Archive for March, 2005

Auto and Home Insurance

March 30, 2005

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I received our auto and home insurance renewal notice in the mail today. Auto insurance (no accidents, demerits or claims in the last year) is 8.7% cheaper than the previous year but home insurance is 7.7% dearer. Overall, home and auto premiums together are 4% cheaper than last year.

The insurance industry has been making record profits for the past two years, so I was hoping that premiums would be at least lower by 10% this year. Alas, it is not to be.

As a capitalist, I understand that insurance companies want to make profits for their shareholders, rather than passing it on to consumers. Perhaps, it is time to search for some attractive opportunities in names like Fairfax Financial (FFH), ING Canada (TSX: IIC.LV), E-L Financial (TSX: ELF), Northbridge Financial (TSX: NB), Kingsway Financial (TSX: KFS) etc. If I can’t beat ’em, at least I can buy ’em.

So, What Should I Do About the Housing Bubble?

March 28, 2005

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In my previous post, I wrote about a possible housing bubble, signs of which seem to be everywhere. Just last week, I saw an ad for real estate investing in The Ottawa Citizen that started with a Frankin D. Roosevelt quote: “Real estate is about the safest investment in the world”. So, assuming that a housing bubble exists, what do I do about it?

The main function of our home is providing us shelter. I am unwilling to sell our home and start renting just because prices seem to be peaking. Even if I am willing, it is probably not a wise move. Buying and selling a home is expensive: realtor commissions, land taxes, lawyer fees and moving expenses should be taken into account. In any case, house price fluctuations have a neutral effect on most homeowners: we have to live somewhere and another house will be subject to the same price movements as ours.

Bubble or not, it makes sense for homeowners to reduce their non-deductible mortgage debt, as fast as possible. A pre-payment towards the mortgage principal immediately reduces outstanding debt and provides a guaranteed tax-free return on the investment.

Any investment (real estate or otherwise) should be made only after comparing its earnings with what could be obtained elsewhere. It is time to be fearful when everyone thinks real estate is a sure thing. What do you think, dear reader? What do you plan to do about the housing bubble (if one exists)?

The Housing Bubble

March 28, 2005

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Fellow blogger Ben Jones writes a blog dedicated to the housing mania sweeping the globe. For Exhibit A, check out this LA Times story and Ben’s comments on it. I can’t believe that someone would cash in their retirement funds to buy a piece of land that produces no income solely based on the “greater fool” theory. But this is precisely what many people are doing, in addition to taking out home-equity loans for consumer purchases. I have a feeling this is all going to end very badly.

The Globe and Mail newspaper recently ran a story comparing the housing boom to the dot-com madness. Analysts derived a P/E ratio for housing based on how much income a house can produce and found that the P/E ratio is at record highs. In the above example from the LA Times, there is no P/E ratio because there are no earnings to begin with. Sound familiar?

A note of caution about using P/E ratios for housing: By itself a P/E ratio is meaningless. P/E ratios will vary based on the current interest-rate environment. In Canada, we still have historically low interest rates. For instance, a recent RBC Economics report finds that housing affordability is still very good across Canada.

Finally, check out this cartoon from The Economist magazine.