Posted by Canadian Dream on March 8, 2010
The majority of reader’s questions I get tend to be situational like: can I retire, do we have enough for me to stay home from work? So it was a bit of surprise to get a question that was looking purely for my speculation on a topic:
I would love to read an article about your opinion of a future “generational housing bubble” regarding our aging baby boomers and our current population growth not turning over enough people to replace them. What happens to house prices when baby boomers start selling their homes and moving into senior friendly housing?
The past 30-40 years of baby boomer house buying has fueled demand and driven up house prices creating an affordability barrier for the next generation, which in turn caused the lax mortgage rules. They made mortgages cheaper instead of homes, and that only gave prices nowhere to go but up. Now a 3 bedroom home is just barely affordable for the average income family. If the gov’t is going to deflate this bubble instead of waiting for it to burst then they will have to tightly reign in the growth in house prices that people have come to expect.
Well this question came in right after my post on the new measures to deflate the housing bubble. So obviously the government has tried to take a bit out of this housing bubble, but not too much. Why? I’m strongly speculating here it has to do with not pissing off the baby boomers by causing their housing values to crash right after the 2008 stock market correction. After all the majority of them do vote (compared to other age categories) so the new rules I suspect are walking a fine line of doing something to cool housing, but not too much. The decision was more of a political one than a practical one.
So what will happen to the housing market in the long run? I still think we are doomed to a large house value correction on average (how it plays out in regional markets is impossible for me to guess at). Why? It’s the basic balance of supply and demand. There are too many boomers with non-starter houses and second houses (cabin or investment property) and too few buyers that can afford to pay what they want for those properties. As they age and want to get rid of those homes (or more likely need to get rid of since they don’t typically have enough saved for retirement) it will put too many houses on the market all at once. For a while the boomers might try to stick to their guns and ignore the reality but in the end some might start getting a bit desperate to sell and that would trigger a spiral down in prices.
Yet there is a large hole in my speculation. It assumes that the majority of boomers just stop working, since there has been a lot of talk about doing some work in retirement you may end up with a more balanced exit of the boomers from the market. In this case it might avoid a crash in housing prices and we might just end up with a more gentle correction that goes slightly down followed by a leveling off in prices as incomes need to rise up to a more equal footing to house prices.
So that’s my speculation on the market. Right now I would guess at about 50-50 odds for either case occurring. The boomers are not typical in a lot of ways so trying to predict their overall movement in a market is gamble at best. What’s your thoughts on this generational bubble? Will it correct or not?
Posted by Canadian Dream on December 28, 2009
Another day and another interesting question from a reader. This one comes from Andy Royer who wrote:
One question I hope you haven’t answered yet. You (and several others) keep
mentioning it’s not worth it to invest in RRSPs if you will be in the same tax
bracket or higher.
“Now in this income level you will most likely want to avoid RRSP’s as you
likely to be in the same tax bracket in retirement.” — Your March 27, 2007 blog
posting for example.
Has anyone ever done the math on this? I’m thinking the Tax Credit gives you
more money to invest now, plus the money grows tax free into retirement. So even
though you may pay more tax later are you really worse off?
My personal plan is to have 100% of my income when I retire, so this is quite
relevant to me. If you don’t have the numbers I may have to sit down and figure
this out when I get some time.
Damn I hate when I write things that come back to haunt me, but Andy brings up a good point that I shouldn’t be using a blanket statement. In that post I was referring to the fact you need to be careful about assuming a RRSP is a good thing. In some cases it isn’t, it depends on the numbers. For example, a TFSA might make more sense when you are just starting out in investing than an RRSP, since it is more flexible to be used for saving for a house down payment or retirement.
In that specific case I was referring to the fact that depending on the type of investment you make it might make more sense to hold something in a taxable account rather than an RRSP. For example, a Canadian dividend paying stock if your marginal tax rate on dividends are negative. This happens for my wife, she gets a tax credit that is greater than the tax owning so hence the negative tax rate. When that happens you are hard pressed to make up that advantage. If you don’t believe me check out my math here (I just assumed a zero tax rate on the dividends to try and make the results closer. Also anyone is free to copy the sheet and play around. Please advise me if you find a formula error). If on the other hand you were taking about interest income you likely would be correct, an RRSP would likely be better.
So really the answer should be: it depends. Check out the math for your specific case and see what makes sense to you. Hope that helps more than it confuses people.
Posted by Canadian Dream on December 21, 2009
Well after this post I suspected I would have to provide some follow up. One comment from Jordan summed it up well with:
I’d be really interested in reading an update on your household balance sheet, how you’ve managed to swing this so soon. Maybe give me some tips to get closer to the same goal.
So I’ll try to answer that question. First off my year end net worth post is coming up next week so I won’t jump into specific numbers on each account, but I’ll provide a brief overview of the items that make up what happened.
First off it’s important to recall I have a low cost lifestyle, so if you added up everything I typically need about $3100 a month to cover my costs, but that includes a larger mortgage payment than required. My normal mortgage payment would be around $750/month, but I’m currently paying about $1100/month.
Then you need to add up my non-day job income which includes:
- Distribution and dividend income from TFSA and taxable accounts which is about $2200/year
- I assumed a return off my RRSP’s and other retirement accounts of 4%, so that’s another $2200/year (based on my last Net Worth post)
- My wife’s daycare clears approximately $6000/year in profit
- My school board job pays about $23,400/year
- Total $33,800/year or $2816/month
So from here it is simple math. If I lowered the mortgage payment to the $750 my income from other sources is greater than my expenses. Or if my wife takes another kid in the daycare and clears another $350 a month in profit we also get to the same place.
Obviously there are a few holes in this crude analysis. Income taxes have not been considered on that income so that will lower the monthly amount a bit and it isn’t sustainable since it doesn’t include cash for retirement savings or expenses that are currently covered by my dental/health coverage at my day job. Yet once the mortgage is paid off in the next three years I’ll firmly be fine without the day job regardless of taxes and other expenses.
So by looking at the numbers you can see the major driver for this is my school board trustee job, which ironically I took without caring about the pay at all. So it brings for an interesting conclusion: following your passion will sometimes lead you to where you want to go sooner than you thought possible.
For many years I’ve been focusing on the expenses and savings part of the early retirement, but the other side, income, is ultimately what go me to this milestone. So this leads the path of semi-retirement which I intend to investigate in the New Year a bit more. Perhaps the issue isn’t that I want to retire early, but rather leave my day job and work on other things instead.
