Q and A: Calum Ross, wealth planner and mortgage broker

NextHome chats with with Calum Ross, wealth planner, mortgage broker, The Mortgage Management Group, and author.

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Calum Ross mortgage broker

NextHome: In its latest Housing Trends and Affordability Report, Royal Bank says housing affordability in Canada in the second quarter hit the worst level since 1990. How would you advise prospective homebuyers?

Calum Ross: I wouldn’t advise them any differently than I would have in the past. Predicting interest rates and real estate market conditions in the long run is an impossible task. If you have a long-term hold piece of real estate, don’t be overly concerned with values. As we see interest rates rise, real assets prices (including real estate) tend to go down. However, most people seem to forget that
real estate prices tend to rise quickly, but tend to be very sticky on the
way down.

The reality is that a home should be shelter first and I personally don’t view my principal residence as investment. Even in periods of rising real estate values, it is difficult to make a profit with a short-term hold cycle. My advice is always do the math. Understand the theoretical cost benefit of renting versus buying, and then make the most informed decision possible. The decision to buy or rent for personal use should be driven primarily by your family needs. If your home equity is your most valuable asset, then you need to re-weight your asset allocation and fire your financial planner. I never see a very wealthy client with personal use real estate as the biggest part of their balance sheet. When I see someone with an expensive home and cottage, and the value outweighing other investment holdings, I immediately worry for their financial well-being as those represent high cost items (even without a mortgage) and can put a lot of strain on household income. Ironically, my wealthy real estate investors as a whole tend to have considerably cheaper principal residences than my other high net worth clients.

NH: After years of historical low rates, the Bank of Canada has raised its overnight rate target twice in recent months. Are the days of low rates over?

CR: Answering this question worries me, as it is astonishing that people have lost a real perspective on historical interest rate realities when they consider current rates as anything other than extremely low.

NH: As mortgage rates rise, who’s most at risk – homeowners with variable rate mortgages?

CR: Selecting a fixed or variable rate mortgage is not something we suggest you do for a fit today (or over the next month or so), but something you select as fit for your financial philosophy and long-term objectives. You must be able to weather the good and bad to yield long-term benefits and costs on both sides of the spectrum of choices.

Choosing between a variable and fixed mortgage is easily the most debated mortgage question. There is no clear-cut answer, as it depends on the market at any given time, your risk tolerance and personal financial goals. A variable mortgage is just that – it fluctuates with market interest rates. It might not make sense for someone who would prefer the peace of mind that comes with a fixed mortgage payment. A variable mortgage would make more sense, however, for someone who is more concerned with freeing up cash flow.

Historically, variable rates have proven less expensive over mortgage terms than fixed rates, but current market conditions may not warrant reflection on the long-term historical perspective. The spread (difference) between variable and fixed rates is smaller than “normal,” and the consensus amongst economists is that interest rates will continue to rise. What this means to mortgage consumers is that there is not as much of a payoff for taking variable, and the deck predicting rate direction is heavily stacked against you with interest rate futures predicting more rate increase.

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NH: The next Bank of Canada held its overnight rate target on Oct. 25, but has raised it twice this year. What are your expectations for the balance of the year?

CR:: The Bank’s second rate hike was on Sept. 6, when it raised the overnight lending rate from 0.75 to one per cent. This increase completely reverses the half-percentage point by which the Bank dropped interest rates in early 2015 after oil prices suddenly dropped in late 2014.

Canadian economic growth continues to come in stronger and more broadly based than it had previously predicted. In a recent policy statement by the BoC, further rate changes “will be guided by incoming economic data and financial market developments as they inform the outlook for inflation.”

The Bank is looking very closely at the data, but I suspected it would sit on the sidelines for the October announcement since we have just seen GDP stabilize. However, I fully expect at least one more 0.25-per-cent increase in interest rates before the end of the year.

NH: You recently said “neither our government nor Canadian consumers can afford too much of a rate increase too fast – they are both in far too much debt.” That doesn’t sound good for the long term for either party… What’s the solution?

CR: The solution is based on stronger savings rates and a greater aversion for bad debt (debt that is not used for active wealth accumulation). There is just no way that our provincial and federal governments can continue to run deficits without our country meeting a similar fate to Greece in the long-run. Respectfully, there wouldn’t even be a remote chance that the Province of Ontario would qualify for even a subprime mortgage… and that should make people pause to think! Make no mistake about it: Our government policies are absolutely putting our country at risk of being unable to borrow money, downgrading our public-sector debts which would in the long term negatively impact our currency and severely impact the stability of our economy.

When it comes to consumers and consumer debt – the real safety comes from their household balance sheets. While household debts are at all-time highs, so are household net worth levels. In real terms, this means that if put under payment shock from rising interest rates then, while not ideal, they could liquidate assets and retire part or all their debts, which would allow a structural re-shift in payments and thus allow for a full crisis to be averted in most cases.

NH: How’s your book (The Real Estate Retirement Plan) doing? It was aimed at investors… how bad of a hit are they taking, with fast-rising home prices in some markets, and all these new government-imposed rules that effect ROI?

CR: I have been very fortunate with the book sales. The book has been both a Globe and Mail National Best Seller and has been number one in all three of its categories in Amazon. At time of writing, it’s still sitting at number one in all three of its categories in Amazon. It is important to note that it’s more of financial planning book that introduces the merits of conservative leverage and borrowing to invest, and then closes with the real estate component.

The Real Estate Retirement Plan is absolutely not a get rich quick type of book, and it is intended to give conservative fundamentals to see people through the long run plan – not time markets or bet on asset classes. I insist real estate investors buy with at least a three-per-cent spread for rising interest rates built in, buy real estate as part of a broader financial plan that includes investing in equities and maxing out tax sheltered growth vehicles such as RRSPs and TFSA. I also tell people not to invest in real estate unless you have a long hold cycle.

I previously recommended that Toronto and Vancouver real estate investors consider selling, as their holdings have become speculative grade as they are relying too much on value growth, since cash flow (rent increases) has not kept up with appreciation. In fact, I published a very well read and circulated blog on this topic.

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