Other Rent-vs-Buy Calculators

August 22nd, 2014 by Potato

I’ve done a lot of things I’m proud of. I think the rent-vs-buy spreadsheet has to feature somewhere near the top of that list (at least if we limit the discussion to things I’ve done for personal finance). It’s the only such calculator to let you include the risk of future rate increases, and includes many important factors without completely blowing the whole thing open to the maze of apples-to-basement-suite type comparisons. Rather than starting blank or with valuations that may have been relevant in 1995, it’s prepopulated with recent data from Toronto (and every 6 months or so I even update the interest rate projections based on what’s available in the mortgage market). Moreover because it’s a spreadsheet you can check the math (or tweak it to do an apples-to-basement-suite comparison) if you so choose.

Really the only drawback is that it’s a spreadsheet rather than a flashy widget (and I keep meaning to get around to learning how to code those but it’s just too big a time commitment for me now), which seems to hurt its popularity. Because other rent-vs-buy calculators are still popular, let’s take a tour through the options.

New York Times: The NYT calculator was updated recently. It takes a neat approach in that instead of getting you to tell it what the cost of rent is, it computes what the equivalent breakeven rent would, and leaves it up to you: “if you can rent for less than this, then rent.” It also has itty-bitty graphs that show you the sensitivity of the outcome to each factor. Now, I prefer my approach because it’s clearer what the magnitude of that is. Maybe you can rent for less, but if it only works out to $10k more over 10 years, maybe “pride of ownership” is worth that. Or maybe the difference merely looks small when expressed in monthly terms: if NYT says to rent below $2500/mo and you find a place for $2000, maybe that sounds like it’s close enough to break-even that you’ll just buy. But if you saw how quickly that difference compounds into hundreds of thousands of dollars, maybe your decision would be different. There’s no way in the current NYT calculator to enter your market rent to make a comparison.

My main beef with the NYT calculator is that you have to tweak it for Canadians in really non-intuitive ways. The big change is that you have to set your tax rate to zero — in the calculator it’s not the investments that are being taxed, but that Americans get a tax deduction for mortgage interest. I think the NYT one is the most-recommended one out there. Even Rob Carrick recommends it on a regular basis, which stings because the refinements to my calculator came about through discussions on his facebook page. Rob Carrick why don’t you love me??? Ahem. Anyway, it’s not bad — actually rather good if you’re American — it’s just that the link doesn’t usually come with the appropriate Canadian conversion kit, and there are Canadian calculators [waves] available.

Getsmarteraboutmoney: This one IS BROKEN. Stop sending people to it. I talked about the “wonky” results back in December, and emailed them about it as well. They acknowledged the problem back in March and said they would fix it soon. Well, it’s still broken and there isn’t even a notice on the webpage about it or anything. The main problems are that it always sells in year 30, so you can’t compare other holding periods (even though the graph visually implies that it is looking at break-even times), but the larger error is that it does not compound the differences in cashflow between the renting and buying option. That can really skew the difference between the options over a long time period. Otherwise it is flashy and pretty and has sliders for all the right things, so it should be good to go in a couple of years when they finally fix the back-end calculations. Of course, that just makes the math errors that much more tragic because it looks like it should be fancy and trustworthy.

RBC: To be clear, they call it a “rent or buy calculator,” not me. It is simply not a calculator to compare the two options. The only inputs are how much you pay in rent, what interest rates are, and how long you want your amortization period to be. Then it tells you how much house you could buy with a mortgage payment “equivalent” to your rent — note that it ignores tax and maintenance and opportunity cost and insur– just all the costs. Every ownership cost you can think of, it is ignored. I’m hoping it ranks so highly in Google because they bribed someone and not because people are actually linking to that POS.

In fact as a short-cut, if a rent-vs-buy calculator doesn’t have an input for your investment return as a renter, just throw it away. It’s likely missing a number of other important factors for the decision. Naturally, Genworth’s is similarly biased, as are most of the other big bank ones. CIBC’s is not that bad, but it does miss transaction costs and insurance. Its rates of return for a renter’s investment and the house are are unhelpfully labelled “market appreciation” and “rate of return” — you tell me which is which.

First Foundation: They recently launched their suite of calculators, including a rent-vs-buy calculator. It seems to do all the calculations properly and includes the most relevant factors. I could nitpick and add the ability to include future rate increases or whatever, or to start with all three tabs open, but the only real criticism I have of it is that the default for maintenance is zero rather than some wrong-but-better-than-zero approximate number. Also, the property taxes are annual while the maintenance is monthly. It’s explained in the tooltip, but the average user buzzing through it might get wonky results before realizing the problem. It’s not mine, and I can quibble, but the math checks out and it includes the important factors others often miss — First Foundation gets the nod.

