Tuesday, 31 August 2010
Though home sales are slowing, prices in six of Canada's largest housing markets are in bubble territory.
Home prices are sitting at 4.7 to 11.3 times Canadians' annual income - much higher than historical comfort levels of between three and four times income, according to a report by the Canadian Centre for Policy Alternatives. The report defines a bubble occurring when housing prices increase more rapidly than inflation, household incomes and economic growth.
"To see all of the major markets outside of that comfort zone is very unique and concerning," said David Macdonald, a research associate who wrote the report called "Canada's Housing Bubble: An Accident Waiting To Happen."
Sales have fallen by 25 per cent since reaching its peak at the begnning of the year. But canadian home prices were up 13.6 per cent in June from a year ago in Canada's major cities.
"The concern today is all six major markets, not just Vancouver and Toronto, are out of that comfort zone," said Macdonald, including Calgary, Edmonton, Ottawa and Montreal. "All six major markets now have an average price of over $300,000."
Tuesday, August 31, 2010
Monday, August 30, 2010
Clipboard kings
Helen Morris, National Post · Saturday, Aug. 28, 2010
It is easy to fall in love with a house or condo the first time you view it, but having a detailed home inspection should give you some idea of what really lurks beneath the surface beauty of that dream home.
"The function of the home inspector is to identify what we call 'major defects'," says Trevor Welby-Solomon, vicepresident, technical training, support and development at home inspection company Pillar to Post. "What we're looking for are things that affect health and safety or something that could have a significant impact on the livability or the affordability of the home."
Mr. Welby-Solomon says his company's inspectors undergo a rigorous training and mentoring process before they are let loose on the public. However, in Ontario the home inspection industry is not regulated.
"Real estate is buyer beware. Home inspections is still in the Wild West," says Ray Leclair, real estate lawyer and vicepresident, TitlePLUS at LawPRO. "There is no legally recognized designation of home inspector. There is nobody that sanctions home inspectors and so anybody can call themselves a home inspector. There are some very good ones. There are some that are not."
To make sure you get a good inspector, start looking for one well before you need him.
"The difficulty is that most buyers leave it to the last minute and so this means that being able to do the research is tougher," says Aubrey Le-Blanc, chief operating officer, Ontario Association of Home Inspectors. "As with a lawyer, you want to know a home inspector in advance. You want references...the best test is [to ask] 'Who did you use and did you have any surprises after?'"
Mr. LeBlanc also suggests asking your real estate agent for recommendations.
In the absence of personal recommendations, the Ontario Association of Home Inspectors does provide a list of inspectors who will carry out an inspection according to the association's standards of practice.
"We have standards of practice that are on our website [oahi. com]. It forms part of everybody's contract, what will be examined and what won't be examined," Mr. LeBlanc says. "The basic principle is, if it can't be observed, it can't be assessed."
Knowing what the inspector will not do can be almost as important as knowing what he will.
"It is a purely visual inspection conducted of the home and its systems, and the only controls we use are the user operator controls," Mr. Welby-Solomon says. "The home inspector is a general practitioner like your family doctor and is not an expert in any particular field. That is why -- same as your doctor would refer you to a specialist--if a home inspector sees something outside the parameters of those standards of practice, they would tend to refer you on to a specialist."
In many older Toronto homes, Mr. Welby-Solomon says, inspectors must hunt for clues that may suggest ancient wiring or plumbing is lurking beneath.
"In the downtown Toronto area, our biggest problem is the old housing stock that has been remodelled so many times we really don't know in a typical visual inspection what's behind those walls," he says.
If you discover a defect after moving in that wasn't on the inspection report, any recourse will depend on what your particular report covered. If you've lived in the house for some time and see a window leak, you may not be covered.
"The [response to any such complaint] may well be: 'Well, that was a maintenance issue'," Mr. Leclair says. "[They may say,] 'You should have maintained that part of it, you should have recaulked the windows. If you would have done that, they would not have leaked, so I'm not responsible.'"
While 95% of Ontario Association of Home Inspectors members and all Pillar to Post inspectors have liability insurance, Mr. Leclair warns that some inspectors limit their liability to repaying the cost of the inspection.
Read more: http://www.nationalpost.com/Clipboard+kings/3453814/story.html#ixzz0y35SZvxv
It is easy to fall in love with a house or condo the first time you view it, but having a detailed home inspection should give you some idea of what really lurks beneath the surface beauty of that dream home.
"The function of the home inspector is to identify what we call 'major defects'," says Trevor Welby-Solomon, vicepresident, technical training, support and development at home inspection company Pillar to Post. "What we're looking for are things that affect health and safety or something that could have a significant impact on the livability or the affordability of the home."
Mr. Welby-Solomon says his company's inspectors undergo a rigorous training and mentoring process before they are let loose on the public. However, in Ontario the home inspection industry is not regulated.
"Real estate is buyer beware. Home inspections is still in the Wild West," says Ray Leclair, real estate lawyer and vicepresident, TitlePLUS at LawPRO. "There is no legally recognized designation of home inspector. There is nobody that sanctions home inspectors and so anybody can call themselves a home inspector. There are some very good ones. There are some that are not."
To make sure you get a good inspector, start looking for one well before you need him.
"The difficulty is that most buyers leave it to the last minute and so this means that being able to do the research is tougher," says Aubrey Le-Blanc, chief operating officer, Ontario Association of Home Inspectors. "As with a lawyer, you want to know a home inspector in advance. You want references...the best test is [to ask] 'Who did you use and did you have any surprises after?'"
Mr. LeBlanc also suggests asking your real estate agent for recommendations.
In the absence of personal recommendations, the Ontario Association of Home Inspectors does provide a list of inspectors who will carry out an inspection according to the association's standards of practice.
"We have standards of practice that are on our website [oahi. com]. It forms part of everybody's contract, what will be examined and what won't be examined," Mr. LeBlanc says. "The basic principle is, if it can't be observed, it can't be assessed."
Knowing what the inspector will not do can be almost as important as knowing what he will.
"It is a purely visual inspection conducted of the home and its systems, and the only controls we use are the user operator controls," Mr. Welby-Solomon says. "The home inspector is a general practitioner like your family doctor and is not an expert in any particular field. That is why -- same as your doctor would refer you to a specialist--if a home inspector sees something outside the parameters of those standards of practice, they would tend to refer you on to a specialist."
In many older Toronto homes, Mr. Welby-Solomon says, inspectors must hunt for clues that may suggest ancient wiring or plumbing is lurking beneath.
