Feds ignoring bigger picture

Feds ignoring bigger picture

 

 
 
 

I don’t disagree with one aspect of the decision by federal Finance Minister Jim Flaherty and his cronies to have homebuyers put more of their own money into the process.

I’ve always figured that the more of their own money that people have to put toward buying a home, the better it would be — it’s something called pride of ownership.

It does mean that people might have to save a little longer to gather together the down payment, although it doesn’t rule out relatives such as parents providing some of the cash.

Flaherty recently came out with plans to toughen up measures on mortgages.

The plan says borrowers will have to be able to qualify for a mortgage at a five-year fixed rate level instead of the three-year rate required now.

For those refinancing a mortgage, only 90 per cent of the value of the home can be withdrawn, down from the current 95 per cent.

One final element: Flaherty says he will require a 20-percent down payment on government-insured mortgages for properties bought for speculation.

As always, there are pros and cons to the plan. But in the long run, the more of one’s own money in a home, the better it is.

People tend to care more about things when they have their own money at stake.

What I don’t like about Flaherty’s announcement is the fact he says he’s doing this to prevent a housing bubble from forming.

Vancouver and Toronto are the largest — and among the most expensive — cities in Canada to buy a home, so Flaherty has looked at them as the premise for establishing his new strategy.

As the grip of the economic downturn eases, these two cities have shown the largest rebound in MLS sales, pushing up the national average.

Flaherty has looked at these markets and then gone ahead, unfairly painting every market in the country with the same brush.

How about a quick peek at what has been happening with real estate in the Olympic host city and Hogtown?

Vancouver’s average resale price was hit by the downturn and was sitting at a three-year low of just over $510,000. But by the end of last month, it had jumped 25 per cent to well over $637,000.

In Toronto, the average sat at more than $343,000 in January 2009, but climbed 19 per cent a year later.

The Flaherty camp was focusing on the short-term rebound from trough to peak, instead of looking at longer-term trends. Even the Bank of Canada says it’s “premature” to talk about a bubble, saying that recent price increases “do not appear to be out of line” with supply-demand fundamentals.

Also, with housing construction starts below long-term demographic requirements, inventories are still declining.

“It is likely, though, that a significant part of the surge in housing sector activity is associated with temporary factors — notably the historically low borrowing costs as well as pent-up demand and pulled-forward demand,” the central bank says in a statement.

Let’s take a look at another strong market — Calgary. Prices here are moving along at a more leisurely pace.

In January of last year, the average price hit a 25-month low of just over $362,000 — higher than the Toronto price for the same month. A year later, the price had only moved 5.5 per cent.

No problem here. We have an orderly market that favours neither buyer nor seller. Price increases are more modest over the 12-month period and are aligned with healthy demand and a lower inventory of homes. Come spring, though, inventory is expected to ramp up.

The Canadian Real Estate Association is also suggesting the basis for bubble talk isn’t broad enough, centering mostly on Van and TO. “The extraordinary decline in activity one year ago and subsequent rebound … is stretching current year-over-year comparisons,” it says.

CREA also says that by the second half of this year, price gains are likely to “shrink significantly” because a year will have elapsed since the decline and rebounds previously mentioned.

But there are those who will argue the real estate market is having problems.

“From their trough in 2007, the most sustainable path for Canadian home prices would have been a gradual and modest uptrend aligned with nominal income growth,” says TD Economics.

“But now that home values are already past their previous peak in such short order, we estimate that the typical home remains overvalued by 12 per cent at the national level. Unfortunately, sheer momentum suggests that this over-valuation is likely to increase over the course of the next few quarters, peaking at 13 to 15 per cent in the first half of 2010.”

But we can talk all we want about bubble or no bubble, higher down payments or not, or beefier qualifying elements — it won’t do any good. Finance Minister Flaherty has spoken: now everyone buying or remortgaging will pay the piper.

mhope@theherald.canwest.com

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Property shopping on a budget – The Globe and Mail

Real Estate

Property shopping on a budget

Tips from the professionals on how to make your mark in real estate investing

Steve Ladurantaye

From Friday’s Globe and Mail

With the Canadian real estate market – be it residential, industrial or commercial – showing resiliency in the wake of the recession, property as an asset class is drawing investors with the promise of higher returns on hard assets.

After watching their wealth evaporate on the stock market, many investors are drawn to the property market because they want to be able to look at what they just bought, said Queen’s University professor John Andrew, who specializes in investment real estate.

“Historically real estate has been a haven in times of inflation,” he said. “It’s also been a place where people feel they have an understanding of what they’ve just done – they can walk down the street and see their purchase.”

