29 Apr

Rent or buy? Do the math


Posted by: Mike Hattim

A young couple who have been renting in our modest Toronto condo building recently bought a home a couple of miles away in a nice old neighbourhood with the aim of starting a family. The house is a big, detached fixer-upper and the renovation costs will be extensive.

In moving up to the rungs on the property ownership ladder, our young friends are committing themselves to a quantum leap in monthly expenses: They came up with a substantial down payment; they are taking on a mortgage payment, property tax bill and other expenses almost twice as large as their $1,600 rent; and they are spending a large amount on the renovation and other costs associated with buying a house.

It is a story that has unfolded millions of times in Canadian history and one that will continue to unfold because home ownership is deeply ingrained in our culture, a cornerstone of getting established and getting on our way in life. People will make great sacrifices and otherwise twist themselves out of financial and emotional shape to buy into the dream.

They willingly become what we used to call “house-poor,” paying well over the one-third of household income that many professionals believe should be the threshold.

Over the past decade, owning has been a financial success for most people, with prices rising almost in a straight line, with low, low interest rates feeding into the equation and with homeowners’ equity subsequently bounding higher.

And yet, if it has been just about as good as it gets for so long, perhaps conditions are going to deteriorate at least somewhat, with prices likely to stabilize or retreat a little and with interest rates set to rise modestly at least.

Our friends and other buyers this spring will know that Canadian house price gains have been flattening out. The Teranet-National Bank House Price Index for February published this week showed house prices gained just 0.1% from January for a 12-month gain of 3.8%. It was the eighth consecutive month of deteriorating gains.

While the forecast of a 25% drop in house prices over the next few years by one widely quoted economist seems far-fetched under present circumstances, a pattern of smaller gains likely signals a flat to slightly lower market.

So, is it time to revisit buying versus renting? For most of the 30% of Canadians who rent their accommodation it’s simply not an option. Getting their hands on a significant down payment and having the flexibility to meet higher payments if rates rise is difficult at best.

But some people with the wherewithal to buy a property might want to keep renting, keep saving and investing, and keep their options open. Other long-time owners might even want to consider selling and renting, thereby locking in their tax-free gains.

If you wish to see how the math works, visit United Mortgage Group’s Rent vs. Buy Calculator website. Even your technodunce reporter could plug in some numbers and come away with worthwhile conclusions.

A two-bedroom condo in our building might sell for $400,000. Let’s say you have a $100,000 down payment, a mortgage rate of 4.5% over five years, a $672 monthly condo fee, $200 a month in property taxes and other expenses of, say, $100 month.

Let’s also say that a two-bedroom might rent for $1,600 a month in the building, other costs might total $100 a month and the rent might rise 2% a year over five years.

All other things considered, the purchased condo would have to appreciate 2.33% a year, selling at $441,571 to match the gain made by renting a similar property in the building and investing the difference in outgoings at a conservative 2.5% a year.

The other way around, an owner could sell for $400,000 — with net proceeds of about $375,000 — and rent for $1,600 a month. The $375,000 could pay a conservative net return of, say, $10,000 a year. That $1,600 a month plus $100 in expenses would add up to $20,400 a year.

But deduct the net investment return of $10,000 a year and the condo fees of $672 a month, property tax of $200 and other expenses of $100 (for $11,664 a year), and the monthly rent for the former owner is basically paid. Or the former owner could invest the $10,000 a year and still end up paying only about $728 a month more than he was when he was owning.

Of course, this is just the rough math, which doesn’t take into account other factors, such as pride of ownership, the sense of place and the strong probability of building equity.

But geez. If I could live in the building basically for what I’m paying now in fees, taxes and insurance (by deploying my $10,000 a year investing return), and have my $375,000 to “invest” in winters in Waikiki and nice overnighters in Niagara-on-the-Lake, well then ….

It’s a thought, but only that. They’ll probably carry me out of here feet first from our condo, the equity in which may one day be needed to help us out in one of the emergency situations that can arise in older age.

Meantime, it wouldn’t hurt for everyone to do some math and determine what’s best financially for them — renting versus buying. And then, of course, throw the math out the window and succumb to the emotional tug of home and hearth.

