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Baby, we got a bubble!?

Slightly off topic but relevant I believe. Intriguing to me that someone could actually look at a line of credit as an asset. That said, it is exactly the concern that Mark Carney keeps bringing up:

From the Toronto Star:

http://www.moneyville.ca/article/931311--wealthy-barber-we-ve-become-such-great-spenders?bn=1

Wealthy Barber: We've become such great spenders

David Chilton's new book The Wealthy Barber Returns will not be available until summer, 2011.




David Chilton, the author of The Wealthy Barber will have a new book out this summer and a large part will be devoted to what great spenders we have become. In the 21 years since The Wealthy Barber appeared, Chilton says we’re much better savers, but we’re killing ourselves with the misuse of easy credit.

In an interview in Toronto last summer to talk about his new book — The Wealthy Barber Returns: Significantly Older and Marginally Wiser, Dave Chilton Offers His Unique Perspectives on the World of Money. He reiterated old themes that we don’t save enough and we’re lousy investors. But the new one is that we’re treating our lines of credit like a second income, rather than money we owe.

“The access people have to debt is killing them,” he said.

Here is an edited version of that portion of our conversation:

What worrisome trends do you see?

People are starting to save way too late. That’s a theme I see over and over. It’s very difficult (to have a reasonable retirement income) if you don’t start setting aside money until your mid-40s or later. The math isn’t there. You need those years of compounding.

But the biggest problem I’ve seen in the last 10 years has been debt. The access people have to debt is killing them. Lines of credit are a huge problem. Huge.

You open them up for $80,000, or $100,000 or $150,000. You think: ‘I’m not going to use it, I’ll draw it down infrequently’ and all of a sudden, you have a big debt that’s sabotaging your savings while you try to pay it down. Or worse, you don’t pay it down.

People cannot stop spending and easy credit has made it easier for people to give in to the temptation. That lack of discipline is shining through.

My biggest frustration has been people who are disciplined enough to save by paying themselves first, but are still in trouble because they use their line of credit.

When The Wealthy Barber came out, if somebody paid themselves first I didn’t worry about how they spent the rest of the money, because they were saving. What kind of trouble could they get into? Now they can get in trouble by paying themselves first but then running up lines of credit for $10,000, $50,000 or $150,000. So now pay yourself first isn’t enough.

Is it true some people believe that a line of credit is an asset?

Yes. It’s absolutely bizarre. I was dealing with a very intelligent guy who had his $35,000 line of credit on the asset side of his balance sheet. I said: Why is this an asset? Who owes you the money? Who did you give a line of credit to?

He said: I gave it to myself. I said: Why would that be an asset? He said it’s my line of credit. That is one of the dumbest things I have ever heard.

He owes $35,000 to the bank and he has it on his asset side because it’s ‘his line of credit.’ That’s how messed up people get. They think of it as a second income.

Two of the new book’s chapters are parables about lines of credit

I wrote the first chapter and gave it out to a test group. I couldn’t believe how many people said: ‘Oh my God, that’s us.’ The stories coming back were far worse than the ones I used, so I think I understated the problem.

I blame HGTV. People watch those shows and say I have to have it. I’m not against home renovations, but they have to be done in the context of affordability which is where people are losing their way.

Or, they’ll do the first reno within the context of affordability, but don’t realize that it will lead them down this path to continuous home improvements and their line of credit lets them. In the old days they ran out of money and said: ‘Okay we have to save up again. Now they say lets use our line of credit.’

What worries you?

The two things that people have to focus on is saving more and investing more efficiently. That’s what it’s all about. The new book looks at spending from every angle. I say early on that our problem is not that we’re bad savers, it’s that we are fantastic spenders. We are amazing at spending money in developed countries. I think you’ll like that part of the book.
 
Is it true some people believe that a line of credit is an asset?

Yes. It’s absolutely bizarre. I was dealing with a very intelligent guy who had his $35,000 line of credit on the asset side of his balance sheet. I said: Why is this an asset? Who owes you the money? Who did you give a line of credit to?

He said: I gave it to myself. I said: Why would that be an asset? He said it’s my line of credit. That is one of the dumbest things I have ever heard.

He owes $35,000 to the bank and he has it on his asset side because it’s ‘his line of credit.’ That’s how messed up people get. They think of it as a second income.

That deserves a big :confused:WTF:confused:.
 
Slightly off topic but relevant I believe. Intriguing to me that someone could actually look at a line of credit as an asset.
Not a big surprise that someone is a moron. Lots of morons out there.

That said, my HELOC gets listed on my bank card as a "Savings Account", and I have a ridiculously enormous amount of "Available Funds*" in that account.

* Refer to the "Available Funds" column to see how much money you have to make an immediate transaction.