Money Geek: I opened it up and I was like “nnnnnnuuugggggghhhhhhhh…” as my brain started to overload. This must be how other people feel when they open one of my ridiculously overly detailed spreadsheets. I can’t actually evaluate it because it only works in the bleeding-edge versions of Excel. But it’s there if you can get past that technical challenge.

Yahoo Finance: I’ve seen this exact one around on other sites, so it must be a licensed calculator/widget. Anyway, all the tax issues of being American, without the benefit of sensible defaults (0% selling cost yet 5% house appreciation?). It’s also a little odd in that it subtracts the opportunity cost of investing the down-payment from the owner’s side rather than adding the value to the renter’s side — I haven’t thoroughly tested it to see if that still gives the correct results but a spot test looked in the ballpark.

The Art and Science of Cover Design

August 19th, 2014 by Potato

The cover to Potato’s Short Guide to DIY Investing is something I designed myself one weekend. It’s fairly uninspired in terms of layout: block lettering on the top for the title, a fairly plain image, and then my name. It’s black-on-white so a bit more dull than the typical book, but I think the art piece of my physical $10 bill origami bunnies (with hand-drawn eyes and whiskers — no photoshop there) overlaid on the graph that forms the central message of the book was, well, pretty good. I mean, the book even heavily featured bunnies so it works well.

Still, it does look kinda amateurish in hindsight. So I’ve retained an artist friend to help me create a wonderful new cover design for [new book: title to be announced soon]. I’m trying to come up with some ideas of where to start.

Many personal finance books fall into a few basic categories for cover designs. You have your author lounging in a suit ones, like Preet Banerjee’s, Dave Chilton’s, Peter Lynch’s, Jim Cramer’s, and a whole host of others. Then there’s the really, really ridiculously long title so that the whole book cover is just text school of thought, like Rob Carrick’s and Gordon Pape’s. Some are more academic: plain, with some text decoration at most, like the Intelligent Investor (some editions, anyway) and the Little Book of… series, but not as crowded as the other textual school of thought. Then there is the Cult of the CGI Piggy Bank, which covers nearly every other personal finance book out there. I think Millionaire Teacher had one of the more unique covers, but I can’t say whether that actually helped it sell copies.

So in preliminary discussions on how the cover should be designed this time I’ve decided that I’m not going with the lounging-in-a-suit type cover: no one knows me, and I’m not that pretty. The pig is out, that is just a complete non-starter for me.

Rather than plain white the base of the cover will include some colour. I don’t know if I will go with a conventional title on top, framed image in the middle, author on the bottom, or something else — we’ll play with it. A refresh of the bunnies is possible (not necessarily origami money), but now the bunnies occupy much less of the book*.

A maple leaf is in. Everyone agrees on that, and many can’t believe I didn’t work one in to the first book’s cover. A clear oversight on my part for a book focused on Canadians — though at least my bunny origami was made from a recognizably Canadian $10 bill. How else are they to know? (Other than reading the synopsis, that is.)

Beyond bunnies I’m having trouble of thinking of anything unique and creative related to this book. How do you say, in a visually appealing way, that this book will walk you through investing in a friendly and helpful way? How do you say that this will help you cut out the noise and focus on what matters? Is there a visual metaphor for “index fund good” or “here there be ETFs”? Or should I bring in tropes from other genres, like a long-haired man with oiled musculature ripping asunder the bodice of a flushing maiden arching her back with an impossible curve? Spaceships flying through asteroids and nebulae (mentioned nowhere in the book)? A full moon with mist on the moor?

Actually, let’s revisit that assumption: is unique and creative something to shoot for at all? There are hundreds of personal finance books out there, but maybe if I get too creative with the cover it won’t look like a PF book (or like a respectable one)? Have these few tropes evolved for a reason?

Any brainstorming thoughts or suggestions to add?

Note: if I get a publisher they will likely take care of the cover art. But I’m proceeding as though it will be self-published before the end of 2014 until I have a contract in my hands to the contrary.

* - All the existing bunnies made it over to the new book, but there are no additional bunnies despite the near-tripling in length, so proportionately fewer bunnies.

Sustainable House Prices?

August 11th, 2014 by Potato

While there may be great disagreement over whether a crash is coming, most people can agree that

    1) this past decade has seen an incredible increase in real estate prices
    2) that this rate of growth cannot continue forever

The issue is that the ultimate barrier and outcome is not so clear. Some think prices could continue at high-single-digits growth until Toronto is approximately as expensive as London or Tokyo (or Vancouver!). Others (such as myself) don’t think Toronto incomes can support that level — indeed, there is a question as to whether the current level can be sustained.

The Toronto market has started to segment in the past few years: condo price appreciation has moderated, while detached houses have gone on a tear (especially those under the new $1M CMHC cap). In the last post I was trying to figure out whether there were enough rich people to support the current prices — if we had already crossed the point where a soft landing is impossible. If price increases do abate, but the levels stay this high relative to incomes and rents (a soft landing), then houses will continue to turn over year after year like this — are there enough households rich enough to keep buying for decades to come in a soft landing? I have my doubts, and tried to put some math to it.

