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The house price correction that some market analysts have been predicting for Canada for years will begin this year, says the world’s largest bond fund.
House prices in Canada will fall as much as 30 per cent over the next two to five years, says Ed Devlin, head of Canadian portfolio management for Pimco, the trillion-dollar mutual fund run by high-profile billionaire Bill Gross.
“I’ve been talking with clients and writing about how the housing market is overvalued,” Devlin told the Financial Times. “The change this year would be that I actually think it starts this year.”
But Devlin isn’t calling this a crash; he refers to it as a market “correction.” In a note published in January, Devlin said Canada’s housing markets won’t “burst” in a “disorderly manner” like the U.S. market, because Canada’s economic conditions are relatively stable.
Nonetheless, Canadian house prices are “stretched,” Devlin noted, and a cyclical correction back to more sustainable price levels is in the cards.
Not everyone agrees with this forecast, and whether or not Canada is experiencing a housing bubble has been the subject of heated debate among economists for several years.
In a recent Reuters poll, 13 of 16 housing market analysts said they were “very concerned,” “concerned” or “somewhat concerned” that house prices could fall in Canada.
A recent Deutsche Bank survey named Canada as having the world’s most overvalued housing market.
But other observers argue Canadians can handle the high house prices, thanks to record-low interest rates that are making monthly payments more affordable than sticker prices would suggest.
Pimco’s Devlin doesn’t see those interest rates going up, but he does predict banks’ costs will rise, thanks to new regulations, and banks will pass on those costs to consumers.
One of those new rules was announced last week, when Canada Mortgage and Housing Corp., the government-run mortgage insurer, announced it is raising the premiums it charges for insuring mortgages by 15 per cent on average. Those new premiums will be reflected in higher borrowing costs for consumers who borrow more than 80 per cent of the value of their house.
A divide has opened up between domestic observers of the Canadian housing market — who tend to favour the view that Canada’s housing market remains healthy — and foreign observers, who appear much more concerned that Canada’s decade-long run of house price increase could end in disaster.
Bets against Canadian banks and the loonie have been hitting record highs over the past year. Those who bet against Canada’s banks have so far been losing, as their earnings have held up.
But those who bet against the loonie have been more successful; the currency has lost about 10 per cent of its value against the U.S. dollar over the past year, with about half that decline taking place since the start of the year.
As RRSP season closes and many Canadians prepare for tax time, a CBC Marketplace investigation reveals that financial advisers at some of Canada’s top banks and firms are giving consumers inaccurate, misleading and inappropriate advice.
Meanwhile, consumers face a complicated patchwork of regulatory bodies if they want to complain about bad investment advice, as some investor rights groups call for more robust consumer protection rules.
Since a third of Canadians rely on advisers to help them make financial decisions, Marketplace sent a person wearing hidden cameras to visit the five big banks and five popular investment firms in Ontario. The full investigation, Show Me The Money, reveals how individual banks and firms performed. The show, including practical tips on how to hire a financial adviser, airs Friday at 8:00 p.m. (8:30 p.m. NL) on CBC Television.
“That’s one of the worst pieces of advice I’ve ever heard in my life,” financial analyst and former adviser Preet Banerjee told Marketplace co-host Erica Johnson when shown hidden camera footage of one of the tests. “That was atrocious. That’s the only word to describe that advice.”
Hidden camera investigation
The tests revealed a wide range in the quality of advisers. Some performed well, giving clear answers and asking appropriate questions about the tester’s financial situation and risk tolerance. Other interactions, however, Banerjee found troubling.
In some cases, information was incorrect or misleading – even in response to direct questions, such as how fees are calculated. Some gave unrealistic promises about returns, including one adviser who said that a $50,000 investment should increase by $10,000, $15,000 or $20,000 in one year.
Others failed to adequately assess the customer’s risk profile, which advisers are supposed to use to ascertain the suitability of investment products they recommend to a person.
In an unusual twist, one firm tried to recruit the Marketplace tester to become an adviser herself. While some designations and certifications do require training, and individuals have to be licensed to sell specific products, “financial adviser” is not a protected term. There are currently about 100,000 advisers in Canada.
Several advisers in the Marketplace test neglected to include any conversation of paying down debt in their financial advice, which Banerjee says reveals a conflict of interest that most consumers don’t consider as they’re weighing the recommendations of an adviser.
“If you invest there’s a commission involved with that, or a percentage of assets,” he said. “But if you pay down debt, there’s no financial incentive for the adviser to do that. So that’s one of those conflicts of interests that people should know about.”
As a result of the Marketplace investigation, one firm suspended the employee and reported the behaviour to the regulatory body, the Investment Industry Regulatory Organization of Canada (IIROC).
