The Summer of Suck

August 29th, 2022 by Potato

There are still a few days of the summer left, and it hasn’t been all bad, but 2022 has been right up there with 2020 as a summer that was not good for me.

Head Injury

It was after getting a head injury that I coined the term “Summer of Suck” in my mind.

Selfie from outside emerg after being stitched up

It’s not even a very good story to tell: my indoor cat ran outside when my neighbour came to the door. So I tore out after the cat, with my hands making contact, just about to snatch him back up… when I ran head-first at full speed into the overhanging bay window. What they say about scalp wounds is true: they bleed a lot. Within a breath or two I had a big puddle of blood at my feet. My neighbour grabbed some paper towels for me, collected the cat from under the bush, took her dog back home, and kindly drove me to the hospital for some stitches and glue. No cracking under pressure with that one!

I had a ~3″ long slice across the top of my head, deep enough to bleed ridiculously but not showing bone. Thankfully I was seen fairly quickly, and was in and out of emerg in just over 2 hours.

In a bit of comedy, my mask’s straps ended up inside the bandages the doctor put on, so I had to wear it the whole way home until I could cut it off.

The wound healed up fairly well — I’ve got a small pink scar (with a palpable dent) where the stitches were, and the other ~1.5″ of the cut that was glued together seems to have healed without a trace.

Amazingly, I didn’t seem to get a concussion, even though it seems like I exploded my head from the force of the impact — I was wearing a hat which didn’t get cut, which casts doubt on my theory that I got sliced open by a sharp part on the siding.

Grant Conjunction

It was also an insanely busy period at work, another one of those projects where you’re thankful for work-from-home because there simply weren’t enough hours in the week to fit in commuting too (assuming, as we do, that running on 3-4 hours of sleep/night was already on the wrong side of the insane line and that there was nothing left to cut for train time).

It is not done to bite the hand that feeds you and criticize the agencies that provide research funding. But I have to note how crazy this summer was, and it was not because of so many researchers demanding my services. This year an agency launched a call on top of another agency’s major call (they often attempt to coordinate their deadlines better than that), and even just the one competition was so over the top on the work required and the lack of time provided that it was essentially a denial of service attack on the administrative hearts of the research institutions involved.

But the response was their hands were tied because their funding agreement with the federal government required such insane timelines on our end to make it work. And perhaps they have the same don’t-bite-the-hand-just-suck-it-up attitude we have (esp. as we’re the ones dealing with the fallout), but, like, funding agreements can be amended if you realize there isn’t enough time to complete the project on time. Just sayin’.

And that’s all I’ll say about that SNAFU for now.

Site Attack

Oh and speaking of attacks, I also had someone decide to attack the Value of Simple shop with hundreds of fraudulent orders, which soaked up what little blog/writing/side business time I set aside this summer.

Thankfully, Stripe, my main credit card processor, flagged the fraudulent transactions and stopped them after a handful had gone through.

You may not know this about running a small business, but when you issue refunds, you’re still on the hook for the credit card processing fees for that transaction. So if you buy my $7 e-book and then demand a refund (say for the very legitimate reason that someone stole your credit card), and I refund your $7, I still have to pay the credit card processor roughly $0.50 for handling that non-transaction. So I was out about four bucks, which is not a big deal in the grand scheme of things.

But here is where things get ironic: you cannot pay your bill to the credit card processor with a credit card. They want a wire transfer. I haven’t actually ever done a wire transfer, so I went to Tangerine to see what I should do (and how much they’d charge me to do one). While I was afraid it was going to be like a $20 bank service charge to pay my $4 debt, it turned out to be even more of a Catch-22: they don’t offer wire transfers, period.

Eventually my (concussed?) brain caught up with the obvious work-around: I bought a copy of my own book to get money into my Stripe account to cover the deficit.

At the moment, direct sales are suspended until I can figure out a way to help prevent a future attack — Stripe suggests adding a captcha, and I honestly can’t believe that’s not included as an out-of-the-box option in WooCommerce. There’s a third-party plug-in that will do it for $38/yr, which is right in that valley of being much more than the economic loss I’ve suffered while also being less than the brain damage and time I’d have to commit to re-learn a minimal amount of PHP to functionally drop in the code snippet myself.

The book is still available from Kobo, Amazon, Indigo, Google Play, etc., so I’m not in a hurry to make my direct-from-the-author webstore work again, so that may be a while.