28 Apr

Selling house not just about highest price


Posted by: Mike Hattim

The number one question you need to ask yourself if you’re selling your home this spring is: How do I net the most money?

It’s not how do I get the most money for my home. It’s how do I keep the most money in my pocket after paying all my expenses, including commissions and fees.

Discounters are popping up everywhere now that they can access the Multiple Listing Service. Then there’s still the full-service broker who promises a better price and ultimately more money in your pocket.

A settlement last year between the Competition Bureau and the Canadian Real Estate Association, which represents about 100 boards across the country and almost 100,000 agents, allows consumers to have “a mere listing” on the MLS. Being on the MLS system is key since about 90% of transactions are handled by organized real estate.

A poll commissioned by LawPro and TitlePLUS, which sells title insurance, was released Tuesday and it shows confusion still exists in the marketplace.

The poll found even though 72% of Canadians were not aware of the changes made to the MLS, 45% of Canadians would still consider selling privately or using a real estate lawyer to help them sell.

“What these findings show us is that there is an appetite among Canadians to conduct the sale of their home privately,” says Ray Leclair, vice-president of TitlePLUS.

So you can be a do-it-yourself real estate agent and use the MLS. But do you want to?

Market conditions have to factor into your decision. There hasn’t been a U.S.-style collapse here, but it’s no longer a seller’s market, meaning you don’t just stick a sign in the ground and wait for the pigeons to flock. You’re going to have to work.

“For the discount that you’re getting, am I willing to take the gamble that my house is being shown at its optimum,” says Gary Siegle, Calgary-based regional manager for mortgage broker Invis Inc., about private selling.

He says the industry has been sticking to its guns when it comes to commission rates -generally around 5% of the purchase price -so if you’re using an agent, the negotiation might be on the service being provided for that commission.

“The professional service real estate agent is not going to give [commission up] just because someone has access to the MLS. They have to articulate the value more to justify their fee,” Mr. Siegle says.

Phil Soper, chief executive of full-service firm Royal LePage Real Estate Services, says the industry has not moved much off commissions since the agreement with the government.

“I think the impact in the market in the first year postchanges has been in the low end of the market,” says Mr. Soper, who says that narrow segment of the market is less than 15% of the overall sales volume.

He says for sale by owner or FSBO companies are now merging their operations with independent agents so customers also get an MLS listing as part of their service. “I don’t think they are actually selling any more houses. The listings are just showing up on more websites than they used to,” Mr. Soper says.

One of those FSBO companies is PropertyGuys.com. Walter Melanson, managing director of the Moncton-based company, says he currently has about 9,000 active listings across the country.

“I watch the comments [of the major real estate companies] and they say nothing has changed and nothing will ever change and that’s the way they built their mousetrap,” Mr. Melanson says.

What he and others are doing is creating a service that allows you to list with his company for as little as $399. When you sign up, his website hooks you up with a registered real estate agent who doesn’t do much but put your home on the MLS, for an extra $299.

The company’s Ontario representative, a licensed real estate agent, has close to 1,000 listings. She’s based in Hamilton but accepts listings from as far away as Elliot Lake, so she’s not doing too many showings.

“We want someone to compare how much it costs to sell your home using PropertyGuys to, say, Re/Max. You do that math and you’ll see quite the difference,” he says.

It’s no small amount. When you consider the average home is now selling for close to $375,000, at 5%, that’s $18,750 in commission.

However, consider if you do choose do it yourself on the MLS, you are forcing buyers to jump through one more hoop. In the case of Property Guys, the buyer has to click on the MLS broker’s listing office and then punch in the listing number before he’s directed to the seller.

“The bounce rate is amazing,” Mr. Melanson says. “Who wouldn’t look for their dream home and make that extra click? Our data says people will make that click. We’ve had to deliver magic within a narrow set of rules.”

But you have to wonder whether that extra work will affect your sale price at the end of the day. If you save $20,000 in commission, what’s the point if your house sells for 5% less?

Market conditions ultimately play into any decision. It comes down to whether you think your agent can earn that commission by getting you a better price or meeting a goal of selling your home in the time frame you want.

