Oct 132014
 

The trickle down effect

It has been said that if we cut taxes for the rich and help profitable businesses make even more money then the economic benefits would trickle down from the top to the rest of us. But for many in the working class this has simply not been the case. 🙁

14-10-trickle-down-treading-water

14-10-household-income-us treading water The top 1% have never been wealthier, but the rest of us still face many financial roadblocks. Both consumers and governments of all levels are still carrying a lot of debt. However real incomes in the U.S. have been slowly declining since 2008. Up here in Canada our debt-to-income ratio is near an all time high.

We often receive conflicting messages from policy makers. The Canadian Central Bank is keeping rates low to encourage consumers to spend and stimulate the economy. But at the same time it says that rising consumer debt is a major risk in this country. That’s right, patronize consumers for their debilitating debts when the Central Bank is responsible for creating the cheap money in the first place. Sound logic, Mr. Poloz. 😛

Continue reading »

Jun 172014
 

The Canadian housing market continues to defy gravity! 🙂 According to CREA the average home price in May increased to $416,584, a 7.1% jump from a year ago. The number of homes sold also increased by 5.9% month over month, which is the largest gain in several years.

A lot of people feel concerned that this kind of growth is unsustainable. They question how prices can increase so much without personal incomes growing at the same pace. Many have concluded that we are surely headed for a correction soon.

I hope I can explain what’s going on, and why it would be perfectly normal for home prices to move even higher.

As an investor I know from experience that personal income has very little to do with purchasing power or prices. For example I spent over $200,000 on stuff in 2013 (mostly financial assets) even though my take home income last year was less than $50,000. Living in a debt based economy means we have the privilege to borrow money from other people so we may buy things even if we don’t have the cash 🙂

Local incomes also don’t account for the massive amounts of foreign money that gets pumped into the Canadian housing market each year. But what really affects the price of homes is the cost of financing. Over the last year mortgage rates went down in this country. A 5 year fixed rate term is under 3% now.  Cheaper financing options means people can buy more expensive homes.

Mortgage and down payment real estate market canada

If the Bank of Canada lowers its Key rate by 1%, bond yields would fall to almost nothing, and mortgage rates would be even lower than today. You could probably get a $300,000 mortgage for 2%, which would cost a new home buyer just $6,000 a year in interest to live there. That’s cheaper than renting a comparable property! On the other hand if the Key rate increases by 1%, mortgage rates will also climb, and many people wouldn’t be able to afford a $300,000 home anymore so home prices would drop across the board. If rates don’t move at all, home prices should simply increase at roughly the pace of economic growth, which is about 2% a year.

Continue reading »

Apr 092014
 

Last Fall I made some bold predictions that low interest rates are staying until 2016, which will keep the housing market stable. I also suggested that investing in parts manufacturers like Magna International would be a profitable venture due to the consumer’s love for cars 😀

Fast forward to today and it looks like events are unfolding thus far 🙂 The Prime lending rate is still at 3%, unchanged from last year. Mortgage rates have not moved higher. Home prices have not corrected. And Magna International’s stock price is now 25% higher since last year’s post.

14-04-magnaint Low Interest Rates

Anyway, the International Monetary Fund (IMF) recently published their growth projections for countries in 2014. Canada’s economy is expected to grow at 2.3% this year, lower than that of the U.S. at 2.8%, and the U.K. at 2.9%.

So we must create a plan to make the best of this current economic situation, because if we fail to plan – then we plan to fail 😉 The following image demonstrates the importance of planning ahead. Can you figure out what’s wrong with this sandwich?

14-04-sandwichmayo Low Interest Rates

Today I will make some more predictions 🙂 I think the overnight lending rate in Canada, currently at 1%, will increase to 1.25% in 2015. And by 2018, it would only be at 1.75%. Since rates are going up so slowly I would continue to own instead of rent, because I think the national average real estate price will move higher in the next few years 😀

Continue reading »

Sep 062013
 

Real Estate Sales Strong Despite Higher Mortgage Rates

Yesterday we just saw the yield on the 10 year US treasury climb to 2.99%, a multi-year high, and mortgage rates are starting to creep up. But houses are still being sold with unimpeded fervor in many parts of Canada 😎 The number of homes sold in Vancouver was 52% higher last month than the same period in 2012. 28% higher in Calgary year over year. 10% higher in Edmonton, and 21% higher in Toronto. Holy guacamole! 😼 This is good news for myself and the other 69% of Canadians who are homeowners because it means there is still lots of transactions and liquidity in the real estate market. How to profit from this trend? Buy a home 🙂 People told me to wait for the bubble to pop when I was looking to buy a condo back in 2009. Fiddlesticks! If I had listened to them my net worth would not be even close to $187,000 today 😛  Continue reading »