That said, it can be a risky proposition. If this recession has taught us anything, it’s that property values can plummet, and fast. You just can’t buy a building and walk away. But if you have the nerve, here are some tips from the professionals on how to make your mark in real estate.

Getting started

Real estate investment trusts are the most passive way to get involved. These companies have units that are publicly traded, which means you own a share of the REIT rather than a piece of real estate. The sector is small in Canada, with fewer than 20 publicly traded REITs, but the well-funded companies have been actively adding properties to their portfolios in a bid to generate more income for their investors.

The first few weeks of this year haven’t been particularly great for the REITs, with the S&P/TSX Capped REIT index (which tracks the companies) gaining 2 per cent, but it’s still above the overall market’s .9-per-cent decline. For the past 12 months, the index has gained 60.8 per cent.

“This is a good way for a passive investor to get involved with real estate with fewer of the headaches,” Prof. Andrew said.

A little deeper

While the $12-million office building around the corner keeps catching your eye, maybe you find the price tag a little hefty. If only there was a way you could pool your resources with other cash-strapped millionaires.

Turns out, there is. Brokers around the country are constantly putting together syndicates – groups of private investors who want to pool their money and share ownership of attractive properties.

Jason Shiner of Ottawa’s District Realty said most deals involve investments of $100,000 to $250,000. The key is to ask questions before joining.

“You want to look at who you are partnering with, what rules there are about who can join, what are the exit strategies,” he said. “You don’t want to be the weakest link, or the strongest, you all want to have about the same amount at stake.”

For the big player

These investors – and if you’re one of them, you probably already know this – tend to purchase retail and industrial properties and keep them in the family. When they want to do a deal, they pick up the phone and call someone such as Michael Turner, an executive vice-president at CB Richard Ellis who specializes in private investments.

The country’s most expensive cities aren’t their primary targets. They opt instead for smaller markets where pension funds and real estate investment funds couldn’t be bothered to go shopping.

“They prefer places like Atlantic Canada, or smaller Prairie cities,” Mr. Turner says.

Joys of rental properties

The dream of home ownership isn’t the motivating factor for those buying rental properties – it’s the dream of a steady stream of cash as dream tenants make their payments on time and take extra care not to scratch the hardwood.

Of course, you’re just as likely to hand over the keys to someone who looks trustworthy but then decides that paying rent is for chumps. Worse yet, your unit could sit empty for months as expensive classified ads fail to draw anyone to your doorstep.

But for this exercise, let’s ignore the nightmare scenario and focus on the deal. Interest rates are at all-time lows, which means more of the cash that is generated each month can go toward paying off your mortgage. And with a 5-per-cent down payment, the barriers to entry are actually quite low (one caution – you carry that mortgage on your personal credit report).

And unless you want to spend a lot of time doing maintenance, a property manager is a must.

“If you are not handy, then get a manager,” Ottawa property investor Chris Jurewicz said. “If you do not want to be tied to your cellphone 24×7, you need one. It sounds like a lot of money at 4 to 6 per cent of revenue, but see if you would want to do it for that amount of money.”

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Canadian interest rates will soon start to inch upward

February 26, 2010

By Todd Hirsch
Alberta Business Columnist
Troy Media

Todd Hirsch

Todd Hirsch

CALGARY, AB, Feb. 26, 2010/ Troy Media/ — The chatter around water coolers and board room tables these days may still be focused on Olympics but, shortly after the Games wind down and the closing ceremonies wrap up, everyone will get back to that other favourite topic du jour: where are interest rates going?

Let’s start with what we know for sure:

Currently, the Bank of Canada’s overnight rate – which is the trend-setting rate that influences (but does not dictate) all other borrowing rates in the economy – is still at a record low of 0.25 per cent. It’s been there since last April when central banks all around the world were chopping interest rates as quickly as they could, a kind of life preserver to the global economy that was quickly being washed under the waves.

World economy has found its feet

We also know that the global economy has found its feet, led by growth in the emerging economies. Many threats lurk in the shadows, ready to ambush the global recovery. Commercial real estate in the US, the situation in Greece and Portugal, and protectionist trade barriers going up all around us come to mind. But even if the recovery does stall out, there is some degree of confidence that the worst is behind us.

As well, we know that the Bank of Canada has been sticking with its conditional commitment to keep the overnight interest rate steady until at least June of this year. But with rates at rock bottom, we know with certainty that the only direction they can go is up.