Change coming slowly
The Marketplace test was similar to a broader mystery-shopper test in the UK by the Financial Services Authority. That test included 231 mystery shopping tests of investment advice at six major firms. The results of that test, made public last year, found that more than 25 per cent of investment advice was of poor quality because it was unsuitable or because the adviser did not collect enough information to be able to make the recommendations.
Ontario firms could face a test this year, as the Ontario Securities Commission (OSC) conducts a mystery shop to determine the quality of investment advice. While the OSC declined to provide specific details about its test to Marketplace, the results are expected to become public later this year.
However, investor rights advocates are critical of slow-moving efforts to provide better consumer protection. In a letter to the OSC, the Investor Advisory Panel pressed for reform, including how fees are structured and how complaints are investigated. “We have debated, discussed and studied the issues and their solutions for many years. It is time for decisions that will lead to a more robust investor protection regime in Canada.”
Among the most pressing issues: Financial advisers are not in fact required to act in the client’s best interest.
“There’s a big debate raging about that very issue right now,” says Banerjee. “So, it seems in a couple of years they will be bound to do what’s in the client’s best interest. But right now that’s not actually regulation.”
That runs contrary to the very reason many Canadians turn to advisers in the first place.
“If you walk into a financial institution, I think the average person on the street assumes they’re going to have someone who’s going to take care of all their financial issues,” says Banerjee. “But on the other side of the desk, there’s a wide range of people that you could see. Some of them are just order-takers or salespeople and others are true financial planning professionals.”
Patchwork complaints process
For consumers struggling with the consequences of bad investment advice, a confusing patchwork of organizations oversee complaints, including IIROC, the Mutual Fund Dealers Association (MFDA) and provincial securities associations. Each body oversees different types of complaints, depending on the nature of the complaint or the type of product the adviser is licensed to sell.
The Ombudsman for Banking Services and Investments (OBSI) also investigates complaints, but only for participating banks and firms. And OBSI has limited enforcement powers, offering only non-binding recommendations, so it’s entirely up to the bank or firm to decide whether or not to comply.
OBSI’s 2013 report, released this week, reveals a sharp increase in the number of banks and firms refusing to compensate investors for mistakes.
According to the report, banks and investment firms refused to pay back investors even when OBSI found wrongdoing in 10 cases last year. In total, investors were denied more than $1.3 million in restitution. The OBSI report called this trend “disappointing.”
Marketplace notified all of the banks and firms about the test and approached some for interviews, but all declined. Some viewed the test as an isolated incident; others vowed to investigate and take appropriate measures.
The Huffington Post Canada | Posted: 02/26/2014 5:48 pm EST | Updated: 02/26/2014 5:59 pm EST
The deadline to contribute to a Registered Retirement Savings Plan (RRSP) is drawing near, and apparently quite a few Canadians are leaving their contributions to the last minute.
Thirty-one per cent of eligible Canadians still planned on making a contribution before this year’s cutoff date, according to a poll conducted by Harris/Decima for CIBC from Feb. 13-17.
This year’s RRSP deadline is March 3, now less than a week away.
Out of that 31 per cent who still wanted to contribute so close to the deadline, just under half hadn’t made any contributions for that tax year, while the remainder had, but planned to contribute more.
The poll showed those most likely to procrastinate on planned RRSP contributions were between the ages of 25 and 44. CIBC said previous research indicated younger Canadians often need to balance their savings with debt repayment, which can result in delaying contributions.
A previous poll conducted in November 2013 for RBC said only 23 per cent of Canadians planned to contribute the maximum amount allowed. Younger Canadians are less likely to have the cash to make the maximum contribution, CBC noted, but just 20 per cent of people between the ages of 35 and 54 and 25 per cent of people over age 55 said they’d contribute the full amount.
Senior Manager with RBC Financial Planning Richa Hingorani said putting money aside on a regular basis can help make the process more affordable.
“Maxing out your contribution at the start of the year is great if you can afford it,” she said in a press release, “but for most Canadians, regular contributions throughout the year is a more realistic and effective approach.”
Christina Kramer, CIBC’s Executive Vice President, Retail and Business Banking, also noted the benefit of saving throughout the year, rather than scrambling to find cash close to the cutoff.
“Some Canadians find it difficult to come up with a lump sum for their RRSP, underscoring the importance of creating a budget and a regular savings plan for the year ahead to avoid the last-minute crunch,” she said in a news release.
CP | By Julian Beltrame, The Canadian PressPosted: 02/26/2014 10:33 am EST | Updated: 02/26/2014 3:59 pm EST
OTTAWA – A new paper by researchers at the International Monetary Fund appears to debunk a tenet of conservative economic ideology — that taxing the rich to give to the poor is bad for the economy.
The paper by IMF researchers Jonathan Ostry, Andrew Berg and Charalambos Tsangarides will be applauded by politicians and economists who regard high levels of income inequality as not only a moral stain on society but also economically unsound.
