May 212019
 

Farmers are feeling the pain

Last year Canadian farmers couldn’t grow enough canola to satiate China’s appetite. About 40% of Canada’s canola exports go to China every year. In 2018 that worked out to about $3.8 billion. But it all changed this year after Canadian officials detained Meng Wanzhou, the CFO of Chinese tech company Huawei, due to an extradition request from the U.S. government.

In March, China started to ban shipments of Canadian canola on the grounds they’re plagued with pests, even though Canadian authorities say they’ve received no evidence to support that claim. Unfortunately the trade war and political shenanigans between the U.S. and China have affected households around the world, including Canadians. Our farmers in Saskatchewan are in trouble. They’re caught up in a global conflict between the two largest economies in the world, that has nothing to do with them. I canola imagine what they’re going through. Prime Minister Justin Trudeau recently announced financial aid for canola farmers. But it’s not a proper long term solution.

value of major exports from Canada to China

Major export products Canada shipped to China in 2018.

 

But canola isn’t the only export facing bans in China. Canadian peas and soybeans also have restrictions. And earlier this month, China suspended imports from two major Canadian pork producers over paperwork issues. According to the Canadian Pork Council the suspensions appear to stem from a labelling problem and are not tied to any political moves by China. But some people think that excuse is complete hogwash. 🙂 It’s ironic that China is currently experiencing a major pork shortage due to swine fever. The country could lose up to 200 million pigs to disease during the epidemic. To put that into perspective that’s about 3 times the pig population in the U.S. :0 And yet China still refuses to buy our pork. But that’s because China is so big, it can afford to cut off its snout to spite its face. It doesn’t need Canadian bacon because it can import it from other countries.

 

Farm prices rose modestly last year

The new farmland values have been published by Farm Credit Canada. It appears the average value of Canadian farmland increased 6.6% last year. That’s down from 8.4% in 2017 but at least it’s still going up. 🙂 Quebec had the highest increase, while Nova Scotia actually saw a decline.

It’s nice to prices continue to rise for farmland almost across the country. By contrast, Canada’s housing market fell about 5%  in 2018, according to the Canadian Real Estate Association (CREA.) But maybe farmland prices naturally lag the residential market? It would be interesting to how prices change in next year’s value report. 🙂

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Jul 042018
 

Five years ago I acquired a variable rate mortgage from CIBC. It was the cheapest rate I could find at the time. I was quite pleased with the rate but that mortgage term expired a couple of months ago. So I shopped around to see if I can find another good deal.

I expected my mortgage to become more expensive. Surely rates would have climbed over the last 5 years right?

But no. To my surprise I found a lender that offered me an interest rate that’s lower than my previous mortgage by 43 basis points. 😀 CIBC was not able to match this offer so I switched. The new financial institution I am with is not one of the big 5 banks in Canada. It is a lesser known company called National Bank.

I was paying 3.05% with CIBC. This was a variable rate 5 year mortgage at prime minus 0.40%. This was the best CIBC could do.
But my new mortgage with National Bank is only 2.62%. This is also a variable rate 5 year mortgage term. Except the rate is Prime minus 0.83%

A 0.43% difference in interest rates doesn’t sound like a lot. But my mortgage balance is around $193,000. So I will be saving roughly $4,000 over the next 5 years because I switched to a cheaper mortgage provider.

However there are costs associated with changing lenders. Appraisal costs $600, and legal documents from a notary public was $800 in my case. Luckily National Bank has a $750 rebate program for transferring over an existing mortgage. 🙂

In the end the cost of changing banks was worth the extra savings in my case.

Even though most Canadians are choosing fixed rate mortgage I still believe that variable rate is the way to go if you want to save money. The increase in fixed rate mortgages locked in by most home buyers this year is “seen as a response to rate hikes, and fear of higher rates in the future.” But critics have been calling for higher rates for over a decade. Yet rates haven’t actually gone up much. In fact, mortgage rates have dropped over the past 5 years as shown in my post today. That’s why we have to be informed of economic conditions so we can make our own financial decisions, instead of following others. 🙂

I have been a homeowner for almost 10 years. During this time my mortgage interest rates fluctuated from 2.3% to 3.2%. It doesn’t look like rates will climb significantly any time soon. Until we see increasing mortgage rates, I would expect Canadian housing prices to climb even higher.

 

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Random Useless Fact:

30 years ago only 5% of the population admitted to being chronic procrastinators compared to 25% today. Some believe technological advances is the main cause of this change.

Aug 012016
 

Stock Markets Reach Record Highs… Again 

Both the Dow Jones and the S&P 500 indexes have climbed to all time highs in late July. 🙂 But corporate earnings have been stagnant and economic growth remains weak. Restaurant sales have slowed. The U.S. economy only grew a disappointing 1.2% in the second quarter, well below expectations. 😕

So what’s producing so much excitement in the stock market? In short, I believe it’s largely caused by Negative Interest Rate Policies (NIRP). For example, in Europe the benchmark lending rate is negative 0.4%. Usually the bond issuer pays interest to the investor. But with negative rates, the investor pays the issuer. Currently about 1/3rd of the world’s government bonds are producing negative yields. Investors can’t get rich by holding these securities anymore. So in this kind of environment bonds really hold people down.?

