Bloomberg News Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements said.
“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published Sunday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”
While policy makers in Asia and Latin America are already raising borrowing costs to damp price pressures, rates remain near record lows in the world’s largest developed economies. Central banks in the U.S., U.K. and Japan have signalled they intend to keep that stimulus in place for some time, with only the European Central Bank moving to gradually tighten credit as inflation risks increase.
“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” said the BIS, which acts as a central bank for the world’s central banks. “These increased upside risks to inflation call for higher policy rates.”
With U.K. inflation running at 4.5%, more than double the Bank of England’s target, the BIS said “one wonders how long its current policy can be sustained.” The pound rose half a cent in early European trading to $1.5985 before retracing to $1.5931 at 9 a.m. in London.
Crude oil prices have gained 20% in the last 12 months, putting pressure on companies to increase wages and pass on higher costs to consumers.
“The price pressure is there,” said Carsten Brzeski, chief European economist at ING Group NV in Brussels. “One of the lessons of the financial crisis is that you shouldn’t leave rates too low for too long. Now is the time to remember that lesson.”
BIS General Manager Jaime Caruana said global headline inflation has risen a percentage point to 3.6% since April 2010. At the same time, short-term interest rates adjusted for inflation “have actually fallen in the past year, from minus 0.6% to minus 1.3% globally,” he said in a speech in Basel Sunday.
“The world economy is growing at a historically respectable rate of around 4%,” Caruana said. “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”
The ECB in April raised its benchmark interest rate from a record low of 1% and has signalled another quarter-point step is likely in July.
By contrast, the Federal Reserve last week repeated a pledge to keep its policy rate close to zero for an “extended period,” while the Bank of Japan this month held its benchmark near zero and kept credit and asset-purchase programs in place.
Minutes of the Bank of England’s last policy meeting this month, at which the key rate was held at 0.5%, show some officials see the potential to extend bond purchases to boost a faltering recovery.
The BIS said that in “some advanced economies” policy tightening still needs to be balanced against the “vulnerabilities” associated with balance-sheet adjustment and financial sector fragility.
Still, “undue delay in the normalization of the monetary policy stance entails the risk of creating serious financial- market distortions,” it said. Furthermore, a “timely tightening” of policy in both emerging-market and advanced economies will be needed “to preserve a low-inflation environment globally and reinforce central banks’ inflation- fighting credibility.”
The BIS said central banks should reduce the size of their balance sheets, though it would be “dangerous” to cut them “too rapidly or too indiscriminately.”
In response to the financial crisis, the Fed and the Bank of England “sharply” increased their total assets from about 8% of gross domestic product to just below 20%, while the ECB expanded its assets from 13% of GDP to more than 20%, according to the BIS.
“Balance-sheet policies have supported the global economy through a very difficult crisis,” it said. “However, the balance sheets are now exposed to greater risks — namely interest-rate risk, exchange-rate risk and credit risk — that could lead to financial losses.”
The BIS also urged governments to pursue fiscal consolidation, saying the biggest risk is “doing too little too late rather than doing too much too soon.” In Europe, policy makers must fix the region’s debt crisis “once and for all,” it said.
“Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today,” Caruana said. “There is no easy way out, no shortcut, no painless solution.”
The BIS warned that a failure of the U.S. to tackle its budget deficit could become a source of instability, with potentially “far-reaching ramifications for the global economy” should a rapid depreciation of the dollar result.
“The current ability of the United States to easily finance its deficit cannot be taken for granted,” the report said.
The BIS holds currency reserves on behalf of its members and provides policy makers with a forum for discussion. Attendees at the annual general meeting in Basel Sunday included ECB President Jean-Claude Trichet, Fed Chairman Ben S. Bernanke, Bank of Japan Governor Masaaki Shirakawa and Bundesbank President Jens Weidmann.
Wednesday, June 29, 2011
Tuesday, June 28, 2011
Why economists see a modestly stronger second half for 2011 after a dismal 6 months
By Christopher S. Rugaber,Paul Wiseman, The Associated Press
WASHINGTON - Farewell and good riddance to the first half of 2011 — six months that are ending as sour for the economy as they began.
Most analysts say economic growth will perk up in the second half of the year. The reason is that the main causes of the slowdown — high oil prices and manufacturing delays because of the disaster in Japan — have started to fade.
"Some of the headwinds that caused us to slow are turning into tail winds," said Mark Zandi, chief economist at Moody's Analytics.
For an economy barely inching ahead two years after the Great Recession ended, the first half of 2011 can't end soon enough. Severe storms and rising gasoline prices held growth in January, February and March to a glacial annual rate of 1.9 per cent.
The current quarter isn't shaping up much better. The average growth forecast of 38 top economists surveyed by The Associated Press is 2.3 per cent.
The economy has to grow 3 per cent a year just to hold the unemployment rate steady and keep up with population growth. And it has to average about 5 per cent growth for a year to lower the unemployment rate by a full percentage point. It is 9.1 per cent today.
As welcome as the stronger growth envisioned in the second half is, the improvement should be modest. For the final six months of the year, the AP economists forecast a growth rate of 3.2 per cent.
So far this year, high gas and food prices have discouraged people from spending much on other things — from furniture and appliances to dinners out and vacations. That spending fuels economic growth.
And some U.S. auto factories had to suspend or trim production after the March earthquake in Japan interrupted supplies of parts and electronics. American dealerships have had fewer cars to sell.
The latest dose of glum news: The government reported Monday that consumer spending was about the same in May as in April, the first time in a year that spending hasn't increased from the previous month.
The report confirmed the toll that high gas prices, Japan-related disruptions and high unemployment have taken on personal spending in the second quarter.
"Here's to a better third," says Jennifer Lee, senior economist at BMO Capital Markets.
Relief is in sight, economists say. Oil prices have been falling since Memorial Day. The drop has lowered the price of regular unleaded gasoline by 23 cents in the past month, to a national average of $3.57 a gallon, according to AAA.
The timing of the drop in gas prices is especially fortunate because they usually rise during summer driving season, says Robert DiClemente, chief U.S. economist at Citigroup .
And the kinks in the global manufacturing chain are starting to be smoothed out as the Japanese factories that make cars and electronics resume production.
Diane Swonk, chief economist at Mesirow Financial, says auto sales should improve "quite substantially" later this year because the lost production from the earthquake is coming back faster than had been expected.
One sign of that rebound came when the Federal Reserve Bank of Chicago reported Monday that manufacturing in the Midwest rebounded in May after falling sharply in April.
And last week, the government said orders for machinery, computers, cars and other durable goods rose slightly in May after dropping in April. Economists attributed the turnaround, in part, to Japanese factories that started to rev up.
The U.S. economy is also expected to get a slight second-half boost from reconstruction in flood-ravaged sections of the South and Midwest. Construction workers will be employed rebuilding homes and businesses. People will replace destroyed cars and other possessions. Analysts predict the economic losses from the floods in the April-June quarter will be reversed in the July-September quarter.
The economists surveyed by AP predict unemployment will fall to 8.7 per cent at year's end. It is not exactly the start of a boom: The economy is still carrying too much baggage from the financial crisis — damaged banks, depressed home prices, debt-burdened consumers — to achieve much liftoff.
Though some of the economy's weakness in the first half is temporary, "it is hard to see much on the horizon to cheer about," Swonk says.
WASHINGTON - Farewell and good riddance to the first half of 2011 — six months that are ending as sour for the economy as they began.
Most analysts say economic growth will perk up in the second half of the year. The reason is that the main causes of the slowdown — high oil prices and manufacturing delays because of the disaster in Japan — have started to fade.
"Some of the headwinds that caused us to slow are turning into tail winds," said Mark Zandi, chief economist at Moody's Analytics.
For an economy barely inching ahead two years after the Great Recession ended, the first half of 2011 can't end soon enough. Severe storms and rising gasoline prices held growth in January, February and March to a glacial annual rate of 1.9 per cent.
The current quarter isn't shaping up much better. The average growth forecast of 38 top economists surveyed by The Associated Press is 2.3 per cent.
The economy has to grow 3 per cent a year just to hold the unemployment rate steady and keep up with population growth. And it has to average about 5 per cent growth for a year to lower the unemployment rate by a full percentage point. It is 9.1 per cent today.
As welcome as the stronger growth envisioned in the second half is, the improvement should be modest. For the final six months of the year, the AP economists forecast a growth rate of 3.2 per cent.
So far this year, high gas and food prices have discouraged people from spending much on other things — from furniture and appliances to dinners out and vacations. That spending fuels economic growth.
And some U.S. auto factories had to suspend or trim production after the March earthquake in Japan interrupted supplies of parts and electronics. American dealerships have had fewer cars to sell.
The latest dose of glum news: The government reported Monday that consumer spending was about the same in May as in April, the first time in a year that spending hasn't increased from the previous month.
The report confirmed the toll that high gas prices, Japan-related disruptions and high unemployment have taken on personal spending in the second quarter.
"Here's to a better third," says Jennifer Lee, senior economist at BMO Capital Markets.
Relief is in sight, economists say. Oil prices have been falling since Memorial Day. The drop has lowered the price of regular unleaded gasoline by 23 cents in the past month, to a national average of $3.57 a gallon, according to AAA.
The timing of the drop in gas prices is especially fortunate because they usually rise during summer driving season, says Robert DiClemente, chief U.S. economist at Citigroup .
And the kinks in the global manufacturing chain are starting to be smoothed out as the Japanese factories that make cars and electronics resume production.
Diane Swonk, chief economist at Mesirow Financial, says auto sales should improve "quite substantially" later this year because the lost production from the earthquake is coming back faster than had been expected.
One sign of that rebound came when the Federal Reserve Bank of Chicago reported Monday that manufacturing in the Midwest rebounded in May after falling sharply in April.
And last week, the government said orders for machinery, computers, cars and other durable goods rose slightly in May after dropping in April. Economists attributed the turnaround, in part, to Japanese factories that started to rev up.
The U.S. economy is also expected to get a slight second-half boost from reconstruction in flood-ravaged sections of the South and Midwest. Construction workers will be employed rebuilding homes and businesses. People will replace destroyed cars and other possessions. Analysts predict the economic losses from the floods in the April-June quarter will be reversed in the July-September quarter.
The economists surveyed by AP predict unemployment will fall to 8.7 per cent at year's end. It is not exactly the start of a boom: The economy is still carrying too much baggage from the financial crisis — damaged banks, depressed home prices, debt-burdened consumers — to achieve much liftoff.
Though some of the economy's weakness in the first half is temporary, "it is hard to see much on the horizon to cheer about," Swonk says.
Friday, June 24, 2011
Flaherty Says No More Mortgage Changes- for Now .
Although there have been several reports of late indicating that debt in this country is on the rise, Jim Flaherty does not believe that the answer lies in more mortgage and lending restrictions.
It is a delicate balance- to put checks and balances in place to support responsible borrowing and lending--- and allowing enough access to credit to keep the wheels of economic growth turning
One has to look no further than to our neighbours in the South to understand what can happen when credit is too accessible- and then the economic backlash when the reins are pulled in with great haste.
Both Stats Can and BMO released data this week that suggests that debt levels are still rising, even in the face of strategized debt control- in the form of staggered changes to lending, as introduced by Jim Flaherty.
Flaherty cites the health of the Real Estate market in this country as the main reason that there is no immediate need to further impose lending restrictions.
In remarks during a speech delivered this week, he said, “We just took action in March and activity is already starting to moderate.”
Stats Can said, “Mortgage debt advanced, partly reflecting relatively stable borrowing costs as well as higher housing resale and renovation activities.” The concern, as been the impetus for these lending changes- is not even so much about the increase in borrowing amount- but in putting in perimeters for both responsible lending and borrowing. In short, it is about debt management, as opposed to debt accumulation.
Stats Can reported this week that “the ratio of household credit market debt to personal disposable income advanced to 147.3% in the first quarter, as growth in household credit market debt (+1.3%) outpaced that of the personal disposable income (+0.7%). The debt-service ratio also edged up in the first quarter, continuing a trend that started in the third quarter of 2010. Somewhat weaker growth in personal disposable income (as a result of temporary factors) and moderately higher borrowing, accounted for the rise in the debt-service ratio in the first quarter.”