Labelled as the first study to incorporate recently compiled figures comparing pre- and post-tax data from a large number of countries, the authors say there is convincing evidence that lower net inequality is good economics, boosting growth and leading to longer-lasting periods of expansion.
In the most controversial finding, the study concludes that redistributing wealth, largely through taxation, does not significantly impact growth unless the intervention is extreme.
In fact, because redistributing wealth through taxation has the positive impact of reducing inequality, the overall affect on the economy is to boost growth, the researchers conclude.
“We find that higher inequality seems to lower growth. Redistribution, in contrast, has a tiny and statistically insignificant (slightly negative) effect,” the paper states.
“This implies that, rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect.”
While the paper is heavy on the economics, there is no mistaking the political implications in the findings.
In Canada, the Liberal party led by Justin Trudeau is set to make supporting the middle class a key plank in the upcoming election and the NDP has also stressed the importance of tackling income inequality.
Stephen Harper’s Conservatives have boasted that tax cuts, particularly deep reductions in corporate taxation, are at least partly responsible for why the Canadian economy outperformed other G7 countries both during and after the 2008-09 recession.
In the Commons on Tuesday, Employment Minister Jason Kenney said the many tax cuts his government has introduced since 2006, including a two-percentage-point trim of the GST, has helped most Canadians.
Speaking on a Statistics Canada report showing net median family wealth had increased by 44.5 per cent since 2005, he added:
“It is no coincidence because, with the more than 160 tax cuts by this government, Canadian families, on average, have seen their after-tax disposable income increase by 10 per cent across all income categories. We are continuing to lead the world on economic growth and opportunity for working families.”
The authors concede that their conclusions tend to contradict some well-accepted orthodoxy, which holds that taxation is a job killer.
But they say that many previous studies failed to make a distinction between pre-tax inequality and post-tax inequality, hence often compared apples to oranges, among other shotcomings.
The data they looked at showed almost no negative impact from redistribution policies and that economies where incomes are more equally distributed tend to grow faster and have growth cycles that last longer.
Meanwhile, they say the data is not crystal clear that even large redistributions have a direct negative impact, although “from history and first principles … after some point redistribution will be destructive of growth.”
Still, they also stop short of saying their conclusions definitively settle the issue, acknowledging that it is a complex area of economic theory with many variables at play and a scarcity of hard data.
Instead, they urge more rigorous study and say their findings “highlight the urgency of this agenda.”
The Washington-based institution released the study Wednesday morning but, perhaps due to the controversial nature of the conclusions, calls it a “staff discussion note” that does “not necessarily” represent the IMF views or policy. It was authorized for distribution by Olivier Blanchard, the IMF’s chief economist.
Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?
The fact is it’s all about the tax. Here’s a quick refresher of the tax-free registered savings account:
How much can I put into my TFSA? Since the beginning of 2013, you can now contribute up to $5,500 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn’t a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It’s also worth noting that your withdrawals won’t compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.
It’s a great retirement savings tool: If you’ve successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, keeping in mind your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won’t reduce your taxable income, you won’t receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP. By contrast, any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income.
Don’t forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off. If you could afford to, contributing to each year’s maximums in both plans would be ideal. Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.
Posted: 02/19/2014 12:34 pm
Over the years that Desjardins Group conducted its retirement survey, two themes always came up: most Canadians avoid retirement planning and they’re sure they haven’t saved enough. So, how prepared are you?
A) You’re totally confident about your financial security and retirement plans, or;
B) You know you haven’t saved enough, but now you’re ready to make a plan.
If you answered B, the experts from Desjardins have some suggestions to help you get started:
1) Think about what your retirement will look like: Will you be spending your retirement travelling the world or will you just keep on working? According to the results in previous retirement surveys, more than half of respondents expected to do just that. Many said it was because working kept them active. But the most popular reason was financial. While it might be nice to think that you could continue your current working lifestyle well into your 80s. But life has a way of throwing you curveballs. The reality is that less than one retiree in five continues to work. In fact, events like job loss, a disability, becoming caregiver to a loved one, or simply fatigue can change your plans in an instant. This is why it’s important to visualize what your life might look as part of creating a solid plan.
2) Figure out how much money you’ll need to save: Keep in mind that you’ll likely need enough savings for a retirement that last 25 to 30 years. For example, the average 55-year-old woman who is a non-smoker will live to 86 while her male counterpart will live to 83. That being said, you will likely need a retirement income of about 70 per cent of your gross working income. Here’s a snapshot of the type of income sources you may have if you were retiring today:
1. An employer pension, if it was available to you
2. The Canadian Pension Plan
3. The Old Age Security Pension
4. Savings in an RRSP and/or TFSA
Since future retirees have no control over the amounts of the first three sources of income, creating a substantial nest-egg within your RRSP and other savings accounts will be an essential part of your written retirement plan.