28 Apr

Tips for dealing with a renovations contractor


Posted by: Mike Hattim

Since they rely heavily on word-of-mouth to spread their businesses, contractors are motivated to fully satisfy their customers and build a solid reputation. But because bad news travels faster and farther than good news, it’s far more common to hear stories about bad contractors than it is to hear about good ones. (You think your updated house looks great, but potential buyers may not feel the same way.

Hiring a top-notch contractor will pay off in the long run, even if the initial cost is a bit higher than if you simply go with the lowest bidder. If the job is done right to begin with, it will last longer and avoid the cost to correct shoddy workmanship. Plus, you save yourself a lot of time and aggravation because you’re dealing with someone you can trust.

The Search
Millard Blakey, cofounder of the remodeling company WreckCREATIONS, in Lexington, KY, says that it’s best to know the qualities you’re looking for in a contractor before you begin your search. Once you determine those qualities, use referrals from friends, family and neighbors to come up with an initial list of names. Interviewing at least three potential contractors before deciding to ask for a cost proposal is recommended, in order to ensure that you are comfortable with your decision.

Shaun Smith of Koru Landscape Construction in Louisville, CO says that the interview process works both ways. “My experience lets me know very fast what they are really trying to achieve, and if I am the right contractor for them.” He encourages homeowners to contact local resources for a list of local contractors. This will help to narrow the search and support the craftsmen in your area. He also recommends touring nearby neighborhoods to find a few homes that are undergoing construction. “Stop by and talk with the owners about how their project is coming along,” he advises.

Smith warns against contractors who try to convince you they are the only one for your job. He says that their work should speak for itself, and a strong portfolio, good references and pictures of previous jobs can often say more than the answer to any interview question can.

Many homeowners get into trouble because the work they want done isn’t clearly defined at the outset. Then, as the work progresses, they change the scope of work causing additional costs to the contractor that are passed on to the owner. That’s not the contractor’s fault, but he often gets the blame. The way to avoid this is to produce a thorough remodel plan that completely covers every aspect of the job, including the specific materials to be used. A good contractor will let you know if your proposed project and budget is realistic. (Some renovations will mean a bigger sale price on your home, while others will just cost you.

Get everything written down in the form of a contract that includes cost, schedule, materials, bonding and insurance information and a list of subcontractors. For the homeowner, a fixed-price contract is preferred over paying by the hour, because it locks in the maximum liability. However, this leaves you open to price increases if you change any of the work content.

Contractors are entitled to a reasonable down payment in order to cover their initial labour and material costs. This is negotiable, depending on the nature of the job, but should usually not exceed one-third of the total contract amount. The balance of the money can be allocated to completion milestones that incentivize the contractor to stay on schedule. For example, discrete milestone payments could be made upon completion of the framing, plumbing and electrical installations. Hold a sizable amount of money for the final payment that is contingent on your personal inspection and satisfaction of the finished project.

Perhaps most important is to keep the lines of communication open. A failure to effectively communicate may be the reason for many failed relationships between homeowners and contractors. Whether the issue is money, jobsite cleanliness, finish expectations or even how to deal with additional work, it’s critical to discuss these matters as soon as they arise. If you believe the work being done is unsatisfactory, approach the contractor immediately and attempt to get a resolution. Most contractors will work with you to try and solve the problem.

The Payoff
The importance of hiring the right contractor can’t be overstated. A good contractor will save you money by doing the job right the first time, and will not only save you money in the long run, but also eliminate stress by ensuring a quality finished product.

27 Apr

Safe as houses? That loud knocking is falling prices


Posted by: Mike Hattim

The most enduring and simplistic argument for buying a house is that you’re making an investment.

What an understatement. Between your mortgage, property taxes, utility bills, maintenance, furnishings, renovations, landscaping and such, you’ll be investing non-stop in your home. But what’s the return on your money?

Looking back a decade, houses have been an excellent investment that rivalled the stock market. But the view ahead is not nearly so positive. Bear this in mind if you’re considering a jump into this high-priced and increasingly unaffordable real estate market of ours.

How did the market get where it is today? Housing economist Will Dunning says resale housing prices have grown by an average annual 4.9 per cent in Canada since March, 1988, which is the year that comprehensive real estate industry data begins.

The more recent experience with housing is even better, Mr. Dunning found. The 10-year average annual price gain for a house is 8.3 per cent, almost on par with the average 8.9-per-cent increases logged by the S&P/TSX composite index, including dividends.