"In the downtown Toronto area, our biggest problem is the old housing stock that has been remodelled so many times we really don't know in a typical visual inspection what's behind those walls," he says.
If you discover a defect after moving in that wasn't on the inspection report, any recourse will depend on what your particular report covered. If you've lived in the house for some time and see a window leak, you may not be covered.
"The [response to any such complaint] may well be: 'Well, that was a maintenance issue'," Mr. Leclair says. "[They may say,] 'You should have maintained that part of it, you should have recaulked the windows. If you would have done that, they would not have leaked, so I'm not responsible.'"
While 95% of Ontario Association of Home Inspectors members and all Pillar to Post inspectors have liability insurance, Mr. Leclair warns that some inspectors limit their liability to repaying the cost of the inspection.
Read more: http://www.nationalpost.com/Clipboard+kings/3453814/story.html#ixzz0y35SZvxv
Ben Bernanke's critical speech in 11 words:
"Yes, the economy's weak, but there's not much more I can do"
Henry Blodget, Business Insider · Friday, Aug. 27, 2010
If you can't spare the time to read Ben Bernanke's whole speech this morning, we'll boil it down to 11 words for you:
"Yes, the economy's weak, but there's not much more I can do."
But, wait, didn't the New York Times say that Ben said the Fed was "ready to prop up the economy"?
Yes, the New York Times said that. And, yes, Ben said there were still other actions the Fed could take. But he didn't make a compelling case that any of them would "prop up the economy."
Specifically, as Joe Weisenthal notes, Ben proposed four (4) ways the Fed could intervene. He then dismissed three (3) of them as ineffective or inappropriate.
Here are three ways Ben said the Fed could potentially intervene--and why it won't use them or they won't help:
* The Fed could change the language used in its "communications" with the public--i.e., promise Wall Street explicitly that the Fed would keep interest rates near zero for years. The theory here is that this would presumably cause traders to go hog wild and bid up asset prices, thus triggering animal spirits that would lead to huge Wall Street bonuses that would then trickle down into the real economy. As Ben observed, however, saying stuff like this would be misleading and it would reduce the Fed's flexibility going forward. So the Fed won't do that.
* The Fed could stop paying banks interest on the money they don't lend. Come again? Yes, it's true. The Fed is currently paying banks 0.25% annual interest on the reserves that they keep at the Fed and don't lend to the real economy. Thus, it is giving the banks a huge subsidy at taxpayer expense just for being banks. (Don't you wish you were a bank?). In any event, Ben proposed that the Fed might stop paying banks not to lend in an effort to encourage them to lend. But then he immediately observed that the cost of money for banks is already so low that this wouldn't really do much.
* The Fed could raise the Fed's stated inflation target from 2%-3% to 4%-5%--thus scaring savers into spending money now before its value gets destroyed. Given that the Fed has demonstrated that it can't CAUSE inflation, at least so far, this would just be another communication tactic: Put the fear of God in savers that the US is about to become Zimbabwe, so they might as well go spend their cash now before it becomes worthless. This is a perverse option, and, thankfully, Ben dismissed it as inappropriate.
So that left the one option that Ben says the Fed might actually consider using that might actually do something: Increasing the size of the Fed's balance sheet.
If the Fed does this--by buying long-dated Treasury securities--it will be a boon to the bond market (prices will go up), and it will also bring long-term interest rates down even lower than they already are. Doing this, of course, will also increase the amount of risk the Fed is taking, and it will also further distort market forces that are already causing havoc in the credit markets (namely, that big Too Big To Fail companies can borrow at near-zero cost while small companies can't borrow at any cost). But it might also stimulate some demand, thus "propping up" the economy.
Might.
Don't forget that long-term interest rates are already extremely low. And don't forget that Japan has been trying the "increase the balance sheet and reduce interest rates" trick for more than a decade now--and it hasn't done squat.
So, yes, Ben said the Fed stands ready to do something.
But that something is really only one thing: Increase the size of its balance sheet.
And we have seen no evidence yet that further increasing the balance sheet would actually "prop up" the economy.
Read more: http://www.financialpost.com/news/business-insider/Bernanke+critical+speech+words/3450676/story.html#ixzz0y33I5paA
Henry Blodget, Business Insider · Friday, Aug. 27, 2010
If you can't spare the time to read Ben Bernanke's whole speech this morning, we'll boil it down to 11 words for you:
"Yes, the economy's weak, but there's not much more I can do."
But, wait, didn't the New York Times say that Ben said the Fed was "ready to prop up the economy"?
Yes, the New York Times said that. And, yes, Ben said there were still other actions the Fed could take. But he didn't make a compelling case that any of them would "prop up the economy."
Specifically, as Joe Weisenthal notes, Ben proposed four (4) ways the Fed could intervene. He then dismissed three (3) of them as ineffective or inappropriate.
Here are three ways Ben said the Fed could potentially intervene--and why it won't use them or they won't help:
* The Fed could change the language used in its "communications" with the public--i.e., promise Wall Street explicitly that the Fed would keep interest rates near zero for years. The theory here is that this would presumably cause traders to go hog wild and bid up asset prices, thus triggering animal spirits that would lead to huge Wall Street bonuses that would then trickle down into the real economy. As Ben observed, however, saying stuff like this would be misleading and it would reduce the Fed's flexibility going forward. So the Fed won't do that.
* The Fed could stop paying banks interest on the money they don't lend. Come again? Yes, it's true. The Fed is currently paying banks 0.25% annual interest on the reserves that they keep at the Fed and don't lend to the real economy. Thus, it is giving the banks a huge subsidy at taxpayer expense just for being banks. (Don't you wish you were a bank?). In any event, Ben proposed that the Fed might stop paying banks not to lend in an effort to encourage them to lend. But then he immediately observed that the cost of money for banks is already so low that this wouldn't really do much.
* The Fed could raise the Fed's stated inflation target from 2%-3% to 4%-5%--thus scaring savers into spending money now before its value gets destroyed. Given that the Fed has demonstrated that it can't CAUSE inflation, at least so far, this would just be another communication tactic: Put the fear of God in savers that the US is about to become Zimbabwe, so they might as well go spend their cash now before it becomes worthless. This is a perverse option, and, thankfully, Ben dismissed it as inappropriate.
So that left the one option that Ben says the Fed might actually consider using that might actually do something: Increasing the size of the Fed's balance sheet.