Similarly, my available funds for my chequing account isn't the balance on the account. It's the balance + the 4-digit overdraft.

So, the banks are wording stuff to make it seem "you're richer than you think", so they can extract as much interest off you as possible. Then again, my credit card company was nice enough to reverse an interest charge when I asked. I normally pay my balance off every month. However, last month I confused the due date with another card and thereby missed the payment date by a few days. I called in and they said they'll just reverse the interest charge on the next bill.
 
According to Urbanation, the average price of an unsold pre-construction condo in the downtown core is $723 psf vs $518 psf in for a resale condo and the price of price of pre-construction continues to grow faster than resale. Furthermore, total of the total sales of condos in the Toronto CMA, pre-construction sales have out sold resale units by about 4000 last year

So this begs the questions:

Are condos still a good investment?
Are we gpomg to oversupplied?
or
will prices continue to rise?

Tune in tonight as we ask these questions and more to Brad Lamb and Hunter Milborne

Have your own question?

call 416.446.7090 and ask host Brian Persaud live and on air. Inside Toronto Real Estate airs Wednesdays at 7:00 PM only on Rogers TV.

Repeats
Thursday 12:00p

For video and more info check out our web Page http://www.rogerstv.com/itre
 
http://www.moneyville.ca/article/931311--wealthy-barber-we-ve-become-such-great-spenders?bn=1

Yes. It’s absolutely bizarre. I was dealing with a very intelligent guy who had his $35,000 line of credit on the asset side of his balance sheet. I said: Why is this an asset? Who owes you the money? Who did you give a line of credit to?

He said: I gave it to myself. I said: Why would that be an asset? He said it’s my line of credit. That is one of the dumbest things I have ever heard.

He owes $35,000 to the bank and he has it on his asset side because it’s ‘his line of credit.’ That’s how messed up people get. They think of it as a second income.

It depends. If he had it appropriately listed on the debit side of his balance sheet then his accounting was correct. The article doesn't confirm that he didn't list the appropriate debit entries.
 
According to Urbanation, the average price of an unsold pre-construction condo in the downtown core is $723 psf vs $518 psf in for a resale condo and the price of price of pre-construction continues to grow faster than resale.

This rampant use of the word "average" is starting to make me batty! With places like the Ritz Carlton all the way down to The Modern in the core, it's a ridiculous measure of anything.
 
I thought the same thing when I read this Simuls. We know that alot of the projects have been at the upper end of the market because that has been the sweet spot of the market from $700-900/sq.ft. So comparing previous condo construction and the fact that there has been more high end projects means it is really comparing apples to oranges when comparing mostly mid range resale with higher end newer construction.
 
To me the above article Ka1 just sounds like an attempt to justify continued borrowing. Remember, banks make their money by people borrowing.
I get the logic of what he is saying but the reality is people are and continue to take on increasing debt loads and it is my belief that nobody actually gets ahead in the long run taking on more debt. they just guarantee themselves longer payment times and a longer working life.
I appreciate there is good and bad debt. Unfortunately, while one may be able to justify a good home in a good neighbourhood, I am less certain one can justify a 3rd "flat screen TV" or a new mattress "bought on credit".
 
I have several flat screen TVs, and a projector too. ;)

Flat screen TVs are cheap as borscht these days. OTOH, a single luxury car may set you back $75000, and mid-range larger family car may set you back $35000. The reason I mention this is because people used to wonder why I had multiple computers, multiple iPods, and multiple TVs. My response was that as far as luxury items go, they're actually fairly cheap... at least when compared to stuff like cars, yet people have no problem dropping $25000-35000 on a car, even though a car <$20000 may be perfectly fine for their needs. People don't question buying $35000 cars, yet they question buying a couple of thousand $ worth of electronics? Go figure.

As for mattresses? A good mattress, even a $1000-1500 one, is a necessity IMO. In many instances I'd rather have $1000 burning a hole on credit than a bad back.
 
Eug:
I perhaps did not express myself as clearly as I might have.
I have no problem with people having multiple TV's.
My problem is with people at debt/income ratios of 1.48 and higher going with credit to by a 3rd TV.
As for a mattress, yes a necessity but do you go and buy the bed on credit when your previous bed may work reasonably well (not at 100% perhaps) or do you save and not increase your debt further.
I am quite sure from your previous posts that you are not at debt to income of 1.48 or higher and if you are, it is probably "good debt" for the most part.
My point is that unfortunately credit is not necessarily used wisely by alot of people and that these people succumb to the slick advertising campaigns that convince them "they are richer than they think....not", and that they are entitled to have everything today and why wait which is wrong in my view.
I too use credit but for investment purposes or convenience but not to buy things that I do not need or buy just because retail therapy makes me feel better. So back to your point. If electronics that are cheap are your thing, and you use them, enjoy them and can afford them, then that is your choice and I have no qualm with it. If you on the other hand are buying all this, sinking further into debt, and ultimately cannot meet your obligations, then I would say that I do not agree with your or anyone else making this decision.
 