I Was Once an Adventurer Like You

I picked up another fun injury this summer: apparently from sitting too long at my desk in suboptimal positions (hundred-hour workweeks will do that), I have blown out my ankle. It certainly wasn’t from physical activity or sports! Too busy to see anyone about it, of course, it seems to be healing slowly (very slowly). Nice big lump in my Achilles’ tendon, and it kind of gives out and won’t hold my weight if I lean to the right. I just hope it’s fully healed by curling season!

Road Trip

Once the grants were in, I was off to PEI on a road trip with Blueberry! This was actually a really nice part of the summer, I’m sure she’ll remember her daddy-daughter road trip for a long time. I was really nervous about it — I used to drive 2 hours at a time every week before she was born, and did the trip out East almost yearly. But in the last 10 years the longest road trip I’ve taken has been 3 hours, and I felt worn out after that. So on the way out I decided to space the ~19 hours of actual driving (plus meal breaks and pit stops makes it even more in the car) over three days, which also gave us a bit of time to hit some tourist attractions.

The driving itself was fine, and she was a great little passenger. So on the way home I decided to do the drive in two days.

And we’ve been home for 8 days as I write this and I still have motion sickness — like when you’re on a boat all day then feel as if you’re swaying when you get back on land, I feel as if I’m rumbling along the highway and get dizzy if I look anywhere but straight ahead. I keep hoping one good night of sleep will fix that… and am just waiting for that one good night of sleep to happen!

The Cat

Not too long after our return, the cat got sick. He threw up in every room of the house (more than once in a few), and stopped eating. I took him to the vet, and he had all the signs of a blockage in his digestive tract. A quick surgery found a section of diseased intestine, like bowel ischemia… but no foreign object causing it! Quite the medical mystery.

He’s forbidden from any climbing or jumping activity, not even going up or down stairs for 14 days while he recovers. Yeah, try telling a cat that. The first few days he was so sick and tired and low energy after not eating for a day and then surgery that it was easy to comply, but we still have the better part of a week to go and he is done with recovery.

More Injuries

And then I fell down the stairs randomly. I’ve tried to replay what happened but while I remember the landing, I don’t recall exactly what caused me to fall in the first place. I don’t think I was dizzy from my weird road trip motion sickness, but it could have played a part. I don’t think my weirdly injured ankle gave out, but it was the one that I fell on.

I managed to land pretty much on my kidney, catching a riser across that lower back area. On the plus side, I didn’t hit my hip or a rib so no broken bones. On the down side, everything hurts. And honestly, who lands on their kidney?

The Next Quadrennial

The past few years I’ve gotten more serious about curling (by which I mean, I play more often. I’m still plenty silly on the ice). I even have a team in the team-entry league! We have matching jackets!

Or, had. After the Olympics, many of the pro teams broke up and re-formed for new configurations to try to win their medals in the next 4-year cycle. And I guess that happened to us, too? So now I’m sad because I have to find a new curling team.

My Mom

And of course the worst for last: in case you weren’t aware, my mom has MS, and has been living through the gradual loss of function for years, but up until recently was still walking with assistance (i.e. a walker), could stand up, etc. Early in the summer she very suddenly and unexpectedly lost a lot of lower-body function and requires significantly more help in the daily activities of life. She apparently didn’t want to tell any of her relatives out on the east coast, and had just mysteriously cancelled her planned trip out there on them. So I got to be the herald of bad news while I was out there.

I had originally written that we were waiting on PSW support from the Province, but before hitting publish (and after two months) we finally got coverage for two visits, five days a week, which should help with some of the burden (which is falling mostly on my sister).

The Summer of Suck Comes to a Close

So, as August comes to a close, hopefully that is it for injuries and stress and bad news and health problems.

I haven’t had a chance to work on any of the site/side business goals I had for this year yet. No fun blog posts. And the health goals are way out the window, there’s no getting those back.

Real Estate Bear Spring

June 13th, 2022 by Potato

This spring looks like real estate prices are coming off the boil. People seem to be wondering if prices could possibly go down despite years of bulls and the FOMO crowd saying that it only ever goes up.