I think it’s getting close to the breaking point if it’s not already past it. Note that there is nothing stopping the market from running well past the point of sustainability — just that once it does a soft landing is nigh impossible to pull off.

Toronto Is Running Out of Rich People (to Sustain the Housing Bubble)

August 9th, 2014 by Potato

I normally like to look at the housing market from the bottom-up using a rent-vs-buy analysis. After all, you have to live somewhere and that’s the key to deciding what to do with your own life — the macro stuff will work itself out eventually over many years. I still like reading and thinking about the macro stuff, it just wasn’t really my area of expertise for analysis and Ben Rabidoux used to post a lot about it. But he’s not posting any more so screw it, let’s have a look at the Toronto market with some Fermi-esque math.

In 2013 the overall average price of a detached house in Toronto (416) was $842k; 11.4k such houses traded hands, according to TREB. Some of those would have been $500k crack shacks, while others would have been multimillion dollar mansions bringing the average up. TREB doesn’t publish median figures. Up in subwayville/North York a “normal” house runs for about $700k so let’s take that as a reasonable average for the city based on those numbers.

How much income do you need to carry a $700k house in Toronto?

Property tax would be about $5,600/yr.
The mortgage, if you want to use 4.5% to give yourself a small buffer against increasing rates, and assuming 20% down, would run $37,356/yr.
Utilities, insurance, maintenance, etc. we can ballpark at $10,000/yr.
Rough total with these minor contingencies/conservative estimates: $46k/yr.

Assume that the owners of such lavish mansions have other things to spend their money on (cars, daycare, hot yoga, Muskoka cottage, pusateri’s, retirement savings) so they want to limit their spending on shelter to something reasonable like 45% of their pre-tax income. That means they need to make over $100k to afford a house at this level. At least. Of the roughly one million households in Toronto, fewer than 120,000 180,000 290,000 of them have household incomes over $100k. How many houses are there to buy at those prices? If the average detached house turns over every 10 years, then there are only 110k or so.

That doesn’t look so bad: as long as everyone who has the income to do so is behind the current prices and willing to ignore traditional affordability rules-of-thumb (forever), they can be sustained.

Except that about a third as many semi-detached houses traded hands last year at an average price exceeding $600k, so we’re looking at at least another 1,000 sales and 10,000 units or so of semi-detached houses over our $700k threshold. A quick scan of MLS also tells us that there are still a few thousand units that cross our $700k level, even though condos may have an average price of less than half the detached/semidetached class. That’s another 15,000 or so rich families we need to be committed to the expensive property cause, getting us well within the error bars of the total number of rich people available.

Looking closer at that estimate of detached houses, it comes out kinda low — mining the StatsCan data suggests that there are closer to 300k detached houses in Toronto [edit: or if you have the power of Ben Rabidoux to find the correct table rather than subtracting others, you can say it is precisely 275,015].

I’ve heard the argument more and more lately that the housing bubble is just a new reality in Toronto: the days of an average or middle-class family owning a detached house — even in the burbs near the subway — are over, and such things are only for the rich. Condo living or extreme commuting are the new normal. Except current prices are so insanely high we don’t even have enough rich people for that narrative to make sense.

Toronto’s going to run out of rich people before all the houses can turn over. Fixing the income numbers, I can’t say definitively that Toronto doesn’t have enough rich people to support the house prices any more, but we’re still cutting it kind of close. The question circles us back to many people needing to commit to stretched affordability to keep the prices up, and with prices increasing every year how stretched can affordability get before it all falls apart? Unfortunately that’s been a question for a few years running now, and kind of depends on how insane people are willing to let things get. The longer interest rates stay low, the more willing people are to stretch every last dollar and throw out their contingency for rate increases. So the median detached house price is right now $700k. At what point does it rise enough that the question I raised here does become an issue — when is affordability stretched so much that there aren’t enough rich for all the houses? Maybe when the median price hits $875k, another 25% increase from here? So like, 2 years at current price increases?

[Edit: I had a report that put the percentage of households with incomes over $100k at 18%, and I had the total number of households as about a million. In the original post I multiplied those out to get 120k, failing once again at simple math. That report was based on 2005 data, I’ve since been informed the 2011 census figure is 26% of 1.1M households.]

Life Insurance Bete Noire

August 4th, 2014 by Potato

Just before Blueberry was born, we had a discussion about why we didn’t need life insurance for our situation. I’d like to broaden that discussion a bit, but I have to tread carefully. There are many who are under-insured not because they have decided that insurance isn’t for them, but because they just haven’t gotten around to it yet. I don’t want to encourage further procrastination (well, I do — don’t go off and work, read my blog!), and it can be very important for many people out there. But at the same time the insurance sale may be a bit heavy-handed and the base assumptions seem to increase the apparent need. Part of that may be my perspective: my value system is compatible with the idea that my survivors’ lifestyle shouldn’t be completely untouched (let alone improved) by my passing.