If the Fed does this--by buying long-dated Treasury securities--it will be a boon to the bond market (prices will go up), and it will also bring long-term interest rates down even lower than they already are. Doing this, of course, will also increase the amount of risk the Fed is taking, and it will also further distort market forces that are already causing havoc in the credit markets (namely, that big Too Big To Fail companies can borrow at near-zero cost while small companies can't borrow at any cost). But it might also stimulate some demand, thus "propping up" the economy.
Might.
Don't forget that long-term interest rates are already extremely low. And don't forget that Japan has been trying the "increase the balance sheet and reduce interest rates" trick for more than a decade now--and it hasn't done squat.
So, yes, Ben said the Fed stands ready to do something.
But that something is really only one thing: Increase the size of its balance sheet.
And we have seen no evidence yet that further increasing the balance sheet would actually "prop up" the economy.
Read more: http://www.financialpost.com/news/business-insider/Bernanke+critical+speech+words/3450676/story.html#ixzz0y33I5paA
Thursday, August 26, 2010
Canadian home prices continue to rise
Sunny Freeman — The Canadian Press
Canadian home prices are still on the rise even as sales fall as demand peters out, one factor that is making homes less and less affordable, according to a study by the Conference Board of Canada.
Home sales have fallen by 25 per cent since reaching a peak at the beginning of the year as fewer buyers compete and more houses come onto the market. That hasn't stopped houses from becoming more expensive, a trend that is likely to continue, said conference board associate director Michael Burt.
“Most of the costs associated with home ownership, such as mortgage costs and insurance, are outstripping inflation and income growth,” said Mr. Burt, who studies industrial economic trends.
“As a result, housing affordability in Canada, which has been deteriorating over the past decade, will continue to decline during the next two years.”
Canadian home prices were up 13.6 per cent in June from a year ago, according to the Teranet—National Bank composite house price index, released Wednesday. Month over month, June prices were up 1.5 per cent — the largest monthly increase since last August and the 14th straight monthly increase.
Price increases in June were driven by the bustling housing markets of Vancouver and Toronto, where many buyers entered the market in advance of the new harmonized sales tax that took effect July 1 in Ontario and British Columbia.
Recent figures from the real estate brokerage industry show July sales fell 30 per cent and prices were essentially flat.
As more resale houses come onto the market and fewer buyers compete for homes, the housing markethttp://images.intellitxt.com/ast/adTypes/mag-glass_10x10.gif
Many economists predict the sector could move further toward a buyers market, which could be accompanied by a deceleration of price increases, if not outright price drops as seen in the United States.
Marc Pinsonneault of National Bank (TSX:NA) says home prices could soon fall, especially since the introduction of the HST in the hot housing markets of B.C. and Ontario have raised the price of many home purchases
His report on the index — a compilation of average home price changes in six metropolitan areas — suggests that it may be too early to conclude that vigorous price rises in April, May and June represent a trend.
“The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have stimulated sales in Vancouver, Toronto and Ottawa in the preceding months,” the report said.
Seasonally-adjusted home sales fell 8.2 per cent in June from the month before and shrunk 19.7 per cent compared to June 2009, according to the Canadian Real Estate Association.
However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.
Sales activity peaked in December 2009 and hovered near record levels during the first quarter of this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest ratehttp://images.intellitxt.com/ast/adTypes/mag-glass_10x10.gif
Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the gap is expected to shrink as the year progresses because sales ramped up heavily during the latter part of 2009.
The strong pace of spending at the beginning of the year indicates the Canadian industry has fully recovered from the recession, and although new home construction activity is expected to slow, housing starts will remain at a healthy level, the Conference Board said in its report.
Housing starts slowed to 192,800 units in June, the slowest monthly pace this year. And home building is expected to slow during the second half of the year.
“The slowdown represents a shift to a more sustainable building pace rather than the beginning of a large correction in demand,” said the Conference Board.
Many economists predict an accompanying deceleration of price increases, with some saying prices could begin to fall modestly by the end of the year.
While performance in the Canadian housing market is weakening, it is faring much better than the U.S. market, where the past three months have been the worst on record for new home sales.
Sales of new U.S. homes dropped sharply last month to the slowest pace on records going back nearly half a century, the latest sign that the economic recovery is fading.
The U.S. Commerce Department said Wednesday that new home sales fell 12.4 per cent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600.
With files from the Associated Press http://www.theglobeandmail.com/report-on-business/canadian-home-prices-continue-to-rise/article1685242/
Canadian home prices are still on the rise even as sales fall as demand peters out, one factor that is making homes less and less affordable, according to a study by the Conference Board of Canada.
Home sales have fallen by 25 per cent since reaching a peak at the beginning of the year as fewer buyers compete and more houses come onto the market. That hasn't stopped houses from becoming more expensive, a trend that is likely to continue, said conference board associate director Michael Burt.
“Most of the costs associated with home ownership, such as mortgage costs and insurance, are outstripping inflation and income growth,” said Mr. Burt, who studies industrial economic trends.
“As a result, housing affordability in Canada, which has been deteriorating over the past decade, will continue to decline during the next two years.”
Canadian home prices were up 13.6 per cent in June from a year ago, according to the Teranet—National Bank composite house price index, released Wednesday. Month over month, June prices were up 1.5 per cent — the largest monthly increase since last August and the 14th straight monthly increase.
Price increases in June were driven by the bustling housing markets of Vancouver and Toronto, where many buyers entered the market in advance of the new harmonized sales tax that took effect July 1 in Ontario and British Columbia.
Recent figures from the real estate brokerage industry show July sales fell 30 per cent and prices were essentially flat.
As more resale houses come onto the market and fewer buyers compete for homes, the housing markethttp://images.intellitxt.com/ast/adTypes/mag-glass_10x10.gif
Many economists predict the sector could move further toward a buyers market, which could be accompanied by a deceleration of price increases, if not outright price drops as seen in the United States.
Marc Pinsonneault of National Bank (TSX:NA) says home prices could soon fall, especially since the introduction of the HST in the hot housing markets of B.C. and Ontario have raised the price of many home purchases
His report on the index — a compilation of average home price changes in six metropolitan areas — suggests that it may be too early to conclude that vigorous price rises in April, May and June represent a trend.
“The prospect of harmonized sales taxes coming into effect July 1 in Ontario and B.C. may have stimulated sales in Vancouver, Toronto and Ottawa in the preceding months,” the report said.
Seasonally-adjusted home sales fell 8.2 per cent in June from the month before and shrunk 19.7 per cent compared to June 2009, according to the Canadian Real Estate Association.
