Quick Update on Life

October 21st, 2016 by Potato

Sharing bad news of a personal nature is sometimes easy on a blog (especially if there’s a good story behind it or its cathartic), and sometimes hard. Today it’s hard, but I want to let people know why I’ve dropped off the face of the earth. I’ll likely tell a fuller account of all this at some point in the future (esp. after I run it by Wayfare).

The short version is that Wayfare has been very sick, in-and-out of the hospital over the last week, until on Tuesday they figured out that she has an incredibly rare and mysterious blood disorder and admitted her to the ICU. She will be in the hospital for at least another week, likely longer, and even once out she’ll be making regular trips back downtown for specialized treatments that will take hours at a time.

Because I can’t seem to turn off the personal finance blogger in my head, I can’t help but be glad that we have a big emergency fund. There may be existential issues ahead about the cost of living in Toronto and the loss of several months worth of income (or possibly permanent changes to work structure) for at least one of us (and likely both), but we can afford to just deal with the crisis phase of this now and not worry about money for a few months — we’ll cross that bridge when we come to it. I’m also glad that I have a fucktonne of time banked at work, so I just walked out when this was happening. I’m sure there’s some kind of compassionate leave program that would have helped out here, but it’s just easier to say “surprise vacation!” and put off having to look into any policies or do any paperwork for now.

For those enrolled in the course, unfortunately it is not looking good for timely completion in November. I had originally booked a few days off work over these couple of weeks specifically to finish shooting video for the course — so in terms of timing for such a tragedy, it wasn’t as bad as it could have been (though never would have been the preferred timing) — and obviously that’s not happening right now, and I don’t know if I’ll be able to make up the lost time in November.

Blueberry has been just fantastic at dealing with all of this so far, though we’ve all been spoiling her rotten when the grandparents pick her up from school or I let her get away with murder at tuck-ins.

I think I have managed to respond to all the emails sitting in my inbox, even if it’s only with a quick “I have not read this and will get back to you later.” If not, this post will help explain where I’ve disappeared to.

Mortgage Insurance, Tightening, and Shadow Banking Infrastructure

October 4th, 2016 by Potato

If you had asked me in 2011 or so, I would have gone on at length about how critical CMHC (and Genworth) mortgage insurance was to fueling the housing bubble in Toronto and Vancouver. Heck, you didn’t even have to ask me, I would have told you anyway. Having to save up a downpayment helps to make the system more robust, and acts as a brake when house prices start to rocket higher as people can’t save fast enough and get priced out. Mortgage insurance circumvents that, and lots of people were buying with minimal downpayments, thus it had to have been a big causal factor in the bubble.

In 2012 some reforms were announced, including that mortgage insurance would be capped at $1M house value. It was no 10% downpayment minimum like I was hoping for, but I thought that would help cool the market by providing an upper limit to the insanity (at that point the average Vancouver detached house had already crossed $1M, and the average Toronto one was a bit shy, but many neighbourhoods were over).

For a brief while you could see the strange behaviour as lots of houses that may have fetched prices ranging anywhere from $800k to $1.1M were all compressed into a narrow band near $990k. I thought a few more months of that and a few people with downpayments would push a bunch over $1M, and those without downpayments would have to exit the market, and the correction would start. I was so wrong. Before you could even take MLS screenshots and write a blog post on the strangeness, prices started rocketing higher again, and $1M was no kind of barrier at all.

And then the truly puzzling stats started coming in: Canada’s two most bubbliest cities had the highest downpayments. Roughly two-thirds of buyers across the country were tapping CMHC, but it was Toronto and Vancouver that were pulling the average downpayment up.

The bank of mom & dad was by and large saving the day. CMHC insurance became but a minor factor in Toronto and Vancouver’s housing bubble.

This is troubling because it meant that things had gotten away from the government’s ability to control via CMHC reform unless they went nuclear (i.e. 10-15% downpayments, not this wimpy sliding scale tweaking stuff — more on this below). It’s also troubling because many a First National Bank of Mom and Dad gets its financing from HELOCs, and that’s very pro-cyclical — it’s easy to get a HELOC while prices are rising (and indeed, you can fool yourself into thinking you have to and that it’s good for your kid to do so), but that source gets turned off when the bubble bursts, making corrections worse. It also masks the vulnerabilities in the system, making it look like we have a bunch of borrowers taking out ~20% of their equity and some buying new with ~20% down when really it’s more like a bunch with paid-off houses and a bunch with nothing (the total equity may be the same in both cases, but the latter group is much more likely to blow up).

[And to add, the other answer is “foreign money” which may be a bigger component of the market than I thought, but still doesn’t change the answer as to whether you should buy or rent — as we’re now seeing]

So that brings us to today, with some new rules from the Finance Minister. What’s interesting here is that a lot of the previous rule-tightening moves for CHMC didn’t apply to insurance that the banks took out on mortgages with over 20% down.