We know that inflation is still dormant in North America: Even if it may show an occasional uptick from month to month, it’s mostly due to gyrating gasoline prices, not any fundamental increase in consumer demand. There is still a lot of underutilized capacity in Canada and the output gap is still positive, which is economist talk for slack.

Finally, we know for sure that June 1 is only three months away.

That’s about all we know with complete certainty. As always with economics, it’s the things we don’t know that make for interesting water cooler talk.

We don’t know, for example, what will transpire between now and June. Commodity prices seem to be gaining some strength, especially crude oil, but demand could falter if the situation in the US turns sour. The American economy has been growing, but only on the shoulders of Washington’s spending spree and bail-out programs. Consumers in the US are still reeling with high unemployment and maxed-out credit cards. Growth in consumer spending or even demand for petroleum products will probably remain weak for some time.

China, on the other hand, is dealing with a different problem: trying to cool its economy a bit. With asset prices soaring and inflation picking up, Chinese officials are rightfully nervous about bubbles building. They’re tapping on the brakes.

In other words, demand for Canadian commodities and other exports could still falter in the months ahead.

We also don’t know what will happen with the Canadian real estate market. Prices and sales have been astounding in 2009, and there’s been plenty of worry over bubbles building. While new measures have been put in place recently by Ottawa to calm the market down a bit, we don’t know if prices will continue to rocket ahead or not.

Finally, there is much uncertainty around what will happen with the US dollar, and by extension, the Canadian dollar. The American greenback slumped in 2009, but nervousness around what may happen to sovereign debt in places like Greece has some investors piling back into the safe haven US dollar. So, we’ve seen corresponding ups-and-downs in the Canadian dollar as well. While it does not target a value for the Canadian dollar, there will be much hollering if interest rate increases in Canada lift the loonie well above par.

Interest rate increases this summer or fall

So, weighing what we know with what we don’t know, the most we can say about interest rates is that we are likely to see the Bank of Canada start raising rates in the summer or early fall of 2010. They just cannot stay at the crisis-level rate of 0.25 per cent for much longer.

The Bank will be reluctant to raise rates suddenly or dramatically, since rates in the US probably won’t start climbing as soon (as per Mr. Bernanke’s comments this week). Big jumps in rates will prompt corresponding jumps in the Canadian dollar, and would slam the brakes on a very fragile recovery.

Yet if rates must eventually return to a neutral level of around three to four per cent, the Bank will want to put some steady pressure on those rates, lifting them by 25 to 50 basis points at a time. A year from now, barring another major economic catastrophe, we can expect the Bank’s overnight rate to be 100 to 150 basis points higher than it is today.

Todd Hirsch is Senior Economist with ATB Financial

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Task force to consult with Canadians on savings, debt – The Globe and Mail

Financial literacy

Task force to consult with Canadians on savings, debt

Sun Life chief executive officer Donald Stewart

Group formed by Jim Flaherty will be headed by Sun Life’s Don Stewart

Tara Perkins

Globe and Mail Update

The federal government’s task force on financial literacy is embarking on a cross-country consultation as it seeks to put together a national strategy that will teach Canadians how to manage their finances.

The task force will release its “Leveraging Excellence” consultation document Monday as a starting point to discuss issues including managing debt, saving and investing, retirement planning and pension reform.

Such issues are among the key problems on Ottawa’s plate right now, and Finance Minister Jim Flaherty has been working to address them through regulatory reform and other means.

The committee, led by Sun Life Financial chief executive Donald Stewart with vice-chair Jacques Menard, has spent months studying the degree of financial literacy among Canadians, and it has found reason for concern.

“Canadians must try to make sense of increasingly sophisticated financial products,” Mr. Stewart wrote in the introduction to the committee’s consultation document. “The recent economic downturn – and its impact on Canadians’ financial security – has highlighted the need for personal financial savvy.”

The group is examining a survey of more than 15,000 Canadians that suggests that one-third of the population is struggling financially. The data also suggests that Canadians don’t fully grasp their financial picture, or are overly optimistic. Half of them say they are confident that they will enjoy a comfortable retirement, but very few can explain how they plan to get there.

The task force, which appears highly ambitious, is already looking to determine what type of follow up study should be done in a few years time to assess the success of its national strategy.

“Time and again we see behaviour by people – we are talking highly educated, high income people – who are making less than ideal financial decisions for themselves and their families,” said one source. “Other countries that have developed a strategy have focused on education in high schools. This task force has come to the early conclusion that, while enhanced financial education is vital over the long term, it is insufficient.”

The task force is delving into behavioural science and looking for ways to nudge Canadians into adopting better financial practices, such as saving more. Committee members have had discussions with experts on the psychology of money, such as Richard Thaler, the author of “Nudge,” in the hunt for ideas.