However, the average Canadian home price sat at $342,662 compared to $326,689 in 2009.
Sales activity peaked in December 2009 and hovered near record levels during the first quarter of this year as buyers rushed into the housing market ahead of changes to mortgage rules, interest ratehttp://images.intellitxt.com/ast/adTypes/mag-glass_10x10.gif
Activity so far this year is up 5.6 per cent compared to the first seven months of last year, but the gap is expected to shrink as the year progresses because sales ramped up heavily during the latter part of 2009.
The strong pace of spending at the beginning of the year indicates the Canadian industry has fully recovered from the recession, and although new home construction activity is expected to slow, housing starts will remain at a healthy level, the Conference Board said in its report.
Housing starts slowed to 192,800 units in June, the slowest monthly pace this year. And home building is expected to slow during the second half of the year.
“The slowdown represents a shift to a more sustainable building pace rather than the beginning of a large correction in demand,” said the Conference Board.
Many economists predict an accompanying deceleration of price increases, with some saying prices could begin to fall modestly by the end of the year.
While performance in the Canadian housing market is weakening, it is faring much better than the U.S. market, where the past three months have been the worst on record for new home sales.
Sales of new U.S. homes dropped sharply last month to the slowest pace on records going back nearly half a century, the latest sign that the economic recovery is fading.
The U.S. Commerce Department said Wednesday that new home sales fell 12.4 per cent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600.
With files from the Associated Press http://www.theglobeandmail.com/report-on-business/canadian-home-prices-continue-to-rise/article1685242/
Top 6 most indebted countries (and why)
by Michael Sanibel, Investopedia.com
The recent financial crisis and recession have been a worldwide occurrence. The events in the United States since 2008 have garnered most of the headlines because the U. S. has the world's largest economy and national debt, but the reality is that many countries in Europe are in worse financial shape and continue to deteriorate.
There are various ways to rank indebtedness, such as debt per capita and deficit or debt as a function of gross domestic product (GDP). This ranking is based on cumulative debt as a percentage of GDP and is limited to an analysis of the 25 largest economies. It is further limited to "external" debt, which is the portion of the national debt that is owed only to foreign creditors. The source for the debt and GDP amounts is the Central Intelligence Agency World Factbook most recent numbers from mid to late 2009.
1. Ireland - Debt/GDP: 997%
The days of Ireland enjoying one of the fastest growing economies in Europe are over, at least for now. The story is all too familiar, as easy credit fueled a housing bubble that burst and damaged consumer confidence.
After recording budget surpluses in the prior two years, the economy reversed course in 2009 and contracted 7%. This eroded tax revenues and sent the annual deficit to a record 14.3% of GDP. The European Union set a target for Ireland to reduce that figure to 3% by 2014, but the International Monetary Fund has indicated that the deadline will be missed. Moody's has subsequently lowered its bond rating.
2. Netherlands - Debt/GDP: 467%
The national debt in the Netherlands has reached record levels as a result of the world financial crisis and recession. Much of the added burden was caused by significant government support for the country's banking sector. The increase in debt per capita is second only to that experienced in Ireland.
The Netherlands joined the eurozone with a hard guilder a decade ago, but its current debt would likely disqualify it for membership.
3. United Kingdom - Debt/GDP: 409%
Investment bank Morgan Stanley fears that Great Britain could face a severe debt crisis in the near future if it continues down its current path. According to the bank's report, this is a case of not putting aside sufficient reserves when the economy was sound. During the peak of the boom, it still ran a budget deficit of 3% of GDP when other European countries were running surpluses exceeding 2%.
Like many other countries, Britain bought time during the financial crisis by implementing massive fiscal stimulus and forcing the public to fund losses in the private sector. Without the restoration of fiscal credibility, there is a significant danger of a government bond sell-off, pound weakness and a flight of capital.
4. Switzerland - Debt/GDP: 273%
Generally regarded as having one of the world's most stable economies, Switzerland has taken its budget crisis seriously. When the national debt began to escalate in the last decade, the Swiss voted to approve a constitutional amendment forcing the government to balance expenses and revenue during each economic cycle. While annual deficits may still occur, this has instilled discipline in the process and lowered the country's borrowing costs as investors rushed to safety.
This so-called "debt brake" was implemented in response to increasing debt stemming from a slowdown in economic growth. Deficits climbed as spending rose for unemployment benefits and tax revenues declined. While government expenditures were cut across the board, rising revenues have not been sufficient to pay down the incurred debt.
5. Portugal - Debt/GDP: 228%
With last year's deficit coming in at 9.4% of GDP, the Portuguese government has instituted a growth and austerity program with the objective of reducing that number to 2.8% by 2013. These measures have sparked strikes in the public sector including postal and transportation services. Those events have been further propelled by unemployment above 10%, the worst in 40 years.
The root problem has been low productivity and virtually no economic growth in the past few years. Portugal ranks last in GDP growth among countries that adopted the euro as a common currency. Demand for goods and services has stalled, along with innovation and business momentum. In addition, Portugal's exports have been undercut by cheap labor in countries such as China. (For related reading, see The Economics Of Labor Mobility.)
6. Austria - Debt/GDP: 214%
The recession and government assistance to banks have contributed to the budget crisis in Austria. The finance minister has rejected the notion of higher taxes in favor of administrative reforms to cut spending. He has predicted that the annual deficit would grow from 3.5% to 4.7% of GDP between 2010 and 2012 before starting to decline. That peak would be the third-highest since 1976 when such data were first recorded.
Rising unemployment has resulted in increased expenditures for unemployment compensation and other government benefits. In addition to the reduced payrolls, tax reforms have driven down overall tax revenues.
The Bottom Line
While the U.S. and Canada have large economies, their respective debt-to-GDP ratios are 93% and 62%. The U.S. gets most of the attention because of the size of the numbers that comprise the ratio - $13.5 trillion debt (June 2009) and $14.4 trillion GDP (2009 estimate).
By comparison, China and India have ratios of 7% and 20% respectively. Their economic growth rates have also exceeded the western nations over the past few years, thereby keeping their debt ratios relatively low. If the western nations don't implement policies to reduce their debts, they run the risk of jeopardizing future economic growth and prosperity.
The recent financial crisis and recession have been a worldwide occurrence. The events in the United States since 2008 have garnered most of the headlines because the U. S. has the world's largest economy and national debt, but the reality is that many countries in Europe are in worse financial shape and continue to deteriorate.