There have also been more people wondering about housing bears. “Remember housing bears? Didn’t they once say that housing could possibly go down in the future? Is this what ‘down’ is?” And of course the big one “So how bad could this get?” As us long-time housing bears come out of hibernation this spring, perhaps it’s worth a long (and snarky) review of the thesis.

A Low Growl

There are lots of ways to determine what a house is “worth” or what it “should” be priced at. You can look at historical relationships between incomes and debt and house prices, but that’s all very high-level stuff, and hard to apply to one specific house that you want to live in. The argument that has always resonated best for me is that a house is primarily a place to live, and shelter is also one of life’s greatest expenses, so it’s worth looking at all your options. Renting your shelter or buying it are the alternatives available.

So we can examine the relative costs between renting and buying, and I made a spreadsheet and a whole series of posts to do that and others made rules-of-thumb and YouTube videos. And basically house prices had gotten so expensive relative to rents that it looked like you were better off renting, and the only way buying would possibly come out ahead is if already-expensive housing became even more expensive at a very high clip and even then you needed cheap leverage.

Well, we got skyrocketing prices and cheap leverage, so people who bought anyway look like they came out ahead (for now). But it didn’t have to turn out that way, and the question is always how much further can those trends go before something breaks? The bigger the price:rent ratio gets, the harder it is to fix it through anything other than a housing crash (assuming of course, that these fundamentals matter at all).

But if doing a price-to-rent comparison is so easy anyone with a physics degree and insomnia can do it, why did prices get so detached from fundamentals in the first place?

Models of the World

The market is far from monolithic: there are many players in it. Not just buyers, sellers, and agents, but buyers with different pricing models at work – people are playing the game with different rules. We can build a thought experiment with different agents (agents in the sense of actors in a model, not the people whose job it is to sling houses) using different strategies and approaches, and how prices might change.

A decade ago we talked about supply and demand, and how speculative demand works: in a textbook economics market, as the price increases, fewer buyers demand the thing the textbook is discussing. Even if they disagree on the assumptions and arrive at different estimates of fair value, people who use a rent-vs-buy framework will, all else being equal, start to drop out of the market as the price gets too high, and choose to rent instead. But with speculative demand, you don’t get that: high prices beget high price expectations, which helps bring in new buyers to replace (or even exceed) those who got priced out.

So that’s one of our groups of buyers and their pricing models: prices going up is good, because they’ll continue to go up, so pay whatever you need to today as you’ll only be richer in the future. This group is what we’ll call the FOMO-MOMO group: fear of missing out/momentum. They expect that as prices go up, they will continue to go up. And the faster they go up and the closer housing gets to completely unaffordable, the more they will pull demand forward and buy more because they are more and more afraid of missing out or getting priced out (e.g., those stories of people buying places for their children). Their pricing model is basically to look at the last comparable price, see how many people show up for the bidding war, and add $10k for every nose on top of the last price.

It can have big positive-feedback cycles, as prices going up makes them feel wealthier, and feel more certain in their worldview, and gives them easier access to credit. A subset of them buy more and more properties: as the first purchase works out and goes up, they build equity, which they can drain with a refinance to buy another place, and another, helping to propel the market upward while adding leverage and fragility to the structure.

The bear case is of course that this is insanity, but we’ll get to that.

The next class of buyers are the ones who just want a place to live, but who skip step zero (i.e., the rent-vs-buy analysis). So they are only looking to buy, and they’re just simply going to go into the market at some pre-determined time point (say on their 30th birthdays for the sake of modelling) and buy as much as they possibly can (AMAP). They don’t care too much about what the price of housing is doing – up, down, or sideways – they just borrow as much as they are able and buy as much house as possible. Their only limit is their ability to service the debt used to finance the purchase and things like a stress test that affect their buying power.

Then you have the “rational” buyers (R): those who may want to buy a house, but want to do so at a “fair” price, and will go rent or GTFO if the prices get too extreme. They may use a price:rent or price:income basis, like dinosaurs, but they’re looking to buy without becoming house poor.

So if we have a group of price-insensitive buyers, and even a small supply/demand imbalance, the FOMO-MOMO and AMAP crowd can rapidly drive prices to crazy levels, and drive the R’s completely out of the market – the demand is strongly inelastic from those buyers. In addition to all the speculation about how this was working in Toronto and Vancouver’s run-ups, we saw more natural experiments with this in the pandemic: prices in many small exurb towns doubled with very small increases in the number of price-insensitive buyers hitting the region.