It is a delicate balance- to put checks and balances in place to support responsible borrowing and lending--- and allowing enough access to credit to keep the wheels of economic growth turning
One has to look no further than to our neighbours in the South to understand what can happen when credit is too accessible- and then the economic backlash when the reins are pulled in with great haste.
Both Stats Can and BMO released data this week that suggests that debt levels are still rising, even in the face of strategized debt control- in the form of staggered changes to lending, as introduced by Jim Flaherty.
Flaherty cites the health of the Real Estate market in this country as the main reason that there is no immediate need to further impose lending restrictions.
In remarks during a speech delivered this week, he said, “We just took action in March and activity is already starting to moderate.”
Stats Can said, “Mortgage debt advanced, partly reflecting relatively stable borrowing costs as well as higher housing resale and renovation activities.” The concern, as been the impetus for these lending changes- is not even so much about the increase in borrowing amount- but in putting in perimeters for both responsible lending and borrowing. In short, it is about debt management, as opposed to debt accumulation.
Stats Can reported this week that “the ratio of household credit market debt to personal disposable income advanced to 147.3% in the first quarter, as growth in household credit market debt (+1.3%) outpaced that of the personal disposable income (+0.7%). The debt-service ratio also edged up in the first quarter, continuing a trend that started in the third quarter of 2010. Somewhat weaker growth in personal disposable income (as a result of temporary factors) and moderately higher borrowing, accounted for the rise in the debt-service ratio in the first quarter.”
Thursday, June 23, 2011
Bank of Canada's Carney warns of mounting risk, predicts bad quarter for economy
Julian Beltrame, The Canadian Press
OTTAWA - Strain from a world awash in debt is increasing the risk to what is already a fragile and weak economic recovery, the Bank of Canada warns.
And Canada faces a second, more immediate challenge from temporary factors such as disruptions from the Japanese earthquake and tsunami that will limit growth to about one per cent this quarter, governor Mark Carney added Wednesday.
"This is a disruptive time, there are a major series of changes going on ... so there will be some volatility," Carney told a Senate committee after his bank released its latest biennial Financial Systems Review.
The U.S. economy — which most Canadian exporters depend on — is a shadow of itself, he said, adding that U.S. households may need a decade to get out from debt.
Meanwhile, although emerging economies are booming, Canada's exporters, with the exception of commodities, are under-represented in that world.
And lastly, there's the mountain of debt weighing on the balance sheets of advanced countries, from Japan to parts of Europe to the U.S., that will dampen growth for years.
The summary put into stark language the findings of the central bank's financial systems review, released earlier in the morning, which took a more pessimistic view of the recovery.
The big problem facing the world is debt. Debt even threatens Canada's economy, given that household indebtedness is at record levels and could grow further before tailing off.
"The key risks to the stability of the Canadian financial system remain elevated and have edged higher since December," the bank concludes in the systems review.
For the first time, Carney revealed to a Senate committee that the current second quarter in Canada could see growth drop all the way to one per cent, from 3.9 per cent in the first three months.
Acknowledging that he had previously predicted growth of two per cent this quarter, which ends June 30, Carney told the senators: "The growth could be even lighter than that, it could be in the one per cent range."
He added, however, that he still expects the economy to do better in the second half of this year.
The bank report and Carney's testimony comes as Greece is again under the gun to hold off a credit default that would likely cripple some European banks and possibly touch off a new round of global financial jitters.
But the Bank of Canada says the debt woes extend further than Greece to other peripheral European nations — Spain, Portugal and Ireland — and over the longer term, to the U.S. and Japan .
Canada too faces a troubling household debt issue, the bank warns, which could be exacerbated by shocks, including an economic downturn and interest rate hikes.
In a separate report card, U.S. Federal Reserve officials also took a darker view of the situation, downgrading growth expectations both for the economy and job creation.
All these risks "are interconnected and mutually reinforcing," the Bank of Canada said.
Carney urged Canadians to keep things in perspective, however, growth is "reclining, not declining," and Canada still benefits from sound fundamentals.
Canada's financial system got a "healthy" grade both in terms of the soundness of the banking system and business balance sheets, but it is vulnerable somewhat to outside forces.
Carney said Canada's exposure to Europe's sovereign debt is small, but not insignificant, given the interconnectiveness of the international banking system.
"The Canadian financial system is not immune to the tensions that are currently affecting European markets," the bank's policy council says in the report.
Finance Minister Jim Flaherty has also expressed concern about the Greek crisis, urging European policy-makers to "create a firewall that would ensure that this type of issue would not spread beyond Greece."
Despite the weak recovery and the pain it will cause, governments have no choice but to start the process of getting their fiscal houses in order, said Carney.
He cautioned that indebted countries, even the U.S., shouldn't assume bond markets will be always be prepared to fill their credit needs at reasonable rates. Canada learned that lesson the hard way in the 1990s, he pointed out.
"Our experience in the mid-1990s is that the bond market is there and then it's not," he said.
Domestically, the bank is still very worried about Canadian household debt, which is at an all-time high of 147 per cent of disposable income.
The risk, it says, is that as household finances get squeezed, Canadians will have less money to spend on consumer goods, which would slow down economic growth.
"Further moderation in the pace of debt accumulation by households is needed to contain the buildup of this vulnerability," it says.
The bank also cites global imbalances, the two-speed recovery where advanced nations grow far slower than emerging economies, as additional risks that appear no closer to resolution.
"If the significant fragilities that still burden the financial system are not addressed in a timely manner, the progress achieved to date could be derailed," the bank said.
TD Bank economist Diana Petramala said the report suggests the Bank of Canada is very much in worry mode, and is unlikely to raise interest rates — which could weaken the economy — until 2012.
"All of these risks (cited by the central bank) could have significant economic consequences on Canada’s economy and financial system," if they are borne out, Petramala said.
"In addition, they are medium-term (rather than short-term) in nature, suggesting they are unlikely to disappear any time soon. Under our current forecast, we don’t anticipate Canada’s overnight rate to reach a more normal level of three per cent until 2013."
The bank last hiked interest rates last September , lifting its policy setting to one per cent, still exceptionally low by historical standards.
OTTAWA - Strain from a world awash in debt is increasing the risk to what is already a fragile and weak economic recovery, the Bank of Canada warns.
And Canada faces a second, more immediate challenge from temporary factors such as disruptions from the Japanese earthquake and tsunami that will limit growth to about one per cent this quarter, governor Mark Carney added Wednesday.
"This is a disruptive time, there are a major series of changes going on ... so there will be some volatility," Carney told a Senate committee after his bank released its latest biennial Financial Systems Review.
The U.S. economy — which most Canadian exporters depend on — is a shadow of itself, he said, adding that U.S. households may need a decade to get out from debt.
Meanwhile, although emerging economies are booming, Canada's exporters, with the exception of commodities, are under-represented in that world.
And lastly, there's the mountain of debt weighing on the balance sheets of advanced countries, from Japan to parts of Europe to the U.S., that will dampen growth for years.
The summary put into stark language the findings of the central bank's financial systems review, released earlier in the morning, which took a more pessimistic view of the recovery.
The big problem facing the world is debt. Debt even threatens Canada's economy, given that household indebtedness is at record levels and could grow further before tailing off.
"The key risks to the stability of the Canadian financial system remain elevated and have edged higher since December," the bank concludes in the systems review.
For the first time, Carney revealed to a Senate committee that the current second quarter in Canada could see growth drop all the way to one per cent, from 3.9 per cent in the first three months.
Acknowledging that he had previously predicted growth of two per cent this quarter, which ends June 30, Carney told the senators: "The growth could be even lighter than that, it could be in the one per cent range."
He added, however, that he still expects the economy to do better in the second half of this year.
The bank report and Carney's testimony comes as Greece is again under the gun to hold off a credit default that would likely cripple some European banks and possibly touch off a new round of global financial jitters.
But the Bank of Canada says the debt woes extend further than Greece to other peripheral European nations — Spain, Portugal and Ireland — and over the longer term, to the U.S. and Japan .
Canada too faces a troubling household debt issue, the bank warns, which could be exacerbated by shocks, including an economic downturn and interest rate hikes.
In a separate report card, U.S. Federal Reserve officials also took a darker view of the situation, downgrading growth expectations both for the economy and job creation.
All these risks "are interconnected and mutually reinforcing," the Bank of Canada said.
Carney urged Canadians to keep things in perspective, however, growth is "reclining, not declining," and Canada still benefits from sound fundamentals.
Canada's financial system got a "healthy" grade both in terms of the soundness of the banking system and business balance sheets, but it is vulnerable somewhat to outside forces.
Carney said Canada's exposure to Europe's sovereign debt is small, but not insignificant, given the interconnectiveness of the international banking system.
"The Canadian financial system is not immune to the tensions that are currently affecting European markets," the bank's policy council says in the report.
Finance Minister Jim Flaherty has also expressed concern about the Greek crisis, urging European policy-makers to "create a firewall that would ensure that this type of issue would not spread beyond Greece."
Despite the weak recovery and the pain it will cause, governments have no choice but to start the process of getting their fiscal houses in order, said Carney.
He cautioned that indebted countries, even the U.S., shouldn't assume bond markets will be always be prepared to fill their credit needs at reasonable rates. Canada learned that lesson the hard way in the 1990s, he pointed out.
"Our experience in the mid-1990s is that the bond market is there and then it's not," he said.
Domestically, the bank is still very worried about Canadian household debt, which is at an all-time high of 147 per cent of disposable income.
The risk, it says, is that as household finances get squeezed, Canadians will have less money to spend on consumer goods, which would slow down economic growth.
"Further moderation in the pace of debt accumulation by households is needed to contain the buildup of this vulnerability," it says.
The bank also cites global imbalances, the two-speed recovery where advanced nations grow far slower than emerging economies, as additional risks that appear no closer to resolution.
"If the significant fragilities that still burden the financial system are not addressed in a timely manner, the progress achieved to date could be derailed," the bank said.
TD Bank economist Diana Petramala said the report suggests the Bank of Canada is very much in worry mode, and is unlikely to raise interest rates — which could weaken the economy — until 2012.
"All of these risks (cited by the central bank) could have significant economic consequences on Canada’s economy and financial system," if they are borne out, Petramala said.
"In addition, they are medium-term (rather than short-term) in nature, suggesting they are unlikely to disappear any time soon. Under our current forecast, we don’t anticipate Canada’s overnight rate to reach a more normal level of three per cent until 2013."
The bank last hiked interest rates last September , lifting its policy setting to one per cent, still exceptionally low by historical standards.
Wednesday, June 22, 2011
4 Ways To Value A Real Estate Rental Property
Stephan Abraham, On Tuesday June 21, 2011
During the first half of the 2000s, investing in real estate became more common for average Americans. With easily available financing and minimal down payment requirements many Americans made handsome profits by flipping homes. Well, as we are all aware of, this couldn't go on forever, and the real estate bubble popped in 2007, leading to The Great Recession. Notwithstanding this fundamental change, real estate investment is certainly not unprofitable. Some economic factors such as high unemployment and very strict lending standards by financial institutions have contributed to low vacancies for rentals across the United States. Perhaps real estate investors should look at rental investments as an alternative to a buy and sell approach. So, how does one go about valuing real estate rentals? Here we will introduce at a high level some ways to value rental property.
Sales Comparison ApproachThe sales comparison approach (SCA) is one of the most recognizable forms of valuing residential real estate. This approach is simply a comparison of similar homes that have sold or rented over a given time period. Most investors will want to see an SCA over a significant time frame to glean any potentially emerging trends.
The SCA relies on attributes to assign a relative price value. Price per square foot is a common and easy to understand metric that all investors can use to determine where there property should be valued. If a 2,000 square foot townhome is renting for $1/square foot, investors can reasonably expect a similar rental income based upon similar rentals in the area. Keep in mind that SCA is somewhat generic; that is, every home has a uniqueness that isn't always quantifiable. Buyers and sellers have unique tastes and differences. The SCA is meant to be a baseline or reasonable opinion and not a perfect predictor or valuation tool for real estate. It is also important for investors to use a certified appraiser or real estate agent when requesting a comparative market analysis. This mitigates risk of fraudulent appraisals, which became widespread during the 2007 real estate crisis.