Here is why I’m out of the mainstream:

  1. my idea of dependents
  2. my idea of lifestyle of survivors
  3. my assets/situation

The idea of dependents is a bit of a strange one these days: kids are and always will be, but we are long past the time when the typical family consisted of one breadwinner head-of-household and a stay-at-home spouse (who was typically the female head-of-household). Many families are dual-income now, and even many of the ones that presently aren’t could be (modern stay-at-home mom or dad is likely university educated and had a career before getting hitched at an ever-later age and spawning). So your family would be without your income if you died, but they could still have some income. In our case, Wayfare actually has a much higher earnings potential than I do, and after Blueberry’s in school she could ramp up her hours worked to fully offset any loss of income from my death.

The assumptions of what the needs of survivors will be also seems a little over-the-top to me: some sites suggest full income replacement until you would have retired. But if I’m not there to spend part of that money, it means that my survivors would have an economically better life than if I were still there (except for the dark void in their hearts). Liabilities are also a typical factor in calculators estimating your needs: having enough to instantly pay off the mortgage is common, but seems to imply that they would or should stay in the same house, rather than downsizing, and that the surviving spouse wouldn’t be paying any of that down. For mortgagees, some insurance is a good idea because house prices can go down and transaction costs can be high, and you don’t want your survivors trapped and unable to extract the equity to move on.

The typical assumptions seem to imply that the survivors won’t make any adjustments in their life, work, or spending to compensate for the loss, which can lead to some large insurance needs. Instead, I figure that if I die, Wayfare and Blueberry will be free to move to a smaller, cheaper rental. There will be no need for a place so large with one person down (my whole dual-monitor home office set-up will reduce the room needs by one, and I don’t think Wayfare needs a kitchen half as large as the one I insisted on). And part of the reason for living in the over-crowded fourth circle of hell Toronto is the arcane arithmetic of the two-body problem and large populations; freed of that constraint they could move to a cheaper centre like Hamilton or London. Combined, a smaller place in a less-expensive town (or even less-expensive part of Toronto) could cut rent costs in half. On top of that is the significantly non-zero probability that Wayfare will find a replacement spouse who is gainfully employed.

Having a contingency so that these adjustments don’t have to happen right away makes sense, as does enough coverage for daycare until Blueberry is in full-time school. That’s where our situation also helps with my estimate of minimal insurance needs: we already have over a year’s worth of expenses saved up, and supportive parents who could provide an additional layer of security if we badly screwed up the math. As it turns out, my job came with group benefits for some measure of life and disability insurance (and it is the disability insurance I am more worried about).

Death is tragic, but from a financial perspective it’s not the biggest cause of young families losing an income. Divorce can not only rip daddy away, but cause massive upheaval and lead to a chunk of the “estate” being lost to lawyers. I’m ok with the idea that if I die, even with just 2 years of income for insurance coverage, my family will still be better off than those who started from similar circumstances and got a divorce. But I don’t want to make the delta so large that perverse incentives form.

Back to insurance: I actually found it quite hard to find ballpark quotes on disability insurance outside of my group plan. For life insurance I think it is important to disaster-proof your life, but the actual coverage need might not be quite as high as some calculators suggest, if you’re ok with the idea of your survivors taking basic steps to adjust for the loss.

Sunsetting Potato’s Short Guide to DIY Investing

July 28th, 2014 by Potato

Time to make it official: I will be putting my ebook Potato’s Short Guide to DIY Investing to rest in November.

What does sunsetting mean? It means that the ebook will be going out of “print”, taken down from my website as well as the Amazon and Kobo stores, but not immediately. I plan to pull the plug near the end of November, 2014.

Why are you retiring the book? Though the book is still useful and not wrong, things have changed at TD and in the marketplace, in particular the introduction of commission-free ETF trading at several online brokerages. However, the main reason is that I have a new, more comprehensive book coming out. Unfortunately I can’t share too many details about the new book yet as it is still being reviewed by the potential publisher. By the end of November I should have more details to share on the publishing path and timelines.

What can you say about the new book? It’s longer and more comprehensive — nearly triple the length of the original. I’ve tightened up the writing and added many more helpful figures, and it addressed years of reader feedback and suggestions. It includes detailed how-tos for three investment options that represent ideal trade-offs in terms of cost and complexity: Tangerine’s index funds, TD’s e-series funds, and ETFs (with a worked example using Questrade’s commission-free purchases). It has a much stronger focus on planning and process, to help you set up and stick to an investing plan.