These pricing models used by the currently dominant agents lead to a powerful positive-feedback loop. But what happens when the market finally changes?

Eschatology

As soon as prices stop going up, the momentum buyers may hit pause, creating a reinforcing cycle in the other direction: fewer buyers, putting fear into others, as fewer and fewer believe it’s a dip and start to fear prices won’t be up so much in five years’ time that any price today can be justified. Plus, how do you even set a price if your model is to multiply X by the number of noses in the bidding war and nobody else shows up to bid?

If the FOMO-MOMO crowd disappears, the next marginal buyer is the AMAP, who simply will borrow as much as they can for a house and pay that. With interest rates rising, their ability to borrow is more limited, so prices will have to come down a bit to match their maximum affordability.

So our mental model suggests that the first new equilibrium point would be wherever the new constraint on buying power puts prices.

Take a house that’s currently selling for say $1.5M in Toronto. An AMAP buyer that could afford that place at 2.5% (a mortgage payment of ~$5400/mo) may only be able to pay $1.3M at 4%, or $1.2M at 5%. Not a huge difference, which is what a lot of people are saying now – a slowdown or correction is in the works from interest rate increases, but far from the crash the bears have been crying about that would be needed to restore actual affordability. We’re still in the post-pandemic bump there, and not even negative year-over-year thanks to that massive run-up at the end of 2021/start of 2022.

The true bear case is if the fomo momo crowd steps back, and there aren’t enough price-insensitive AMAP buyers (or their purchasing power is significantly impaired, which may happen for example if they need a down payment from the bank of mom and dad, which is also facing higher financing costs on their HELOC, or interest rates rise even more, or inflation hits all the other line items in the GDS calculation at the same time that interest rates rise) to move the needle. The next marginal buyer is then the “rational” buyer.

And the problem is that the price that the “rational” buyer or investor buyer steps in is far, far below the current prices. That $1.5M (peak) house might rent for $3200/mo, a price:rent of 469X. To get back to say 250X, the price has to come down to $800k – a big air gap below current prices.

So that’s how a crash could play out from too-high prices and a shock that breaks the momentum and psychology. It’s certainly plausible, but is it at all likely?

And that’s the problem with this mental model: it produces some narratives to help explain how we got here, and some potential future paths, and where some reasonable stopping points for bottoms might be (when the monthly payment for AMAPs balances out, when the price:rent gets back to historic norms, etc.). But it doesn’t make any actual predictions about what will happen – there isn’t survey data out there about how many AMAPs are left, for example.

The Turn

Though the market does seems to be turning now, with rising interest rates putting fear into the hearts of the fomo momo crowd, and reducing how much “as much as possible” is for the AMAP crowd – the “every 50 bp reduces the maximum amount you can borrow by X,” etc. articles that you’ve no doubt seen all over.

But wait, there’s more! In the calculation for the debt service ratios is also a line for heating costs. And natural gas has roughly tripled in price over the last few months, which will take another decent chunk ($100/mo or so?) out of the maximum borrowing capacity of buyers.

So in that example of a $1.5M house that an AMAP could reach for at 2.5% going to $1.2M at 5%, add in an extra $100/mo hit on heating costs and now their maximum serviceable price is hit by another $20k.

I see lots of people still saying that there’s no way it could crash though, and there’s a lot of good reason to think that way. The government explicitly said they wouldn’t allow even a 10% correction to happen, and they’ve made plenty of (deliberate?) policy errors to get us into this over-priced mess in the first place. And the market has gone straight up in the face of bear logic for so long that people believe that there must have been a mistake in the logic somewhere. Every time we’ve had a good reason to think a correction was at hand (2012, 2017, 2020), the market has given bears a thrashing and gone right back to resuming its lunar trajectory.

And maybe they’re right. The fundamentals have gotten worse (better if you want high prices): we do also have a supply problem now on top of the demand surge, and we can see it in rents that have gone up above the rate of inflation (esp. for product that makes for a good [illegal] AirBnB). However, the increase in rents isn’t even in the same solar system as the increase in prices. So the floor has been raised… but it’s still a long way down.