There are various ways to rank indebtedness, such as debt per capita and deficit or debt as a function of gross domestic product (GDP). This ranking is based on cumulative debt as a percentage of GDP and is limited to an analysis of the 25 largest economies. It is further limited to "external" debt, which is the portion of the national debt that is owed only to foreign creditors. The source for the debt and GDP amounts is the Central Intelligence Agency World Factbook most recent numbers from mid to late 2009.
1. Ireland - Debt/GDP: 997%
The days of Ireland enjoying one of the fastest growing economies in Europe are over, at least for now. The story is all too familiar, as easy credit fueled a housing bubble that burst and damaged consumer confidence.
After recording budget surpluses in the prior two years, the economy reversed course in 2009 and contracted 7%. This eroded tax revenues and sent the annual deficit to a record 14.3% of GDP. The European Union set a target for Ireland to reduce that figure to 3% by 2014, but the International Monetary Fund has indicated that the deadline will be missed. Moody's has subsequently lowered its bond rating.
2. Netherlands - Debt/GDP: 467%
The national debt in the Netherlands has reached record levels as a result of the world financial crisis and recession. Much of the added burden was caused by significant government support for the country's banking sector. The increase in debt per capita is second only to that experienced in Ireland.
The Netherlands joined the eurozone with a hard guilder a decade ago, but its current debt would likely disqualify it for membership.
3. United Kingdom - Debt/GDP: 409%
Investment bank Morgan Stanley fears that Great Britain could face a severe debt crisis in the near future if it continues down its current path. According to the bank's report, this is a case of not putting aside sufficient reserves when the economy was sound. During the peak of the boom, it still ran a budget deficit of 3% of GDP when other European countries were running surpluses exceeding 2%.
Like many other countries, Britain bought time during the financial crisis by implementing massive fiscal stimulus and forcing the public to fund losses in the private sector. Without the restoration of fiscal credibility, there is a significant danger of a government bond sell-off, pound weakness and a flight of capital.
4. Switzerland - Debt/GDP: 273%
Generally regarded as having one of the world's most stable economies, Switzerland has taken its budget crisis seriously. When the national debt began to escalate in the last decade, the Swiss voted to approve a constitutional amendment forcing the government to balance expenses and revenue during each economic cycle. While annual deficits may still occur, this has instilled discipline in the process and lowered the country's borrowing costs as investors rushed to safety.
This so-called "debt brake" was implemented in response to increasing debt stemming from a slowdown in economic growth. Deficits climbed as spending rose for unemployment benefits and tax revenues declined. While government expenditures were cut across the board, rising revenues have not been sufficient to pay down the incurred debt.
5. Portugal - Debt/GDP: 228%
With last year's deficit coming in at 9.4% of GDP, the Portuguese government has instituted a growth and austerity program with the objective of reducing that number to 2.8% by 2013. These measures have sparked strikes in the public sector including postal and transportation services. Those events have been further propelled by unemployment above 10%, the worst in 40 years.
The root problem has been low productivity and virtually no economic growth in the past few years. Portugal ranks last in GDP growth among countries that adopted the euro as a common currency. Demand for goods and services has stalled, along with innovation and business momentum. In addition, Portugal's exports have been undercut by cheap labor in countries such as China. (For related reading, see The Economics Of Labor Mobility.)
6. Austria - Debt/GDP: 214%
The recession and government assistance to banks have contributed to the budget crisis in Austria. The finance minister has rejected the notion of higher taxes in favor of administrative reforms to cut spending. He has predicted that the annual deficit would grow from 3.5% to 4.7% of GDP between 2010 and 2012 before starting to decline. That peak would be the third-highest since 1976 when such data were first recorded.
Rising unemployment has resulted in increased expenditures for unemployment compensation and other government benefits. In addition to the reduced payrolls, tax reforms have driven down overall tax revenues.
The Bottom Line
While the U.S. and Canada have large economies, their respective debt-to-GDP ratios are 93% and 62%. The U.S. gets most of the attention because of the size of the numbers that comprise the ratio - $13.5 trillion debt (June 2009) and $14.4 trillion GDP (2009 estimate).
By comparison, China and India have ratios of 7% and 20% respectively. Their economic growth rates have also exceeded the western nations over the past few years, thereby keeping their debt ratios relatively low. If the western nations don't implement policies to reduce their debts, they run the risk of jeopardizing future economic growth and prosperity.
Monday, August 23, 2010
Seven must-have real estate contract conditions
It's a good idea to educate yourself on the not-so-obvious parts of a real estate contract
Amy Fontinelle
When you formally make an offer on a home you want to buy, you'll fill out a lot of paperwork specifying the terms of your offer. Aside from such obvious things as the address and purchase price of the property on which you're making an offer, there are some items you should be sure to include in your real estate purchase contract.
1. Finance Terms
If you are like most people and you won't be able to buy the home without obtaining a mortgage, your purchase offer should state that your offer is contingent upon obtaining financing at a specified interest rate. If you know you can't afford the monthly payment on the house if the interest rate is higher than 6 per cent, don't put 6.5 per cent in your offer. If you do that and you are only able to obtain financing at 6.5 per cent, the seller will get to keep your earnest money deposit when you have to back out of the offer.
If you need to obtain a certain type of loan in order to complete the deal, you should also specify this in your contract. If you are paying all cash for the property, you should state this as well because it makes your offer more attractive to sellers. Why? If you don't have to get a mortgage, the deal is more likely to go through and closing is more likely to happen on time. (Learn more in 6 Ways To Come Up With A Down Payment On A Home.)
2. Seller Assist
If you want the seller to pay part or all of your closing costs, you must ask for it in your offer. The offer should state the amount of closing costs you are requesting as a dollar amount (e.g., $6,000) or as a percentage of the home's purchase price (e.g., 3 per cent).
3. Who Pays Specific Closing Costs
The agreement should specify whether the buyer or seller will pay for each of the common fees associated with the home purchase, such as escrow fees, title search fees, title insurance, notary fees, recording fees, transfer tax and so on. Your real estate agent can advise you as to whether it is the buyer or seller who customarily pays each of these fees in your area.
4. Home Inspection
Unless you are buying a tear-down, you should include a home inspection contingency in your offer. This clause allows you to walk away from the deal if a home inspection reveals significant and/or expensive-to-repair flaws in the structure's condition. For example, if the home inspection reveals that the home needs a new roof at a cost of $15,000, the home inspection contingency would give you the option to walk away from the deal.