Capital Asset Pricing ModelThe capital asset pricing model (CAPM) is a more comprehensive valuation tool for real estate. The CAPM introduces the concepts of risk and opportunity cost as it applies to real estate investing. This model really looks at potential return on investment (ROI) derived from rental income and compares it to other investments that have no risk, such as United States Treasury bonds or alternative forms of real estate investments such as real estate investment trusts (REITs).
In a nutshell, if the expected return on a risk-free or guaranteed investment exceeds potential ROI from rental income, it simply doesn't make financial sense to take the risk of rental property. With respect to risk, the CAPM considers the inherent risks to rent real property. For example, all rental properties are not the same. Location and age of property are key considerations. Renting older property will mean landlords will likely incur higher maintenance expenses. A property for rent in a high crime area will likely require more safety precautions than say a rental in a gated community. This model suggests building in these "risks" before considering your investment or when establishing a rental pricing structure.
Income Approach
The income approach focuses on what the potential income for rental property yields relative to initial investment. The income approach is used frequently for commercial real estate investing. The income approach relies on determining the annual capitalization rate for an investment. This rate is simply the projected annual income from the gross rent multiplier divided by the original cost or current value of the property. So if an office building costs $120,000 to purchase and the expected monthly income from rentals is $1,200, the expected annual capitalization rate is 10%.
This is a very simplified model with few assumptions. More than likely there are interest expenses on the mortgage. Also, future rental income may be less or more valuable five years from now than they are today. Many investors are familiar with the net present value of money. This concept applied to real estate is also known as a discounted cash flow. Dollars received in the future will be subject to inflationary as well as deflationary risk and are presented in discounted terms to account for this.
Cost ApproachThe cost approach to valuing real estate states that property is really only worth what it can reasonably be used for. It is estimated by summing the land value and the depreciated value of any improvements. Appraisers from this school often espouse the "highest and best" use to summarize the cost approach to real property. It is frequently used as a basis to value vacant land. For example, if you are an apartment developer looking to purchase three acres of land in a barren area to convert into condominiums, the value of that land will be based upon the best use of that land. If the land is surrounded by oil fields and the nearest person lives 20 miles away, the best use and therefore the highest value of that property is not converting to apartments but possibly expanding drilling rights to find more oil.
Another best use argument has to do with property zoning. If the prospective property is not zoned "residential," its value is reduced since the developer will incur significant costs to get rezoned. It is considered most reliable when used on newer structures, and less reliable for older properties. It is often the only reliable approach when looking at special use properties.
The Bottom LineReal estate investing isn't out of vogue by any stretch of the imagination. Since the last crash, however, the housing market has changed dramatically. Flipping homes financed with no money down is an artifact of the past and possibly gone forever. But real estate rentals can be a profitable endeavor if investors know how to value real property. Most serious investors will look at components from all of these valuation methods before making a rental decision. Learning these introductory valuation concepts should be a step in the right direction to getting back into the real estate investment game.
During the first half of the 2000s, investing in real estate became more common for average Americans. With easily available financing and minimal down payment requirements many Americans made handsome profits by flipping homes. Well, as we are all aware of, this couldn't go on forever, and the real estate bubble popped in 2007, leading to The Great Recession. Notwithstanding this fundamental change, real estate investment is certainly not unprofitable. Some economic factors such as high unemployment and very strict lending standards by financial institutions have contributed to low vacancies for rentals across the United States. Perhaps real estate investors should look at rental investments as an alternative to a buy and sell approach. So, how does one go about valuing real estate rentals? Here we will introduce at a high level some ways to value rental property.
Sales Comparison ApproachThe sales comparison approach (SCA) is one of the most recognizable forms of valuing residential real estate. This approach is simply a comparison of similar homes that have sold or rented over a given time period. Most investors will want to see an SCA over a significant time frame to glean any potentially emerging trends.
The SCA relies on attributes to assign a relative price value. Price per square foot is a common and easy to understand metric that all investors can use to determine where there property should be valued. If a 2,000 square foot townhome is renting for $1/square foot, investors can reasonably expect a similar rental income based upon similar rentals in the area. Keep in mind that SCA is somewhat generic; that is, every home has a uniqueness that isn't always quantifiable. Buyers and sellers have unique tastes and differences. The SCA is meant to be a baseline or reasonable opinion and not a perfect predictor or valuation tool for real estate. It is also important for investors to use a certified appraiser or real estate agent when requesting a comparative market analysis. This mitigates risk of fraudulent appraisals, which became widespread during the 2007 real estate crisis.
Capital Asset Pricing ModelThe capital asset pricing model (CAPM) is a more comprehensive valuation tool for real estate. The CAPM introduces the concepts of risk and opportunity cost as it applies to real estate investing. This model really looks at potential return on investment (ROI) derived from rental income and compares it to other investments that have no risk, such as United States Treasury bonds or alternative forms of real estate investments such as real estate investment trusts (REITs).
In a nutshell, if the expected return on a risk-free or guaranteed investment exceeds potential ROI from rental income, it simply doesn't make financial sense to take the risk of rental property. With respect to risk, the CAPM considers the inherent risks to rent real property. For example, all rental properties are not the same. Location and age of property are key considerations. Renting older property will mean landlords will likely incur higher maintenance expenses. A property for rent in a high crime area will likely require more safety precautions than say a rental in a gated community. This model suggests building in these "risks" before considering your investment or when establishing a rental pricing structure.
Income Approach
The income approach focuses on what the potential income for rental property yields relative to initial investment. The income approach is used frequently for commercial real estate investing. The income approach relies on determining the annual capitalization rate for an investment. This rate is simply the projected annual income from the gross rent multiplier divided by the original cost or current value of the property. So if an office building costs $120,000 to purchase and the expected monthly income from rentals is $1,200, the expected annual capitalization rate is 10%.
This is a very simplified model with few assumptions. More than likely there are interest expenses on the mortgage. Also, future rental income may be less or more valuable five years from now than they are today. Many investors are familiar with the net present value of money. This concept applied to real estate is also known as a discounted cash flow. Dollars received in the future will be subject to inflationary as well as deflationary risk and are presented in discounted terms to account for this.
Cost ApproachThe cost approach to valuing real estate states that property is really only worth what it can reasonably be used for. It is estimated by summing the land value and the depreciated value of any improvements. Appraisers from this school often espouse the "highest and best" use to summarize the cost approach to real property. It is frequently used as a basis to value vacant land. For example, if you are an apartment developer looking to purchase three acres of land in a barren area to convert into condominiums, the value of that land will be based upon the best use of that land. If the land is surrounded by oil fields and the nearest person lives 20 miles away, the best use and therefore the highest value of that property is not converting to apartments but possibly expanding drilling rights to find more oil.
Another best use argument has to do with property zoning. If the prospective property is not zoned "residential," its value is reduced since the developer will incur significant costs to get rezoned. It is considered most reliable when used on newer structures, and less reliable for older properties. It is often the only reliable approach when looking at special use properties.
The Bottom LineReal estate investing isn't out of vogue by any stretch of the imagination. Since the last crash, however, the housing market has changed dramatically. Flipping homes financed with no money down is an artifact of the past and possibly gone forever. But real estate rentals can be a profitable endeavor if investors know how to value real property. Most serious investors will look at components from all of these valuation methods before making a rental decision. Learning these introductory valuation concepts should be a step in the right direction to getting back into the real estate investment game.
Thursday, June 16, 2011
Dream home a nightmare for Idaho couple caught in snake-filled ‘horror movie’
ALWAYS ALWAYS ALWAYS do your own due dilligence when loking at a property!
You don't want this to be you!
Neil "Mortgage Man" McJannet
REXBURG, Idaho – The five-bedroom house sits on pastoral acreage in the rural U.S. countryside. At a price less than $180,000, it seemed a steal.
But a bargain it wasn’t. Ben and Amber Sessions soon realized the dream home they’d purchased in Idaho for their growing family in 2009 was infested with hundreds upon hundreds of garter snakes.
The ground surrounding the home appeared to move at times, it was so thick with snakes.
Throngs of snakes crawled beneath the home’s siding. At night, the young couple said they would lie awake and listen to slithering inside the walls.
“It was like living in one of those horror movies,” said Ben Sessions, 31.
The family would frequently eat out because their well water carried the foul smelling musk that the snakes release as a warning to predators.
Each day, before his pregnant wife and two small boys got out of bed, Sessions said he would do a “morning sweep” through the house to make sure none of the snakes had made it inside. That didn’t always work. One day, he heard his wife scream from the laundry room, where she had almost stepped on a snake. He rushed into the room to find that she’d jumped onto a counter.
“I was terrified she was going to miscarry,” he said.
They invited family as witnesses and snapped pictures.
At the height of the infestation, Sessions said he killed 42 snakes in one day before he decided he couldn’t do it anymore. He had waged war against the snakes and “they won.”
He and his wife had little recourse, though, when they decided to flee the home.
They had signed a document that noted the snake infestation. They said they had been assured by their real estate agent that the snakes were just a story invented by the previous owners to leave their mortgage behind.
But the so-called Idaho snake house was no myth, according to the Sessionses, their neighbours, and the videos and photographs taken by them and past residents of the house. The couple said it seemed like almost everyone else in this tiny southeastern Idaho college town knew about it.
“I felt bad,” said Dustin Chambers, a neighbour. “By the time we knew someone had bought it, they were already moving in. It was too late.”
All of Rexburg, Chambers said, pretty much knows the property as the “snake house.”
The Sessionses filed for bankruptcy. The house was foreclosed. They left in December 2009, the day after their daughter was born and just three months after moving in.
“We’re not going to pay for house full of snakes,” Ben Sessions said.
His wife, Amber, 27, said she felt like their family was starting to fall apart.
“It was just so stressful,” she said. “It felt like we were living in Satan’s lair, that’s the only way to really explain it.”
Several months ago, the house briefly went back on the market.
Now owned by JP Morgan Chase, it was listed at $114,900 (€79,527) in December 2010, according to Zillow.com, a real estate data firm. The price was reduced to $109,200 in early January, which was more than $60,000 below its estimated value. Then, Discovery Channel’s “Animal Planet” featured the Sessionses’ story in its “Infested” series.
The listing was removed and the home has stayed off the market while Chase decides what to do with it.
A Rexburg real estate company that was hired to sell the house referred all questions to a Chase spokeswoman in Seattle.
Darcy Donahoe-Wilmot did not return repeated phone calls from The Associated Press. But she did tell a business columnist for Dow Jones Newswires that the bank had contracted to have the snakes at the home trapped and released elsewhere.
Ben Sessions said that he has been diagnosed with snake-related post-traumatic stress disorder and that the house should be condemned.
“It’s not right to continue to sell this home,” Sessions said. He and his wife said they still have nightmares and haven’t recovered financially.
The home was most likely built on a winter snake sanctuary, likely a snake den or hibernaculum, where snakes gather in large numbers to hibernate for the winter, said Rob Cavallaro, a wildlife biologist with the Idaho Department of Fish and Game.
In the spring and summer the snakes fan out across the wilds of southeastern Idaho, but as the days get shorter and cooler, the snakes return to the den in order to ball up for heat and to be accessible to each other for spring breeding.
Cavallaro has heard only of one other eastern Idaho home that was likely located on a snake den. There was also a bridge-widening project where workers ran into a hibernaculum, he said.
“It is an important site for the snakes,” Cavallaro said. “Every now and then we build on them and it becomes a conflict.”
Neal and Denise Ard previously lived in the home, and in 2006 they invited the local news station to come and film the buckets of snakes they had collected on the property. The video, which has 2.4 million views on YouTube, was taken before the Ards abandoned the home.
In March 2007, the Ards sued the couple who had sold them the home for $189,900 and the real estate agent who negotiated the sale, according to court documents. The complaint was dismissed a year later.
There have been some people who have looked at the house since the Sessionses moved out, neighbour Chambers said. One day, when a real estate agent was showing the property, a farmer who lives down the road stopped by to warn them, he said.