And the demand is still high: for all the demand that has been pulled forward, there are plenty of Canadians and newcomers who want to own, they’re simply priced out. Maybe there are hordes of would-be buyers on the sidelines who will come rushing in to buy on any weakness, and this will only be a gully, not a crash. But at what price can those priced-out hordes come in? If they are themselves AMAPs who were priced out, then prices need to drop enough that even with higher rates and heating costs that they can service the debt again (I am very carefully avoiding the word “afford”), so we’d need to see prices fall by at least 25-30%.

Six Impossible Things Before Breakfast

Through the years, many people have acknowledged how expensive Canada’s housing markets have become, but say that a crash is impossible for reasons.

Back in the day when Alberta was even bubblier than Toronto, people said Toronto could crash, but no way Calgary would because its house prices were supported by the oil industry, and demand for oil wasn’t going anywhere. Just a few years later, the price of oil crashed, though miraculously Alberta experienced a soft landing rather than a crash. Record-low interest rates (which drove Vancouver and Toronto to new heights as they stabilized Alberta) likely helped a lot with that feat.

In Toronto, interest rates have been one of the key impossible things supporting the market: people can afford the payments to keep the market elevated as long as interest rates stay low. And far past the crisis days of 2008, emergency rates stayed with us, and even went lower and lower. It didn’t seem like the BoC was ever going to raise rates, and there are only so many years financial pundits can warn people that rates will eventually go back up before buyers tune the warning out and just go hog wild on debt. Even as inflation started to rage at the end of 2021 and beginning of 2022, the BoC stood its cowardly ground, and bulls became even more emboldened in their call that rates would never go up.

And besides, the argument went, “theycouldn’t raise rates: we’re too indebted as a society, higher rates would crash prices and cause a recession, and they would never do anything to endanger house prices.

Well, it looks like we’re in for some rising rates. [Ed. note: since the first draft of this post and the enormous amount of time it took me to hit publish, the BoC has raised rates 100 bp in two 50-bp steps after the first cowardly 25 bp hike in March] And if the argument was that rates couldn’t rise because house prices would fall… I guess house prices are going to fall then?

When markets get badly distorted, but the most obvious corrective force is “impossible”, well, impossible things seem to happen all the time to break theses in nasty ways. Many people seem to be learning the hard way that real estate prices can go down, and rates can go up.

The Big Misunderstanding

One other common sentiment out there is that “bears were wrong and so will always be wrong. Even with rising rates and a correction, house prices will never go back to 2011 levels so bears have lost! Don’t listen to bears!” And this sentiment is either an attempt to show a brave face as a bull, or a deep misunderstanding of the rent-vs-buy math that we’ve been talking about for that decade.

If you were in Toronto in 2011 and decided to rent when the price:rent was 300X, the bulls were (so far), right post hoc and had a faster increase in net worth… if they were sufficiently levered (and sell and go rent now to lock in that gain). But check that spreadsheet again: the base case for renting was that you would be ~$100k ahead (back then six figures was a lot of money and not just a kicker to win a bidding war) assuming historical ~3% increases in real estate. Bears don’t need prices to go back down to nominally what they were (though we do need a correction to pull ahead < a href="http://www.holypotato.net/?p=2516">post-hoc), as the difference in monthly cashflows and investments can close the gap. Indeed, at various points along the way the price:rent got so disjointed that you needed a 6%/yr increase in house prices forever just to keep pace with the renter. The last decade saw closer to 7%/yr in Toronto, so those who bought have done well for themselves… but how much longer can that rate of appreciation keep up?

Someone who passed on a $700k house in Toronto to rent and invest the difference does not need house prices to crash below $700k to come out ahead – they just need prices to come back to ~$1.2M by 2024 to win in the post hoc comparison. Yes, that will still require a correction from here, but the delta is not nearly as big as those who just want to say being early is the same as being wrong want to paint it as. If you did make the “disastrous” choice to rent, you’re not nearly as far behind as all that.

How Far Down?

A common question I see directed at bears now that people remember that we exist is how far would it have to drop before you’d buy? I’ve been quite happy renting here, and the LL doesn’t seem to be in any hurry to throw us out. Even though it would only take a ~30% correction from the peak to end up ahead (and prices are already down ~10%), I’m not sure that I would be buying there – the price:rent would still be pretty elevated at that point, and we have to be forward-looking with our decisions.