3) Each year, review your plan: The golden rule to ensuring you have saved enough is to regularly review your objectives and adjust your plan as required, as circumstances can change quite often over 20 years. For example, there may be changes in the tax rules, new laws, interest rates and public pension plans that may affect your goals. But if you stay flexible, all this is manageable, giving you much better odds of attaining your retirement goals.
Is the U.S. consumer tapped out? If so, how in the world will the U.S. economy possibly improve in 2014? Most Americans know that the U.S. economy is heavily dependent on consumer spending. If average Americans are not out there spending money, the economy tends not to do very well. Unfortunately, retail sales during the holiday season appear to be quite disappointing and the middle class continues to deeply struggle. And for a whole bunch of reasons things are likely going to be even tougher in 2014. Families are going to have less money in their pockets to spend thanks to much higher health insurance premiums under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government welfare programs. The short-lived bubble of false prosperity that we have been enjoying for the last couple of years is rapidly coming to an end, and 2014 certainly promises to be a very “interesting year”.
Obamacare Rate Shock
Most middle class families are just scraping by from month to month these days.
Unfortunately for them, millions of those families are now being hit with massive health insurance rate increases.
In a previous article, I discussed how one study found that health insurance premiums for men are going to go up by an average of 99 percent under Obamacare and health insurance premiums for women are going to go up by an average of 62 percent under Obamacare.
Most middle class families simply cannot afford that.
Earlier today, I got an email from a reader that was paying $478 a month for health insurance for his family but has now received a letter informing him that his rate is going up to $1,150 a month.
Millions of families are receiving letters just like that. And to say that these rate increases are a “surprise” to most people would be a massive understatement. Even people that work in the financial industryare shocked at how high these premiums are turning out to be…
Since Americans are going to have to pay much more for health insurance, that is going to remove a huge amount of discretionary spending from the economy, and that will not be good news for retailers.
Get Ready For Higher Taxes
When you raise taxes, you reduce the amount of money that people have in their pockets to spend.
Sadly, that is exactly what is happening.
This tax season, millions of families are going to find out that they have much higher tax bills than they had anticipated.
If you are a worker, you might want to check out the chart that I have posted below to see where you stack up. In America today, most workers are low income workers. These numbers come from a recentHuffington Post article…
It is important to keep in mind that those numbers are for the employment income of individuals not households. Most households have more than one member working, so overall household incomes are significantly higher than these numbers.
Higher Interest Rates Mean Larger Debt Payments
On Tuesday, the yield on 10 year U.S. Treasuries rose to 3.03 percent. I warned that this would happen once the taper started, and this is just the beginning. Interest rates are likely to steadily rise throughout 2014.
The reason why the yield on 10 year U.S. Treasuries is such a critical number is because mortgage rates and thousands of other interest rates throughout our economy are heavily influenced by that number.
So big changes are on the way. As a recent CNBC article declared, the era of low mortgage rates is officially over…
Needless to say, this is going to deeply affect the real estate market. AsMac Slavo recently noted, numbers are already starting to drop precipitously…
And U.S. consumers can expect interest rates on all kinds of loans to start rising. That is going to mean higher debt payments, and therefore less money for consumers to spend into the economy.
Government Benefit Cuts
Well, if the middle class is going to have less money to spend, perhaps other Americans can pick up the slack.
Or maybe not.
You certainly can’t expect the poor to stimulate the economy. As I mentioned yesterday, it is being projected that up to 5 million unemployed Americans could lose their unemployment benefits by the end of 2014, and 47 million Americans recently had their food stamp benefits reduced.
So the poor will also have less money to spend in 2014.
The Wealthy Save The Day?
Perhaps the stock market will continue to soar in 2014 and the wealthy will spend so much that it will make up for all the rest of us.
You can believe that if you want, but the truth is that there are a whole host of signs that the days of this irrational stock market bubble are numbered. The following is an excerpt from one of my recent articles entitled “The Stock Market Has Officially Entered Crazytown Territory“…
If the stock market bubble does burst, the wealthy will also have less money to spend into the economy in 2014.
For the moment, the stock market has been rallying. This is typical for the month of December. You see, the truth is that investors generally don’t want to sell stocks in December because they want to put off paying taxes on the profits.
If stocks are sold before the end of the year, the profits go on the 2013 tax return.
If stocks are sold a few days from now, the profits go on the 2014 tax return.
It is only human nature to want to delay pain for as long as possible.
Expect to see some selling in January. Many investors are very eager to start taking profits, but they wanted to wait until the holidays were over to do so.
So what do you think is coming up in 2014? Please feel free to share what you think by posting a comment below…
- Energy bills could soar by ANOTHER 10% before the winter, families warned (mirror.co.uk)
- Energy company profits rise 74 per cent in 48 months (metro.co.uk)
- News story: Report into energy prices, profits and fuel poverty (gov.uk)