“Now, if anybody sees anybody, they kind of will let them know,” Chambers said. “Just so that somebody else doesn’t get caught in the same trap.”
You don't want this to be you!
Neil "Mortgage Man" McJannet
REXBURG, Idaho – The five-bedroom house sits on pastoral acreage in the rural U.S. countryside. At a price less than $180,000, it seemed a steal.
But a bargain it wasn’t. Ben and Amber Sessions soon realized the dream home they’d purchased in Idaho for their growing family in 2009 was infested with hundreds upon hundreds of garter snakes.
The ground surrounding the home appeared to move at times, it was so thick with snakes.
Throngs of snakes crawled beneath the home’s siding. At night, the young couple said they would lie awake and listen to slithering inside the walls.
“It was like living in one of those horror movies,” said Ben Sessions, 31.
The family would frequently eat out because their well water carried the foul smelling musk that the snakes release as a warning to predators.
Each day, before his pregnant wife and two small boys got out of bed, Sessions said he would do a “morning sweep” through the house to make sure none of the snakes had made it inside. That didn’t always work. One day, he heard his wife scream from the laundry room, where she had almost stepped on a snake. He rushed into the room to find that she’d jumped onto a counter.
“I was terrified she was going to miscarry,” he said.
They invited family as witnesses and snapped pictures.
At the height of the infestation, Sessions said he killed 42 snakes in one day before he decided he couldn’t do it anymore. He had waged war against the snakes and “they won.”
He and his wife had little recourse, though, when they decided to flee the home.
They had signed a document that noted the snake infestation. They said they had been assured by their real estate agent that the snakes were just a story invented by the previous owners to leave their mortgage behind.
But the so-called Idaho snake house was no myth, according to the Sessionses, their neighbours, and the videos and photographs taken by them and past residents of the house. The couple said it seemed like almost everyone else in this tiny southeastern Idaho college town knew about it.
“I felt bad,” said Dustin Chambers, a neighbour. “By the time we knew someone had bought it, they were already moving in. It was too late.”
All of Rexburg, Chambers said, pretty much knows the property as the “snake house.”
The Sessionses filed for bankruptcy. The house was foreclosed. They left in December 2009, the day after their daughter was born and just three months after moving in.
“We’re not going to pay for house full of snakes,” Ben Sessions said.
His wife, Amber, 27, said she felt like their family was starting to fall apart.
“It was just so stressful,” she said. “It felt like we were living in Satan’s lair, that’s the only way to really explain it.”
Several months ago, the house briefly went back on the market.
Now owned by JP Morgan Chase, it was listed at $114,900 (€79,527) in December 2010, according to Zillow.com, a real estate data firm. The price was reduced to $109,200 in early January, which was more than $60,000 below its estimated value. Then, Discovery Channel’s “Animal Planet” featured the Sessionses’ story in its “Infested” series.
The listing was removed and the home has stayed off the market while Chase decides what to do with it.
A Rexburg real estate company that was hired to sell the house referred all questions to a Chase spokeswoman in Seattle.
Darcy Donahoe-Wilmot did not return repeated phone calls from The Associated Press. But she did tell a business columnist for Dow Jones Newswires that the bank had contracted to have the snakes at the home trapped and released elsewhere.
Ben Sessions said that he has been diagnosed with snake-related post-traumatic stress disorder and that the house should be condemned.
“It’s not right to continue to sell this home,” Sessions said. He and his wife said they still have nightmares and haven’t recovered financially.
The home was most likely built on a winter snake sanctuary, likely a snake den or hibernaculum, where snakes gather in large numbers to hibernate for the winter, said Rob Cavallaro, a wildlife biologist with the Idaho Department of Fish and Game.
In the spring and summer the snakes fan out across the wilds of southeastern Idaho, but as the days get shorter and cooler, the snakes return to the den in order to ball up for heat and to be accessible to each other for spring breeding.
Cavallaro has heard only of one other eastern Idaho home that was likely located on a snake den. There was also a bridge-widening project where workers ran into a hibernaculum, he said.
“It is an important site for the snakes,” Cavallaro said. “Every now and then we build on them and it becomes a conflict.”
Neal and Denise Ard previously lived in the home, and in 2006 they invited the local news station to come and film the buckets of snakes they had collected on the property. The video, which has 2.4 million views on YouTube, was taken before the Ards abandoned the home.
In March 2007, the Ards sued the couple who had sold them the home for $189,900 and the real estate agent who negotiated the sale, according to court documents. The complaint was dismissed a year later.
There have been some people who have looked at the house since the Sessionses moved out, neighbour Chambers said. One day, when a real estate agent was showing the property, a farmer who lives down the road stopped by to warn them, he said.
“Now, if anybody sees anybody, they kind of will let them know,” Chambers said. “Just so that somebody else doesn’t get caught in the same trap.”
Wednesday, June 15, 2011
TD Bank forecasts low interest rates this year.
OTTAWA — The TD Bank says Canadians can expect borrowing costs to remain near record lows for the rest of the year.
That’s because the pace of the economic recovery is expected to slow sharply in Canada, the United States and much of the world.
As such, the Bank of Canada will likely refrain from raising its key interest rates until 2012, TD says.
The central bank has had its policy rate set at one per cent since September. The rate was set at all-time low of 0.25 per cent through much of the recession, to stimulate borrowing and spending, until a series of rate hikes began last summer.
The still-low rates have been a double-edged sword for Canadians who are already piling up debt at record levels, according to the Certified General Accountants Association of Canada.
The association says Canadian household debt has reached a record $1.5 trillion, and calculates that more than half of indebted Canadians are borrowing just to afford day-to-day living expenses such as food, housing and transportation.
Low interest rates will make it easier for Canadians to keep borrowing, setting them up for a fall further down the road.
Debt is partly contributing to a slowdown in Canadian growth, says the TD Bank, because households are too tapped out to spend and stimulate the economy.
The bank says Canada’s economy is believed to have already slowed to 1.3 per cent growth during this current quarter that ends at the end of the month, one-third the pace of the first quarter’s 3.9 per cent gain.
The rest of the year will see growth crawl along between two and 2.5 per cent, the bank says.
As the recovery moderates, so will job growth. The bank says it expects the unemployment rate in Canada will remain above seven per cent throughout its forecast period to the end of 2013.
With little help from consumers, Canada will need to depend on exports and business investment to fuel growth
That’s because the pace of the economic recovery is expected to slow sharply in Canada, the United States and much of the world.
As such, the Bank of Canada will likely refrain from raising its key interest rates until 2012, TD says.
The central bank has had its policy rate set at one per cent since September. The rate was set at all-time low of 0.25 per cent through much of the recession, to stimulate borrowing and spending, until a series of rate hikes began last summer.
The still-low rates have been a double-edged sword for Canadians who are already piling up debt at record levels, according to the Certified General Accountants Association of Canada.
The association says Canadian household debt has reached a record $1.5 trillion, and calculates that more than half of indebted Canadians are borrowing just to afford day-to-day living expenses such as food, housing and transportation.
Low interest rates will make it easier for Canadians to keep borrowing, setting them up for a fall further down the road.
Debt is partly contributing to a slowdown in Canadian growth, says the TD Bank, because households are too tapped out to spend and stimulate the economy.
The bank says Canada’s economy is believed to have already slowed to 1.3 per cent growth during this current quarter that ends at the end of the month, one-third the pace of the first quarter’s 3.9 per cent gain.
The rest of the year will see growth crawl along between two and 2.5 per cent, the bank says.
As the recovery moderates, so will job growth. The bank says it expects the unemployment rate in Canada will remain above seven per cent throughout its forecast period to the end of 2013.
With little help from consumers, Canada will need to depend on exports and business investment to fuel growth
Tuesday, June 14, 2011
Recreational property markets bouncing back: Re/Max
OTTAWA — Canada’s recreational property market appears to be bouncing back from a recessionary lull as buyers seek to capitalize on equity and stock-market gains, Re/Max says in a report Monday.
Demand rose 78% in the 46 markets across the country covered by the realtor’s Recreational Property Report, while sales had risen or were on par in 41% of those centres.
“Buyers who held off during the recession are back in recreational property markets from coast-to-coast,” says Pamela Alexander, chief executive of Re/Max for Ontario-Atlantic Canada. “Their patience has been rewarded with more affordable recreational values and greater inventory levels.”
While prices have remained stable in many markets, values could be found for higher-end properties, pushing luxury sales higher in almost half of the markets examined, Re/Max said in its report.
Opportunities were also to be found in Western Canada.
“Prices are down as much as 20% from peak levels reported in 2006-2007, bringing ownership within reach to many potential purchasers,” said Elton Ash, regional executive vice-president of Re/Max in Western Canada.
On British Columbia’s Salt Spring Island, for example, starting prices for oceanfront properties have fallen to $669,000 today from $1.3-million in 2008.
In the North Okanagan Valley, a three-bedroom, winterized recreational property on a standard-sized waterfront lot — the common measures used in Re/Max’s report — that sold for $1.5-million in 2008 now sells for $995,000.
Starting prices for similar properties on Alberta’s Sylvan Lake are now at $800,000 from $1.25-million previously and in the Rocky Mountain resort town of Canmore, a two-bedroom condo has fallen to $229,000 from $320,000.
“The strengthening oil sector has . . . brought Albertans back into mix, driving demand for both local and coastal B.C. properties,” Ash said.
Another factor influencing the recreational property market has been that Americans who bought when the Canadian dollar was at 65 U.S. cents are now cashing out, boosting inventories.
The report found that there has been some tightening for entry-level properties in about one-third of the markets covered. As well, it noted, the supply of properties has tightened considerably at the lower end in Ontario, Quebec and Atlantic Canada.
It also noted that recreational properties are moving more toward year-round homes, with fewer traditional cottages available for sale.
“These waterfront properties are disappearing from the landscape. Meanwhile, today’s average recreational getaways are truly earning the distinction as the “home away from home,” with many of the bells, whistles and comforts of their residential counterparts
Demand rose 78% in the 46 markets across the country covered by the realtor’s Recreational Property Report, while sales had risen or were on par in 41% of those centres.
“Buyers who held off during the recession are back in recreational property markets from coast-to-coast,” says Pamela Alexander, chief executive of Re/Max for Ontario-Atlantic Canada. “Their patience has been rewarded with more affordable recreational values and greater inventory levels.”
While prices have remained stable in many markets, values could be found for higher-end properties, pushing luxury sales higher in almost half of the markets examined, Re/Max said in its report.
Opportunities were also to be found in Western Canada.
“Prices are down as much as 20% from peak levels reported in 2006-2007, bringing ownership within reach to many potential purchasers,” said Elton Ash, regional executive vice-president of Re/Max in Western Canada.
On British Columbia’s Salt Spring Island, for example, starting prices for oceanfront properties have fallen to $669,000 today from $1.3-million in 2008.
In the North Okanagan Valley, a three-bedroom, winterized recreational property on a standard-sized waterfront lot — the common measures used in Re/Max’s report — that sold for $1.5-million in 2008 now sells for $995,000.
Starting prices for similar properties on Alberta’s Sylvan Lake are now at $800,000 from $1.25-million previously and in the Rocky Mountain resort town of Canmore, a two-bedroom condo has fallen to $229,000 from $320,000.
“The strengthening oil sector has . . . brought Albertans back into mix, driving demand for both local and coastal B.C. properties,” Ash said.
Another factor influencing the recreational property market has been that Americans who bought when the Canadian dollar was at 65 U.S. cents are now cashing out, boosting inventories.
The report found that there has been some tightening for entry-level properties in about one-third of the markets covered. As well, it noted, the supply of properties has tightened considerably at the lower end in Ontario, Quebec and Atlantic Canada.
It also noted that recreational properties are moving more toward year-round homes, with fewer traditional cottages available for sale.
“These waterfront properties are disappearing from the landscape. Meanwhile, today’s average recreational getaways are truly earning the distinction as the “home away from home,” with many of the bells, whistles and comforts of their residential counterparts
Saturday, June 11, 2011
Canadians continue to rack up debts
Tom Fennell, Yahoo Finance Thursday June 9, 2011,
Are rising consumer debt loads the Achilles' heel of the Canadian economy?
