Blessed by the Potato

I visited my Prius today. I didn’t get to take it home with me — they want me to pay first, which is kind of crazy in this world of credit, but who am I to argue with the man. It’s a winter grey with dark grey interior. I didn’t sit inside to check for myself, but the paperwork says that there are 211 km on it — a bit more than I’d expect a new car to have, but not enough that I’m concerned it was a demo and that I would try to renegotiate the deal.

This is probably a good time to review all that’s happened up to this point.

The Car Search: I must have had the longest car search process ever. Back in 2006 my car was stolen and recovered (and yes, I did disclose that to the dealer about the trade-in), and I started looking for a new one. Even though it felt icky after being stolen, I came to the decision to keep the Accord, since it was still a reliable source of transportation. That didn’t stop me from looking though: I looked at the Accord, Civic, Civic Hybrid, Matrix, and Prius. After much research I decided that a hybrid made a lot of sense in a world of rising gas prices (and I made many spreadsheets to back that up). Moreover, they offered a number of environmental benefits, so as long as the financial side was at least a wash, I was all for it. Plus, I didn’t know what my future driving cycle would be: if I had to do a commute through Toronto rush-hour traffic, a hybrid system would more than pay for itself. As a car, the civic hybrid (and later the Camry/Fusion hybrids) were eliminated due to trunk space issues. The Prius, being a hatchback (and a purpose-designed hybrid with the batteries in the floor) didn’t share that problem, and looked a lot better than the Civic on a number of spatial and amenity fronts, and even compared fairly favourably with the Accord. I did think it was bull-dog ugly at first. It’s grown on me, especially as the aerodynamic shape gets copied by more manufacturers… but it’s definitely “quirky” in the looks department. Even inside, the high-mounted information display (which I like for its functionality) just looks somehow wrong.

I also did a lot of research into the many, many myths, misconceptions, and other bizarre ideas that are out there about hybrids. And there were a lot — I’ve covered many of them in past posts. I had my dad counselling me not to get a hybrid, because the technology is still “too new” — in 2006 he said to wait a few more years for more data; now it’s 2010 and that’s still his line. At this point I know that there are still unknown factors out there, but I think that things look good enough to take the plunge.

The Wait: Then came three and a half years of further research, discussion, and spreadsheeting. The Accord had it’s share of old car repairs to make, and each time I had to wonder when it would be time to give it up. After a wheel bearing needed to be replaced this fall I figured that this winter would be its last (since wheel bearings are expensive and there were 3 more in there that might be nearing the end of their lives). A few weeks ago there was the recall mess at Toyota, and I thought it was an opportunity to get a deal on a car they don’t normally negotiate too hard on.

The recall doesn’t phase me: I think this can only lead to a safer car in the long run. Toyota is under the spotlight now and they will have to make these issues right. Any car could have a hidden major defect, and I don’t really see it as being an area of concern after it’s been found out and a fix on the way.

The Buying Process: I went to Car Cost Canada and got the invoice price report for the Prius. CCC had a recommended dealer here in London, Tim Felsky of Toyota Town. Since I know I’m not terribly good at in-person negotiations, but am good at having a sense of fairness and at working numbers, I added in a reasonable profit margin to the CCC invoice price, and sent it to Tim. He was able to work with it, and I went in to put down a deposit. It was just that easy. I probably could have gotten a better deal by negotiating harder, or even waiting a day or two (the Toyota gas pedal recall spread to the Prius braking system the day after I left my deposit) — indeed, some people at PriusChat were reporting getting below invoice in the US, and one friend said I should have squeezed them right down to invoice price, since they still make some money at that point, and there weren’t any other customers around! Nonetheless, I got a better deal than I figured I would be able to get before the recall, or if I had waited until later in the summer (or for the 2011 release to avoid the first model year).

So far, the nastiest part of the buying process has been shopping for insurance quotes. A lot of insurers want the day I got my G1, G2, and G licenses. I actually do remember the day I got my G1 way back in 1995 (four days after my birthday), but can barely remember what year I got my full G in. I don’t even know where to go to look that stuff up.

I’m also shopping for a set of winter tires for it. Since February is almost over, I may not even put them on now, but if I can get a good deal as winter comes to a close I’ll take it and store the tires through the summer.

The government, in a bit of a surprise move today moved to tighten mortgage lending rules to help reign in the housing bubble here (which, for political reasons they can’t actually admit exists). I don’t mean that rules of this sort coming into play were a complete surprise, indeed there has been much speculation and hope that some sort of tightening would be employed in the budget. Just that it was a surprise to come today when the federal budget is less than a month away. To me that’s an actions-speak-louder-than words type thing, that these rules couldn’t wait until the spring frenzy.

Anyhow, on to the new rules:

The weakest in my opinion is the new rule that refinancing can only take one down to 90% equity. It’s to help prevent people using their homes’ rising valuations as ATMs, but I have trouble seeing how it might actually prevent a bubble — just maybe lessen the pop since it makes it a little harder for existing homeowners to put themselves underwater alongside new homebuyers.

The way the banks and the CMHC will calculate your debt service ratios (i.e.: how much house you can afford) will change slightly, so that now you must be able to afford payments at the 5-year fixed rate instead of the 3-year one. Since the 5-year rate is currently a few hundred basis points higher than the variable-rate, it will help protect people from themselves, and ensure that a small jump in rates won’t cause people to have to leave their homes. Supposedly, many people in this rate environment are taking 5-year mortgages anyway, but I have to suspect that this is going to screen out at least a few first-time buyers whose real estate agents have sold them on a price point based on the “monthly carry” at 3% or some ridiculous temporary interest rate. Personally, I’d like to see this as an even more conservative rule: i.e., ensuring people could afford their houses if rates shot up to beyond the current 5-year rate — perhaps an arbitrary 8 or 10% rate, or perhaps the high water mark for the last decade (though that can also lead us towards fooling ourselves in long periods of declining rates).