What does this mean for right now? Unfortunately until I hear back from the potential publisher I can’t promise anything in terms of release date or special offers. I want to offer anyone who buys the current ebook now a discount on the upcoming book to make the choice simple, however I can’t promise that as it my not be under my control. It’s up to you whether you want to wait months (or possibly over a year) for a newer, more comprehensive book, or to buy the decent short ebook that you can download right now. I don’t want to prejudice you against Amazon or Kobo, but if I do end up with enough control to offer discounts on the future book, I will only be able to do so for people who buy through my online storefront (ePub/PDF versions — sorry Kindle owners).

Quick question/straw poll for the bloggers and journalists: what format would you like review copies to be in?
1) ARC electronic (placeholder art)
2) Final electronic
3) “Report style” hardcopy ARC (letter paper form factor)
4) Final hardcopy (trade paperback form factor)

I had a meeting with the artist and my new cover art isn’t going to be ready until November, and that’s also when I’ll hear back from the publishers on whether they will take it on or if I’ll be self-publishing. I’d like to give people as much time as possible to read at their leisure (and also to collect blurbs if you like it!), but I know that an ARC with placeholder art can look a little amateurish, and more importantly can’t really be passed along to your own friends and readers through a giveaway (though I can follow with final hardcopies later for that).

I’m interested to hear what the consensus is before I start firing off review requests, and will also note that I can start sending ARCs this weekend for those interested in that format.

Back from the Grant Monsoon

July 24th, 2014 by Potato

It’s been a hell of a run here at the day job with two massive projects back-to-back. I know pagecount is a very rough metric of productivity at best, but within two weeks we had a ~44-page grant and a ~40-page grant to submit, of which ~36 and ~18 pages were for me to write, and all of which were mine to edit. Some writing is more labourous than others — 36 pages of unfocused blog rambling is something I might do in my spare time over two weeks if I was in the right mood, whereas single pages of highly technical material can take days to churn out, much of which may be spent reading research materials to get and reference the data — but however you slice it that was a lot of work. And a lot of overtime to make it happen with the crunch on.

I can hear you asking “but Potato, how could you possibly work so hard and pull so many all-nighters and still be such an awesome daddy to Blueberry, while keeping up your 10-hour-per-week second job inspecting subway cars for the TTC?”*. Of course one part is that I completely neglected the blog over the last month, but that was a pretty minor contribution to the war effort. The answer is the magical combination of salty food, refined sugar, a significant calorie surplus, and caffeine. That’s pretty much the recipe for supercharging your brain to keep you going and focused for such a task, but it comes at a steep cost: between not exercising (Wayfare and Blueberry made it into the car early enough many mornings to give me a ride to the subway so I lost many of my morning walks), the stress, and the lack of sleep, I’ve put on 20 pounds in the last year, all of which came in sudden bursts during two particularly busy periods (this last month and the insanity last fall).

With the book pretty much done and under review at the prospective publisher(s), and my other InDesign project shelved, my side project is now to lose that weight and try to undo some of the damage. That’s a tall order: I’ve had no success at this in the past. Though I managed to make it through my PhD gaining basically no weight, I gained an amount that can only be described in fuck-ton units through my MSc and have never managed to lose any of it. I suspect it is an evil curse from all those Western blots (because if half-assed attempts at dieting and semi-serious exercise regimes didn’t get rid of it then it has to be supernatural, right?).

Anyway, let’s move on to something you might want to read about.

Over on the Reddit, a user asked me to create “the complete rent-vs-buy manifesto” to bring together the salient points when making the comparison and decision. To a large extent that would just mean putting some organization to about a half-dozen posts I’ve already written to form one larger, coherent post. It’s kind of an interesting challenge and I almost reflexively started outlining how I would approach it. However, I’m crazy enough without having a manifesto to my name, and it’s hard enough to get first time buyers to even look at their rental options with a 1000-word post — I don’t think a 5,000 word soup-to-nuts summary is really going to help.

Oh, I see the Ballparkinator fix is still on my to-do list. I’ll get to it real soon.

Have I talked about the book much yet? (Checks back, not really). So it’s done. Not like ready-to-put-on-the-bookstore-shelf done, but done enough that I have sent it (or queries) to publishers to see if they want to publish it instead of publishing it myself. With all the feedback/feature creep from the beta testers it ended up being legitimate personal finance book length — about 42,000 words or about 200 trade paperback pages, with 20 helpful figures (I consider the bunnies helpful). That’s more than triple the length of the first book, so it’s way, way beyond just “PSGtDIYI 2nd ed” and is its own book (with that how-to/implementation stuff as the core of it). I have a new title that I really like (I know a publisher may choose a new title if they take it on but I’ve gone ahead and spent a few bucks to register the associated domain).

To be realistic, the odds are that a publisher will not take it on. I’m hoping they will of course, but my plan is to be ready to launch into self-publishing as soon as the rejections come in. From what I’ve read, they typically take ~6 months to make a decision so I’ve got a few months yet. Still, I’m moving in the background to continue to tighten up the editing, get the formatting ready for the different form factors, and I’ve retained an artist to help me with a new cover design. I’ll definitely go with a hardcopy version this time around.