Before we tackle that question, let's back up a few months and revisit the lecture Bank of Canada Governor Mark Carney gave the country on rising personal debt levels, and the fact that while money is cheap today, it could get expensive again — and quickly.
"Low interest rates today do not necessarily mean low rates tomorrow," warned Carney. "Risk reversals, when they happen, can be fierce; the greater the complacency, the more brutal the reckoning."
What's happened to consumer debt levels since he scolded Canada's profligate spenders? Well, apparently nobody was paying much attention, and over the first three months of this year a new study suggests consumer debt has continued to climb.
According to the credit rating agency, TransUnion, Canadians now owe an average of almost $26,000 on their credit cards, lines of credit and auto loans.
That's an increase of 4.5 per cent, or another $1,000, over the same period last year.
The picture becomes even bleaker when you factor mortgage debt into the TransUnion report. Currently, Canadians owe just over $1 trillion in mortgage debt, and that pushes the $26,000 figure to just over $100,000 per Canadian family.
Now let's bring that debt picture into line with earned income.
According to the Ottawa-based Vanier Institute, the average Canadian family is now carrying a household debt that amounts to 150 per cent of their personal disposable income. That's the highest level in history. And stated in a starker way, for every $1,000 a Canadian family earns, they have to make about $1,500 in debt payments.
Sadly, according to TransUnion, Canadians persist in carrying large credit card balances at onerous rates. And the amount being carried on plastic only fell $25 to an average of $3,539 over the last year.
At the same time, the national credit card delinquency rate rose 11 per cent.
And despite Carney's hectoring and the rule changes surrounding lines of credit, they are still the most popular lending vehicle. Excluding mortgages, they accounted for more than 41 per cent of outstanding debt at the end of the first quarter at $33,981, up 5.9 per cent from the first quarter of 2010.
It's interesting to note that Canadian indebtedness rose as interest rates came down steadily over the last ten years. And that begs the question: what will happen when interest rates start to rise again as many analysts believe they must?
In fact, speaking earlier in June, Carney warned that while he was holding the core bank rate at one per cent, it would rise from crisis lows at near zero to what many economists believe to be a more normal rate in the six-per-cent range.
That's where broader economic conditions come to bear on debt levels.
If interest rates jump, the impact will be immediate on floating-rate vehicles like lines of credit and variable-rate mortgages. For example, someone with a 3.5 per cent variable-rate mortgage can carry a $400,000 mortgage at around $2000 a month.
If interest rates climb, and the variable rate reaches six per cent, that same mortgage would jump to almost $2,600 a month.
The debt picture also gets complicated when you compare the growth in mortgages to annual wage gains. In its annual report, the Canadian Association of Accredited Mortgage Professionals said that over the last 15 years, the annual growth rate in mortgage debt has been around 7.5 per cent. And yet wages have been increasing at around 2.3 per cent a year.
Why is that important? Simply because if consumers are already stretched to keep up because of flat-lined wage increases that have barely matched the inflation rate, they have very little room in their budgets to accommodate rising costs triggered by a surge in interest rates.
Obviously loan delinquency and home foreclosures would increase. And if you add a job-killing recession to the mix, you have the onset of a perfect storm that could see an increasing number of Canadians fall into personal bankruptcy.
Perhaps that's why Finance Minister Jim Flaherty joined Carney in warning Canadians to cut back on debt. He certainly fears that the world could be faced with another recession, given the sluggishness of the global economy and the inability of the U.S. to get its fiscal house and economy in order. "I am quite worried," said Flaherty in an interview. "We have lived three-and-a-half years now since the credit crisis started in late August, 2007. We are seeing in Europe, in particular, some very difficult situations."
Fortunately, so far the Canadian economy shows little sign of weakness with the Bank of Canada predicting growth in the three-per-cent range for this year.
But with economic stimulus programs being withdrawn in the U.S. and Flaherty vowing to turn off the spending taps in Ottawa, growth could slow sharply as the country enters 2012. If it does, Canada's debt binge could make things even worse as consumers cut back on their spending to reduce their loan balances.
Only time will tell. But for now, Canadians seem determined to ignore the warnings and keep on borrowing.
Are rising consumer debt loads the Achilles' heel of the Canadian economy?
Before we tackle that question, let's back up a few months and revisit the lecture Bank of Canada Governor Mark Carney gave the country on rising personal debt levels, and the fact that while money is cheap today, it could get expensive again — and quickly.
"Low interest rates today do not necessarily mean low rates tomorrow," warned Carney. "Risk reversals, when they happen, can be fierce; the greater the complacency, the more brutal the reckoning."
What's happened to consumer debt levels since he scolded Canada's profligate spenders? Well, apparently nobody was paying much attention, and over the first three months of this year a new study suggests consumer debt has continued to climb.
According to the credit rating agency, TransUnion, Canadians now owe an average of almost $26,000 on their credit cards, lines of credit and auto loans.
That's an increase of 4.5 per cent, or another $1,000, over the same period last year.
The picture becomes even bleaker when you factor mortgage debt into the TransUnion report. Currently, Canadians owe just over $1 trillion in mortgage debt, and that pushes the $26,000 figure to just over $100,000 per Canadian family.
Now let's bring that debt picture into line with earned income.
According to the Ottawa-based Vanier Institute, the average Canadian family is now carrying a household debt that amounts to 150 per cent of their personal disposable income. That's the highest level in history. And stated in a starker way, for every $1,000 a Canadian family earns, they have to make about $1,500 in debt payments.
Sadly, according to TransUnion, Canadians persist in carrying large credit card balances at onerous rates. And the amount being carried on plastic only fell $25 to an average of $3,539 over the last year.
At the same time, the national credit card delinquency rate rose 11 per cent.
And despite Carney's hectoring and the rule changes surrounding lines of credit, they are still the most popular lending vehicle. Excluding mortgages, they accounted for more than 41 per cent of outstanding debt at the end of the first quarter at $33,981, up 5.9 per cent from the first quarter of 2010.
It's interesting to note that Canadian indebtedness rose as interest rates came down steadily over the last ten years. And that begs the question: what will happen when interest rates start to rise again as many analysts believe they must?
In fact, speaking earlier in June, Carney warned that while he was holding the core bank rate at one per cent, it would rise from crisis lows at near zero to what many economists believe to be a more normal rate in the six-per-cent range.
That's where broader economic conditions come to bear on debt levels.
If interest rates jump, the impact will be immediate on floating-rate vehicles like lines of credit and variable-rate mortgages. For example, someone with a 3.5 per cent variable-rate mortgage can carry a $400,000 mortgage at around $2000 a month.
If interest rates climb, and the variable rate reaches six per cent, that same mortgage would jump to almost $2,600 a month.
The debt picture also gets complicated when you compare the growth in mortgages to annual wage gains. In its annual report, the Canadian Association of Accredited Mortgage Professionals said that over the last 15 years, the annual growth rate in mortgage debt has been around 7.5 per cent. And yet wages have been increasing at around 2.3 per cent a year.
Why is that important? Simply because if consumers are already stretched to keep up because of flat-lined wage increases that have barely matched the inflation rate, they have very little room in their budgets to accommodate rising costs triggered by a surge in interest rates.
Obviously loan delinquency and home foreclosures would increase. And if you add a job-killing recession to the mix, you have the onset of a perfect storm that could see an increasing number of Canadians fall into personal bankruptcy.
Perhaps that's why Finance Minister Jim Flaherty joined Carney in warning Canadians to cut back on debt. He certainly fears that the world could be faced with another recession, given the sluggishness of the global economy and the inability of the U.S. to get its fiscal house and economy in order. "I am quite worried," said Flaherty in an interview. "We have lived three-and-a-half years now since the credit crisis started in late August, 2007. We are seeing in Europe, in particular, some very difficult situations."
Fortunately, so far the Canadian economy shows little sign of weakness with the Bank of Canada predicting growth in the three-per-cent range for this year.
But with economic stimulus programs being withdrawn in the U.S. and Flaherty vowing to turn off the spending taps in Ottawa, growth could slow sharply as the country enters 2012. If it does, Canada's debt binge could make things even worse as consumers cut back on their spending to reduce their loan balances.
Only time will tell. But for now, Canadians seem determined to ignore the warnings and keep on borrowing.
Thursday, June 9, 2011
Top 8 House-Hunting Mistakes
Amy Fontinelle,
Buying a home is a very emotional process, but if you allow those emotions to get the best of you, you may fall prey to a number of common home buyer mistakes. Since buying a home has many far-reaching implications - ranging from where you will live to how hard it will be to make ends meet - it's important to keep your emotions in check and make the most rational decision possible.
There are eight common emotional mistakes that people make when buying a home. Avoiding these pitfalls will help you find the best home-sweet-home.
Mistake 1: Falling in Love With a House You Can't Afford
Once you've fallen in love with a particular home, it's hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered - the lovely, tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances. However, if you can't or won't be able to afford that house, you're just hurting yourself by imagining yourself in it. To avoid the temptation to get in over your head financially, or the disappointment of feeling like you're settling for less than you deserve, it's best to only look at homes in your price range.
Start your search at the low end of your price range - if what you find there satisfies you, there's no need to go higher. Remember, when you buy another $10,000 worth of house, you're not just paying an extra $10,000 - you're paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of your loan. You may be better off putting that money toward another purpose.
Mistake 2: Assuming There's Nothing Better Out There
Unless you are a high-end buyer looking at custom homes, chances are that for any home you find that you like, there are quite a few others that are nearly identical to it. Most neighbourhoods have multiple homes that are the same model. Further, most neighbourhoods are full of homes that were all constructed by the same builder, so even if you can't find an identical model for sale, you can probably find a house with many of the same features. If you're considering a condo or townhouse, the odds are also in your favour.
Even when you have a long list of must-haves, there are probably several homes out there that can meet your needs. If there are snags with the home you've decided you like - such as major repair issues, an inflexible asking price or a difficult possession date - consider moving on. Being open to keep looking will save you from making rash decisions you might regret later.
Mistake 3: Being Desperate
When you've been looking for a while and you're not seeing anything you like - or worse, you're getting outbid on the houses you do want - it's easy to get desperate to get into your new house now. However, if you move into a house you'll end up hating, the transaction costs to get rid of it will be costly. You'll have to pay an agent's commission (up to 5-6% of the sale price) and you'll have to pay closing costs for the mortgage on your new house. You'll also deal with the hassle and expense of moving yet again. If you decide not to move but to try to make the best of what you have, remember that alterations and renovations are expensive, time-consuming and stressful. If you have time on your side, it's OK to wait until something that suits you comes along - as long as your demands are realistic for your budget, you are bound to find something you live with.
Mistake 4: Overlooking Important Flaws
For any of the three reasons we just discussed, you might be tempted to ignore major problems with the house that will be difficult, expensive or impossible to change. Carefully consider your options before you make a commitment, and consider waiting until something better comes along. New houses come on the market every day.
Mistake 5: Overestimating Your Handyman Skills
Don't buy a fixer-upper that's more than you can handle in terms of time, money or ability. For example, if you think you can do the work yourself then realize you can't once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in the labour - and that may not be in your budget. Not to mention the costs involved to fix anything you may have started and the fees to replace the materials you wasted. Honestly evaluate your abilities, your budget and how soon you need to move before purchasing a property that isn't move-in ready.
Mistake 6: Rushing to Put In an Offer
In a hot market, it may be necessary to pull the trigger very quickly if you find a home you like. However, you have to balance the need to make a quick decision with the need to make sure the home will be right for you. Don't neglect important steps like making sure the neighbourhood feels safe at night as well as during the day and investigating possible noise issues like a nearby train. Ideally, you'll be able to take at least a night to sleep on the decision. How well you sleep that night and how you feel about the home in the morning will tell you a lot about whether the decision you're about to make is the right one. Taking the time to consider the decision also gives you a chance to research how much the property is really worth and offer an appropriate price.