More Discussions in our Globe Investor forums

What is a top priority: Investing in a TFSA, RRSP or RESP?

Started by: Mathew Ingram
39 replies
Last post by ryageo
2/25/2010 8:30:00 PM

The task force is also concerned that if it limited its strategy to education in school, it would not help immigrants or aging Canadians who are struggling with retirement. One of the committee’s priorities is the pension situation.

The consultation process that’s being announced Monday will spread to each province and territory and make use of online forums, public hearings, requests for formal submissions, and round-table discussions.

As the committee, which was formed by Mr. Flaherty, develops its recommendations, it is keenly aware that it will need the provinces on side because they are ultimately responsible for education and pensions. Mr. Stewart travelled to Whitehorse in December to speak to the Canadian finance ministers about the task force’s work.

Some provinces have already made big strides in revamping their grade 10 curriculum to include financial education, and Australia is actually currently studying B.C.’s curriculum with an eye to adopting something similar, a source said.

With files from CP

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Is your money personality keeping you in debt?

The Smart Cookies

Is your money personality keeping you in debt?

If you’re maxing yourself out, these five tips from Dr. Kathleen Gurney could help, says Smart Cookie Angela Self

More Discussions in our Globe Investor forums

What is a top priority: Investing in a TFSA, RRSP or RESP?

Started by: Mathew Ingram
39 replies
Last post by ryageo
2/25/2010 8:30:00 PM

Our average household debt hit new records last year – $96,000, according to a recent study. Roughly 30 per cent of this total is consumer debt. If we’re maxing ourselves out, and in many cases doing it mindlessly, it could only help to tap into a few of Dr. Gurney’s suggested strategies.

1. Create a Personality Balance Sheet.
Dr. Gurney suggests first assessing your personality as you would a balance sheet. Run through your traits and list them either as assets or liabilities. When you have your strengths and weaknesses staring back at you, you can see what is working for you and what isn’t. This is also a great exercise for couples who can see strengths and weaknesses of one another and play to those.

2. Eliminate any decisions requiring willpower.
If you were trying to lose weight, it wouldn’t be wise to keep chocolate-chunk cookies in the house – too tempting. Same logic applies to trying to get out of debt. If it requires any amount of discipline, or tempts you in the slightest, then get rid of it. Take the credit card out of your wallet, avoid the mall all together, have friends for potlucks rather than eating out.

3. Carry a notebook and use it daily.
This sounds like a pesky task but it actually requires very little work. Plus, it’s effective and will make you feel good. The idea is to write down three things a day that you are proud of: took public transit instead of a cab, bypassed Starbucks and opted for the office coffee, used points to buy a housewarming gift, etc. Then, write down three things you could do better or differently tomorrow to improve your situation. Putting it to paper starts the shift of power, from feeling like a victim to feeling like you’re in control. The key is to do this everyday until making smart and conscious choices is a habit. Changing bad habits takes constant attention and time.

4. Avoid anything that will make you feel “poor.”
Avoid places or situations that make you feel bad about yourself or your current financial state. You know what these are. If window shopping at the mall makes you feel bad about all the things you’d like, but can’t afford right now – don’t go there. It’s important to stay as positive as you can when dealing with debt because it can take its toll on your emotional well-being.

5. Be in control at all times.
As you’re working your way out of debt, you must control your environment. Don’t let others dictate where and when you will spend your money. This takes thoughtful planning and a bit of time. If your friend suggests a particular restaurant for dinner, check it out online to ensure it’s within your range. If it’s not, suggest an alternative that’s less expensive. You might want to even suggest one closer to home so you can walk there and avoid additional transportation costs all together.

6. Find an accountability partner.
This could be your partner, a friend in a similar situation, or even a counselor. Have a regular check-in to make sure you’re on track. Dr. Gurney also advises picking the brain of the people in your life who seem to have it together. People love sharing what has worked for them; all you have to do is ask.

Most of us fail to realize the extent to which our financial personality impacts our financial picture. To help you identify and understand your money personality, Dr. Gurney developed this online program. Based on your answers, the online program also provides you with an action plan and suggestions for improving your skills and reaching your financial goals. It will cost you about the same price as ordering your credit score online.

Dr. Gurney believes there is an inseparable link between our unconscious feelings about money and the way in which we earn, spend, save and invest it, and part of getting out of your financial status quo is looking at and changing your money mindset and habits.

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Major real-estate markets have tight supply: Re/Max – CTV News

Major real-estate markets have tight supply: Re/Max

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via ctv.ca

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