As a result of NIRP, more investment capital has moved from the bond market to relatively stable stocks. These tend to be companies that operate gas pipelines, railways, utilities, telecommunication services, and other infrastructure that are recession resistant. Last year I wrote about how to easily make $75 of annual income without using any of my own savings by using leverage to buy shares of TransCanada Corp (TRP.)

16-08-financial-advice-dog-bonds-tennis-balls

I purchased TRP stocks for $42 per share. I mentioned at the time that analysts had an average price target of $57.50 per share. This doesn’t always happen, but sure enough TRP is trading at roughly $60 per share today. 😀 So not only am I making $75 a year in dividends, but I’ve also made $1,800 in unclaimed capital gains so far. 😉

In normal circumstances this kind of price movement in a large cap, blue-chip company wouldn’t happen. But due to a lack of viable investment alternatives, an influx of additional buyers has pushed up TRP and many other relatively safe stocks.

Increasing Valuations and Risk

Unfortunately, NIRP produces asset bubbles and may cause the markets to behave precariously. The chief executive of DoubleLine Capital, who oversees more than $100 billion in assets, recently said that many asset classes look frothy and his firm continues to hold gold, which has also climbed due to NIRP.  At the end of July gold reached $1,350 per ounce, the highest monthly close in years! Stock investors have entered a “world of uber complacency,” said Jeffrey to the media. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Continue reading »

Jul 112016
 

Real Estate Incentives

Financial advisors sometimes get a bad reputation for not having their client’s best interest in mind. Many continue to earn commissions even if their client’s portfolio is losing money. But what about real estate agents? Their compensation structure is also heavily based on commissions. They often earn a percentage from the final sale of a home. For a homeowner looking to sell, the ideal situation is to sell his house for the highest price possible. So at first glance it would appear that both a homeowner and a real estate agent would have the same financial incentive; to get the best possible deal for the seller. 🙂

mics-house

But further investigation reveals that maybe that’s not really true. Let’s say a homeowner sells his house for $500,000 with the help of a real estate agent on a fixed 2% commission. This means the realtor earns $10,000 and the homeowner keeps the remaining $490,000. To keep it simple we’ll ignore taxes and other costs.

But maybe with some additional advertising, negotiations, and patience, the house could actually be sold for $510,000. But this is when the incentive structures begin to diverge. As the homeowner selling the house, an extra $10,000 from the sale price means adding $9,800 more to the bank. 😀 Most sellers would like to see that money, even if it means waiting an extra couple of weeks to find the right buyer. But a realtor would only make $200 off the extra $10,000. For most real estate agents, putting in the extra time and effort (and sometimes even money for ads) isn’t worth the extra commission. So if the homeowner stands to gain $9,800 while the agent would only receive $200, then clearly their incentives do not align very well anymore.

Continue reading »

Jun 272016
 

Real Estate Ad Terms

Some folks might think using words like “charming,” or “spacious” in a properly listing is smart and would result in a higher sale price. But in reality the opposite is true. Here are 10 common real estate ad terms. Half of them have strong positive correlations with a higher sale price, and the other half is negatively correlated.

16-06-common-real-estate-ad-terms-houses

According to the book Freakonomics by Steven Levitt and Stephen Dubner, the 5 terms correlated to a higher sale price are:

  1. Granite
  2. Maple
  3. Corian
  4. State of the art
  5. Gourmet

And the 5 terms correlated to a lower sale price are:

  1. Fantastic
  2. Charming
  3. Spacious
  4. Great neighborhood
  5. !

Words such as Granite, Maple, and Corian (a countertop brand,) are all definitive physical descriptions of a home. It tells any potential buyer exactly what the property is like. The terms Gourmet and State of the art, also connotes a place that’s ready to move in.

But on the other hand words like Fantastic can be a misleading description, as are other ambiguous terms such as Charming or Spacious. These words aren’t tangible enough to tell the buyer anything specific about the property. Mentioning a “Great neighborhood” might signal that this particular house isn’t that great and may not have any specific attributes worth mentioning, but at least other homes nearby are pretty nice. The last word on the list isn’t really a word; it’s an exclamation point. It feels like a feeble attempt to cover real shortcomings of the home with a false sense of enthusiasm!

The book also broke down the language used in a listing for a real estate agent’s own home. She indeed emphasize adjectives like new, granite, maple, and move-in condition. She avoided empty and interpretive portrayals like wonderful, immaculate, or the overused exclamation point. She used every advantage she had to increase her final sale price, including telling potential buyers that a nearby house recently sold for $50,000 above the asking price. But that doesn’t make her a bad person. Realtors are people too. They’re simply looking for closure.

Continue reading »