Blessed by the Potato

First off, I had two recent podcast appearances:

Over at Because Money, we talked about who should be a do-it-yourself investor, related to this post. Interestingly, after we recorded this we got to hear more about the importance of behaviour at the Canadian Personal Finance Conference, where the final talk by Dan Bortolotti indicated that because of self-defeating behaviour he doesn’t think many investors should be do-it-yourselfers. I tried to emphasize behaviour and processes in the book to make sure that people didn’t fall into those traps, and I plan to focus my efforts for the rest of the year on solving that problem so that more DIYers will be successful.

Then, I was on the Mo’ Money Podcast, talking about the book and my history with money.

If this is your first time finding out about the book, or if you have someone you think should pick up a copy to learn about investing, then be sure to head on over to Amazon — it’s on sale at the moment for an incredible price. I’m not sure if it’s a financial literacy month thing (aka “November”), or if it’s a flash sale that will be over tomorrow.

I also want to excitedly say that my October sales numbers are in and the Value of Simple now sits at 956 sales. It’s totally feasible to get 44 sales in November (the financial literacy-est month of the year!) to manage to roll over 1000 the sales mark by the 1-year anniversary of the book’s release in December! Totally feasible with your help that is. Remember that most people you know and love likely don’t know anything about investing or a lot of other financial topics — Kyle called it the “Canadian emperor has no clothes” phenomenon in the podcast, where everyone assumes everyone else has this all figured out and doesn’t want to talk about it. So be sure to whisper it in their ear, or send them a link to buy the book (or at least check out the reading guide), or just buy a copy for them now for Christmas to help me reach my completely arbitrary goal!

Finally, if you’re interested in a bulk order (for instance if you want to get your clients or employees something awesome and educational for the holidays), the printer has reminded me of the various ordering cut-offs for shipping in time for Christmas, as well as an extra discount for orders (over 10) placed before Nov 22. Contact me for details about bulk orders.

In what I have to assume is a world first, I had a door-to-door solicitation from a pair of realtors flogging pre-construction condos last night.

In true door-to-door salesman style‎, I had just taken the first bite of dinner when the knock on the door came. I jumped to answer the door, thinking it was the landlord stopping by to chat, only to be faced by a pair of ladies lugging glossy brochures of the new Tridel development coming down the street.

I had hot food waiting so I brushed aside their sales pitch and wished them good night, but I have so many questions‎ that I wish I had asked at the time.

• Do people, who already live in detached homes, actually buy pre-construction condos from an unsolicited visit?
• Has anyone ever made a major six-figure purchase from a door-to-door solicitation ever? Do you think it likely to happen?
• Why does the sales literature promote shopping at Bayview Village (more than anything else about the development) when Fairview is the larger mall and closer to the development?
• ‎Doesn’t it hurt the image of the development to flog the units this hard? Hasn’t the traditional approach been to hold “VIP” and “exclusive” sales events?
• Is door-to-door condo sales really a thing Torontonians can look forward to, or were you just trolling me in particular?
• And then the first few questions like twenty more times because seriously WTF.

I know I’m a blogger, prone to introspection and constantly amazed by the impulsiveness of people in this city when it comes to real estate, but do people really make half-million-dollar decisions by door-to-door sales?

In today’s post at TRB David Fleming casually mentioned visiting National Trust as a kid. I had an account there too when I was younger, so it brought back some memories. I decided to dig up some historical statements for National Trust (which was taken over by Scotia in 1997).

The late 80’s were a wild time for Toronto real estate. National Trust, despite the name, was heavily concentrated in Ontario: about 75% of its business was there, with about 25% in Toronto alone. From ’87 to ’88, mortgage growth for NT was 13%, then 18% the year after, and another 9.8% into 1990 (as things were peaking in TO). Return on equity was 13.8%, 12.9%, and 13.4%. The provision for loan losses was peanuts in ’87, and they actually wrote some loans back up (a negative provision) in ’88. In ’89 the provision for loan losses was 3.4 basis points (0.034%) of the mortgage portfolio.

By 1992 the mortgage portfolio was shrinking, with provisions for loan losses at 85 basis points. Return on equity was down to 5.5%, and they had laid off 12% of their employees (by the time Scotia took them over, 25% of those who worked there in the 1989 peak were out of work).

I’ve made my bear case on real estate so many times I don’t want to go too crazy here. But this week I was once again hearing the meme that Canadian banks are invincible, that real estate will never correct and even if it does it won’t hurt them. National Trust came out more-or-less unscathed from the 1989 Toronto crash, and the dividend was never cut (though it also never increased from 1990 on). However, if you were a buyer in the late ’80s I’m not sure you’d be happy with the performance through the next half decade.

I like to write my MP and MPP whenever a big topical issue comes up that I’m passionate about. Some things aren’t topical, but could still use attention. Now that we have ousted the Conservatives, I think it’s as good a time as any to just congratulate my new MP on his win, and send him a letter to know what’s on the mind of one of his constituents as he plans out the next ~5 years of his life. Please feel free to pull whatever parts of this letter out that you like and write your own MP.

—

Dear Dr. Tan

Congratulations on your victory! I’m very happy to be represented by a fellow scientist in my riding, and to hopefully see some positive change from a Liberal majority in Parliament.

As you plan out your priorities for creating new legislation, I wanted to share my thoughts on issues that weren’t central planks of the election platform. I am myself trained as a scientist, and in addition write as an expert on personal finance, so those fields are my primary areas of interest.

