Blessed by the Potato

The stats on how many people got nastygrams from the CRA with penalties for over-contributing to their TFSAs this year have come out, and there’s a lot of shock over the fact that this keeps happening. Young recently made that mistake.

I will say it again: the onus is on you to track it yourself. The web portal is known to be dramatically out-of-date. IMHO the CRA should just take it down because it’s misleading and the opposite of helpful. Young suggests calling to get a more up-to-date reckoning. This may be more up-to-date than carbon dating the archeological evidence in the sedimentary layers of the web portal, but I can guarantee someone will be caught by this system also being out-of-date at some point. There is no getting around the fact that the CRA can’t give you an updated contribution limit if the banks haven’t sent them the information (and as an aside, it’s really weird to me that phoning will get you more up-to-date information than the computer system, like we live in an age where there’s a pile of paper forms on somebody’s desk that haven’t been entered into the computer yet). And the CRA will not accept responsibility for telling you that you have contribution room left when they later determine that you don’t.

I make tracking it simple on myself: I max it out in one call the first week of January, and then forget about it for the rest of the year. Now that’s only possible because I had non-registered savings and investments when the TFSA was launched, and continued to have non-registered funds every year, so I just have to call up TD, make an in-kind transfer of some shares, and contribute whatever cash is needed to round out to the limit (which I can then use to buy e-series with inside the TFSA).

But whether you have a simple system so you don’t screw it up (like contributing in one chunk, or an automatic monthly contribution that keeps you under the limit), track it religiously, or go through all your statements on an as-needed basis to forensically re-create the events in question, ultimately it’s up to you to not over-contribute.

I didn’t like the recent MoneySense tale of a capitulating bear in Toronto. It had some good stuff in there, but it was sandwiched by some awful thinking that does the readers a disservice.

Sandi picked up on one good bit: “It’s a purchase—it’s what I’ve been saving my money for.” While I do harp a lot on the insane costs and the importance of making a good comparison to renting, the purpose of that comparison is to make an informed choice of how to best spend your money for you. Many people are willing to spend more to own for the “pride of ownership” (me? Well, given how awesome this house is and the services our landlords provide, as well as seeing the risks inherent to owning, I would need a discount to owning to take the plunge). But how much more is always the question. So you do your comparison and you may say “meh, an extra $2k per year plus so much extra risk, that’s worth it to us.” Of course for many in Toronto and Vancouver, after running some scenarios it may be more like “Fuckity-buckity! It costs how much more to own?” So he said that money is for spending (which it is), and that his house is not an investment (which I suppose it’s not), but then never really clarified for readers how much more he was looking at or that it was a trade-off he was willing to make because yearly beach vacations are dumb and bad and nobody likes them anyway.

He does do a number of things right: he checks to see if his budget can handle an increase in rates; that he can survive a decent 20% correction and still stay above water in case he needs to move; he acknowledges that prices may fall and is not buying with visions of future gains in his eyes; and he’s not planning to move for a long time (though as a snarky aside, the assumption that he’s not planning to sell for at least 20 years may be a bit optimistic for someone in the magazine industry…).

However, the article also uses some seriously specious reasoning which brackets that good stuff. The worst was right up front:

“The reason is simple: I want to eventually retire with a paid-off house, and I was running out of time.”

There are many paths between not having a paid-off house today, and having a paid-off one in retirement (and that is not even commenting on the goal itself). For example, you can rent your larger family home right up until the day you retire — investing the difference the whole time — and then buy your retirement pad (which may be a downsizer from your working/family life place you rented) all in cash. Boom, paid off in one day and saved one round of transaction fees too. At no point does a mortgage have to come into it. Indeed, given the basic affordability issues he talked about in the preceding paragraph, the last way to get to a paid-off house in retirement should be to buy one now. The last part of that statement also makes no sense: there is no time limit, other than actually entering retirement. You don’t get to having a paid-off retirement pad any more surely from paying off a mortgage on a too-costly house at a young age than you do from renting and saving.