5. Fixtures and Appliances
If you want the refrigerator, dishwasher, stove, oven, washing machine or any other fixtures and appliances, do not rely on a verbal agreement with the seller and do not assume anything. Specify in the contract any fixtures and appliances that are to be included in the purchase.
6. Closing Date
How much time do you need to complete the purchase transaction? Common time frames are 30 days, 45 days and 60 days. Issues that can affect this time frame might include the seller's need to find a new home, the remaining term on your lease if you are currently renting, the amount of time you have to relocate if you are moving from a job, and so on. Occasionally, the buyer or seller might want a closing as short as two weeks, but it's difficult to remove all the contingencies and obtain all the necessary paperwork and funding in such a short time period. (Learn more in 10 Hurdles To Closing On A New Home.)
7. Sale of Existing Home
If you are an existing homeowner and you will need the funds from the sale of that home to buy the home you are making an offer on, you should make your purchase offer contingent upon the sale of your current home. You should also provide a reasonable time frame for you to sell your home, such as 30 or 60 days. The seller of the property you're interested in is not going to want to take his property off the market indefinitely while you search for a buyer.
There are many other things that go into a thorough real estate contract, but for the most part, you shouldn't have to worry about them. Real estate agents will commonly use standardized, fill-in-the-blank forms that cover all the bases, including the ones described in this article.
If you want to familiarize yourself with the details of the purchase agreement form you're likely to use before you write your offer, ask your real estate agent for a sample agreement, or search online for the standard form that is common in your locality. (If you are looking for a good deal and have time to wait, a short-sale house may be for you. To learn more, read Purchasing A Short-Sale Property.)
The Bottom Line
Even though these forms are common and standardized and a good real estate agent would not let you leave anything important out of your contract, it is still a good idea to educate yourself about the key components of a real estate purchase agreement.
Read more: http://www.theglobeandmail.com/globe-investor/personal-finance/seven-must-have-real-estate-contract-conditions/article1680262/
Amy Fontinelle
When you formally make an offer on a home you want to buy, you'll fill out a lot of paperwork specifying the terms of your offer. Aside from such obvious things as the address and purchase price of the property on which you're making an offer, there are some items you should be sure to include in your real estate purchase contract.
1. Finance Terms
If you are like most people and you won't be able to buy the home without obtaining a mortgage, your purchase offer should state that your offer is contingent upon obtaining financing at a specified interest rate. If you know you can't afford the monthly payment on the house if the interest rate is higher than 6 per cent, don't put 6.5 per cent in your offer. If you do that and you are only able to obtain financing at 6.5 per cent, the seller will get to keep your earnest money deposit when you have to back out of the offer.
If you need to obtain a certain type of loan in order to complete the deal, you should also specify this in your contract. If you are paying all cash for the property, you should state this as well because it makes your offer more attractive to sellers. Why? If you don't have to get a mortgage, the deal is more likely to go through and closing is more likely to happen on time. (Learn more in 6 Ways To Come Up With A Down Payment On A Home.)
2. Seller Assist
If you want the seller to pay part or all of your closing costs, you must ask for it in your offer. The offer should state the amount of closing costs you are requesting as a dollar amount (e.g., $6,000) or as a percentage of the home's purchase price (e.g., 3 per cent).
3. Who Pays Specific Closing Costs
The agreement should specify whether the buyer or seller will pay for each of the common fees associated with the home purchase, such as escrow fees, title search fees, title insurance, notary fees, recording fees, transfer tax and so on. Your real estate agent can advise you as to whether it is the buyer or seller who customarily pays each of these fees in your area.
4. Home Inspection
Unless you are buying a tear-down, you should include a home inspection contingency in your offer. This clause allows you to walk away from the deal if a home inspection reveals significant and/or expensive-to-repair flaws in the structure's condition. For example, if the home inspection reveals that the home needs a new roof at a cost of $15,000, the home inspection contingency would give you the option to walk away from the deal.
5. Fixtures and Appliances
If you want the refrigerator, dishwasher, stove, oven, washing machine or any other fixtures and appliances, do not rely on a verbal agreement with the seller and do not assume anything. Specify in the contract any fixtures and appliances that are to be included in the purchase.
6. Closing Date
How much time do you need to complete the purchase transaction? Common time frames are 30 days, 45 days and 60 days. Issues that can affect this time frame might include the seller's need to find a new home, the remaining term on your lease if you are currently renting, the amount of time you have to relocate if you are moving from a job, and so on. Occasionally, the buyer or seller might want a closing as short as two weeks, but it's difficult to remove all the contingencies and obtain all the necessary paperwork and funding in such a short time period. (Learn more in 10 Hurdles To Closing On A New Home.)
7. Sale of Existing Home
If you are an existing homeowner and you will need the funds from the sale of that home to buy the home you are making an offer on, you should make your purchase offer contingent upon the sale of your current home. You should also provide a reasonable time frame for you to sell your home, such as 30 or 60 days. The seller of the property you're interested in is not going to want to take his property off the market indefinitely while you search for a buyer.
There are many other things that go into a thorough real estate contract, but for the most part, you shouldn't have to worry about them. Real estate agents will commonly use standardized, fill-in-the-blank forms that cover all the bases, including the ones described in this article.
If you want to familiarize yourself with the details of the purchase agreement form you're likely to use before you write your offer, ask your real estate agent for a sample agreement, or search online for the standard form that is common in your locality. (If you are looking for a good deal and have time to wait, a short-sale house may be for you. To learn more, read Purchasing A Short-Sale Property.)
The Bottom Line
Even though these forms are common and standardized and a good real estate agent would not let you leave anything important out of your contract, it is still a good idea to educate yourself about the key components of a real estate purchase agreement.
Read more: http://www.theglobeandmail.com/globe-investor/personal-finance/seven-must-have-real-estate-contract-conditions/article1680262/
Thursday, August 19, 2010
CIBC World Markets Inc. trims forecast for rate hikes
CIBC World Markets Inc. trims forecast for rate hikes and currency strength in Canada as economic growth outlook dampens abroad
TORONTO, Aug. 18 /CNW/ - Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.
"North America's story is again darkening," says CIBC's Chief economist in the latest Global Positioning Strategy report. "We were looking for a material second-half slowdown for the U.S. but as it turns out, it's already happened."
Economic growth stateside from April to June is being revised downward, Mr. Shenfeld notes, and key indicators are pointing to growth that will be slower than anticipated by U.S. monetary policy makers.
And still ahead is a "further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year.
"Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest."
While Canada is in much better economic shape - it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job - it "cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold," Mr. Shenfeld contends.
