Blog

Monthly Archives: September 2016

Odette Morin

Vancouver’s Housing-Bubble Risk Unmatched on the Planet, says Swiss Bank

There is currently a certain fatigue felt in Vancouver regarding our Real Estate market. We get bombarded daily now by shocking news of unethical shadow sales deals, risky shadow lending, money laundering, property bought and sold like commodities, empty properties that could ease the scarce rental market and foreign buyers avoiding capital gains taxes on real estate gains. Many younger Vancouverites have given up hoping to ever own a home, while others have become instant millionaires recently by selling their west-end condos as a group to developers.

While this is happening, you can see cranes and construction at every corner of the city. Building towers are going up, and single family homes are being torn down to be replaced by multi-family dwellings. It’s everywhere and it is scary to see prices continue to go up, despite the common wisdom that this does not make sense. One of my clients is an architect for one of the prominent Vancouver developers. I asked him recently what his firm was doing right now in view of the current market. He responded: “We continue to build as fast as we can go”.

The recent foreign buyer taxes introduced by our city and government to attempt to cool it off seem to be working somewhat. It is still too early to tell, but this Greater Vancouver Real Estate sales price graph shows that prices have come down in August. Numbers of sales are also down.

gvrd-real-estate-graph

To gain some perspective, I looked at the Toronto real estate crash in the late 80s. I found a lot of similarities to our current situation.

According to Toronto Real Estate Board data, between 1985 and 1989 the average price of a house in the Greater Toronto Area (GTA) increased by 113%. Low unemployment, large inflow of immigrants and investment speculation helped to inflate the bubble.

“In (the) late 80s everyone thought that the housing prices were going to rise indefinitely. More people jumped into the market hoping to make a fortune causing an artificial increase in demand. Suddenly housing became scarce, which further increased the price. Developers decided to profit on this illusive scarcity by building condos left and right – many of them in downtown Toronto. During the peak of the bubble the borrowing cost started increasing and the 5-year fixed mortgage reached 12.7%. Coupled with the early 90s recession, a spike in unemployment and a drop in the inflow of immigrants to the area, housing prices in the GTA collapsed. Between 1989 and 1996 the  average price of a house in GTA  declined by 40% adjusted for inflation. Downtown of Toronto was hit the worst with over 50% decline in value of a home. Unaccounted for inflation, it took 13 years for the average house price to recover in the GTA.” (*)

Looking at the graph above, similar drops happened in Vancouver in the 80s and 90s.

Real estate markets are tightly influenced by interest rates. While current interest rates are far from the double-digits of the early 90s, a rise of 2% or 3% can have a dramatic impact, as I described in my interest rate article. When interest rates start rising, our real estate market will cool off, hopefully gradually.

So what can you do to prevent financial hardship? It is impossible to know if, and when, the real estate market will crash. The market could tumble next year or it could simply cool off gradually. We just don’t know.

So, to avoid financial distress, make sure to buy real estate for the long-term. Think with a 10-year window to make sure you can ride the potential downturn. Make sure that you can afford your mortgage, even if rates go up to 5% or 6%. Finally, only buy if your job is secure or you have sufficient short-term savings to be able to meet mortgage payments for at least 6 months in the event of a job loss or sickness.

Talk to us before buying a property. We can help you confirm whether your cash flow can safely cover the mortgage, property taxes, insurance, lifestyle and savings for retirement and children’s education.

 

(*) Read the full story here about the Toronto Real Estate bubble in the late 80s.

 

 

 

Odette Morin

How Much is Too Much Equity?

how-do-you-feel-about-your-finances

When you come in for your annual review meeting, we tell you that you have 80% equity and – in some cases – you get concerned. Is that too much to be investing in the stock market, you ask? Shouldn’t you have more of safer fixed income especially as you get closer to retirement? These are valid questions.

The old investing rule of thumb was to have an equal amount of fixed income to your age.  So if you are 50, you should have an equal proportion of fixed income and equity.  This is now thought to be too conservative because of three main reasons:

  • We live longer, and we therefore have a longer time horizon and need more money to fund a longer retirement. Many now live now live beyond the 80-85 year life expectancy.
  • Fixed-income yields have plunged in past years, and are likely to stay very low in this low interest rate environment. If inflation is higher than the saving rate you get, you are actually “losing” money with a safer investment.
  • Dividends keep up with inflation, which is very important over the long-term, and also because many pension plans no longer guarantee inflation adjustments.

