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moneysense.ca, 15/04/10
This and That: Housing, Retirement and more…
- Canadian Business magazine featured an article on why buying a house is a bad investment. A reader pointed out some errors in the article but at current prices houses are surely no bargains.
- Triaging my Way to Financial Success wonders if the housing market is topping out when he hears opinions stating real estate is “un-correctable”.
- The Financial Blogger explained how he is staging his home for a sale with before and after pictures.
- Ellen Roseman points out that with mortgages paid off, kids out of the home and no need to save, retirees can live on far less than 70% of pre-retirement income.
- “Have a plan and stick to it” is sound advice but only if the plan is a sound one in the first place says Michael James.
- Private banking sounds exclusive but Kathryn finds out that it is (a) expensive and (b) rife with conflicts.
- Gail Vaz-Oxlade wrote a four-part series to help 20-somethings put down a solid foundation for financial success. The first part deal with probably the most important lesson — Learn to live on what you earn.
- With all the adverse publicity that Toyota Motors is involved in these days, Larry MacDonald says there has never been a better time to buy a Toyota car.
- Canadian Financial DIY did an exhaustive analysis of tax software products and highly recommends UFile and TaxChopper.
- Questrade might have low, low commissions but Invest in the Markets finds Questrade’s trading platform to be glitchy.
I’m unable to highlight all the articles worth checking out in my weekly round up but you can check them out through my Twitter feed. Have a great weekend everyone!
moneysense.ca, 15/04/10
Thanks for the mention… and yes, many investors have discovered that with the low, low commissions come some potential glitches… well put!
[...] This post was mentioned on Twitter by Canadian Capitalist, youngandthrifty. youngandthrifty said: RT @CCapitalist New Blog Post: This and That: Housing, Retirement and more… http://bit.ly/bDwZcA [...]
More on the Canadian real estate situation. Where do Cdn cities rank?
http://www.planbeconomics.com/2010/04/15/does-your-city-have-the-most-overvalued-real-estate-in-canada/
Thanks for the mention CC; great group of articles for this week btw.
The rebuttal to “why a home is a bad investment” has incorrect points. There are certainly exogenous benefits to home ownership but property investors have no such benefits. In a market comprised of both owner-occupiers and investors, the investors invariably set the price.
Likewise, the principle residence capital gains tax exemption do not impact what an investor is willing to pay. On a related note, there are no capital losses to carry forward either.
Comparing a risk profile of a house should be done with something like a utility, where income streams are constant, generally track inflation, and have ongoing costs associated with immovable assets and capital maintenance. This puts a property with stable tenants to have a net return of around 7% after taxes, before accounting for risk.
In William Bernstein’s latest book (“The Investors Manifesto), he briefly reviews the dilemma of renting versus owning real estate. The rule of thumb he quotes is that the selling price needs to be less than 180 times the expected rent to justify purchasing the property (i.e. the total of 15 years expected rent). As I recall, he says to be a bit more conservative, he uses 150 as the multiplier. Here in the Interior of BC (near the number two city on MO’s list– thank you MO!), I don’t think you could find a property that one could justify purchasing under this rule-of-thumb.
Unlike the US, I don’t believe our real estate bubble has burst yet. I am very, very pessimistic with respect to real estate over the next business cycle…
@Doc Stock: I experienced glitches with Questrade as well. I got dinged with phantom margin interest and it took about a week to get the money back. Moved out shortly thereafter.
@MO: That’s a very nice analysis. A home in our neighbourhood came on the market. Asking price: $349,000. It would probably rent for $1,800 per month. Gross yield: 6.18%. Net yield will probably be half that. Hardly a bargain, IMO.
@jesse: Real estate markets are local of course, but many areas of Ottawa appear to be overpriced. I don’t think the net yields are anywhere near 7%.
@B.C. Doc: By Bernstein’s measure, Ottawa seems to be overpriced. The value-to-monthly rent ratio is a steep 190+. I share your pessimism about real estate. It is certainly looking frothy.
For a colourful take on the housing situation, we can always count on housing-bust prognosticator Garth Turner. Some excerpts from his April 15 blog post, making hay out of the recent jump (20%) in house listings:
“Sales up 1.4%. Listings up 20%. I rest my case.”
“The big question cannot be answered yet, however: Will this be a quick 15% or 20% market correction over 12 or 18 months? Or are Canadians starting into a Yankee-style slow real estate grind which can churn lower for the next five years, taking those areas where prices soared the most down as much as 70%?”
“Is Vancouver about to be nuked? Are those tens of thousands of young equityless 2009 and 2010 buyers in Mississauga and Oakville and Richmond Hill about to taste negative equity? Will we soon have more condos to rent than there are renters, plunging the costs of leasing? Are the winners of bidding wars the new losers? Will Calgary ever apologize to Garth?”
http://www.greaterfool.ca/2010/04/15/list-this/
Thanks for the mention. I think Ellen is right that many retirees won’t need 70% of their pre-retirement income, but this can vary wildly. A couple with a strong desire to travel extensively may need more income than they earned before retirement.
My tax software review may be exhaustive, but it was exhausting too. However, it was nothing as frustrating as doing a T3 trust return manually with paper forms for Quebec – two sets of forms, 2 days work and 30 pages later, all for 6 data points of original data. Thank goodness for software. Thanks for the link, CC.
In the spirit of real estate investment, I’m going to be buying a vacation property down south of the border, mainly because this is the first time in my life that I’ve been able to afford beachfront property. I am looking 5 to 10 yrs down the road hoping that housing prices recover down south. In the meantime, I can use the beachfront property for my own personal pleasure.
Thanks for the link CC!
“Exogenous benefits” balance out against the fact that a house owner has to pay all the costs of his home including taxes and maintenance. The owner has to actually take care of any repairs or issues themselves. All of this is included for a person who pays rent. Add these details would have made the article larger and harder to read without bringing much more to the discussion.
Stocks also benefit from various tax advantages such as 50% tax on capital gains and special rules for dividends. Then there are plans such as the TFSA and RRSP.
“should never compare returns on investments that have different risk profiles.” This is easy to say but this ultimately the question that is being discussed, house versus stock investment. It doesn’t really help to redefine the issue to conclude we simply can’t talk about it.
The point about leverage is that while many people will borrow money to buy homes, very few do so for stocks. The returns from the house seem larger due to this leverage.
You are picking apart the details in the article and missing the gist of it. Your response had just as many issues with it.