The last point is the one that I think is the most needed, and will do the most to stem speculation: people buying real estate other than as their primary residence, i.e., speculators, must put down at least 20%. So anyone that’s been investing in multiple condos in Toronto because you only need 5% to get your foot in the door will find that they have to have some money to buy. Unfortunately, it’s probably also the hardest to enforce — after all, if you search the blogs of the speculators, you’ll find they seem to skate around the other principal residence rules in efforts to make their flipping gains tax-free. I’m sure they’ll argue that they intend to live in each of their units, but had to buy the next three before selling the first… Depending on how this rule is implemented, it could start deflating the condo market quite quickly: if people who signed up for a dozen pre-construction units two years ago for completion this summer find they now have to have 20% down at the close, they may be in a terrible rush to sell. If existing contracts aren’t affected though, then it will still take some time for the hot air to work its way out of the system — which is probably how this will be implemented.

So, some quick (slightly inaccurate) numbers:

Let’s say you’re a couple with a gross income of $100k. 32% of that monthly is $2666/mo — that’s the guideline maximum for your mortgage payment, heating costs, and property tax. Let’s assume your heat and property tax are a fixed $300/mo, which leaves $2366/mo for the mortgage. With a 35-year amortization and a 3-year posted rate of 4%, you can afford a morgage of about $534k. At the 5-year posted rate of 5.4%, that maximum possible mortgage drops to $446k. A decline of ~17% in the maximum house you can buy. Depending on how many people were actually at the limits of their debt service ratios, that could undo the massive run-up that we had in 2009 as a result of the low interest rates.

Here I am on a holiday Monday, looking at the inside of people’s brains — basically technological mind-reading — while making funny noises with my mouth.

Boom-bi-chika-bum-ba-bum-ditty-do.

An RRSP is a tax-sheltering account. Any money you put in it is considered to be “pre-tax”, or tax-deferred, so you are not taxed on contributions you make. If, like most working Canadians, you pay taxes in advance as a deduction on each of your paycheques, this means that you can expect a refund of the taxes you paid on the money you stick in your RRSP.

You can contribute money to your RRSP any time through the year, and also all the way through to the end of February of the following year. However, people being the way they are, tend to leave it until the last minute creating “RRSP season” in February. It was into the midst of this chaotic selling frenzy at the bank that Wayfare made an appointment at the local TD to review her RRSP account (in fact, she was called in to update her risk profile survey). It was there that she was shocked by how misinformed the saleslady at the bank was (and believe me, they are salescritters and not “advisors” or “planners”).

After educating herself (with no small amount of help from yours truly, if I may pat my own back) Wayfare has realized that a lot of the products sold at the bank branch are expensive, with high fees (aka MERs) designed to make the bank rich, rather than her. So she (with some small amount of administrative confusion) converted her RRSP account to an e-series low-cost index fund account almost 2 years ago. At the branch, the salescritter saw that she was in these broad market index funds (~80% equities, ~20% fixed income), and said that her investments were too conservative for her age. Then she tried to sell her on a “balanced fund” which was “more appropriately aggressive”, with nearly 40% in bonds. For anyone who’s even remotely knowledgable about matters financial, you’ll immediately recognize that this is a far less aggressive fund (not to mention more expensive!). Wayfare actually had to hold the line to not get switched over to this poorer option — the sales push was fairly hard. And to add insult to injury, the salesperson spent the whole time selling, and never actually updated Wayfare’s risk profile, her original reason for going in! “We could do that next time when you make an appointment with me to switch over to these funds.” Give me a break!

A few years ago, being just a little less knowledgeable, she probably would have acceded to the salescritter’s suggestions (indeed, 3 years ago she walked out invested in a “market-linked GIC”, which while generally bad deals, was not such a bad idea in hindsight with the market crash of ’08).

So, to the rest of you: remember as you rush out to fill up that RRSP contribution room at the last minute with little time to check your facts that the salesperson at the bank branch is not necessarily your friend, and may in fact know less about the products they’re pushing than you do (or, at least than I do ;). If you’re young (as I believe most of my readers are), and if your RRSP is holding GICs (or equivalently, savings accounts or money market funds), then you’re probably doing it wrong (or have exceptionally low risk tolerance). You can hold stocks, bonds, cash, or mutual funds which own combinations of those. If you have a time frame of decades then you should probably have at least some exposure to equities (though the exact amount will depend on your risk tolerance). And fees matter.

I’ve been using the same towel for two weeks now, and it doesn’t smell like death. Living mould-free is the way to go, I tell you.

I’ve been amazed at how quickly my desk re-cluttered. Not 3 weeks ago everything was packed up into boxes for the move, or thrown out as junk. For the first week or two I kept my desk as clean as possible so that there was plenty of open space to do double duty as my eating table (since the kitchen table was piled high with boxes of kitchen stuff to be properly put away after the move). Now after just a few days of working on my lecture for this morning, it’s every bit as bad as it was before the move, if not worse. Pop cans, candy wrappers, and papers piled everywhere.

Finally, a teaser: John Hempton at Bronte Capital had an interesting post about the demographic crunch coming our way in a few decades, and what that might mean for socialized medicine. Once I catch up on my sleep I plan on doing a short post on the matter.