What we have here is a housing market that has been rising at close to double its long-term rate in the past decade. Don’t expect this to continue.

“I’m not in the camp that says we have a big correction coming, but I think we are looking at a fairly long period of moderate changes in house prices – plus or minus 2 per cent,” Mr. Dunning said.

In its most recent update on housing affordability, Royal Bank of Canada predicted a period ahead of very modest price increases. “(The) rapid home-price appreciation of the past 10 years has likely run its course overall in Canada,” the report said.

We’ll call that the optimistic view of what’s ahead for the market. For the pessimists, the question is how far prices will fall, and for how long. Sample prediction: Toronto-based Capital Economics sees a decline in prices of up to 25 per cent in the next three years.

The negative outlooks for housing are based primarily on factors such as prices, income growth and interest rates, all of which are a function of current economic conditions and thus short-term in nature. A long-term concern for housing values is Canada’s changing demographics.

The fastest-growing component of our population comprises those who are 65 and older. In other words, people who are going to be selling houses over the decades ahead and doing very little buying, if any. That’s bound to affect demand for homes and the potential for price appreciation.

For an actual real life example of how real estate prices can fall, let’s look at what happened in Toronto between April, 1989, and February, 1996. According to Mr. Dunning’s numbers, the average resale home price in the city fell to $192,406 from $280,121, or 31 per cent.

That was an extreme plunge, fuelled in part by a level of rampant speculation that we aren’t seeing in today’s market. But prices can still fall in today’s market. Check out the Calgary market, which dipped 1.7 per cent in March.

“The fact remains that housing can decline in value, and for prolonged periods,” Moshe Milevksy, a finance professor at York University’s Schulich School of Business, wrote in his 2009 book Your Money Milestones. “It is definitely not a risk-free investment.”

Buying a house and living in it for decades can protect you from temporary market dips, just as long-term investing in stocks smoothes out the stock market’s ups and downs. Still, it’s worth noting that someone who bought an average-priced house in Toronto around the ’89 market peak and still owned it would be looking at modest annualized gains in the 2-per-cent range.

Historical changes in housing prices are just a guideline, anyway. They don’t consider things like mortgage interest, property taxes and maintenance, none of which add any value to a home.

Houses bought today have questionable investment value, but there are some other factors to consider if you’re thinking of getting into the market. First, gradually paying down the mortgage on your house is a kind of forced savings plan. Not a great savings plan, but better than nothing.

Second, there’s the best reason of all to own a house. It’s freedom: Your family, your rules, your lifestyle. That’s really what you’re investing in when you buy a home today.

Here’s how the housing market compares to other investments over the 10 years to March 31. Returns are expressed on an average annual basis.

Houses (Average resale housing price in Canada) 8.30%


Stocks (S&P/TSX composite index with dividends included) 8.90%


Bonds (DEX Universe Bond Index) 6.10%


T-bills (91-day Treasury Bill Index) 2.60%


Gold bullion (per ounce, in U.S. dollars) 19.10%

26 Apr

The ‘thrill’ of buying a house


Posted by: Mike Hattim

You walk into the open house, take one look and say to yourself: This is it. It’s the house I have to live in. Where do I pay? A bidding war? I’m in.

Over my years of buying houses, I never bought one that did not have that frisson moment, that thrill of finding a place so suited to my wants. Indeed, I have in the past decided that I wanted to buy a house in what seems, in retrospect, to be nanoseconds. (By contrast, I’ve taken weeks to decide on the right pair of shoes.)

It is no way to make an “investment,” to be sure. But, as I’ve previously discussed in this space, buying a house is perhaps the most uninvestment-like of investments.

Just about anyone who’s purchased a property or thought about purchasing knows that it is much about gut-feel, in which the senses can conspire to trump sense.

Now, as the major real estate selling season gets under way, along comes a survey commissioned by BMO Bank of Montreal to give statistical weight to the notion that intuition carries a particularly heavy weight in the house-buying process.

The survey by Leger Marketing found that more than two-thirds of Canadians cited a “good feeling” toward the property as a reason to buy. Meantime, though, good sense is not thrown out of that gorgeous bay window and into those manicured flower beds. More than 90% of house-hunters value affordability and location over resale value.