What I’m struggling with now is whether I should continue to keep things pretty hush-hush or start getting the word out. I don’t want to publicly say what the snazzy new title is yet because that could still yet change (especially if a publisher has a better idea), but I also don’t want to leave it until a day before release. I want to start sending out advanced reading copies, but don’t want to step on the publisher’s expert toes on marketing if I do end up getting a publisher — after all, that’s the primary reason for getting one.

The broad sketch of my plan is basically to wait another month or so before I start doing any of this stuff, and then to start with ARCs for bloggers. I don’t know whether the 6-ish-month clock for hearing back from publishers starts when I sent the first query, or only after the full manuscript arrived. I should hear back by December, so if I don’t hear back by then I’d like to launch the self-published version in time for xmas shopping, new year’s resolutions, and RRSP season. I know some works started as self-published items and transitioned to traditional presses, but aside from those exceptions I don’t really know if initiating a self-publishing push will scuttle a potential publishing deal if I had just waited an extra few months. Though I’m afraid to push too hard too soon on self-publishing, I also don’t want to wait forever (and miss a big part of the yearly cycle) to give extra time to a process that has a ~90% rejection rate.

Anyway, lack of sleep, dilemmas, too much stress weight, manifestos, and soon I’m going to have to start “sunsetting” Potato’s Short Guide to DIY Investing.

* - or alternatively: “what’s with all the whining? 83 hours/week should be your starting point for the work week. That leaves you with 85 hours of non-work every week: put in 18 to watch Blueberry, 1.5 to get groceries, 3 to wash the dishes and clean up, 2 for meals you’re not eating at your desk or during Blueberry time, 2.5 for personal hygiene, and you’ve still got 8.3 hours per day left to do whatever the hell you want. Don’t whine about a lack of sleep just because you chose to spend some of that time with your wife, checking your email, watching TV, telling people on the internet how wrong they are, or massacring video game orcs to de-stress instead.”

Conservatives and a Disdain for Data

June 17th, 2014 by Potato

I did not have the chance to follow the Ontario election in depth, and haven’t commented at all on it. Now that it’s over, there isn’t much to say.

Except one thing: Hudak’s “million jobs plan” was shown fairly early on to be based on flawed math. This was an excellent opportunity for him to take the race* by changing his platform based on the data and corrected information. Not only could he then have run on a sounder plan (though in the end that plan would likely have looked very much like the other parties’), but he could have distanced the provincial party from the federal cons and their well-known disdain for data.

Instead, the message was “well, in my heart and mind…” [it’s true]. For so long I have had so much trouble relating to conservatives — there is a perfectly valid basis for disagreeing with one another on how we should run the country, what roles the government should play, and whether that should be minimized or optimized based on various value systems and circumstances of the day. But some opinions and plans are so out there that I’m just left shaking my head. And now I know: the disdain for data goes so deep that — Hudak at least — lives in a fantasy world. That or the conspiracy version where he is so interested in appeasing the corporations/lobbyists he truly works for that it doesn’t matter if the thin veneer of reason for playing into their interests comes off, he’s sticking to that flawed plan.

I know the centre and left are far from perfect, and at both the federal and provincial level the Liberals have had their share of scandals and waste, but it’s the lesser evil in my mind. Hopefully Toronto at least has seen enough of reactionary leaps to the right — with Rob Ford, Mike Harris, Harper, and now a glimpse at a near-miss of the Hudak fantasy — to perhaps give us a generation or two of respite from the conservative fantasies.

* - Not that I was rooting for the provincial conservatives — I’m definitely a left-leaning centrist if anything — but as many commenters had said going into the election, with the sentiment against the Liberals and the illogical move by the NDP to trigger the election in the first place over a budget they should have been crowing about, it was his race to lose.

Home Maintenance Rule-of-Thumb

May 23rd, 2014 by Potato

Back when we talked about the gross debt service ratio, we discussed how sometimes a simple rule can scale in surprising ways.

A set percentage of your house’s value is a very common rule-of-thumb for estimating ongoing maintenance costs — 1% is typically seen these days (and what I use), though older articles from before the massive run-up in prices can be double that. It’s a tough thing to estimate accurately because there are so many line items and they’re all irregular; however, maintenance is a pretty big part of the cost of ownership so you can’t ignore it when considering the costs of shelter. A rule-of-thumb at least gets it in people’s minds — people who might otherwise only consider the costs they had to pay in the last few months (indeed, so many bad amateur rent-vs-buy considerations just use the mortgage payment). So if it’s even approximately right to +/- 50% I’m happy to continue to spread the rule-of-thumb.

In a comment this morning, Geoff says:

My issue with such articles about homeownership is that anytime they mention home maintenance, they use a percentage of the house value to estimate costs; this worked maybe when home price reflected the size of the house. But there’s no way that my 1961 built 1200 sq.ft house in toronto (worth I’d say $750,000 easy) costs more to maintain than my in-laws 3500 sq.ft house in Trenton (worth I’d say $150,000).