There is a kernel of truth to all that stuff people say about not perfectly timing the market and all that, so I wouldn’t be trying to pick the bottom once we get back into range of some semblance of a fair value. But even at 30% off, unless rents also spike, we’re still talking about very elevated price:rent levels around here. There’s no way to know if the R’s in our mental model will ever become the marginal buyer again, but for doomcasting, that would mean prices dropping something like 45% from the spring 2022 peak.

Demand Destruction and Carbon Taxes

May 5th, 2022 by Potato

Oil prices have gone through the roof with the war in Ukraine, but even before that, gas prices in Toronto were about 25% higher than pre-pandemic. Despite that, gasoline consumption appeared to be hitting new highs in the fall of 2021. New cars are hard to come by, and the prices of used ones are up a lot following the pandemic for other reasons (supply chains, etc.), but still I was not seeing the interest in hybrids that we saw the last time gas prices spiked.

I was staring to think that maybe people forgot that it’s one of those things I spent way too much time learning way too much about, or maybe instead of accosting random Prius drivers in parking lots people had learned to research things on the internet themselves. I was starting to think that the price of gas didn’t matter.

Then gas prices hit ~$1.75 and it was like a tsunami of hybrid interest hit me. And it wasn’t just me and BbtP: Google trends shows that searches for Prius doubled from baseline in March of 2022, and those for PHEVs tripled. So there was a point where gas would get expensive enough that more people would get interested in burning less of it. I also noticed more people on the 404 and 400 driving the speed limit — slowing down is a good way to burn less gas (and much more immediate).

While I was expecting more to happen at $1.30 or $1.40/L, people did seem to get to a point where there was interest in change. It’s just that people seem to be able to tolerate much bigger changes in prices before getting to the point of demand destruction than we ever would have guessed before.

Which brings us around to the idea of the carbon tax. A carbon tax is an attractive idea for reducing GHG emissions: give carbon a price, and let the free market figure out solutions to reduce consumption. While I still think the approach is a good idea, after seeing how resilient demand can be in the face of sharp price increases, I think we need to increase it by about an order of magnitude a factor of ~3 to have any effect — the ~11 cents/L carbon tax is not moving the needle at all on people’s driving habits and consumer choices.

It may also be a good idea to re-think how we apply carbon taxes in a market with rapid swings in natural pricing: rather than a static carbon price, would it be better to set floor and quasi-ceiling amounts for gasoline directly? When the market is already setting a price that’s high enough for demand destruction, does an additional tax help further drive behaviour, or would it be better to cut it back as gas approaches $2/L to provide a modicum of relief? And vice versa, if gas prices start going back under $1.50/L, should a new responsive carbon tax make up the difference to keep the price high enough to maintain that reduction in use and behaviour change, or do we really think a $0.11/L carbon tax will do anything if the oil market corrects and gas drops back under $1/L?

A Different Take on the FHSA

April 13th, 2022 by Potato

Budget 2022 proposes to introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home—including investment income— would be non-taxable, like a TFSA. Tax-free in, tax-free out.

The new Tax-Free First Home Savings Account (FHSA) is pitched as a way to save up for your first home. It’s like a super-charged RRSP: you get to put pre-tax money in, and in one specific circumstance (buying a home), you can take it out tax-free. And if you don’t buy, you can roll it into an RRIF like a regular RRSP.

There’s lots to nit-pick with this idea: the $40k lifetime limit doesn’t make it much more effective for saving for a home than the old HBP option did. And while this is even better as you don’t have to pay it back and get to keep that tax savings, that’s a benefit you only see in later years vs the HBP — the $35k HBP was already letting you put that much pre-tax money to work for the purchase itself. On top of that, the $8k yearly limit means it will take 5 years to max out (and 4 to match what you could do in 90 days with the HBP and a regular RRSP). So at least it will push demand out if some people want to max it out before buying.

It’s a bit regressive, in that people in the highest tax brackets will see the biggest advantage from using the FHSA.

However, ignore all of the talk about using it for a downpayment. The fact that they took out the age limit and let you roll it into an RRIF mean that the FHSA serves another purpose: it helps renters shelter more investment income, functioning basically as more (and with an embedded option!) RRSP room. Someone who buys a place gets any increase in equity as a tax-free gain thanks to the principal residence exemption. That’s been a huge windfall in recent years, and can push people toward buying in an environment where prices are going up double-digits every year. That tax advantage also makes it even harder for those who don’t own to keep up. Someone can choose to rent instead and save the difference in monthly cashflows, but may soon run out of TFSA and RRSP room. An extra $8k/yr will help them shelter more of those gains.

