Tax returns and applying for a mortgage

If you are thinking of applying for a mortgage you can run into problems if you aren’t current with your tax return filings. If you are late and past the Efile deadline (this year Nov 30th), then your return must be paper filed. Paper filed returns have longer processing times and the delay in receiving an income tax Notice of Assessment could mean going past application deadlines.

If you plan on purchasing real estate or refinancing in the next year but have outstanding tax returns now is a good time to get caught up. Give us a call and book a free 1/2hr consultation and we’ll explain what tax saving opportunities you have. Regardless of how many years need to be filed we have the experience and qualifications to minimize late penalties and interest. You may even have refunds that are approaching expiration if not claimed so don’t delay.

The Credit Crisis – What to expect and what to watch.

The Credit Crisis – What to expect and what to watch.

June 8, 2010

As the world comes to grips with its unsustainable credit expansion of the last decade, a harsh new reality awaits many that assumed that this past period was a normal economy. Rooted in the widely adapted theory of Keynesian economics (save in good times, spend in bad times) boosting the economy has been a priority. Unfortunately, this theory does not work well in today’s reality. The difficulty in determining when the economy should be held back is secondary to the main problem. Elected politicians rarely receive enough general public support to propose budget surpluses that pay down national debts and hold back hot economies. It’s far too tempting to cave to special interest groups using future taxpayer dollars, thereby bolstering (re)-election support. They do so because there’s little opposition to be found when the taxpayer is bled little by little. Only when catastrophic changes like austerity measures are required does the ordinary citizen seem to care.

As austerity becomes the new keyword, and governments struggle to lower their deficits, recessions will become inevitable. Even the US will be forced to question its overspending as being detrimental, likely in time for the 2012 elections. In the meantime, America’s calls for additional stimulus around the world are being laughed off as the sovereign debt crisis takes precedent. This crisis has now taken on enough momentum that it appears unstoppable. Rising bond rates are increasing interest costs, which in turn increase deficits and reduce credit worthiness – a vicious cycle. Just the thought of a renewed crisis has caused Eurozone retail sales to plummet in May, much like they did when the 2008 subprime crisis hit.

But this problem is not just limited to governments. Individuals, especially here in Canada, have indulged in credit to the extent we are now the worst country for individual debt in the G20, worse than Greece.

In the coming years it’s important for people to get control of their debt levels and prepare for higher government taxes and lower levels of disposable income. Unfortunately, this will have a compounding effect on GDP for countries mired in debt. A look at the US (approximately 5 years ahead of Canada) shows that when consumers cut back on spending, such as housing, there is a significant negative impact on GDP. Canada is poised to follow with unsustainable individual debt levels. In turn, our national deficits will be revised upwards as lower GDP and tax revenues become apparent. We are not nearly as insulated as we were led to believe.

As unsustainable markets begin to crumble, the decay will take hold in the market’s weakest areas. Countries the most at risk will suffer rising bond rates and not everyone will be so eager to avoid defaulting only to accept an IMF loan with strings attached. Bailout talks will continue being futile without monetizing debts and confidence in paper currencies will be shaken. Gold will flirt with reserve status and sovereign defaults will become inevitable despite “bailout” loans.

Be prepared for deflation as economies contract. Austerity, higher tax rates, rampant global bank failures, pre-boom housing prices, high levels of personal and corporate bankruptcies, amazingly low share valuations, and new gold highs. Then, with the continued monetization of debt, inflation will take hold. In the end we should all have learned a valuable lesson about misusing Keynesian economics.

After all, the solution to a debt problem is not more debt. It’s a balanced budget that takes into account the double whammy that cutbacks will have in times of recession. It’s not necessarily a popular position to take, but it’s the only viable solution. The sooner we accept that notion the less pain we’ll have to endure.

Solomon Nordine, MBA

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Investment Disclaimer: This webpage is provided for general information only and nothing contained in the material constitutes a recommendation for the purchase or sale of any security or any other transaction. Seek advice from a registered professional investment advisor before making any investment decisions.

Canadians spend their way to top of debt heap, report says

Canadians are among the most profligate spenders in the developed world, a new report says.