Mistake 7: Dragging Your Feet
It's a tough balancing act to make sure you make a careful decision, but don't take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences. Let's say you are self-employed. Perhaps for you more than anyone else, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the homebuying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage. If you don't pull the trigger quickly, someone else might, and you'll have to keep looking. Don't underestimate how time-consuming and routine-disrupting house shopping can be.
Mistake 8: Offering Too Much
If there's a lot of competition in your market and you find a place you really like, it's all too easy to get sucked into a bidding war - or to try to pre-empt a bidding war by offering a high price in the first place. There are a couple of potential problems with this. First, if the house doesn't appraise at or above the amount of your offer, the bank won't give you the loan unless the seller reduces the price or you pay cash for the difference. If this happens, the shortfall on your bid as opposed to your mortgage will have to be paid out of pocket. Second, when you go to sell the house, if market conditions are similar to or worse than they were when you purchased, you may find yourself upside down on the mortgage and unable to sell. Make sure the purchase price for the home you buy is reasonable for both the house and the location by examining comparable sales and getting your agent's opinion before making an offer.
Conclusion
It's natural for emotion to come into play in the home-buying process. Buying a house is a big decision, but this is exactly why you need to ensure you are making rational choices, rather than getting wrapped up in the notion of a dream home. Slow down, overcome your emotions and, ultimately, make a home-purchase decision that's good for both your feelings and your finances
Buying a home is a very emotional process, but if you allow those emotions to get the best of you, you may fall prey to a number of common home buyer mistakes. Since buying a home has many far-reaching implications - ranging from where you will live to how hard it will be to make ends meet - it's important to keep your emotions in check and make the most rational decision possible.
There are eight common emotional mistakes that people make when buying a home. Avoiding these pitfalls will help you find the best home-sweet-home.
Mistake 1: Falling in Love With a House You Can't Afford
Once you've fallen in love with a particular home, it's hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered - the lovely, tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances. However, if you can't or won't be able to afford that house, you're just hurting yourself by imagining yourself in it. To avoid the temptation to get in over your head financially, or the disappointment of feeling like you're settling for less than you deserve, it's best to only look at homes in your price range.
Start your search at the low end of your price range - if what you find there satisfies you, there's no need to go higher. Remember, when you buy another $10,000 worth of house, you're not just paying an extra $10,000 - you're paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of your loan. You may be better off putting that money toward another purpose.
Mistake 2: Assuming There's Nothing Better Out There
Unless you are a high-end buyer looking at custom homes, chances are that for any home you find that you like, there are quite a few others that are nearly identical to it. Most neighbourhoods have multiple homes that are the same model. Further, most neighbourhoods are full of homes that were all constructed by the same builder, so even if you can't find an identical model for sale, you can probably find a house with many of the same features. If you're considering a condo or townhouse, the odds are also in your favour.
Even when you have a long list of must-haves, there are probably several homes out there that can meet your needs. If there are snags with the home you've decided you like - such as major repair issues, an inflexible asking price or a difficult possession date - consider moving on. Being open to keep looking will save you from making rash decisions you might regret later.
Mistake 3: Being Desperate
When you've been looking for a while and you're not seeing anything you like - or worse, you're getting outbid on the houses you do want - it's easy to get desperate to get into your new house now. However, if you move into a house you'll end up hating, the transaction costs to get rid of it will be costly. You'll have to pay an agent's commission (up to 5-6% of the sale price) and you'll have to pay closing costs for the mortgage on your new house. You'll also deal with the hassle and expense of moving yet again. If you decide not to move but to try to make the best of what you have, remember that alterations and renovations are expensive, time-consuming and stressful. If you have time on your side, it's OK to wait until something that suits you comes along - as long as your demands are realistic for your budget, you are bound to find something you live with.
Mistake 4: Overlooking Important Flaws
For any of the three reasons we just discussed, you might be tempted to ignore major problems with the house that will be difficult, expensive or impossible to change. Carefully consider your options before you make a commitment, and consider waiting until something better comes along. New houses come on the market every day.
Mistake 5: Overestimating Your Handyman Skills
Don't buy a fixer-upper that's more than you can handle in terms of time, money or ability. For example, if you think you can do the work yourself then realize you can't once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in the labour - and that may not be in your budget. Not to mention the costs involved to fix anything you may have started and the fees to replace the materials you wasted. Honestly evaluate your abilities, your budget and how soon you need to move before purchasing a property that isn't move-in ready.
Mistake 6: Rushing to Put In an Offer
In a hot market, it may be necessary to pull the trigger very quickly if you find a home you like. However, you have to balance the need to make a quick decision with the need to make sure the home will be right for you. Don't neglect important steps like making sure the neighbourhood feels safe at night as well as during the day and investigating possible noise issues like a nearby train. Ideally, you'll be able to take at least a night to sleep on the decision. How well you sleep that night and how you feel about the home in the morning will tell you a lot about whether the decision you're about to make is the right one. Taking the time to consider the decision also gives you a chance to research how much the property is really worth and offer an appropriate price.
Mistake 7: Dragging Your Feet
It's a tough balancing act to make sure you make a careful decision, but don't take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences. Let's say you are self-employed. Perhaps for you more than anyone else, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the homebuying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage. If you don't pull the trigger quickly, someone else might, and you'll have to keep looking. Don't underestimate how time-consuming and routine-disrupting house shopping can be.
Mistake 8: Offering Too Much
If there's a lot of competition in your market and you find a place you really like, it's all too easy to get sucked into a bidding war - or to try to pre-empt a bidding war by offering a high price in the first place. There are a couple of potential problems with this. First, if the house doesn't appraise at or above the amount of your offer, the bank won't give you the loan unless the seller reduces the price or you pay cash for the difference. If this happens, the shortfall on your bid as opposed to your mortgage will have to be paid out of pocket. Second, when you go to sell the house, if market conditions are similar to or worse than they were when you purchased, you may find yourself upside down on the mortgage and unable to sell. Make sure the purchase price for the home you buy is reasonable for both the house and the location by examining comparable sales and getting your agent's opinion before making an offer.
Conclusion
It's natural for emotion to come into play in the home-buying process. Buying a house is a big decision, but this is exactly why you need to ensure you are making rational choices, rather than getting wrapped up in the notion of a dream home. Slow down, overcome your emotions and, ultimately, make a home-purchase decision that's good for both your feelings and your finances
Tuesday, June 7, 2011
5 Factors That Impact the Value of Your Home
Money Crashers, On Wednesday June 1, 2011
Selling your house can be a huge headache--especially when you're selling it in today's buyer's real estate market. One of the most challenging aspects to deal with is determining your home's value. When it comes to fixing a fair price, homeowners always shoot high. After all, you love your house and you know how much work you've put into it. Won't someone else appreciate it as much as you do?
The short answer is no. An experienced real estate agent will take the emotional factor out of the equation and help you come up with a realistic market value for your house. But if you want to sell your house yourself without a realtor--or you just want to be prepared for the number they advise--here are five factors that can heavily skew the asking price of your home.
1. Location
We've all heard how important "location, location, location" is, and with good reason. A great house in a bad location can knock as much as 50 percent off the value. If you have the nicest, most expensive house in your average neighbourhood, then the value is also going to be much lower than it would be if you had the least expensive house in a nice neighbourhood. Other factors, like freeways, proximity to a landfill or sewage treatment center, and train tracks, can knock 10 to 15 percent or more off the value of your home. This is why it's so important to shop location first when you're buying a house; you can always add home improvements, but moving it to another neighbourhood isn't going to happen.
2. Outdated Rooms
If your fridge is more than 15 years old and your oven isn't black or stainless steel, then count on listing your house lower than you'd be able to if you had a fully updated kitchen. With the influx of homes on the market right now, people can easily get a home that doesn't need any updating, so why would they choose one that does? If you don't want to update your home in order to sell it, know that outdated rooms can affect the value of your home by up to 10 percent.
3. Renters
Many people don't want to own a home surrounded by rental properties. Although it's a stereotype, tenants often don't keep up the property like an owner would. In this case, the value of your house can go down as much as 15 percent, depending on how many rentals are in close proximity to your home.
4. Major Upgrades
In this market, don't count on getting more for your home if you just upgraded the plumbing, bought a new furnace, or replaced your roof. However, if your home does need those upgrades and you haven't done them, then it's going to knock as much as 20 percent off the value of your home, depending on how severe the upgrade is. Buyers simply don't want to shell out for major upgrades - especially when there is a large pool of other properties to choose from.
5. Fencing
Most people looking to buy a house have kids or pets. If your home doesn't have a fenced backyard, you're going to alienate a huge portion of the market since fenced backyards are essential for keeping kids and pets safe and contained. Not having a fence can knock up to 10 percent off your home's value.
Final Thoughts
Although many of these factors, like location and proximity to renters, are out of your hands, there are plenty of things you can do to increase the value and appeal of your home. For instance, buyers almost always choose light and airy homes over dark ones. Therefore, it's beneficial to do whatever you can to bring a sense of light and space into your home. Other factors, such as fresh paint and a tidy lawn, make a great first impression as well. The important thing is to be realistic when deciding on a price for your home so that you can move it off the market as quickly as possible.
Selling your house can be a huge headache--especially when you're selling it in today's buyer's real estate market. One of the most challenging aspects to deal with is determining your home's value. When it comes to fixing a fair price, homeowners always shoot high. After all, you love your house and you know how much work you've put into it. Won't someone else appreciate it as much as you do?
The short answer is no. An experienced real estate agent will take the emotional factor out of the equation and help you come up with a realistic market value for your house. But if you want to sell your house yourself without a realtor--or you just want to be prepared for the number they advise--here are five factors that can heavily skew the asking price of your home.
1. Location
We've all heard how important "location, location, location" is, and with good reason. A great house in a bad location can knock as much as 50 percent off the value. If you have the nicest, most expensive house in your average neighbourhood, then the value is also going to be much lower than it would be if you had the least expensive house in a nice neighbourhood. Other factors, like freeways, proximity to a landfill or sewage treatment center, and train tracks, can knock 10 to 15 percent or more off the value of your home. This is why it's so important to shop location first when you're buying a house; you can always add home improvements, but moving it to another neighbourhood isn't going to happen.
2. Outdated Rooms
If your fridge is more than 15 years old and your oven isn't black or stainless steel, then count on listing your house lower than you'd be able to if you had a fully updated kitchen. With the influx of homes on the market right now, people can easily get a home that doesn't need any updating, so why would they choose one that does? If you don't want to update your home in order to sell it, know that outdated rooms can affect the value of your home by up to 10 percent.
3. Renters
Many people don't want to own a home surrounded by rental properties. Although it's a stereotype, tenants often don't keep up the property like an owner would. In this case, the value of your house can go down as much as 15 percent, depending on how many rentals are in close proximity to your home.
4. Major Upgrades
In this market, don't count on getting more for your home if you just upgraded the plumbing, bought a new furnace, or replaced your roof. However, if your home does need those upgrades and you haven't done them, then it's going to knock as much as 20 percent off the value of your home, depending on how severe the upgrade is. Buyers simply don't want to shell out for major upgrades - especially when there is a large pool of other properties to choose from.
5. Fencing
Most people looking to buy a house have kids or pets. If your home doesn't have a fenced backyard, you're going to alienate a huge portion of the market since fenced backyards are essential for keeping kids and pets safe and contained. Not having a fence can knock up to 10 percent off your home's value.
Final Thoughts
Although many of these factors, like location and proximity to renters, are out of your hands, there are plenty of things you can do to increase the value and appeal of your home. For instance, buyers almost always choose light and airy homes over dark ones. Therefore, it's beneficial to do whatever you can to bring a sense of light and space into your home. Other factors, such as fresh paint and a tidy lawn, make a great first impression as well. The important thing is to be realistic when deciding on a price for your home so that you can move it off the market as quickly as possible.
Monday, June 6, 2011
Five myths about homeowner's insurance
Angie Mohr Investopedia.com Published Friday, Jun. 03, 2011
Homeowner's insurance is one of the most common types of insurance and one of the least understood. Many homeowners believe that their policies will cover them for practically any damage sustained to the house or contents. The reality is that homeowner's policies contain many exclusions and restrictions on coverage that can leave you with a coverage gap. Here are five common myths about homeowner's insurance. (For related reading, also take a look at The Beginner's Guide To Homeowners' Insurance.)
