Category Archives: Real Estate

Foreboding part III.

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In Foreboding part I I said that I felt a big wave may be coming towards the financial markets.

In Foreboding part II I explained a few ways that I am rebalancing my portfolio and taking a more conservative approach right now.

After the last two articles, I thought the question on many readers mind might be why I feel there is trouble ahead for the economy.

What worries me.

Canadian real estate is now the third most overvalued in the world. Seventy percent of Canadians own real estate, are deep in debt and have little or no other savings. If the real estate bubble bursts here, our economy is in big trouble.

OECD2

I am currently reading a book called “The End Of Growth” by Jeff Rubin who was the former chief economist at CIBC World Markets. In the book he explains how cheap oil drives economies.

“Guess what oil prices were doing in 2008 when the world fell into the deepest recession since the 1930s? From trading around $30 a barrel in 2004, oil prices marched steadily higher before hitting a peak of $147 a barrel in the summer of 2008.”

“When oil prices go up, so does inflation.”

“A fivefold bump in interest rates was the last straw for the massively leveraged US housing market. Higher rates popped the speculative housing bubble, which brought down not only several prominent Wall Street investment banks but also the entire global economy.”

There is no reason to expect we will have cheap oil in the future.

But what really keeps me up at night…

Foreboding part I.

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In the last year I have been learning to surf. It has been a long time goal of mine, but not the easiest sport to pick up in your mid 40′s. One of the toughest things to learn is how to read the ocean.

Experienced surfers develop a sixth sense and will move into position and start paddling long before I even realize a wave is coming. I am usually left out of position and facing the wrong way when the wave comes and get crushed!

Right now I feel the same way about the economy. Something’s coming…

Just like when I see all the experienced surfers turning around and getting in position, right now everything I read is pointing to the fact that there is a wave heading towards the financial markets. I’m not sure how big it will be and it might already be here…

After the federal reserve flooded the markets with cheap money in the States (and created an extra trillion a year in debt) the stock market soared this year by 19% (the resource heavy Canadian market only went up by 3%). And now the markets are pulling back.

TSX (Canadian Market)

TSX (Canadian Market)

S&P 500 (U.S. Market)

S&P 500 (U.S. Market)

And the Canadian real estate bubble may already be bursting. As you know anyone who wants to buy a home in Canada with less than 20% down must get CMHC insurance on their mortgage. CMHC just reported that they insured 54% less mortgages in May than they did a year ago.

Of course home sales are down! In 2012 seventy percent of Canadians owned real estate. Who were they going to sell homes to in 2013, the other 30%? Children under ten years old and seniors over eighty?

Home sales are down and prices are following. In Victoria where I grew up, May single family home prices are down 3.4% from a year earlier.

To be continued…

A better way to buy a condo?

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If you want to make money by investing in condos, there may be a better way.

Macquarie Capital Markets Canada did a comparison between investing in apartment REITs versus condos. They compared returns from investing in a Calgary condo to the Alberta focused Boardwalk REIT. Then they compared returns from investing in a Toronto condo to eastern Canada-focused CAP REIT.

In both cases they found the REIT investment came out ahead consistently in recent years.

REITs pool the investment money from many people then buy apartment buildings (or shopping malls depending on the REIT) and distribute 90% of the profits to shareholders in the form of monthly distributions. It’s a way to profit from real estate without having to pay a down-payment, closing fees, monthly maintenance fees or deal with tenants.

Dividend bubble?

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In the late 90′s people were pouring money into internet stocks. Then the dot-com bubble burst and between 2000 and 2002 the Nasdaq (the market that trades in tech stocks) lost 78% of its value.

Next came the housing bubble where low-interest rates (and the banks lending money to anyone with a pulse) led to a huge run up in real estate prices. By 2009 the bubble had burst and there were almost 4 million foreclosures in the U.S.

And while the Canadian real estate market hasn’t popped, sales of single family homes in Vancouver where I live are down 47% from 2011. Prices to follow?

widening US and Canada house price gap

There are some that are now speculating that dividend paying stocks are a bubble because of their popularity and recent run up in prices. Unless central bankers start raising interest rates, I think stable companies paying increasing dividends will be in a bull market for some time.

Conventional wisdom was that you should take the number 100, subtract your age and that is the percent you should have in stocks. The rest should be in bonds and fixed income. The problem is that with rock bottom interest rates, those bonds are now paying almost nothing. Retired people who relied on that income are now in shock as the bonds they held roll over at todays rates.

The U.S. can’t raise interest rates either without crushing the already fragile real estate market and increasing the interest they pay on the national debt. With the national debt spiralling out of control, will they ever be able to afford to raise interest rates?

So retirees now have a choice: Learn to live on 1/3 of what they used to, or venture out into dividend paying stocks. As money has been flowing back into dividend paying stocks, the prices have been pushed up.