And that’s totally fair. The rule-of-thumb isn’t perfect, indeed even for Geoff and his immediate neighbours their maintenance costs may not be that close because of luck or the materials and workmanship they choose. To some extent size will matter, but a maintenance rule-of-thumb won’t scale perfectly with size, either: it costs so much to get a new furnace in the first place, and only a bit more for a bigger one; likewise the expensive kitchen/bathroom/etc. stuff only scales up a bit for larger houses, with most of the extra space being bedrooms/offices/living rooms that are basically simple shells. And within a jurisdiction size is usually captured by price increases anyway.

But keep in mind that there are other factors that will make a smaller place in the city more expensive to maintain than a larger one in the country, so there will be some scaling with price (though it’s never going to be a perfect set percentage).

For instance, the potentially higher labour costs in the city is a somewhat obvious one, but a much bigger factor is that the standards will be different. More expensive houses (larger or smaller) will be more expensive to maintain because they are lived in by people with more expensive tastes (or are situated in neighbourhoods with more expensive standards). For example, on PEI my parents’ kitchen is now about 20 years old, and still perfectly fine — heck, it’s probably still one of the more recent ones out there! In Toronto a 20-year-old kitchen would be scandalous and require a reno — a 10-year refresh is de rigueur — though in that case it may not be a cash cost as you can choose to not do it and just suffer relative depreciation (or reduced appreciation) relative to the trendy neighbourhood. Likewise, when a kitchen renovation does come up on PEI a whole new set of appliances would likely come in a fair bit under $5000; in a prestigious Toronto ‘hood each stainless steel, celebrity-chef-approved piece might run that much. Similarly for the rest: the standard for outdoor appearance in a less-expensive area might be a bag of grasseed and patience whereas in a million-dollar neighbourhood landscapers, sod, and shrubbery would be expected. Etc.

Indeed, it’s for this reason that I think the more common rule-of-thumb is value-based rather than size-based. And for cases of extremely expensive small properties or very cheap large ones, well, you’ll hopefully know to nudge your estimates up or down appropriately.

Fixing Carrick’s Renter’s Guide

May 22nd, 2014 by Potato

I want to be clear up front: I like Rob Carrick. He talks a lot of sense, and is one of the few voices out there talking about the potential dangers to homeownership-at-any-cost, and breaking the misconceptions about renting. I also think the “rent and invest the difference” message is incredibly important — it was the central idea behind creating the rent-vs-buy calculator.

That said, I had a lot of head-shaking moments at his column this weekend called “the renter’s guide to successful investing.” These are mostly quibbles to be sure, but there are a lot of quibbles for a thousand-word article.

I really get the concept of trying to make advice bite-sized and manageable: something close enough that people actually follow is better than precise advice that people tune out (indeed, I have been guilty of that often enough). However, the maxim is that things should be made as simple as possible but no simpler. I think this is unfortunately a case of over-simplifying. Similarly, I just don’t get his “real life ratio”1.

First off the message about saving is confusing. At the start he says “Homeowners build wealth by paying their mortgage down and increasing their equity in a house that they will presumably be able to sell for more than they paid. […] A homeowner with a paid off house has the luxury of choosing to: continue living mortgage-free in the home (and rent-free, for that matter);[…]” which leaves off the issue of homeowners also needing to save. He doesn’t actually say “forced savings” at any point, but this statement brings that terrible idea to mind. Homeowners also need to save — indeed, you can’t live “rent-free” in a paid-off house because you have to pay property tax, upkeep, insurance, etc. That notion does come in at the end, off-handedly: “Just as a homeowner needs to have dedicated savings for retirement, so does the renter.” That idea really doesn’t come through in the article, unfortunately, and I’m sure many missed it.

The big issue though is this mysterious 1.5% rule-of-thumb he comes up with. I mean, the logical thing to do would be to take some average figure for the principal paid down with a mortgage payment and use that. Or to go to a rent-vs-buy calculator and find out what the actual cost difference is and invest that. Instead, he takes an estimate based on maintenance + (1/2)*(property tax). What?

This is not remotely accurate for the areas where the rent-vs-buy debate is most important. Check it out for Toronto: the so-called “renter’s dividend” is almost twice what Rob’s rule-of-thumb predicts. I get 2.7% (if you insist on putting it into a percentage of the house price instead of a dollar value for each situation), and that’s for the apples-to-apples case. If you’re a renter saving up for your first place and plan to move up from your rented accommodations (e.g. to move to a house from a small apartment), then you should be saving that difference, which might be 5% of the house’s value.

Secondly, it really irks me that he doesn’t ever suggest that you should calculate it accurately. The rule-of-thumb is all that’s presented, and that is further simplified down to 1.5%.

