for your readership!
I have a few thoughts, most of them are answered in this post below:
- I encourage all savers, investors, to try and max out TFSA accounts as much as possible for as long as possible as financial priority #1. Essentially, in doing so, you’re building tax-free wealth!
- As soon as your TFSA(s) are maxed out, work on your RRSPs if you can. Why? The ability to defer taxes and grow wealth tax-deferred is almost as good as tax-free!
- Depending on your mortgage rate, I would not bother with lump sum payments right now unless you can do #1 and #2 above. Yes, rates are low and will remain low even with any interest rate hikes in the coming years. That means I believe you should strongly consider investing to the point whereby as long as your investment returns are exceeding your mortgage rate, investing wins.
I can say #1, #2 and #3 above with some confidence and insights because that’s what I did when I sold a rental property many years ago. Steps #1-#3 helped us build a 7-figure portfolio to start semi-retirement with.
The same success can apply to you. Your mileage may vary but that’s my experience and insights!
Best wishes and let me know what you decide 🙂
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Have a great weekend!