Here is an example of a few popular Canadian dividend stocks.

Bell – 1yr return 16.55%, dividend yield 4.88%, total return = 21.43%

Telus – 1yr return 23.87%, dividend yield 3.64%, total return = 27.51%

Royal Bank – 1yr return 15.09%, dividend yield 4.13%, total return = 19.22%

Scotiabank – 1yr return 11.16%, dividend yield 4.11%, total return = 15.27%

TransCanada – 1yr return 15.15%, dividend yield 3.73%, total return = 18.88%

Fortis – 1yr return 0.57%, dividend yield 3.68%, total return = 4.25%

Enbridge – 1yr return 19.15%, dividend yield 2.64%, total return = 21.79%

 

Diversity.

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A friend emailed me the other day because she had watched a show about the retirement crisis in the States and she wanted my opinion.

Click here to watch: The Retirement Gamble.

The show seemed to have two main themes:

  1. People knew nothing about investing.
  2. People were losing money in the stock market.

The first one is very easy to fix. Read.

If you are reading this blog, you probably don’t have this problem, but many people I meet who don’t know anything about investing also tell me they have never read a single book on the subject. All the information is free at the library, but still people don’t bother.

If your work offers you an RRSP or a 401K and you don’t understand how it works there has never been an easier time to get the information you need. Spend 15 minutes a night googling the subject and you will have all the information you need.

The second one is also easy. Diversify.

On the “Retirement Crisis” program, they showed a couple that had $1.5 million invested in high-tech internet company stocks. The stocks were going up in value by as much as $30k a day. Then in the year 2000 the market crashed and they were left with $500k.

They said they didn’t know it was a bubble. They were earning $30k a day. That seemed sustainable to them???

Next it showed a single mom who in 1999 used 100% of her money to buy stock in the computer company she worked for, Comdisco. Well, you can guess the rest… sobbing, tears…

Never put all your eggs in one basket.

To me diversity is the #1 way to protect your money. There all kinds of rules of thumb about how much to invest in what based on your age, but just keep it simple and don’t put all your eggs in one basket.

Try to diversify your investments between different countries and asset classes.

  • U.S. based stocks, mutual funds or ETFs.
  • Canadian based stocks, mutual funds or ETFs.
  • International based stocks, mutual funds or ETFs.
  • The home you live in, a rental property, or a Real Estate Investment Trust (REIT).
  • Gold, silver, or any precious metal (a good hedge against inflation).
  • Your small business.
  • Classic cars, fine art, vintage wine (what’s your hobby?)

CBC casting “any race except caucasian”.

 

 

 

Fear is sexy.

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I haven’t written anything in a while because I have been too busy with work. I have been reading every day though and one story jumped out at me that I think sums up the reason people are so confused when it comes to saving and investing.

Three weeks ago I saw headlines popping up online that said things like, “The risky move Mila Kunis makes with her money” and “Mila Kunis rotates from cash to stocks”.

The fact that it’s news when an actress decides to buy shares in a company and the headline is splashed across yahoo with the same excitement as the latest school shooting should tell us two things.

  1. People fear owing real businesses (stocks) and love real estate.
  2. People buy high and sell low.

If Mila Kunis had bought a house at 2006 it wouldn’t have made headlines even though she would have been recklessly buying in an over-inflated market which would soon lose almost half its value.

In 2009 when the stock market was low and there were great, solid companies selling at discount prices and paying high dividends, Mila Kunis thought is was best to avoid the stock market and keep her money safely in the banks (where it would lose value due to inflation).

Since 2009 many stocks have doubled in price and we are in the middle of a bull market (markets rising). Historically the stock market averages a return of around 7%. I own 3 mutual funds through my actors union. In the past year they have all returned between 11% – 13%. Almost double the average expected return.

Click here to read: Mila Kunis rotates from cash to stocks

To be continued…

Canadian house prices to remain flat for 10 years.

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TD Bank has added it’s voice to the chorus of people predicting Canadian real estate will remain flat or fall in price over the next 10 years.

Yahoo finance reports:

“The “special report” from one of Canada’s largest banks makes the case that gains in housing prices have been exceptionally strong over the last 10 years, even when accounting for a sharp drop during the 2008-09 recession. But now is the time for a bit of a payback.”

Read the full article here: Canadian house prices to remain flat over 10 years, predicts TD bank

To understand how overpriced real estate is in Vancouver, I find it useful to compare the price of homes here to those in other cities.

Click here to see the only “house” selling for $400k in Vancouver right now.

And below is what $400k will get you in another U.S. town.

 

Fake Asian buyers.

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First in 2011 Cam Good, head of The Key, a Vancouver based real estate company hired a yellow helicopter to fly around “rich Chinese investors” with three camera crews onboard. After Global and CBC ran the story, it was discovered that these “Chinese investors” were really realtors from the suburbs of Vancouver.