Now rather than just bitch and not provide a solution, here is a new rule-of-thumb derivation:

Rule-of-Thumb for Amount of “Renter’s Dividend” for Apples-to-Apples Comparisons

How much does it cost to own a house? Roughly speaking property taxes are a hair under 1% in many municipalities, combine that with insurance to make the estimate an even 1%; insurance maintenance rules-of-thumb are about 1% (as Rob has in the article); transaction fees and/or discretionary “while we’re at it…” renovations run about 0.5%/yr amortized out (~10% every 20 years); the last tricky part is figuring out the mortgage payment — remember the renter wants to save the cash flow difference, so this time we do want to include the principal repayment portion. For a 25-year mortgage with 10% down at 3.5%, the mortgage is 5.5% of the property value. The total cash cost of owning is thus 8.0% (which includes principal repayment).

So find what your rent is as a portion of that, subtract, and voila.
Toronto: price-to-rent of 240X translates to rent being 5% of the price of a house; thus save 3%.
Vancouver: price-to-rent of 330X translates to rent being 3.6% of the price of a house; thus save 4.4%
Canada: if the more typical price-to-rent is 180X in other centres in the country, then rent would be 6.7%, so save 1.3% (I guess this is kinda close to what Rob got).

[Note the rule-of-thumb figures are not quite in perfect agreement with the spreadsheet — people should also save what the homeowner would be (e.g., 10% of income for retirement, depending on your guideline of choice]

Rule-of-Thumb for Amount of “Renter’s Dividend” for Moving-Up Comparisons

Now if you’re in a small apartment but planning to move up to a house it gets a bit more complicated. If you want to budget as though you were already in that house and saving the difference, then you would be saving much more. To make the rule-of-thumb simple, assume that the move up is for double the cost of your current place. That is, if you’re in a 2-bedroom apartment and want to move up to a 3-bedroom detached house, assume that if the house is $500,000, your apartment is $250,000.

So if you’re in a Toronto apartment, saving up for your first house (and planning on living to that budget — i.e., it’s not so far in the future that you’re counting on significant wage increases to make it work), then you’d want to save the “renter’s dividend” from your rental versus a comparable condo (half the house) plus all of the cost of owning on the difference between that condo and the house (approximated as half the house). So that first half would depend on the price-to-rent in your city, say 3% in Toronto, plus 8% of the difference, for a total of 11% on the half the value of the house, or 5.5% on the full value of the house.

Now maybe Rob went through a similar rule-of-thumb derivation, and was simply afraid that the numbers were too large — either that no one would believe the so-called “renter’s dividend” would be so enormous in this environment, or that the suggested amount to save would shock people. Moving on.

“Whether you’re a renter or an everyday investor, there’s only one way to set up a disciplined investing program. You need to have money transferred electronically into your investment account from your chequeing account every time you get paid, or once per month.” [emphasis mine] Ok, maybe it’s just hyperbole, but there are lots of ways to set up a disciplined investing program — as individual as the person. Sure, I’m a big advocate for automation: there are lots of good reasons for it to work and it’s proven2. I make a strong case for it in my new book, too. But it’s not the only way. Indeed, automation is very much a do-as-I-say-not-as-I-do recommendation: for my situation, with highly seasonal spending and freelance income, I do almost all of my saving in the first half of the year. If I went automated I would just have to compensate with a larger savings account to buffer the changes in my budget. Plus a natural frugal inclination means I don’t worry about blowing my budget just because I don’t hide my money from myself. I recognize that there can be better ways: some people for instance, respond best by taking out a loan for the next year’s savings to invest, and then target paying down the loan. Others may target a few “no spend” pay periods and save in say 3-4 bi-weekly binges (even those who just save the “triple bonus” pay periods that come up twice per year on a bi-weekly paycheque system manage to hit a 7.6% savings rate, which is not terrible). Whatever works3.

A penultimate, minor quibble: the first table is near-useless. It’s a table of “if you get X% return saving $Y per month, after 30 years you’ll have $Z pile of money.” It’s completely dissociated from the message of the article. Would have been much more useful to combine the first and second tables: pick a rate of return (say 6%) and show that you would have enough to buy the average house price (or not, or buy two, whatever the case is) for each city if you rent and invest the difference.

A final complaint: he ends off with a specific mutual fund recommendation. I know he doesn’t phrase it precisely as a recommendation, instead as an example backing up what returns to expect (which is sadly needed when many readers may think investing means a HISA at 1.2% nominal), but still, the mention of one specific fund to end a column titled “…guide to successful investing” irked.

1. As an aside, if the real life ratio spreadsheet is targeted at potential home buyers I would have built-in defaults on some of the calculations based off purchase price, like mortgage payments, property tax, insurance, and maintenance, because first-time buyers may not know these numbers in advance.

2. Well, as proven as something like that can get.

3. Which yes, is usually automation/pay-yourself-first.