The election platform included a promise to roll back the TFSA contribution limit to $5,500/yr with indexing to inflation, which I agree with. I believe that inflation-indexing is a key component of good policy. Many of our government programs are indexed to inflation so that they continue to remain relevant and fair without the need for constant tinkering by the government. However, the Canada Education Savings Grant and the Canada Learning Bond for low-income families are not indexed, and have not increased in value since their introduction. Adjusting these programs to include inflation-indexing would help keep them relevant for the future.

The Canada Learning Bond could use additional improvements. The current take-up rate of this program is embarrassingly low. There is a group here in Toronto (the Omega Foundation) whose sole mission is to help people who are eligible for the CLB apply for it. Given that low-income Canadians often face challenges in navigating bureaucracy, changing the CLB to include automatic enrollment with a turn-key default investment (that individuals could opt out of) would go a long way to improving the usage of this program, and help better position the children of low-income Canadians to enroll in post-secondary education.

I have been a proponent for a higher marginal tax rate beyond the current top bracket, and I was glad to see the Liberals include that in the election platform. However, the highest effective marginal tax rate is not on Canada’s wealthiest, but on our poorest: an individual on GIS faces a 50¢ clawback in their benefits for each dollar of income earned, on top of any income taxes. Finding exactly the right balance between clawing back the benefit as it no longer becomes necessary and not overly disincentivizing work or drawing from an RRSP/RRIF is difficult, but I believe that 50% is too steep. I would suggest altering the initial clawback level to a slightly lower income level, and decreasing the degree of clawback to something more like 35-40%. Contrarily, OAS recipients face a clawback of just 15¢ per dollar of income earned above a very generous threshold.

Along the same lines, CMHC could use many reforms to make the availability and cost of high-ratio mortgages more counter-cyclical. One suggestion in particular would be to add regional price-to-income or price-to-rent adjustments to the minimum down payment to help prevent future housing bubbles, and ensure that CMHC is able to serve those regions that most need it while sparing those regions with functioning rental markets or escalating prices the self-defeating aspect of high-ratio mortgages.

As someone trained as a scientist, who currently supports researchers, I also want to express my belief in the importance of basic and health research, and to stress that funding for the Tri-Council agencies (NSERC, CIHR, SSHRC) has not kept up with inflation under the former Harper government. It sounds as though you and your colleagues do believe in the importance of science and evidence, and will be making moves to help in this regard, but do remember that there is a lot of “back-filling” to do before we can begin to make research a renewed priority for Canada.

Finally, as a Torontonian and daily commuter, I appreciated the promise to work with the city to develop more transit infrastructure. The ability to move people around has lagged far behind the population growth the city has experienced, and it will take a lot of work to not only catch up, but get ahead and build spare capacity for the future. So when presented with options, build all of them. Downtown relief. Sheppard and Queen subways. Light rail, heavy rail, high-speed regional rail. All of it is needed now or will be soon enough.

Sincerely, Potato

—

And finally, a Harper-is-gone happy dance. I know the Liberals will screw up at some point, or we’ll disagree on something and I’ll get angry. But for now it feels good.

Before CPFC15, Borrowell hosted a drinks and appetizers mixer thing, and I got a chance to ask them a few questions about what they do (and full disclosure: they fed me snacks and a coke).

In particular, I was interested in how they approve borrowers, what their risk processes were, etc., and whether they were using any of the data available online to create fancy algorithms for approving loans. Interestingly (and reassuringly, if you’re an investor of theirs) they use very conventional risk metrics. Transunion and Equifax have been in business a long time, and it’s hard to beat credit scores and debt service ratios for determining risk and ability to repay debt. They can look at other factors to provide small tweaks or help identify potential fraud, but the basics are at work here.

Co-incidentally, after I got back I saw this great quote tweeted out: “Every company with a smart way of making loans others won’t later turns out to have a dumb way of making loans others won’t,” which got to the heart of what was on my mind as I was first hearing about Borrowell and innovative lending. And not that I have anything at stake, but it’s what I worry about for fintech start-ups: innovation is great, but there is over-innovation, and while it may be possible to find the decent gems the big banks reject out of hand and lend to them profitably, it’s hard and creates blow-up risk. And having some of these guys blow-up is not in anyone’s interest. There has been some talk about leveraging “big data” to make better loans, but it’s hard to do much more than tweak what already works, and it’s nice to see in practice that the fundamentals are at play there. They also mentioned that there’s a lot of tension between the underwriters and the marketing team, which is essential IMHO (if the underwriters aren’t killing the marketing team’s buzz something has gone wrong — indeed, if the underwriters aren’t separate from the marketing team, something has gone wrong).

The pitch was quite good: they’re not trying to make loans that no one else will, but rather to make it more convenient for people with decent (if not stellar) credit to get a loan without having to go in to a bank, without having to wait a long time to hear back, and without having to risk facing their neighbourhood branch manager to receive bad news. Also, that their main competition was as much credit cards (who do no risk analysis and just lend at high rates to all comers) as banks, especially since banks these days are mostly interested in pushing lines of credit instead of short-term (~3 year) amortizing loans.

Finally we talked for a bit about behaviour and how they can help. It was good to hear that they’re setting up referrals to debt management programs to point people towards if they get flagged by the system during an application as being over-stretched or in distress. And focusing on small-scale, amortizing loans (i.e. not revolving lines of credit, which are just about all the big banks offer these days), they can be more useful for those people trying to get out of high-interest debt.

It’s not a service I anticipate readers here to use — while the rates will depend on individual circumstances, and they will likely be a damned sight better than a credit card or subprime auto loan, they won’t be as good as a line of credit at a bank if you’re in good financial shape (which I assume all of you are) — but nice to know it exists.