While stocks are more volatile in the short-term, they tend to rise over the long-term. The longer the holding period, the higher the probability that you will come out ahead. Morningstar data service, shows that the S&P500, for example, has produced positive returns in about 95% of rolling monthly 10-year holding periods from 1926 to 2015. For 15-year periods, the return was positive 99.8% of the time. That is why we always buy quality, diversify, and hold regardless of market sentiments.

So, how much equity and fixed income should you hold in your own portfolio?  It highly depends on your personal risk tolerance, as rated when you first became a client; also, it depends on whether you are retired & need income from your portfolio, or are still in the accumulation phase.

Other factors include how much other liquid savings you have on hand in case of an emergency, and if you also are part of a pension plan. Typically, we like our retired clients to have a minimum of 30% fixed income, and our younger clients only 20%. Therefore, 70% to 80% equity is normally what we recommend.

These are general guidelines. We look forward to discussing your personal asset allocation at your next annual review meeting.

 

 

 

Odette Morin

Where are Interest Rates Headed, and Why Should You Care?

Text Interest rates on up trend arrow, with financial data visible on the background.

All eyes are on Janet Yellen, Chair of the US Federal Reserve, these days to try to anticipate where interest rates will go. For the United States, the talk is all about when and how high, not if.  In Canada, it is a different story. Bank of Canada Governor, Stephen Poloz, reiterated that rates are not expected to go up yet. Many analysts believe there won’t be a rate increase until some time in 2018. Our economy is not growing meaningfully enough, and there is no inflation to worry about. Rate increases are a monetary tool to tame rapid growth, and to contain inflation.

While low interest rates are good for Canadians’ pocket books, for now, eventually, rates will go up here in Canada too and this is nothing but bad news for those with too much debt. Unlike the Americans, Canadian debt levels have steadily been increasing in recent years. Raising rates too high or too quickly  risks a huge debt problem for many Canadians.

A recent report by credit monitor TransUnion shows that up to a million Canadians would suffer financial stress if rates increased by 1%. However, rates are likely to increase by 2 or 3%, not only 1%. The Bank of Canada’s own research, states that the Bank’s natural rate of interest is in the range of 3% to 4% (*). This means that the best bank rate to consumers would be in the 4% to 6% range. That kind of increase would translate to considerable economical damage, and would be devastating to real estate markets.

We should care very much about interest rates as they impact us in many ways. Our best word of advice is to use current low interest rates to reduce debt as much as possible. Make sure that you can easily afford a 5-6% interest rate on your mortgage, for example. Manage your credit responsibly, and borrow only what you can afford at the anticipated higher rate.

Rate increases will also have an effect on your investments. Make sure that your portfolio is well balanced, keep fixed income in the lower range of your target allocation and select dividend paying equities which will help keep up with inflation and reduce volatility. Finally, don’t miss your annual portfolio review. This is becoming more important as we approach these uncertain times. This is when we rebalance your portfolio and review your circumstances in light of the current economic environment.

(*) Globe & Mail – Unlike the Fed, the BofC is constrained by a paradox of household debt. Sept 22, 2016 Louis-Phillippe Rochon Professor at Laurentian University.

Frank Mueller

BC Training & Education Savings Grant – Who Says Nothing in Life is Free?

In 2013, the Government of British Columbia introduced the BC Training & Education Savings Grant. This grant is a great way to help build your child’s RESP, as it will receive a one-time grant of $1,200.

According to the BC Training and Education Savings Grant’s info website, the following 3 conditions must be met in order to qualify for the $1,200 one-time grant:

  1. The child must be born in 2006 or later
  2. You and the child must be residents of British Columbia
  3. The child is the beneficiary of a Registered Education Savings Plan (RESP) with a participating financial institution

The earliest you can apply to receive the grant is on the child’s 6th birthday, and the latest you can apply is the day before the child’s 9th birthday.