Aside: Why would they do that? So that they can securitize the loans. From the data I can find, roughly a third of all mortgages issued in Canada end up insured and securitized.

Now, loans used for portfolio insurance must meet the same criteria, plus the new criteria, particularly the closing the 5-year filter on qualifying rates.

Aside: a while ago the rules were changed to try to be more conservative so borrowers had to qualify at a higher rate — based on posted rates — than what they were to pay, to ensure that buyers had the financial flexibility to take on higher interest rates. However, if you went for a 5-year term you didn’t have to go through this check and could just use your contracted rate. This pushed many people into getting 5-year fixed terms (vs. variable-rate mortgages), and created incentive for the banks to make their 5-year fixed discounted rates their most intense point of competition.

So now there’s going to be an effective $1M cap on securitized mortgages (it’s possible to securitize and sell mortgages without insuring them but that largely doesn’t happen because Bad Things Happened and the market for that kind of product is dead — lookup ABCP). It will likely also spell the end of longer-than-25-year amortizations (which could still be had for people with more than 20% down).

That means any bank making a loan in Toronto or Vancouver where so many places go for over $1M is going to have to keep that jumbo loan on their books. No more moral hazard from passing it off in a securitization.

We’ll see how these changes affect the market in the coming months and years. Maybe this less-obvious change will have big effects. Maybe the market is already rolling over so it won’t matter. Maybe the meme is broken.

For the qualifying rates, the difference can be somewhat meaningful for those who are stretching to the limit. If you make $100,000/yr and can borrow up to a GDS of 39%, that means your maximum monthly payment for the mortgage and a few other costs (tax, heat) is $39,000/yr ($3,250/mo). If you take off say $400/mo for heat and property tax, that leaves you with a maximum mortgage payment of $2,850 on that income. With the 5-year filter you can use the actual rock-bottom rate of 2.5% to qualify, letting you borrow about $630k. At the qualifying rate of 4.6%, that takes you down to $510k — a fair bit less room to reach.

There are few ways the banks can respond to this. They can reign in lending (clearly the intended approach). They can say fuck it and put the pedal to the metal and just keep all the loans on their books. For the qualifying rate, that comes from the “posted” rates the banks put up. It’s not likely that they will lower the posted rates to circumvent the stress tests (those higher rates help them rake in interest rate differential fees when people break their mortgages and it’s low-hanging fruit to get people to renew at higher-than-market rates if they don’t shop around), but that is an option. Of course in that case the government can just specify a qualifying rate.

Also today Preet released his interview with Ben Rabidoux which is a good listen that touches on many of these issues (though it was recorded months ago).

An important topic they discuss is the rise of private mortgages (aka shadow banking). Now, an incredibly, impossibly stupid thing has been allowed to happen: people are expected to put no-condition offers on places in bidding wars in our hot housing markets. So every now and then (though surprisingly less often than I would have thought) someone can’t actually get prime financing like they planned, so they get a private mortgage to cover the gap. Or someone will get into trouble, and tap the private mortgage market.

Every time the government tries to tweak prime banking and CMHC just a little bit it does not work to cool the market, because the changes are too marginal. Instead they push a few more people into borrowing from mom & dad or private lenders, and normalize that whole system and alternate ways of qualifying. This approach is doing less to cool the market than it is to build the shadow banking infrastructure. That’s part of why1 I think we shouldn’t keep trying a series of small nudges to CMHC and lending criteria, and letting the system build resistance to regulation. We’ve got to rip the band-aid off and punch the speculators in the nose.

1. The other part being that I am actually Ra’s al Ghul and believe that the bubble can’t be saved so we should just get on with purging the city.

Visualizing Data and Situations

September 28th, 2016 by Potato

Recently I got an email from Chris (his mailing list is actually good, BTW). He includes these neat sketches to try to understand his money and see things in a new light. A few weeks ago was one on his money infrastructure, which I’m hoping he’ll turn into a post for non-subscribers to see, but the one I want to touch on this week is a sketch of his irregular income through the year that he just sent out. It’s basically a bubble chart (though he uses squares instead of bubbles), showing how his confirmed income varies through the year.

RagstoReasonable irregular income figure

I saw that and thought neat, this is presenting some information in a way that will make people think.

I then thought “this can be presented differently, especially if I would want to use this information to plan my freelancing activities.”

In that figure, he has as his independent axis (x-axis) “time available to make money”, with the months scattered all around, and expenses running up the left side. But you can immediately see a strong relationship between the size of the boxes (committed income) and time available to make money — when he has less committed income, he has more time to make money, which is not very surprising and perhaps not what you want to take away from the chart.