Then in Burnaby Asian people were hired to camp out in front of a condo sales centre for 24 hours prior to it opening. TV news crews were invited to witness the spontaneous news event and the stories they ran created mass excitement and more people flocked to the site.

Now this…

What should I invest in?

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In my last 2 posts we talked about how to open an online brokerage account. Today I am going to give you a very general idea of the kinds of investments I think you should be researching in 2013.

Mutual Funds
I am not a big fan of mutual funds because of the fees associated with them. I own some in my union RRSP, but only because they give us no other option. I think mutual funds may be good for someone with no investment knowledge and no desire to take control of their own finances. I suggest if you are going to buy mutual funds you buy “index funds”. These types of mutual funds buy a basket of the most popular stocks, do less trading and have lower fees. These “passive” mutual funds tend to beat 80% of the actively managed mutual funds out there.

Exchange Traded Funds
ETF’s are a relatively new invention. They are just like mutual funds, but trade like stocks on the stock exchange. Each ETF holds a basket of stocks just like mutual funds and is managed by a fund manager. The difference is they can be bought or sold instantly like a stock and have much lower fees. Since we have invented ETF’s why is anyone still buying mutual funds?

Real Estate Investment Trusts
If you ever wanted to own real estate, but didn’t have enough money to get started REIT’s are for you. Many REIT’s own a vast empire of shopping malls or rental apartment buildings. You can buy shares in the trust and be paid monthly from the profits those buildings produce without all the hassles of owning rental real estate.

Individual Stocks
I love owning individual stocks. I like knowing I am part owner of my favourite companies and I enjoy following them the way other people follow the trades made by their favourite hockey team. If you slowly build up a position in big, stable Canadian companies with a long history of paying increasing quarterly dividends I think the risk of losing money is very minimal. There are several tax advantages to this type of investing and if you reinvest your dividends your wealth will grow even quicker.

But which Mutual Fund, ETF, REIT or Stock should I buy???

morningstar

One of my goals this year is to get a paid subscription to Morningstar Canada. The site is one of the most respected in the world and they rate every fund and stock out there. I think it would be one of the best $150 I ever spent. I have read many of the reports they issue (a free service from my brokerage account) and they’re amazing. These 4 page reports give you all the information you need to know to make an informed investment and can be read in 15 minutes.

Up Next… Let’s look at some individual companies.

Money News.

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  1. Sales of detached houses in Vancouver were down 39% in August from the same time last year. This is the worst sales volume since the global financial crisis in 2008.
  2. McDonald’s will be opening its first ever all vegetarian restaurants in India next year. The company is seeking to expand in a market where cows are sacred and eating beef is forbidden. I wonder if India will run ads on TV where their top Olympic athletes chow down on McDonald’s before a big event like we do here?
  3. Quebec elected its first female premier on Tuesday when Pauline Marois and the Parti Québécois claimed victory over the incumbent Liberals Tuesday night, winning a minority government in an election night that ended with a deadly shooting.


    Garth Turner    : “The Parti Quebecois victory is tough news for the Montreal real estate market, given the xenophobic, quasi-racist, isolationist and confrontational signals sent out by the premier-elect during her campaign. An increasingly unilingual, fractious province is not one that investment dollars migrate to, a fact already reflected in house prices being barely 72% of the national average.”

    Brian Lilley: “The Parti Quebecois will lead the next provincial government in Quebec and that’s not a good thing for Canada, although the problems this new government presents have little to do with separation. The real problem with the PQ win is that the party has no plan for dealing with Quebec’s real issues such as the economy and unsustainable government spending. Quebec has the highest debt level per capita of any province and among the highest taxes in North America.”

  4. Half of America on the dole. The Globe And Mail is reporting that according to the Census Bureau, just over 49% of U.S. households were using at least one government benefit to help support themselves in 2011. In the early 80′s, the number was about 30%.
  5. Pay your debts. Canadian debt-to-income ratio is at an all time high of around 150%. According to Equifax Canada, household debt levels continue to reach new highs each quarter. Mark Hopkins, a senior economist recently said in a report: “The situation that faces Canada is much riskier than in 2007-2008 when the first global financial crisis occurred.”
  6. Living paycheck to paycheck? A survey by the Canadian Payroll Association found that 47% of Canadians would be in financial dire straits if their paycheck was delayed by as little as one week.
  7. Stock markets rally. On Thursday European Central Bank President Mario Draghi announced a plan to buy unlimited quantities of short-term government bonds from struggling euro zone nations.

    The Dow Jones (U.S. stocks) was up 1.9%.The S&P 500 (broader U.S. stock index) was up 2% (its highest close in over 4 years). And in Canada the TSX was up 1.3%.