So, the axiom that there are three important things in real estate – location, location and location – might reasonably be replaced by the Three Ps: Price, place and personality.

Nevertheless, that resale value is not a big concern to these surveyed house-hunters – people between 25 and 45 who plan to buy a home within two years – is a telling sign of the real estate times.

With some dips here and there, Canadian house prices have been rising strongly for more than a decade. Indeed, even the recession created just a downward blip in the chart of ever-growing values, with the average national price rising 8.9% last month from the previous March (but just 4.3% excluding Vancouver).

As a result, most of the house-hunters surveyed might never have been aware of a housing market that was not rising. I suspect many in this 25-to-45 demographic believe house prices basically keep going up forever, that though they downplay resale value in the survey, the expectation for solid gains is, well, a given. (Any significant drop in prices would surely shake that belief.)

In recent times, investors have been asked if they are stocks or bonds. If you’re a stock, you are prepared to take on more investment risk. If you’re a bond, you are not.

Perhaps, though, many people are probably houses when it comes to investing. A home is both partly a stock and a bond – and somehow neither.

It is a bond because over the long term it will likely produce modest returns through the enforced savings required by paying down the mortgage. It is a stock because the gains could be outsized if the investor were to buy and sell at propitious entry and exit points for market-timing gains.

And it is neither because it is an “investment” with many moving parts and frictional costs. You don’t live in a stock or a bond, but when the house leaks, it costs money and cuts into the investment. Meantime, the costs associated with buying and selling a property are becoming more daunting in many jurisdictions, with some observers reckoning that a house is often a mediocre investment at best.

But most young first-time buyers and mover-uppers are not fazed by such commentary. Home ownership is a cornerstone of our culture, with 70% of the population owning properties and many of the other 30% looking to join the majority.

And the real estate industry has become far more adept at marketing and selling than in the days decades ago when I was in the market. Today, houses are often professionally “staged” to produce that frisson moment. Prices are sometimes set artificially low to produce that exciting bidding war and that extra frisson of “winning.”

A house, it is said, is not a home. And a home is not strictly an investment. But does a stock have granite counters? Does a bond have stainless steel appliances?

25 Apr

Canadian consumers expected to remain cautious as interest rates set to rise


Posted by: Mike Hattim

Higher food and gasoline prices and hefty debt loads likely to be made worse by interest rate hikes will impact consumers’ buying habits going forward, say those who track retail spending.

It’s going to be tough for consumers who have depended on a low interest rate environment, said TD Bank economist Francis Fong, adding that rates are expected to go up this summer.

“The rising interest rate environment, this high household indebtedness situation — that’s all going to impede the ability of consumers to spend going forward,” Fong said Thursday from Toronto.

Statistics Canada said retail sales increased 0.4 per cent in February to $37.3 billion, giving retailers some relief after declining sales at the start of the year.

Consumers filling their tanks with higher-priced gas, along with those buying furniture and clothing, pushed sales higher in February.

But Fong said consumer spending will no longer be the same driving force going forward as it has been throughout the economic recovery.

The Retail Council of Canada said consumers are “still hanging back a little bit,” especially now that they have to spend more of their incomes on food and gas.

“Clearly, if they’re going to have spend a little bit more on basic necessities, they may pull back a little bit on the nice-to-haves, but not on the need-to-haves,” said spokeswoman Anne Kothawala.

Consumer confidence is soft and that mirrors spending, she added.

“Gas and food prices are actually very closely related. It costs more to transport goods,” Kothawala said.

Statistics Canada said the largest contributor to February’s increase in retail purchases in dollar terms was gasoline sales, which increased 1.3 per cent.

Gasoline prices have been surging along with crude oil, which began rising sharply in February with the outbreak of unrest in Libya, an OPEC member that accounted for about two per cent of the world’s crude output before civil war there.

As of Thursday, the Canadian average price compiled by GasBuddy.com was 129.6 cents per litre, up from about 118 cents per litre at the end of February.

But lower retail sales in Quebec — a 0.8 per cent decline — contributed the most towards the dampening of national retail sales, Statistics Canada said.

“The decline reflected, in part, lower sales of new motor vehicles in the province,” the federal agency said. “This was the second decline in retail sales in Quebec following six consecutive monthly gains.”