Instead of scrambling the months, we can rearrange it chronologically.

He also has expenses and income as separate variables for each month. Sometimes it’s useful to think about those as separate things, especially when you can attack them from either side. But if you’ve more-or-less figured out your expense side and want to focus on making more money (as the initial x-axis implies), we can instead plot the difference between expenses and income — when are the shortfalls? How do the shortfalls line up with opportunities to make more money? Are there blocks or are they one-off months in islands of pre-committed business?

RagstoReasonable variable income chronological

So now with net income, time available, and time through the year plotted I could use this layout to start planning my side business activities.

As Chris, I could see that from November through February I have a large shortfall in budget, and a decent amount of free time, so this period I’d try to book up with freelance work, with some possibly spilling into March to wind-up (and I’d have to be done for the big Opera period in April). Then in May some time opens up, but the motivation to get stuff going won’t be high as there will still be positive net income. However, there will be minor shortfalls all through the summer with lots of time to spare, so assuming that Chris needs to account for lead time to book clients, he would use the time in May to do that business development, and then work freelance lots through the summer. Then come October, Chris really will have no time to spare, so booking business for the Nov – Feb period will likely have to wait until November (and even then the time is not as open). That means he’ll need to budget to deal with that big shortfall expected in Nov, as it’ll take some time for the freelance income to pick up then.

So here I’ve abstracted away a variable — I’m assuming that I’ve already dealt with planning my [Chris’] expenses, and am trying to visualize the data in a way to help me manage a freelance career on top of a singing career. And this may be a more useful visualization for that particular problem.

But that doesn’t make this a better general approach. After all, some of Chris’ expenses may be variable and flexible, and he would want to plan out when to schedule those based on when there will be money in his accounts after paying gigs, and when he will have time. In that case he’ll want to see income and expenses separately — indeed he may want to collapse income and time available to focus on time through the year and then have different bubbles overlaid for different kinds of expenses. Then he could plop some expenses in different places to see what would fit best for him. For example, he may want to schedule his dental appointments in November and May, when he has time and money after his busy October and April gigs. And indeed, he had just such a visualization sketched out when I chatted with him about this.

With some things in life, especially personal finance, there are many more ways to look at data and to try to present it in ways that help guide different decisions. I’m trying to make use of this more in the course — there’s lots of line and scatter graphs, but also a few simple sketches and pictograms with bunnies. But there’s lots more room to go, and I’m excited to see other people sketching things out in different ways

Anyway, stay tuned to ragstoreasonable as I’m sure Chris is going to come out with some neat visualizations and sketches soon (peerpressurepeerpressurepeerpressure).

Short Updates: Renting in Toronto, Because Money, Course

September 22nd, 2016 by Potato

I’m heading into the busiest three weeks of the year for me. Caffeine levels are at max, and I’ll be trying to survive the stress and sleep deprivation until this project is done, so don’t expect a long post in the next while. Here are a few short updates though.

Renting in Toronto: I’m scoping out rental houses in Toronto to get a feel for where current rents are. For several years market rents have been quite stable and it’s been easy to conclude that the absurd price:rent ratios were not going to be fixed by rents increasing. Every now and then a rental would come out way above market, where clearly a landlord was trying to actually cover their costs on a recent purchase price instead of collecting market rates and hoping for appreciation. However, this fall I’m seeing that rents are actually up, with a huge spread in prices (and price:rent). For houses that would be ~$1.3M in a particular neighbourhood, I’m seeing rental rates from $2600 (about where prices from last year would be with inflation) through to $3600. And it’s not just “that one crazy listing” (though one listing did sit for over a month at that top end and is now down — not sure if it found a tenant or just got pulled), there are places at each point in the spectrum, which makes for price-to-rent ratios of anywhere from 460X to 375X — a pretty big spread.

Even at the high-end of that range, renting is still the better deal (because prices to buy are crazy), but it’s surprising to see nearly a thousand dollars a month in possible rent inflation in just a year’s time. Moreover, I’ve commented before that one of the nice aspects of renting over buying is that you get a lot more for your housing dollar — we could never afford to live here if we had to buy. Well, if rent rates are increasing that much, we might not be able to afford to live here even as renters. On the one hand that’s a scary thought, on the other, I don’t really think Toronto’s priced dual-professional families out of even the burbs forever. I’ll have to keep a closer eye on the market to see if it’s just an anomaly of a few crazy people putting their listings up at once without knowing the market rent, or if it’s truly gotten that much more expensive.