Let’s replace “house” with some other thing that isn’t so loaded and traditionally linked with a mortgage and the point should be clearer: “I want to eventually retire with a paid-off boat.” Well now it’s clearer: you could buy a boat now with a boat loan and pay it down, or you could rent a boat, save up, and buy one with cash when appropriate. That makes even more sense if you think there’s a good chance boats might be 20% cheaper in the future and that renting is less expensive for now — how does buying now make sense if your goal is to have one at some point before retirement? If there was a big boat sale on then maybe it would make sense to take the plunge and get a loan if you needed to. Instead, it looks like many buyers these days are getting suckered by the no interest until 2018 promotional event.

This whole “running out of time” thing reminds me of the Stockdale Paradox*: James Stockdale was in a POW camp in the Vietnam war for almost 8 years. When asked about his coping strategy, he said:

“I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end…”

When asked who didn’t make it out of Vietnam, Stockdale replied: “Oh, that’s easy, the optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”

The paradox is that you have to believe in the fundamentals, that sanity will return. Trust the math, trust the logic, and trust that you will prevail in the end, but do not be too optimistic — the unrealistic hope for short-term salvation that is dashed again and again will wear you down and end you over time. You need to live in the gritty reality we face. When the bubble first started becoming a “popular” concern around 2008, some were calling for corrections to be as fast or faster than the US, especially given that we had the opportunity of witnessing their meltdown as a kind of sneak preview. I always figured it would be a slow, grinding process — but even I have been greatly surprised by how long the insanity has gone on for, originally pegging 2012 as the timeframe to be prepared to wait (4-5 years). The differences between the US and Canada that people loved to point out (such as how subprime lending was arranged, or non-recourse states) were largely differences of accelerating factors. It would make a Canadian implosion a painful, drawn-out affair compared to the US’s relatively fast (but still multi-year) implosion, but did not immunize us from a bubble.

Christmas has come and gone, and Easter too, but that does not mean that prices will continue to grow at triple the rate of inflation forever until only the Pentaverate** can buy in Toronto.

That’s why I focus so much on the price:rent metric and rent-vs-buy comparison: you have to live somewhere, so you may as well settle in somewhere nice because it’s gonna be a while. Even after the crash, it’s likely that there will be an undershoot in prices that will last for years, so you’ll have plenty of time to dance out of a stock portfolio. Of course you invest it.

Anyway, back to the MoneySense article at hand and the other half of the bracket — the conclusion:

“So do I feel like I got a good deal on my house? Not at all. By historical measures, I overpaid by quite a bit. But it was either that or no house at all…”

Either that or no house at all? That’s a false dichotomy. A really obviously bad one at that. Where has he been living until today? Is this another instance of the implicit assumption that if you don’t own you must be homeless, that renting is somehow equivalent to cowering under a sheet of cardboard? For such a massive purchase and component of the typical household budget, there is a surprising degree of reliance on memes, mantras, tradition, false dichotomies, and surface analysis. A bubble is as much about belief and memes as it is about interest rates, new developments, and price momentum. To see it as the conclusion in MoneySense by a self-described happy renter was infuriating. This isn’t “native advertising” in the Sun saying that, this is the concluding remark from the MoneySense editor-in-chief, and it just washes away all that good stuff about considering risks that came right above it.

Ugh.

Update/clarification from G+: in the article I’m not trying to slam the individual choice he made (the outcome). It’s not the choice I made, it may be sub-optimal, but he’s done his risk assessment and whatever, that’s his choice. So it’s all good there in the middle “here’s my choice, I’ve got my eyes open, and I’m prepared to deal with the consequences.” What set me off was that the good part is undermined by bracketing it in with things that basically say “and I had no choice whatsoever and was forced to do this.” Which just kind of blew the top off Mt. St. Potato, because I know people who would see that as being just as good as “rent is throwing your money away” or whatever. All the careful risk stuff sounds like an unnecessary aside when it’s the only choice there is anyway.

* – Hat-tip to Brooklin Investor for reminding me of this tale at precisely the right time for this rant.
** – The Queen, the Vatican, the Gettys, the Rothschilds, and Colonel Sanders before he went tits-up.

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 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.

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.