Eug:
I perhaps did not express myself as clearly as I might have.
I have no problem with people having multiple TV's.
My problem is with people at debt/income ratios of 1.48 and higher going with credit to by a 3rd TV.
As for a mattress, yes a necessity but do you go and buy the bed on credit when your previous bed may work reasonably well (not at 100% perhaps) or do you save and not increase your debt further.
I am quite sure from your previous posts that you are not at debt to income of 1.48 or higher and if you are, it is probably "good debt" for the most part.
My point is that unfortunately credit is not necessarily used wisely by alot of people and that these people succumb to the slick advertising campaigns that convince them "they are richer than they think....not", and that they are entitled to have everything today and why wait which is wrong in my view.
I too use credit but for investment purposes or convenience but not to buy things that I do not need or buy just because retail therapy makes me feel better. So back to your point. If electronics that are cheap are your thing, and you use them, enjoy them and can afford them, then that is your choice and I have no qualm with it. If you on the other hand are buying all this, sinking further into debt, and ultimately cannot meet your obligations, then I would say that I do not agree with your or anyone else making this decision.
I have a debt to income ratio much higher than 1.48, and quite frankly, I see no problem with it, assuming I understand it correctly.

My understanding is that the calculation is based on total debt (mortgages, loans, credit cards, HELOC, etc.) vs. after tax income. If that is correct, then my debt-to-income ratio is well over 2 (200%), and lots of people with excellent finances have numbers well over 3 (300%) or 4 or even 5 or more.

Why?

Cuz anyone with a mortgage is likely going to have a significant debt-to-income ratio. Remember, many of us think that a mortgage of less than 4X annual gross income is probably manageable, which means that person's debt to (net) income ratio may actually be over 5.0.

So, I think debt-to-income ratio alone is a pretty useless gauge of an individual's finances. As you say, there's good debt (although some would argue that point) and there's bad debt.

To put it in perspective, although my debt-to-income ratio is well over 2 right now, my mortgage should be paid off well before this decade is over, and long before I retire. Furthermore, during that entire time, I will be maxing out my RRSP contribution room, and then some. And I have 3 LCD TVs (42", 26", 19") and a plasma (42"), as well as a LCD HD projector.
 
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Here is a concrete example. Let's take someone who makes $60000 a year, and has no debts at all. S/he decide to get a condo.

$60000 = $47807 after tax in the province of Ontario.

1.48 x $47807 = $70754.

So, using that 1.48 number as a max, the max mortgage that person could get would be $70754. Clearly that makes no sense at all.

OTOH, let's take a number like 3.5X gross salary. That would be $210000, which means a 4.4X debt to income ratio.
 
Clearly Eug you are describing a situation in which you are talking about a high income earner or at least above the "average income".

The issue is not debt to service ratio in that case but rather the vastly increased earning power over the average $50K individual or $75K average household income.

I believe when they are talking about the ratios, they are talking about the vast majority of people in the average range.

Clearly if one is making $150Kfor example the fact that they choose to spend $15K on electronics or $1K on a bed and the majority of their credit is a $500K mortgage on an $700K property who is maxing out RRSP and will pay off the mortgage in 10 years, that is not a problem.

The vast majority of the average that I am referring to and I believe what has Flaherty and McCarney worried are those making no RRSP payments, carrying 4x debt to income ratios with a $50 or $75K income, a mortgage of $250K, credit card debt of $10K and with no room for any eventuality.

Higher income individuals have more room to exceed these numbers because they have more disposable income to apply to the debt they are undertaking.

The above said, I do understand your position that the ratio in isolation may not be valid.
 
I did give the example of the person making $60000 a year. IMO, that is not a high income earner. That's certainly not a poor person, but it's not high either. A bit above average though yes.

Now I wouldn't necessarily say that a 3rd LCD TV for that person is advisable if they have say a 4.0X debt-to-income ratio, but even with that mid-tier income, it's not necessarily a big deal either. With the three LCDs TVs I listed, in 2011 you can get all three together for less than $1000 total. Add in another $1000 for a nice mattress, and it's still not necessarily a big deal for someone making $60000, esp. if that person has a (properly utilized) prime + 0.5% HELOC.

eg. $60000 a year gross salary with $175000 mortgage and $5000 on the HELOC? Not a problem IMO, despite that person's 3.8X debt to net income ratio.
 

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