In discussions with a reader on the rent-vs-buy choice (which I’ll turn into a post later), I had to bring up the point that buying is in many ways easier (distinct from better) when you’re looking for a detached house. While there are detached houses available, and while it’s the better move financially to rent, there are 20 or 30 for sale listings for every house for rent. It can take months of looking to find one that ticks all the boxes for you, and part of what makes that a challenge is that as a renter you’re almost exclusively looking for as-is properties (or close enough to as-is — it’s possible to put some work in to a place to make it your own space with a long lease or even to negotiate repairs and upgrades with a landlord, but you’re not going to do anything major), whereas when buying you always have the option of getting any old place and gutting it.

I also volunteered to re-write the rent-vs-buy calculator page as part of the Reddit /r/PersonalFinanceCanada wiki effort. I’ve written so much over the years on real estate and the rent-vs-buy choice and the math involved, but I really don’t have a good “start here” resource, and the last time I tried to write one it got way too long and ranty (and when I tried to make a “start here, how-to” page for investing, it turned into a book). Again, busy now, but look forward to something like that later in the fall — and if there’s already a good guide that would serve the average Redditor off the street, let us know and you’ll save me the trouble.

Because Money: I’ve been a guest several times on the Because Money internet show (in fact, the guest with the most appearances on the show). This year I’ll be joining the team as a producer — basically clicking on things while the hosts and guests chat, and every now and then throwing graphs up on the screen because I’m a nerd. We’ll also have MYD doing the hard work of off-line producing, which will make Because Money a downloadable audio podcast and not just a YouTube sensation. For season 3 Chris Enns will fill the seat of Ensign Redshirt/Male co-host #3, and we were really clear in our enunciation of the words of warding to try to ensure that the same curse does not befall him.

Course: This busy period was not unexpected, and that’s why there was nothing in the release schedule for the course in September. However, things started getting busy earlier in August than I had expected (plus I actually took an actual vacation instead of using that time off work to work on the course), so most of the modules I had promised for August are not up yet. Sorry about that, I’ll try to get them all done in the October update (none of the August videos are shot, but most of the articles are at least partway finished).

Questrade: They can’t leave well enough alone over there, and have tweaked their UI again. It’s a fairly minor change so I’m not going to rush to update the errata for the book.

Indexing and Valeant/Nortel

September 20th, 2016 by Potato

An active portfolio manager recently criticized index investing because Valeant became the biggest TSX component and then blew up, as Nortel did in ages past. The implication being that active investing would have avoided concentrating so much into a stock like that.

This is a flawed argument. First, he’s suggesting that active management could have avoided the Valeant collapse, which we can’t just take as a given. After all, it didn’t get that way because of the index investors — Valeant became the biggest TSX component because on average active investors gave it that valuation. Now, it’s possible (especially in this case of a cross-listed stock with an international presence) that American active investors are what drove the price up, leading to its over-weight status in the Canadian index (even if Canadian mutual funds didn’t hold it to that proportion), or a small minority of Canadian active investors just going crazy for the stock drove up its proportion in the index, but sparing the portfolios of most active investors.

Whatever, it happened: Valeant became huge then blew up1. That makes 2015 an easy comparison year for active funds versus the index, right? And indeed, over half of Canadian equity funds managed to out-perform the index that year, a massive increase over the typical numbers. However, despite the gimme at the end of the period, nearly two-thirds of funds still under-performed on a 5-year basis — this is clearly not a fatal flaw in index investing.

Which makes it a really insidious sort of criticism because there is a nugget of truth in there. It would be better if bubbles never formed and blew up, but that’s too hard to avoid in practice, and over the long term (which is what matters), indexing is still the better bet. Even if every once in a while the indexes do throw a soft pitch inefficiency to the active investors, it’s too hard to take advantage of (net of fees) consistently enough to win out.

Oh, and while 2015 was a pretty good year for Canadian active investors versus the average, note further down in the report that 85% of US equity funds under-performed the S&P500 that year, and 99% under-performed on a 5-year basis.

Every now and then index investing will include blow-ups like this (or miss run-ups), making an easy comparable for the active managers. Despite the odd case of that happening, over the long term index investing has been the better choice.

1. Fun fact: VRX is the biggest near-miss in my active investing portfolio. Screwing that trade up is perhaps the strongest signal that I’m too busy for even a small active “play” portfolio and it’s time for 100% indexing for me. I decided to short VRX in August 2015, after the AZ Value posts but before Philidor hit the news. I put in an order to buy some puts, but was too stubborn to cross the spread. My bid did not get filled at the end of the day, and then I was too busy with work to enter it again the next few weeks. Then the Philidor revelations came out and I was dumb enough to think that falling from ~$300 to ~$240 meant that I was chasing it down and most of the negative news was baked in. If I had just been willing to cross the spread and pay like $20 more for my puts, or even to come back and keep the bid alive, I would have had about a 15X return on that short. It is no small source of embarrassment and rage and kicking myself that I actually had done the research and entered an order, and still managed to miss out. As Wayfare said, “there’s this great book on passive index investing you should read…”