And of course, provide that option to take the whole FHSA out at some point in the future to buy, tax-free.

Imagine a world where the cap and 15-year lifespan were removed and renters continued to get $8k/yr in room until they bought or turned 71 (and rolled it into a RRIF). Someone renting in a big, unaffordable city like Toronto could prioritize their FHSA, knowing that it would make it that much more possible to eventually buy when their indentured servitude in the city was over. $8k/yr at a 5% return would leave someone with nearly $400k after 25 years*. You could make a solid plan to do your time, renting happily along the way, and know that you could — tax-free — have nearly enough to buy a place in the boonies outright when your commuting days were done. Or, have more in your RRSP to support the costs of lifelong renting in retirement if you stayed in the city.

So while I don’t think this was a necessary thing to create (indeed it adds more complication to our tax and savings account system, and yet another financial literacy hurdle), and don’t think it’s going to do a damned thing for housing affordability… I welcome the FHSA. For many people, it will be the obvious first account to fill (even edging out a TFSA for those who plan to buy eventually). However, to be truly great and to help incentivize more people to rent and invest the difference and keep open the option to buy in the future, they’ll have to remove the fairly low lifetime contribution cap.

Indeed, I’m not sure many brokerages will bother to offer registered accounts that can only ever accept $40k, and are only available to the subset of renters who save money to invest — see how few bother to offer RDSPs.

* – remember that this is a hypothetical where they remove the cap and time limit. As it stands, the 2022 Federal Budget proposes a $40k lifetime cap and a 15 year maximum term to either buy a home or roll it into a RRSP/RRIF.

Investing Apps: Just Say No

January 26th, 2022 by Potato

Perhaps Commissions Aren’t So Bad

Dan Ariely talks about the difference between free and nearly free. Nearly free and free have basically the same effect on your overall net wealth: whether you pay 14 cents in ECN fees every month or zero as you accumulate your investments is going to have no measurable impact on your ability to retire. But the difference between a few cents and free on your trading behaviour is huge — people will trade a lot more when it’s free. Plus the sales commission on the selling side for Questrade is good for investor behaviour: not high enough to actually be a real barrier to selling, but puts just that little bit of psychological stop in before selling and prevents dabbling in day-trading.

So I’m worried these days that so many people don’t ask “what’s a good brokerage to use?” but “which investing app should I use? Is Robinhood in Canada?”

And as much as lower fees are better, perhaps there’s a behavioural benefit to paying a little bit of commission and we shouldn’t encourage zero-fee platforms. Plus these companies make money somehow, which may include providing worse fills (though that doesn’t seem to be allowed in Canada).

Smartphone Addiction

Your smartphone is an ingenious device, carrying more power than the desktop computer I had in university, and able to carry out many very useful functions. It’s no wonder many of us have them practically welded to us. But they are an insidious thing: they short-circuit our brains in some of the worst ways.

Paying by mobile phone reduces the pain of paying even beyond that of using a credit card, so it’s all too easy to impulse buy something and not even notice how much you spent with that tap. And so many apps are addictive (sometimes purposefully so) that just touching your mobile phone short-circuits all of your careful reasoning faculties. [only a modest exaggeration on my part]

Do. Not. Trade. On. Your. Phone.

Investing Apps

Long before there was daytrading involved, WealthSimple bragged about how a third of their users checked in with the app daily. Daily! For a robo-advisor. There’s nothing to do! The whole point is to have a long-term investment plan that you don’t have to babysit!

From their point of view it was great: more mindshare, better odds that someone is checking on their phone and a friend goes “oh hey what’s that.” So of course they loved it. But I was horrified. Setting aside the unhealthy relationship people had with their phone and this app, it was setting investors up for loss-aversion disappointment (or panic): the more often you check in on your portfolio, the more likely you are to catch a downturn and see that you’ve lost some money.

So mobile phone investing apps had a horrifying relationship to engagement and addiction before they threw day-trading into the mix.

Do. Not. Trade. On. Your. Phone.