For starters, an interest rate differential of 300-400 basis points would take the loonie "substantially stronger" creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.
Furthermore, the "external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline."
Mr. Shenfeld doubts that the Bank of Canada "has been shocked enough to forestall a rate hike in September" but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC's outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.
The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are "lessons learned, we hope," says Mr. Shenfeld.
"Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening."
As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.
A less hawkish monetary policy combined with a mixed outlook for commodity prices affected by slow global growth will also likely see the Canadian dollar roughly two cents weaker than earlier forecast over the same horizon, adds Mr. Shenfeld. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_aug10.pdf
TORONTO, Aug. 18 /CNW/ - Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.
"North America's story is again darkening," says CIBC's Chief economist in the latest Global Positioning Strategy report. "We were looking for a material second-half slowdown for the U.S. but as it turns out, it's already happened."
Economic growth stateside from April to June is being revised downward, Mr. Shenfeld notes, and key indicators are pointing to growth that will be slower than anticipated by U.S. monetary policy makers.
And still ahead is a "further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year.
"Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest."
While Canada is in much better economic shape - it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job - it "cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold," Mr. Shenfeld contends.
For starters, an interest rate differential of 300-400 basis points would take the loonie "substantially stronger" creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.
Furthermore, the "external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline."
Mr. Shenfeld doubts that the Bank of Canada "has been shocked enough to forestall a rate hike in September" but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC's outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.
The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are "lessons learned, we hope," says Mr. Shenfeld.
"Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening."
As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.
A less hawkish monetary policy combined with a mixed outlook for commodity prices affected by slow global growth will also likely see the Canadian dollar roughly two cents weaker than earlier forecast over the same horizon, adds Mr. Shenfeld. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_aug10.pdf
Wednesday, August 18, 2010
Mortgage scam prompts warnings
Latest mortgage scam prompts warnings from real estate board
By MYKE THOMAS, SUNMEDIA-Calgary Sun
The uncovering of the latest mortgage scam and that mortgage fraudsters are active in Calgary is not a surprise, says Diane Scott, president of the Calgary Real Estate Board.
“I started in (the real estate business) 1983 and this is the second or third round of this,” says Scott, who urges all buyers to do their due diligence to avoid being sucked into a scam.
“We have to watch for red flags such as a numbered company on the contract or high-ratio mortgages.”
CREB offers to the following tips to protect yourself against mortgage fraud:
- Employ a licensed mortgage broker registered under the Real Estate Act in Alberta.
Licensed mortgage brokers are required to conform to a code of conduct enforced by RECA. Contact RECA at 403-228-2954 to ensure your broker is licensed.
- Before you buy, have a realtor show you the listing history on the property.
Check the number of sales, price ranges and community prices.
- Use a realtor or other independent representation for your purchase.
If the seller objects, something is wrong.
- Get a comparative market analysis of the property.
Additionally, you may want to include, as part of your offer to purchase, the option to have the property appraised by a designated or accredited member of the Appraisal Institute of Canada.
- Ask for a copy of the land title search.
- Make sure your deposit is being held in a trust account.
For more information go to RECA’s website at http://www.reca.ca/consumers/ and search for ‘mortgage fraud red flags.’
By MYKE THOMAS, SUNMEDIA-Calgary Sun
The uncovering of the latest mortgage scam and that mortgage fraudsters are active in Calgary is not a surprise, says Diane Scott, president of the Calgary Real Estate Board.
“I started in (the real estate business) 1983 and this is the second or third round of this,” says Scott, who urges all buyers to do their due diligence to avoid being sucked into a scam.
“We have to watch for red flags such as a numbered company on the contract or high-ratio mortgages.”
CREB offers to the following tips to protect yourself against mortgage fraud:
- Employ a licensed mortgage broker registered under the Real Estate Act in Alberta.
Licensed mortgage brokers are required to conform to a code of conduct enforced by RECA. Contact RECA at 403-228-2954 to ensure your broker is licensed.
- Before you buy, have a realtor show you the listing history on the property.
Check the number of sales, price ranges and community prices.
- Use a realtor or other independent representation for your purchase.
If the seller objects, something is wrong.
- Get a comparative market analysis of the property.
Additionally, you may want to include, as part of your offer to purchase, the option to have the property appraised by a designated or accredited member of the Appraisal Institute of Canada.
- Ask for a copy of the land title search.
- Make sure your deposit is being held in a trust account.
For more information go to RECA’s website at http://www.reca.ca/consumers/ and search for ‘mortgage fraud red flags.’
Friday, August 13, 2010
10 things to check before you buy a new home
The process of buying a new home—especially if it’s your first time—is incredibly intimidating. And while there are certain things you may know you’re going to want to change upon moving in (like paint colors or retiling), if you’ve never gone through this before you may not know what else to watch out for before you sign the dotted line (just because a home is gorgeous on the outside, it’s not impervious to having a bunch of costly-to-fix issues that go way beyond the surface—remember The Money Pit?). Here, via apartmenttherapy.com, a handy checklist of all kinds of things a potential buyer should be mindful of:
1. Check the drains to make sure they’re not backed-up. To test, do a load of laundry, fill up the tub and sinks, and try to drain them all at the same time.
2. Open all the windows all the way to make sure they’re able to open and shut completely—fixing them is not only a pain, but a financial drain.
3. Turn on all the faucets and make sure they’re in working order.
4. Light a fire in the fireplace. While cleaning them is pretty easy (just call a professional chimney sweeper), you should also make sure they draft correctly.
5. Taste the water. Even if the city you live in has great water, if you’ve got old pipes, they may send out debris into yours.
6. Flush the toilets. Make sure that the toilets are able to flush toilet paper.
7. Open the electrical panel. Watch out for loose wires or ones that simply don’t connect to anything, which could be a sign of live wires inside!
8. Turn on the heat/air. Not only do you want to ensure they turn out, but check to see if they heat/cool to their designated temperatures.
9. Pull the carpets back. Peel away a corner of the carpet to verify what’s underneath (often there’s hardwood under there) and to make sure it’s not mildewing.
10. Basement moisture. Check for signs of dampness, not just on the walls, but near things like dehumidifiers, which suck water out of the air.
http://ca.lifestyle.yahoo.com/home-garden/articles/archive/yahoolifestyle/yahoolifestyle-10_things_to_check_before_you_buy_a_new_home
1. Check the drains to make sure they’re not backed-up. To test, do a load of laundry, fill up the tub and sinks, and try to drain them all at the same time.
