Are You Sure There, Bud?

Quite often the confidence we see from people is astounding. As the saying goes ” The problem with the world is that the experts doubt themselves, while the stupid ones are full of confidence”. Time and time again, I see a lot of assumptions made that turn out to be wrong.

Just this week I had a very wealthy client that bought a cottage. Now, he plans to use it mainly for him and his family, but plans to rent it out here and there. This particular client can write a check for the full purchase price about 6 times over out of his bank account. He was advised by his realtor, his banker, and his accountant to do just that. He had called me to ask my opinion, even though I am semi retired. He gave me the scenario, told me his plans, and I simply asked him ” are you sure there bud?”

After running some very basic numbers, we decided that it made more sense to mortgage the property and to even pay CMHC insurance on the purchase price to get the lower rate on an insured mortgage. Since we can add the CMHC premium to his adjusted cost base, it will help lower his capital gains tax in the future upon the sale ( especially important now that the capital gains tax has been raised ). By the time we factored in the deduction on his income tax of a portion of the mortgage interest paid ( he is in the top tax bracket of 53.53% in Ontario ) , and accounted for an average annual return on his capital in a non registered account, and TFSA, he actually came out ahead by around 3.1% per year with saving his capital and taking out a mortgage. Now of course there was a lot of variables, and we took some conservative assumptions. He was also more than fine to have the mortgage payment as opposed to paying it off in cash. A 3.1% difference per year on almost 1 million dollars of property purchase price can add up to around a 2 million dollar difference 30 years from now. 2 million fucking dollars is a lot of money. All because I chose to run some math. Math doesn’t lie, math isn’t racist, and math doesn’t take sides. Math is simply math. Because I chose to do the work, and not be a lazy prick like his realtor, banker and accountant, it is possible we made a 2 million dollar difference to his future. Now the accountant of course called me up, and shouted that I didn’t know what I was talking about. So I ran through the math with him, and son of a bitch, my math was right. I asked him if the client should litigate him now or later for gross incompetence, and professional negligence, and he didn’t seem to have an answer. Simply because I wasn’t as lazy and asked a couple simple questions.

Also last week I had someone in one of my US businesses reject an order that they thought didn’t work. Now this little sides business I have makes around $200,000.00 a year. Not enough to change the world, but not chump change either. We got an order, and the manager decided it wasn’t worth our time to take. She just made that decision. However, I asked her in my best Canadian ” Are you sure there bud?”. I did a little math, and quickly figured out that if all we ever did all year long was orders exactly like the one she rejected, the small little side hustle business of mine would show a net income of around $980,000.00 USD. Not bad considering the business only makes around $200,000.00 now. She failed to do the math, and take into account that while the money taken in seemed lower than it should be, the amount of time to complete the job was about 25% of what we would normally spend. So a 50% reduction of the income, but a 75% reduction of the labour. Once again, a simple question, and my trusty calculator, and we figured out that the initial assumption was completely wrong. I then reminded her that a good chunk of her compensation is based on company profitability, and perhaps we shouldn’t assume, and actually do the math.

It amazes me that people won’t ask simple fucknig questions and do simple calculations anymore. Like what the hell is so hard about it? Why do we think we know the answer without showing the work? Maybe, and I hate to say this, but maybe the school system is correct, when they make us show our work – and not just provide the final answer?

The reason I mention all of this, is because of the state of Canada’s housing market. Anyone who is associated with this business knows that the housing market is a train wreck, inside a dumpster fire. It is beyond fucked up. Now of course I don’t expect anything less from an industry that has drawn so much government intervention in the last decade. Nothing ruins a business, or a product more than the government getting involved. Now the government that ruined the market has come in with promises to fix the market. Great. Wonderful. Super.

But before we go fixing something that is clearly broken should we maybe ask some questions first? Should we maybe stop and think, instead of just assume? And by asking questions, I mean actually asking the people in the trenches and not some University prof, or some advisor, or some academic with no real world experience. It seems every policy in the country is made based on what some random consultant has suggested, and that recommendation is usually based on what will help themselves out in the long run.

The reason I ask is this: All we have heard from the government is how we need to make buying a house affordable for the next generation. Okay, that sounds like a great and noble policy. But, has anyone asked the next generation if that is what they want? Seriously. When I talk to a lot of the younger kids – they don’t want to own a home. They are fine renting. Not all of course, but a good majority. A lot of the younger kids have seen how bad our generation and the baby boom generation have completely fucked the market up, and wonder if it is worth it for them.

Has anyone asked the next generation if they perhaps don’t want to spend their Saturdays at Home Depot buying parts to fix a leaky toilet? Maybe the next generation doesn’t want to be subject to massive property tax, water, sewer and hydro increases year over year? Perhaps the next generation isn’t keen on cutting half an acre of grass every week, or shovelling snow every winter? Maybe the consistency of a 3% annual rent increase is something that they can budget, and are fine to pay into? Maybe the next generation realizes that owning a home isn’t a glamorous thing, but rather a neuce around their financial neck? Perhaps the flexibility to lock up the apartment door and travel for 2 weeks is something they want? Maybe the kids today don’t want to deal with a lot of bankers all telling them different things when it comes to their mortgage options? Maybe paying a realtor 5% to exit your house is a lot of money and kids today don’t see the value in it? Just maybe the next generation is smarter than we give them credit for, and realizes that everything reverts to the mean over time, and so that means that housing as an asset class will underperform other financial asset classes?

There is also a good chance I am wrong on all of these points above. A very good chance. However, if I could be wrong, so could the people who are suggesting, and spending billions of dollars on building something that perhaps there will not be buyers for. Maybe before we build millions and millions of homes we should actually make sure there will be buyers for the particular homes we are building? There is a chance that if you build it – they will NOT come.

No matter what happens, we need to ask a few more questions, and stop assuming that the older generation and the government are smarter than everyone else. We need to start doing the math, and working the numbers to see if the answer is actually the correct answer. This applies to not just whether or not we should build millions of new homes, but it also applies to every interaction you have in your mortgage business. How many times do you assume, and jump ahead? How many times do you ask all the questions before concluding what should be done?

I feel like a lot more people should be asking each other ” Are you sure there bud?”