If your child meets these 3 conditions, they are eligible to apply for and receive the one-time grant of $1,200. We have been reviewing all of our client RESP accounts, and looking for accounts with beneficiaries that meet the above criteria. If you have an RESP account with us, and would like to find out if your child qualifies for this one-time grant, please do not hesitate to contact us.

Terry Broaders

Travel Insurance – If You Travel You Need It !

It’s just plain risky and foolhardy to go on a trip without travel insurance.  Travel health insurance is as essential as your suitcase and your airplane ticket.  The Travel Health Insurance Association of Canada (THIA) had KPMG conduct a national survey of Canadians about their travel habits and their understanding of provincial health coverage. Only 6% of Canadians realize that provincial health plans cover just approximately 9% of medical expenses when travelling outside of Canada.

But the costs can mount up if you have a medical emergency while abroad. The majority of Canadians (80%) believe the cost of treating pneumonia in the U.S. is $10,000 or less. In reality, the bill can run as high as $66,000, finds a BMO Insurance study.  Provincial health insurance plans will usually pay for a small portion of out-of-country medical costs, but will fall far short of the full cost. A broken leg in Florida could cost as much as $35,000 to mend, according to RBC, but many provincial plans will pay only $2,000. The most common reasons for seeking medical care include gastrointestinal issues (21.8%), infection (16.%) and fractures (10.7%). Sixty per cent of those who received medical attention while away had extended travel medical insurance to pay for the associated expenses.

Despite the “bad insurance company” stories that you hear, and we don’t deny that they do happen, the vast majority (95.3%) of Canadians who purchased individual travel health insurance policies had their claims paid, says the KPMG survey. However, another THIA survey finds 18% of Canadians have inadvertently provided inaccurate health information on travel health insurance forms — something that can void an insurance policy. And 14% have deliberately provided inaccurate health information on travel insurance applications, with half of those admitting they did so to receive a lower rate. We can’t stress enough the importance of full and accurate disclosure on the insurance application. Insurance companies have trained staff to help you understand the questions and provide accurate answers. If you purchase your insurance through us we will help you through the questionnaire and if there is any uncertainty, we will get the insurance company representative on the phone to make sure all is completed properly. A medical questionnaire needs to be taken seriously. The top two reasons for denied claims include medical non-disclosure and misrepresentation, and for pre-existing conditions that were not stable, as required by policies. For example, if you have high blood pressure and it is not “stable” or :controlled” as certified by a medical doctor then your travel insurance will not cover you for any problems or expenses associated with your high blood pressure.

Many of us will have some form of travel insurance with our employer. Make sure you take the time to understand the coverage. Read the booklet, see what the maximum of coverage is, determine the maximum time frame of the coverage. Don’t expect your plan at work to insure you for the full period if you are on a year long sabbatical trip.

Remember vacations aren’t always carefree—21% of Canadian travelers have needed medical attention while away. And 35% don’t buy travel health insurance before they go away. Contact us for your travel insurance needs.

Anthony Sabti

Corporate Class Switching Deadline Extended – Will Take Effect January 1, 2017

In March, the 2016 Federal Budget announced that the tax-deferred switching advantage of corporate class funds would be ending this year. Originally, the budget called for the regulation change to take effect on October 1, 2016; however, the regulation change will now take effect on January 1, 2017.

Until this year, an investor was able to use this fund structure in a non-registered account and switch from one corporate class fund to another – within the same fund company – on a tax-deferred basis.  For example, an investor could switch from ABC Canadian Equity Fund Corp. Class to ABC Global Equity Fund Corp. Class without incurring a capital gain. With a regular fund structure, the investor would normally pay capital gains taxes on the profit incurred on the fund being sold.

While this is unfortunate news, corporate class funds will continue to offer the advantage of tax-efficient distributions.  These funds will restructure any income distribution (including interest income) in the form of capital gains or dividends, and are taxed at a lower rate than interest income.

Since the announcement was made, we have reviewed and will continue to review all non-registered portfolios at client meetings for any changes we would like to make before the rule change takes place. If you have a non-registered account with us and would like to see if we should act on your portfolio before the end of the year, please do not hesitate to contact us.