2. Open all the windows all the way to make sure they’re able to open and shut completely—fixing them is not only a pain, but a financial drain.
3. Turn on all the faucets and make sure they’re in working order.
4. Light a fire in the fireplace. While cleaning them is pretty easy (just call a professional chimney sweeper), you should also make sure they draft correctly.
5. Taste the water. Even if the city you live in has great water, if you’ve got old pipes, they may send out debris into yours.
6. Flush the toilets. Make sure that the toilets are able to flush toilet paper.
7. Open the electrical panel. Watch out for loose wires or ones that simply don’t connect to anything, which could be a sign of live wires inside!
8. Turn on the heat/air. Not only do you want to ensure they turn out, but check to see if they heat/cool to their designated temperatures.
9. Pull the carpets back. Peel away a corner of the carpet to verify what’s underneath (often there’s hardwood under there) and to make sure it’s not mildewing.
10. Basement moisture. Check for signs of dampness, not just on the walls, but near things like dehumidifiers, which suck water out of the air.
http://ca.lifestyle.yahoo.com/home-garden/articles/archive/yahoolifestyle/yahoolifestyle-10_things_to_check_before_you_buy_a_new_home
Tuesday, August 10, 2010
Five expenses that will consume 50 per cent of your lifetime earnings
by Manisha Thakor, Forbes.com
In these recessionary times, financial tips are flowing fast and furious about how to save money and stick to a budget. Facing a sea of information, many people are asking, “Where do I start?” For most of us, five areas of spending will consume over 50% of the money we earn during our lifetime, so that’s the best place to begin.
The five areas are: Home, car, children, education and retirement. Here’s what you need to know about each:
* Don’t bite off more HOME than you can chew. How much house can you comfortably afford? For most people the answer is a house with a purchase price of no more than 3x their annual household income. Rationale: the cost of a home includes much more than the monthly mortgage payment. It’s also property tax, insurance, upkeep, etc. Typically these costs run 2%-3% of the price of your home each year. Assuming a 20% down payment, a 30-year fixed rate mortgage, and interest rates in the 5%-6% rate, the 3x your income rule of thumb will translate into total housing costs of roughly 30% of your gross income.
* Don’t let your CAR drive you to the poor house. The same logic applies to your car. Most people can comfortably afford a car that is one-third of their annual income. If you make $60,000 you can comfortably afford a car that costs $20,000. If that seems low – now you know why so many people are in financial trouble. They are driving it. A car has many other costs than simply the monthly payment. There’s insurance, gas, parking, maintenance, etc. If you follow this rule of thumb, your total transportation costs should be 10% or less of your gross income.
* Don’t let your KIDS kick you in the wallet. Kids are expensive. From a purely clinical standpoint the Dept. of Agriculture estimates it will cost $220,000 to raise a child born in 2008 from diapers to age 18. And that figure is before you add in the cost of college or university! Deciding to be a parent is a major financial obligation. Don’t make it worse by over-indulging your love bundles.
* Don’t forget to ask “How high is too high for higher EDUCATION?” It used to be good debt was defined as mortgage and student loan debt… and bad debt was everything else. Not any more. We’ve now learned that too much of a good thing can indeed be bad. Rough rule of thumb, don’t take on more in total education debt than you think you are going to earn on average annually during your first 10 years after graduating (from college/university or grad school). In plain English, if you think you’ll make $50,000 a year, don’t take out more than $50,000 in loans. The logic behind this is that if it takes you more than 10 years of paying 10% of your income a year in student loan repayments, it’s going to be tough to meet your other financial obligations.
* Don’t underestimate the need to feed your RETIREMENT nest egg. How much will you need to retire? A simple rule of thumb is to multiply your current income by 25. So if you make $50,000 a year and want to maintain that standard of living in retirement, you’ll need a nest egg of at least $1,250,000. Understanding early on in your working life what “your number” is… will help you see just how important it is to plan for this major savings goal.
In these recessionary times, financial tips are flowing fast and furious about how to save money and stick to a budget. Facing a sea of information, many people are asking, “Where do I start?” For most of us, five areas of spending will consume over 50% of the money we earn during our lifetime, so that’s the best place to begin.
The five areas are: Home, car, children, education and retirement. Here’s what you need to know about each:
* Don’t bite off more HOME than you can chew. How much house can you comfortably afford? For most people the answer is a house with a purchase price of no more than 3x their annual household income. Rationale: the cost of a home includes much more than the monthly mortgage payment. It’s also property tax, insurance, upkeep, etc. Typically these costs run 2%-3% of the price of your home each year. Assuming a 20% down payment, a 30-year fixed rate mortgage, and interest rates in the 5%-6% rate, the 3x your income rule of thumb will translate into total housing costs of roughly 30% of your gross income.
* Don’t let your CAR drive you to the poor house. The same logic applies to your car. Most people can comfortably afford a car that is one-third of their annual income. If you make $60,000 you can comfortably afford a car that costs $20,000. If that seems low – now you know why so many people are in financial trouble. They are driving it. A car has many other costs than simply the monthly payment. There’s insurance, gas, parking, maintenance, etc. If you follow this rule of thumb, your total transportation costs should be 10% or less of your gross income.
* Don’t let your KIDS kick you in the wallet. Kids are expensive. From a purely clinical standpoint the Dept. of Agriculture estimates it will cost $220,000 to raise a child born in 2008 from diapers to age 18. And that figure is before you add in the cost of college or university! Deciding to be a parent is a major financial obligation. Don’t make it worse by over-indulging your love bundles.
* Don’t forget to ask “How high is too high for higher EDUCATION?” It used to be good debt was defined as mortgage and student loan debt… and bad debt was everything else. Not any more. We’ve now learned that too much of a good thing can indeed be bad. Rough rule of thumb, don’t take on more in total education debt than you think you are going to earn on average annually during your first 10 years after graduating (from college/university or grad school). In plain English, if you think you’ll make $50,000 a year, don’t take out more than $50,000 in loans. The logic behind this is that if it takes you more than 10 years of paying 10% of your income a year in student loan repayments, it’s going to be tough to meet your other financial obligations.
* Don’t underestimate the need to feed your RETIREMENT nest egg. How much will you need to retire? A simple rule of thumb is to multiply your current income by 25. So if you make $50,000 a year and want to maintain that standard of living in retirement, you’ll need a nest egg of at least $1,250,000. Understanding early on in your working life what “your number” is… will help you see just how important it is to plan for this major savings goal.
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