Quebec also increased its provincial sales tax to 8.5 per cent in January, up a percentage point.

Sales at clothing and clothing accessories stores were up 2.5 per cent, offsetting a decline in January. Sales at furniture and home furnishings stores grew 2.1 per cent in February, helped by gains in real estate sales.

Prof. Ken Wong of Queen’s University business school said once consumers pay down debt and spend more money on food and gas, there isn’t much left for anything else.

“You have to ask yourself what can be delayed and what can’t be delayed,” Wong said of consumer purchases.

“We cannot rely on interest rates remaining as low as they are as long as they have been going forward,” said Wong, who teaches business and marketing strategy.

Geographically, retail sales in February gained in six of 10 provinces, powered by Ontario where sales increased 0.7 per cent after two consecutive monthly declines.

21 Apr

Underwater mortgages: When is it OK to just walk away?


Posted by: Mike Hattim

Let’s just say you owed somebody a ton of money but there was no legal way to force you to pay it back.

Would you? What if it was one of those evil corporate banks that make for an easy target? Did the answer just get a little easier?

Not for 60% of Americans who say it is never okay to simply stop making payments on your home, according to a survey by Eagan, Minnesota-based findlaw.com, a free legal information website.

Another 34% say it’s okay to walk away from a mortgage but only if you can’t make the monthly payments. Only 3% of believe you should be able to walk away from a mortgage anytime you want, according to the survey which interviewed 1,000 American adults and had a margin of error of plus or minus three percentage points.

It’s an interesting survey given that U.S. law in a number of states allows consumers to simply hand over the keys to their homes without the lender going after their other financial assets — something that is all but impossible in Canada.

That is not to say that walking away from a mortgage isn’t affecting the credit of Americans who do so. They might not be able to buy another house for years unless they do so with cash.

Despite what the survey says, Americans have been walking away from mortgages in droves because it makes financial sense.

Think about it. You have a home with a $500,000 mortgage on it. The present value of it is $250,000. Why would you not walk away, if you could?

“We just asked people what do you think of the idea, not would you do it yourself or have you thought about doing it yourself,” said Leonard Lee, the researcher behind the survey. “There is a practical argument but there’s a whole philosophical argument.”

If you were shareholder in a company that owned a $250-million building but kept making payments on a $500-million mortgage even though the company had the ability to walk away from the debt how would you feel? Would the executives be breaching a fiduciary responsibility?

The U.S. real estate industry even has a term for all this – strategic default. “You are asking at some point doesn’t it make more sense to walk away from the mortgage where you are unlikely to recoup your original investment,” says Mr. Lee.

Ted Rechtshaffen, president of TriDelta Financial and certified financial planner, says once you put aside the moral issues it would come down to a simple choice.

“It will impact your credit rating but from a financial perspective why wouldn’t you do it? You are getting a $250,000 head start. Another investment is probably going to be better than your current house,” says Mr. Rechtshaffen.

But Benjamin Tal, deputy chief economist with CIBC World Markets, says while it might not make economic sense, there is evidence Americans are not actually walking away from property as much as they probably would if they were listening to a financial advisor.

“Whatever the default rate is now in the U.S., people say it’s 8% and that’s extremely high. I say that’s surprisingly low,” says Mr. Tal.

“You have up to six to seven million households that could default any day, namely because there are in a negative equity position.”

What’s in it for them to keep paying? There is something to say for wanting to stay in your home where you have been raising a family and living. There is also a stigma that comes with somebody slapping a foreclosure sign on your property — suddenly your neighbours know a little more about your financial situation.

“At the end of the day though, that’s the rational thing to do. You are talking about houses that are under water more than 20%. Based on an economics textbook, that would be the rational thing to do,” says Mr. Tal.

In Canada it’s pretty tough to do. For starters, if you have an insured mortgage, backed by the government, the bank will get paid off for their loan. But the insurance company, whether it’s Canada Mortgage and Housing Corp. or a private insurer, will go after you for any deficiency created by proceeds from the property being less than the mortgage.

It’s the case in most of the country for uninsured mortgages too, says John Turner, director of mortgages for Bank of Montreal. Rules are slightly different in Alberta and designed to protect consumers but Mr. Turner says banks can elect to go after other assets in some circumstances.