Helped by rock-bottom interest rates, consumers have been borrowing at unprecedented levels and now owe a record $1.41-trillion, putting Canada in the number one spot among OECD nations in terms of consumer debt to financial assets, says a study by the Certified General Accountants Association of Canada.

That equates to $41,740 for every individual man, woman and child, or about 2.5 times the level of debt in 1989.

What most people fail to consider when buying real estate

In 2006 the federal government changed the rules on CMHC insured mortgages from 10% down 25 year amortizations to 0% down and 40 year amortizations; they were in effect copying the reckless lending policies of the US. The only difference was who carried the risk. Our banks were actually well insulated from any potential losses because the government took on all the high risk mortgages through the CMHC. This was and currently still is a major subsidy to the banking, construction, and the real estate industries.

When the US housing bubble burst, Finance Minister Flaherty backtracked in 2008, and in an attempt to save face, altered the rules to 5% down and 35 amortizations. Had he done the right thing in light of the financial train wreck south of the border he would have reversed the government’s prior 2006 changes.

Then, with lax lending rules, a perfect storm began to brew. In 2009 the Bank of Canada introduced emergency interest rates to stave off a recession. By doing so it encouraged people to borrow and spend, which they did. However, what our politicians chose to ignore was the fact such low interest rates and lax lending rules increased purchasing power exponentially, especially if a buyer included rental income in their mortgage application. A further tightening of mortgage rules was desperately needed.

This unprecedented housing boom and economic recovery has been fueled solely by debt. A massive credit expansion that is unsustainable by any measure. We only need look to the US to see the hangover effects of a drunken debt binge. Now Canada, faced with a credit contraction is about to repeat history. It’s disappointing that we learned no lessons from the US housing debacle. History should never have to repeat itself so soon.

A brief look at the numbers tells us exactly where Canadians fare with respect to household finances.

• Credit card balances are up 458% in 11 years.
• Lines of credit grew 820% from 1999-2010
• Residential mortgage debt is up 142% in 11 years
• Debt to disposable income is over 147% and climbing
• 1 in 5 Canadians is currently struggling to afford their homes despite emergency level interest rates – what will happen with a modest increase?
• Unemployment in Canada is 8.2%, not including discouraged workers
• The real unemployment rate is 12.1%

With mounting government deficits, a winter Olympic tab to pick up, and unrealistic budget forecasts, we are going to be faced with issuing government bonds in a more and more saturated market. We can all expect government cutbacks and higher taxes to curb these amounts of overspending. Nonetheless, bank interest rates have already begun increasing and the Bank of Canada has indicated its priority is to keep inflation in check. Now that core inflation has taken off expect Bank of Canada Governor Mark Carney to begin a return to non-emergency low interest rates. Purchasing power will be significantly reduced at the beginning of interest rate increases.

To top that all off, Flaherty announced that April 19, 2010 would see another round of mortgage rule changes. Now buyers would have to qualify based on the posted 5 year fixed rate or enter into a 5 year fixed mortgage. Rental income used in the qualification process will be reduced from 80% to 50% and real estate investors not living in the home will need a minimum of 20% down.

BC and Ontario are also introducing the HST July 1, 2010.

All of this explains the massive 20%+ year-over-year run-up in housing prices despite the lack of increases in household incomes. Many people fearful of being priced out of the market or buying with higher interest rates are desperately trying to get in while they still can. Unfortunately, far too many people think they’re the shark in this historic feeding frenzy. As expected, those with vested interests are refusing to call this a housing bubble. Realtors, bankers, newspapers, politicians and even homeowners are taking part of pumping up this market.

This is a perfect storm for a housing bubble.

The saddest part is that many people have banked on real estate in their retirement planning as their only investment. Real estate is volatile and illiquid. Over the next decade we can add to that the retirement of the baby boomer generation and their cashing in of real estate. The results will become a liquidity nightmare. As our Canadian train wreck unfolds many would be retirees will wake up to suddenly find themselves in an extended career they didn’t see coming.

Solomon Nordine, BBA, MBA

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