1. Loss-of-Use Coverage
If you have damage to your home severe enough that you cannot live in it while it is repaired, you likely expect that the insurance company will put you up in a hotel while the work is being done. However, that is not necessarily true. Not all policies include a loss-of-use provision. If you have to pay for a hotel, meals and other services out of pocket, it can add up quickly and put you at financial risk. If loss-of-use is covered, it will be stated explicitly in your policy, along with any limits of coverage. For example, your policy may state a maximum per diem amount or restrict the length of time the expenses will be paid for.
2. Replacement Cost
Replacement cost in a homeowner's policy refers to valuing the loss at the amount it will cost to replace the item. For example, if your four-year-old computer is lost in a fire, replacement cost coverage would allow you to purchase a new one with similar features. Most homeowners believe that is what will happen if they have a claim, however, the bulk of policies do not carry this clause. If not included, losses will be valued at what they were worth in their condition before the calamity. The four-year-old computer might be valued at $250 - not enough to purchase a new one. Replacement cost clauses are a valuable inclusion in a homeowner's policy.
3. Flood Coverage
Almost all homeowner's policies exclude flood coverage, along with earthquakes and other natural disasters. Floods can occur from a number of causes, such as a hurricane, burst pipes or sewer backup. A flood is one of the most common causes of home damage and the destruction of contents. There are companies that specialize in flood coverage, and, if you live in a susceptible area, look into having a separate flood policy. Your mortgage company may require this additional coverage as well. (For more information, see Understanding Lender-Required Flood Insurance.)
4. Termites
Termites live all over North America but are most destructive in southern climates, where their lifecycles are not affected by cold weather. Termites eat wood - lots of it - and can eat the supports in your house as easily as fallen leaves in the forest. They live in large colonies and, collectively, can destroy the structure of your home. Repairing termite damage and eradicating them can cost thousands of dollars. Most policies exclude termites and other pest damage. If you live in a susceptible area, the best insurance is to have the house regularly checked and sprayed by a professional.
5. Valuation of Loss
When you have a house insurance claim, the insurance company will send out an appraiser to determine the extent of the damage and the best way to fix it. The appraiser will assess a value to the loss which will be the minimum the insurance company can pay in order to meet their contractual obligations. However, you do not have to take that value as final. If you can prove your loss should be valued higher, you can negotiate the settlement with the company. Keeping receipts and pictures of valuable items will help you back up your claim.
The Bottom Line
To really know what is in your homeowner's policy, you should read it thoroughly. Look for exclusions to coverage and decide how you will cover those risks. In some cases, your insurance company will have separate add-ons that they can attach to your policy or you can get specialized insurance from another company. For those risks that cannot be insured, analyze how you will financially cover those risks if they should happen.
Homeowner's insurance is one of the most common types of insurance and one of the least understood. Many homeowners believe that their policies will cover them for practically any damage sustained to the house or contents. The reality is that homeowner's policies contain many exclusions and restrictions on coverage that can leave you with a coverage gap. Here are five common myths about homeowner's insurance. (For related reading, also take a look at The Beginner's Guide To Homeowners' Insurance.)
1. Loss-of-Use Coverage
If you have damage to your home severe enough that you cannot live in it while it is repaired, you likely expect that the insurance company will put you up in a hotel while the work is being done. However, that is not necessarily true. Not all policies include a loss-of-use provision. If you have to pay for a hotel, meals and other services out of pocket, it can add up quickly and put you at financial risk. If loss-of-use is covered, it will be stated explicitly in your policy, along with any limits of coverage. For example, your policy may state a maximum per diem amount or restrict the length of time the expenses will be paid for.
2. Replacement Cost
Replacement cost in a homeowner's policy refers to valuing the loss at the amount it will cost to replace the item. For example, if your four-year-old computer is lost in a fire, replacement cost coverage would allow you to purchase a new one with similar features. Most homeowners believe that is what will happen if they have a claim, however, the bulk of policies do not carry this clause. If not included, losses will be valued at what they were worth in their condition before the calamity. The four-year-old computer might be valued at $250 - not enough to purchase a new one. Replacement cost clauses are a valuable inclusion in a homeowner's policy.
3. Flood Coverage
Almost all homeowner's policies exclude flood coverage, along with earthquakes and other natural disasters. Floods can occur from a number of causes, such as a hurricane, burst pipes or sewer backup. A flood is one of the most common causes of home damage and the destruction of contents. There are companies that specialize in flood coverage, and, if you live in a susceptible area, look into having a separate flood policy. Your mortgage company may require this additional coverage as well. (For more information, see Understanding Lender-Required Flood Insurance.)
4. Termites
Termites live all over North America but are most destructive in southern climates, where their lifecycles are not affected by cold weather. Termites eat wood - lots of it - and can eat the supports in your house as easily as fallen leaves in the forest. They live in large colonies and, collectively, can destroy the structure of your home. Repairing termite damage and eradicating them can cost thousands of dollars. Most policies exclude termites and other pest damage. If you live in a susceptible area, the best insurance is to have the house regularly checked and sprayed by a professional.
5. Valuation of Loss
When you have a house insurance claim, the insurance company will send out an appraiser to determine the extent of the damage and the best way to fix it. The appraiser will assess a value to the loss which will be the minimum the insurance company can pay in order to meet their contractual obligations. However, you do not have to take that value as final. If you can prove your loss should be valued higher, you can negotiate the settlement with the company. Keeping receipts and pictures of valuable items will help you back up your claim.
The Bottom Line
To really know what is in your homeowner's policy, you should read it thoroughly. Look for exclusions to coverage and decide how you will cover those risks. In some cases, your insurance company will have separate add-ons that they can attach to your policy or you can get specialized insurance from another company. For those risks that cannot be insured, analyze how you will financially cover those risks if they should happen.
Sunday, June 5, 2011
Credit lines worst trend of last 20 years,
Ray Turchansky, Postmedia News · May 30, 2011
Some 22 years after writing The Wealthy Barber, which became easily the bestselling personal finance book in Canadian history, David Chilton has a dire warning in The Wealthy Barber Returns, to be released this fall.
“The worst thing that’s happening to Canadians in the last 20 years has been lines of credit,” said Chilton, speaking at the conference of the Canadian Pension & Benefits Institute. “If I was prime minister, I’d shut them down. It’s unbelievable how people are abusing these things.”
He helped one person establish a schedule to pay off $30,000 in credit-card debt, only to have the person take on a $150,000 line of credit from a banker, “because the man was so nice and said I needed it.” The banker’s explanation: “It’s my job.”
Chilton’s summation: “That’s the problem. It’s a lot of people’s job to get Canadians to take on debt.
“Our financial institutions, when I was young, were credit providers. Now they’re credit pushers, and they are very aggressively hoisting as much debt onto the Canadian public as they possibly can. The public is taking it in, and it is not a good situation.”
Chilton graduated from Wilfrid Laurier University in Waterloo, Ont., and became a stockbroker. He realized financial education was his calling, and set out to write a book called The Ultimate Guide to Losing Money. Then while watching the TV show Cheers, he changed the book to The Wealthy Bartender, “but by the time I got to retirement savings plans, everybody was hammered. I had guys picking up girls.”
Eventually he did what he advises everyone never to do: He cashed in his registered retirement savings plan. The money was used to self-publish The Wealthy Barber, which held as one of its tenets “pay yourself first,” 10 per cent of your income. The book sold more than two million copies, and led to a U.S. edition and a PBS TV show.
In his followup book, The Wealthy Barber Returns, the message will shift from saving to not spending.
“When I told Canadians to ‘pay themselves first,’ that was three-quarters of the battle; I didn’t care what they did with the rest of their money.
“One thing we’re seeing that we never saw 20 years ago is that all sorts of people who built up their RRSP through ‘pay yourself first,’ have simultaneously built up their credit line through the back end and their net worth has changed modestly if at all.
“People cannot resist lines of credit. And the worst combination in the country is a line of credit and a home renovation — once they renovate one room, the other rooms pale by comparison, so they go on to the next room and it’s a never-ending cycle of renovation as they get deeper and deeper and deeper in debt. The four most expensive words in the English language are ‘while we’re at it.’ And the four most expensive letters are ‘HGTV.’
“We go through a credit crisis brought on by too much private debt in the developed world, particularly in the States, and our response — the Home Renovation Tax Credit. That’s like starting an alcoholic’s rehab by taking him on a pub crawl. The problem with governments is they want to get re-elected.”
“The economy needs to be strong as measured by GDP, and GDP is made up primarily of spending. Government is never going to try to get us away from spending during slow times, through artificially low interest rates and by subsidizing debt. The raison-d’etre of banks is to lend. We are borrowing too much money.”
Chilton says public and private debt in the developed world is “shocking,” and dealing with it through inflation or formal default restructuring is “going to lead to slower economic growth over the next X number of years.”
He also sees an erosion of the middle class in retirement.
“Right now a lot of people 75 or 80 have too much money; they’ve done an excellent job of saving throughout their entire lives, and they had defined-benefit pension plans to boot. It’s so tough to give away money you’ve spent your whole life saving.”
But personal and government debt will cause a new generation of people to run out of money as they live longer in retirement. “Even with pension plans, counting on historic returns is a very shaky move.”
Some people saving for their children’s education or housing will become cash-poor themselves. “Let the kids scramble on their own. You know how many people are headed to retirement with no money now, it’s crazy.”
Chilton reiterated a few topics from his first book.
“Your metric for housing affordability should be: Can you pay it back, can you save for retirement, and can you pay it back before you retire? I think one of the best things that could happen in Canada is if real estate prices fell.”
With life insurance, he said people who need it tend to be 10 to 15 per cent underinsured, but Canadians as a whole are overinsured.
Another way to reduce expenses is by avoiding active money management fees.
“What matters is whether your professional money manager is smarter than the other professional money managers. When you look at Canadian mutual fund sales, it’s amazing how many of the dollars are flowing into funds that have had good recent two-or three-year numbers; the problem is long-term performance has no proven correlation with future performance, and short-term performance has slightly negative correlation with future performance.”
A key is to develop good financial habits early.
“Beyond ‘Pay yourself first,’ I still say ‘Start young’ is the most important personal finance advice by far. It’s getting young kids to save, whether they’re in their 20s or 30s, and to live within their means. Living within their means is what financial planning is all about; it’s still what we struggle most with.”
Some 22 years after writing The Wealthy Barber, which became easily the bestselling personal finance book in Canadian history, David Chilton has a dire warning in The Wealthy Barber Returns, to be released this fall.
“The worst thing that’s happening to Canadians in the last 20 years has been lines of credit,” said Chilton, speaking at the conference of the Canadian Pension & Benefits Institute. “If I was prime minister, I’d shut them down. It’s unbelievable how people are abusing these things.”
He helped one person establish a schedule to pay off $30,000 in credit-card debt, only to have the person take on a $150,000 line of credit from a banker, “because the man was so nice and said I needed it.” The banker’s explanation: “It’s my job.”
Chilton’s summation: “That’s the problem. It’s a lot of people’s job to get Canadians to take on debt.
“Our financial institutions, when I was young, were credit providers. Now they’re credit pushers, and they are very aggressively hoisting as much debt onto the Canadian public as they possibly can. The public is taking it in, and it is not a good situation.”
Chilton graduated from Wilfrid Laurier University in Waterloo, Ont., and became a stockbroker. He realized financial education was his calling, and set out to write a book called The Ultimate Guide to Losing Money. Then while watching the TV show Cheers, he changed the book to The Wealthy Bartender, “but by the time I got to retirement savings plans, everybody was hammered. I had guys picking up girls.”
Eventually he did what he advises everyone never to do: He cashed in his registered retirement savings plan. The money was used to self-publish The Wealthy Barber, which held as one of its tenets “pay yourself first,” 10 per cent of your income. The book sold more than two million copies, and led to a U.S. edition and a PBS TV show.
In his followup book, The Wealthy Barber Returns, the message will shift from saving to not spending.