There’s also a scenario where you might have bought a condominium as an investment before it was built and put down say 20% payment. If you think you walk away should prices drop by 50% once the building is up, forget it. You’ll be sued.

“As a lawyer we can’t advise someone to break a contract. The law is not you don’t have to obey it, the law is the consequences of not obeying [the contract],” says Calgary lawyer Jeff Kahane. “You haven’t broken the law, you’ve broken your promise. Is it any different than saying why would I want to pay for a chocolate bar at 7-11 when I can put it into my pocket and steal it if I can get away with it.”

21 Apr

Canadians struggling to save and pay off debt; 38 per cent have no savings


Posted by: Mike Hattim

Many Canadians are finding themselves caught between the struggle to save money and repay their debts, says a survey from TD Bank.

And with interest rates expected to rise this summer, clearing debts probably won’t get any easier. In the report, 38 per cent of Canadians surveyed said they had no savings at all.

“I think it’s worrisome,” said Carrie Russell, senior vice-president of retail banking at TD Canada Trust “The reality is that we are all going to come into unexpected expenses from time to time, be it a car or health or a job loss and this can really derail you and your family if you have no cushion behind you,” Russell said from Toronto.

Russell said the major factor preventing Canadians from saving is that they are using disposable income to pay down debt, whether it be credit cards, car loans or mortgages.

She recommends a cushion of three to six months of income saved to get through unexpected financial shocks.

One-third of Canadians who responded to the recent online survey also said they didn’t have enough money to cover living expenses like rent or food bills.

The survey found that 54 per cent of the 1,003 people who took part in the survey said it was a real struggle or impossible to save.

Repaying those debts will only get harder if the Bank of Canada raises interest rates this summer, as expected. A spike in Canada’s inflation rate in March was driven by higher food and gasoline prices.

Shopping is also taking a toll on tucking money away for a rainy day.

Russell said 12 per cent of those surveyed said they couldn’t save because “they shopped beyond their means.” Nineteen per cent of those surveyed under the age of 35 said they spent too much on shopping, she added. “This really comes down to the age-old question of budgeting, choices and skills required in making plans for a healthy financial future.”

Changing habits starts with children and making sure they understand how much things cost and understanding the difference between a “want” versus a “need,” she said.

“We don’t send our children into the deep end of the ocean without teaching them how to swim. We shouldn’t send our children out into the workforce and independent lives without giving them the basics of financial literacy.”

On the flip side, 30 per cent of respondents said they had enough money saved to cover living expenses for at least four months.

Russell said those who were most successful with savings were “paying themselves first” and using automatic savings programs to put money aside.

Certified financial planner Marta Stiteler had some tough love for Canadians without nest eggs: learn to live with less and start saving every month even if it’s just $50.

“People are using the downturn as an excuse,” said Stiteler, an associate at Pillar Retirement in Hamilton, Ont..

“The reality is you just have to bite the bullet and save. If you don’t save you’re going to spend it because your lifestyle will eat up that money,” she said. “It’s about discipline.”

The Vanier Institute of the Family has said that average family debt in Canada hit $100,000 in 2010.

“I do think many families are behind the eight ball and the public supports really aren’t there where they once were,” said Katherine Scott, director of programs at the Ottawa-based organization.

Scott said local credit and non-profit agencies can provide resources to help families get a financial plan so they can “start to dig themselves out of that hole.”

The online survey, based on a representative sample of Canadian adults, was conducted from Dec. 2 to Dec. 7, 2010, by Environics Research for the bank.

20 Apr

Pricey property surge drives average up


Posted by: Mike Hattim

Strong sales in Canada’s most expensive market helped push the average price of a home across the country up 8.9% last month from a year earlier, the Canadian Real Estate Association said.

The Ottawa-based group, which represents about 100 boards across the country, said the average sale price of a home was $371,286 in March.

But CREA cautioned that Vancouver was driving the numbers because of strong activity “in a few pricey areas.

“A record number of multi-million dollar property sales in Richmond and Vancouver West are pushing up average prices for Greater Vancouver, British Columbia and nationally,” said Gregory Klump, chief economist at CREA. 