Dark Patterns, Advertising, and Active Investing

The trailblazer in no-commission app-based trading, the brand that has become synonymous with the product itself, is Robinhood in the US. And Robinhood has been criticized for its dark patterns, gamifying parts of the user experience to encourage people to trade more often and make more speculative bets. For example, they’d flash digital confetti up on the screen as a kind of reward/congratulations for placing a trade, and list trendy stocks.

Now WSTrade looks to be copying some (but thankfully nowhere near all) parts of the playbook, with a mobile-only [update: mobile-first, as I took forever to publish this and got scooped in some ways and they now have a desktop web version] app, offering zero commissions and fractional shares. And they’ll give you a free stock, to really drive home that idea of trading individual stocks, with a lottery-like component (will your sign-up bonus be a penny stock or a really valuable share?).

They also moved beyond stocks into an even more speculative space with crypto trading. And while not a dark pattern within the app itself, their ads are highlighting all the new speculative investments you can trade with them (rather than focusing on the good parts, like that you can do long-term investing in an all-in-one ETF with no commissions — in fact I can’t say that I’ve seen a single ad along those lines).

Screengrab of a WSTrade ad on Twitter highlighting the recent highly speculative securities you can now trade. I'll snark for posterity that anyone that bought ARKK is down 35 percent since.

Screengrab of a WSTrade ad on Twitter highlighting the recent highly speculative securities you can now trade, including a crypto coin that was explicitly created as a joke. I'll add some snark that this highly speculative thing is down 50 percent since being added to the platform, and indeed has never traded above that point.

In the US case at least, there are plenty of stories of people getting caught in things they don’t understand and losing lots of money — whether through mistakes, or through functionally a fully enabled gambling addiction. Thankfully, here in Canada investing apps don’t push users toward derivatives to add risk on top of daytrading, though they are moving toward “instant deposits” to wipe out any chance for cooling off periods and do include crypto. And the “first stock” promotion of “up to $4,500!” reinforces the gambling aspect of investing, and fractional share ownership promotes speculating in individual securities long before a user is ready for that.

And that’s not to mention fat-finger trades — how many typos have you made texting on that device?

Do. Not. Trade. On. Your. Phone.

Academic Research Backs Me Up

Two recent papers back up my instinctive refrain that you should not be trading on your phone.

First, Does Gamified Trading Stimulate Risk Taking? looks at the gamification aspect:

“We find that gamification “nudges” participants to take on more risk, particularly when trading high-volatility assets. The effect is stronger for inexperienced traders with lower financial literacy.”

You can read a more lay-friendly version here.

Their finding on the moderating influence of financial literacy gives me some hope. However, it also worries me, as people with low financial literacy are the ones now searching for “investing apps” rather than “best brokerage” – the term brokerage is almost entirely missing from new discussions on Reddit, for example, so the people using these apps are much more likely to be the low-finlit ones most susceptible to the gamification, gambling, ads, and dark patterns.

Next, Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior looks at people’s behaviour when trading on their phone.

“we find that smartphones increase the purchase of riskier, lottery-type, non-diversifying assets, and of past winners and losers. […] following the launch of smartphone apps, investors are—if anything—more likely to purchase risky, lottery-type, and non-diversifying assets as well as chase winners and losers on non-smartphone platforms. […] We find evidence against investors offsetting these trades on other platforms and against digital nudges mechanically driving our results. Smartphone effects are neither transitory nor innocuous: assets purchased via smartphones deliver lower Sharpe ratios. Our findings caution against the indiscriminate use of smartphones as the key technology to increase access to financial markets.” [emphasis mine]

That reinforces my more instinctive view that even touching your phone short-circuits your self control thought: simply trading on your phone increases the likelihood of buying riskier things, and it infects your trading even off your phone. They also include a reference to another study on purchases, supporting the idea that smartphones reinforce system 1 thinking, where people ordered more unhealthy food on their mobile devices.

Conclusion

If you’re looking to start investing, do not look for a zero-commission “app”. Start by reading, and then open a brokerage account and only use your desktop/laptop to trade. Even if the brokerage you ultimately choose has a mobile app, don’t use it, as even occasional usage may change your appetite for lottery-like stocks. Controlling costs is important and a virtue, but zero costs changes our behaviour in ways that may be counter-productive. A few dollars here and there (or even $10 big bank commissions) are not going to derail your long-term plan, but may keep you from trading more than necessary. And finally:

Do. Not. Trade. On. Your. Phone.