“When I told Canadians to ‘pay themselves first,’ that was three-quarters of the battle; I didn’t care what they did with the rest of their money.
“One thing we’re seeing that we never saw 20 years ago is that all sorts of people who built up their RRSP through ‘pay yourself first,’ have simultaneously built up their credit line through the back end and their net worth has changed modestly if at all.
“People cannot resist lines of credit. And the worst combination in the country is a line of credit and a home renovation — once they renovate one room, the other rooms pale by comparison, so they go on to the next room and it’s a never-ending cycle of renovation as they get deeper and deeper and deeper in debt. The four most expensive words in the English language are ‘while we’re at it.’ And the four most expensive letters are ‘HGTV.’
“We go through a credit crisis brought on by too much private debt in the developed world, particularly in the States, and our response — the Home Renovation Tax Credit. That’s like starting an alcoholic’s rehab by taking him on a pub crawl. The problem with governments is they want to get re-elected.”
“The economy needs to be strong as measured by GDP, and GDP is made up primarily of spending. Government is never going to try to get us away from spending during slow times, through artificially low interest rates and by subsidizing debt. The raison-d’etre of banks is to lend. We are borrowing too much money.”
Chilton says public and private debt in the developed world is “shocking,” and dealing with it through inflation or formal default restructuring is “going to lead to slower economic growth over the next X number of years.”
He also sees an erosion of the middle class in retirement.
“Right now a lot of people 75 or 80 have too much money; they’ve done an excellent job of saving throughout their entire lives, and they had defined-benefit pension plans to boot. It’s so tough to give away money you’ve spent your whole life saving.”
But personal and government debt will cause a new generation of people to run out of money as they live longer in retirement. “Even with pension plans, counting on historic returns is a very shaky move.”
Some people saving for their children’s education or housing will become cash-poor themselves. “Let the kids scramble on their own. You know how many people are headed to retirement with no money now, it’s crazy.”
Chilton reiterated a few topics from his first book.
“Your metric for housing affordability should be: Can you pay it back, can you save for retirement, and can you pay it back before you retire? I think one of the best things that could happen in Canada is if real estate prices fell.”
With life insurance, he said people who need it tend to be 10 to 15 per cent underinsured, but Canadians as a whole are overinsured.
Another way to reduce expenses is by avoiding active money management fees.
“What matters is whether your professional money manager is smarter than the other professional money managers. When you look at Canadian mutual fund sales, it’s amazing how many of the dollars are flowing into funds that have had good recent two-or three-year numbers; the problem is long-term performance has no proven correlation with future performance, and short-term performance has slightly negative correlation with future performance.”
A key is to develop good financial habits early.
“Beyond ‘Pay yourself first,’ I still say ‘Start young’ is the most important personal finance advice by far. It’s getting young kids to save, whether they’re in their 20s or 30s, and to live within their means. Living within their means is what financial planning is all about; it’s still what we struggle most with.”
Friday, June 3, 2011
Variable Rate or Fixed? Canadians Unsure .
Thursday, 02 June 2011 13:43 Newsroom .After another reprieve from the Bank of Canada for an interest rate rise, there is much talk amongst Canadians about whether or not variable rate or fixed rate mortgages are the way to go.
Realtor vs. FSBO: A Balanced Perspective
To get legal advice, you visit a lawyer; to get medical advice, you go and see a doctor; most people, to get their car repaired, leave it in the hands of a trained professional. Even to get your hair cut, you go to someone who is trained to do that job. In all of these instances, the average consumer, without specific training and resources in a given area, defers to a qualified individual. So what is it about Real Estate that is so different? ...
Read More CIBC recently conducted a poll which indicated that most Canadians are split on whether or variable or a fixed rate is the best strategy, even in light of the knowledge that rates are eventually going to go up.
Highlights from the survey include: 39% of respondents said they would choose a fixed mortgage if they had to choose between a fixed or variable mortgage today; 32% said they would go with a fixed rate; 25% said that they could not choose between the two.
So, there is no clear-cut strategy favoured here.
Also the survey showed that 61% of respondents believe interest rates will be up this time next year, while 24% believe that rates will hold their own throughout the next year. A mere 3% believe that rates will actually go down through the next year.
"The divergent opinions on whether to go fixed or variable underscores what our advisors see everyday in their meetings with clients - choosing the right mortgage depends on your personal financial situation, and there's no single answer for everyone," commented Colette Delaney, Senior Vice President, Mortgages, Lending & Insurance, CIBC Retail Markets.
There are other factors at play than just the directional predictions for interest rates, as Delaney reminds mortgage holders. "You need to approach the fixed versus variable decision from the inside out, starting with your personal financial goals and working from there," added Ms. Delaney. "Your mortgage is a major part of your overall financial plan, and your decisions should be based on how your mortgage fits with your long term financial goals, not on short term rate fluctuations."
Interestingly, the type of rate that you choose seems to have a lot to do with the stage of life that you are in, according to the CIBC poll. 27% of 25-34 year olds (who are also mostly first time home buyers or relatively new homeowners) would choose a variable rate mortgage; 42% among respondents 45-54 years of age, would choose a variable rate and who incidentally “are more likely to be near the end of their mortgage and have greater tolerance for rate changes within their mortgage payment.”
Ms. Delaney noted that homeowners can look at both a fixed and variable strategy over the life of their mortgage. "For most people, your mortgage is a long term proposition, so your strategy should look beyond your first term," commented Ms. Delaney. "You may choose to start with a fixed mortgage when you buy your first home, then transition to a variable mortgage in later terms when you have improved your financial situation and paid down some of the principal."
Realtor vs. FSBO: A Balanced Perspective
To get legal advice, you visit a lawyer; to get medical advice, you go and see a doctor; most people, to get their car repaired, leave it in the hands of a trained professional. Even to get your hair cut, you go to someone who is trained to do that job. In all of these instances, the average consumer, without specific training and resources in a given area, defers to a qualified individual. So what is it about Real Estate that is so different? ...
Read More CIBC recently conducted a poll which indicated that most Canadians are split on whether or variable or a fixed rate is the best strategy, even in light of the knowledge that rates are eventually going to go up.
Highlights from the survey include: 39% of respondents said they would choose a fixed mortgage if they had to choose between a fixed or variable mortgage today; 32% said they would go with a fixed rate; 25% said that they could not choose between the two.
So, there is no clear-cut strategy favoured here.
Also the survey showed that 61% of respondents believe interest rates will be up this time next year, while 24% believe that rates will hold their own throughout the next year. A mere 3% believe that rates will actually go down through the next year.
"The divergent opinions on whether to go fixed or variable underscores what our advisors see everyday in their meetings with clients - choosing the right mortgage depends on your personal financial situation, and there's no single answer for everyone," commented Colette Delaney, Senior Vice President, Mortgages, Lending & Insurance, CIBC Retail Markets.
There are other factors at play than just the directional predictions for interest rates, as Delaney reminds mortgage holders. "You need to approach the fixed versus variable decision from the inside out, starting with your personal financial goals and working from there," added Ms. Delaney. "Your mortgage is a major part of your overall financial plan, and your decisions should be based on how your mortgage fits with your long term financial goals, not on short term rate fluctuations."
Interestingly, the type of rate that you choose seems to have a lot to do with the stage of life that you are in, according to the CIBC poll. 27% of 25-34 year olds (who are also mostly first time home buyers or relatively new homeowners) would choose a variable rate mortgage; 42% among respondents 45-54 years of age, would choose a variable rate and who incidentally “are more likely to be near the end of their mortgage and have greater tolerance for rate changes within their mortgage payment.”
Ms. Delaney noted that homeowners can look at both a fixed and variable strategy over the life of their mortgage. "For most people, your mortgage is a long term proposition, so your strategy should look beyond your first term," commented Ms. Delaney. "You may choose to start with a fixed mortgage when you buy your first home, then transition to a variable mortgage in later terms when you have improved your financial situation and paid down some of the principal."
Thursday, June 2, 2011
Is buying a student condo for my child a good investment?
Sometimes a parent decides to buy a place for their children while they hit the books in university or college. It can be a good alternative to paying thousands of dollars toward residence fees or rent. Just look at the math:
Student rent of $500 a month = $6,000 a year = $24,000 over 4 years of school.
That money could go to your mortgage instead as an investment for you.
In Ottawa, for example, you can buy an older one-bedroom condo for about $195,000. Or, buy a 2-bedroom for $240,000 and let your child's roommate help cover the mortgage by paying rent. Let's assume you pay 20 per cent down. Here's an example of what your monthly costs could total when mortgage rates are low:
Cost 1-bedroom 2-bedroom
Mortgage payment $800 $1,000
Condo fees $350 $450
Property taxes, maintenance $300 $400
Total: $1,450 $1,850
Think about it: if your child rents a place, your money is helping the landlord pay his or her mortgage and other costs. If you buy a place instead and rent it to them, you have a real estate investment with a guaranteed tenant: your child. If the investment goes up in value, you will make money. Just remember that those gains will be taxed.
Also remember, mortgage rates and other costs change, and these changes will impact the numbers and your decision.
Things to consider before you decide:
You can buy the property in your name, in your child's name, or both. If you buy the property in your name, you should consider:
• The rental income you charge can pay a lot of your costs. Just remember you have to declare that income on your tax return.
• As a landlord, you can also claim many of your expenses, including mortgage interest. Assess your costs carefully before you buy. They will vary with the local real estate market, mortgage rates and other factors.
• Plan for some vacancies. Your child (or their roommate) may not stay in the condo over the summer break. Are you really going to ask them to pay rent if they are living somewhere else for a few months?
• Remember that you will own a greater share of the equity as you pay off the mortgage. And, the value of the condo may rise over time. This can offset your costs. But whether you do more than break even depends on what happens to housing prices in the area.
There are other benefits, too. Your child won't need to look for a different place to live each year. They also won't have to worry about subletting every summer. And their furniture won't be coming back with them if they live at home over the summer break. Not a bad deal.
Remember: you may not make money if you buy a student condo.
But there are other reasons you may decide to go ahead. At the very least, you can provide your child with a nice place to live in a good neighbourhood while they go to school.
Student rent of $500 a month = $6,000 a year = $24,000 over 4 years of school.
That money could go to your mortgage instead as an investment for you.
In Ottawa, for example, you can buy an older one-bedroom condo for about $195,000. Or, buy a 2-bedroom for $240,000 and let your child's roommate help cover the mortgage by paying rent. Let's assume you pay 20 per cent down. Here's an example of what your monthly costs could total when mortgage rates are low:
Cost 1-bedroom 2-bedroom
Mortgage payment $800 $1,000
Condo fees $350 $450
Property taxes, maintenance $300 $400
Total: $1,450 $1,850
Think about it: if your child rents a place, your money is helping the landlord pay his or her mortgage and other costs. If you buy a place instead and rent it to them, you have a real estate investment with a guaranteed tenant: your child. If the investment goes up in value, you will make money. Just remember that those gains will be taxed.
Also remember, mortgage rates and other costs change, and these changes will impact the numbers and your decision.
Things to consider before you decide:
You can buy the property in your name, in your child's name, or both. If you buy the property in your name, you should consider:
• The rental income you charge can pay a lot of your costs. Just remember you have to declare that income on your tax return.
• As a landlord, you can also claim many of your expenses, including mortgage interest. Assess your costs carefully before you buy. They will vary with the local real estate market, mortgage rates and other factors.
• Plan for some vacancies. Your child (or their roommate) may not stay in the condo over the summer break. Are you really going to ask them to pay rent if they are living somewhere else for a few months?
• Remember that you will own a greater share of the equity as you pay off the mortgage. And, the value of the condo may rise over time. This can offset your costs. But whether you do more than break even depends on what happens to housing prices in the area.
There are other benefits, too. Your child won't need to look for a different place to live each year. They also won't have to worry about subletting every summer. And their furniture won't be coming back with them if they live at home over the summer break. Not a bad deal.
Remember: you may not make money if you buy a student condo.
But there are other reasons you may decide to go ahead. At the very least, you can provide your child with a nice place to live in a good neighbourhood while they go to school.
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