“If Vancouver is excluded from the equation, the national average price increase is cut by more than half to 4.3%.”

CREA said that new mortgage rules that made it harder to borrow pushed housing sales forward and that affected condo sales in Vancouver in particular.

However, Mr. Klump said long-term the impact of the new rules will be minimal. Among the changes was a shortening of the length of amortization from 35 years to 30 years which has the effect of increasing monthly payments.

“Interest rates are now widely expected to remain on hold until at least mid-July, which is supportive for resale housing demand, market balance and prices,” said the economist, about another positive for real estate.

Overall, sales in March remained steady, down just one tenth of a percentage from February levels. National sales for the first three months of 2011 are very close to their five and 10 year averages, CREA said.

The number of months of inventory was 5.6 months at the end of March, unchanged from February. The numbers represent the number of months it would take to sell current inventories at the current rate of sales activity.

20 Apr

It started with energy…now inflation has come home


Posted by: Mike Hattim

Inflation was hotter and more widespread than expected in March, figures released Tuesday showed, leading economists to predict that another strong reading in April could all but solidify an interest-rate hike in July.

Statistics Canada said the annual inflation jumped to a 2½-year high of 3.3% in March, well above economist expectations for 2.8%. Core inflation — which factors out volatile items such as energy and food prices — rose 1.7%, compared with an expected 1.2%.

The figures show prices are rising not only faster than expected, but also affecting Canadian wallets beyond the gas pumps and grocery stores. That puts pressure on the Bank of Canada, especially given its target inflation range is 2%.

“We were already expecting the Bank of Canada to tighten rates in July, but the March numbers were a shocker,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “This solidifies our forecast of a July rate increase.”

Tuesday’s numbers come less than a week after the Bank of Canada raised its forecast for inflation this year, citing rising energy prices. Inflation in March was also a big leap from February, when the headline number was 2.2% and the core rate was 0.9%.

Gasoline prices were one of the main reasons for the inflation surge, with prices up 18.9% from a year earlier. The strong uptick coincides with rising oil prices in the wake of unrest in North Africa and the Middle East.

The figures helped push the Canadian dollar to its biggest advance against its U.S. counterpart in two months, surging to $1.0457.

Mr. Porter said the Bank of Canada’s next policy meeting, to be held on May 31, will signal whether the Bank of Canada will move to hike rates in July.

“They’ll have strong wording hinting at an increase,” he said, adding such a move is likely if April turns out to be another month of strong inflation — which he expects to be the case.

Economists will now be paying attention to April numbers and, in particular, to core inflation.

“The Bank of Canada will get one more CPI report before their next interest-rate decision on May 31, to assess whether this was a one-off fluke or the start of a new troubling trend,” Mr. Porter said. “Suffice it to say that the bank won’t be comfortable keeping rates on hold beyond the next meeting if this is not a fluke.”

The bank last raised its interest rate in September, when it moved its benchmark number from 0.75% to 1%.

But while the strong inflation data surprised many industry watchers, economist David Rosenberg labelled the inflation fears “uncalled for.”

In a note to investors about inflation in the United States, Mr. Rosenberg, the bearish chief economist and strategist at Gluskin Sheff + Associates, said inflation targets were unlikely to meet the lofty expectations of most economists.

“Whenever we go through one of these commodity spasms, household inflation expectations take off,” he said. “But this has proven to have been a great contrary signal each and every time.”

In the United States, fears over rising fuel and food prices have led some economists to predict inflation levels in that country could top 5%, especially given the U.S. Federal Reserve is not expected to boost its benchmark interest rate this year.

U.S. inflation in March was up 2.7% year over year, according to the consumer price index. Consumers’ one-year inflation expectation was left unchanged at 4.6% after numbers were released earlier in April.

Mr. Rosenberg, however, said history shows inflation is unlikely to hit those kind of levels.

“In periods when inflation expectations breach 6%, as is now the case, inflation has always receded in the next year and by an average of 300 basis points,” he said.

The latter two years showed just how volatility in non-core items can disrupt inflation. The summer of 2008 saw economists predicting inflation levels of nearly 8%, just as oil pushed US$145 a barrel.

“A year later, the inflation rate was flirting with the 0% threshold,” Mr. Rosenberg said