Behavioral Economics Shows That When It Comes to Investing, People Aren't That Smart
By Michael S. Rosenwald, Washington Post Staff Writer, Sunday, May 25, 2008
Four months ago, judging myself to be the next Warren Buffett, I logged on to my Charles Schwab account and did something that in hindsight was astonishingly stupid, even for my own very long roster of financial screw-ups. I clicked over to the trading page and bought shares of Citigroup.
The company, like most of the big Wall Street banks then staring down the subprime meltdown, was limping along. The headlines were bad. The chatter on CNBC was pessimistic. I saw a bargain. I saw a company whose credit card bills and offers show up in millions of mailboxes every day. Just as soon as the banks got their write-offs out of the way, optimism would return to the sector. There would be more buyers of the stock than sellers. I would profit.
Now here I am today: My investment is down 22 percent. And I'm still holding on to the stock. Am I, as my wife and closest friends sometimes insist, the dumbest man walking the Earth?
"You are human," said Russell Fuller, chief investment officer of Fuller & Thaler Asset Management in San Mateo, Calif. His firm uses behavioral economic theories of Nobel Prize winners and university economists to profit from the mistakes made by everyday investors and the pros on Wall Street. Humans, no matter how hard we try, act in ways that cause us to make the wrong investment decisions almost all the time.
We are -- as I was four months ago when I logged on to my Schwab account -- absurdly overconfident about what we think we know. We are -- as I am now -- reluctant to part with our losers, even though the tax code rewards us for doing so. We sell winners too soon, then we buy stocks that perform worse than the ones we sold. We get anchored on certain opinions about stocks and react too slowly to information that should change those beliefs. We believe things will happen based on how easily we can think of recent examples. (A hurricane just hit. Another one will come soon.)
The world of the behavioral economics, which melds psychology, finance and emotion, seeks to explain and sometimes exploit why we do what we do when it comes to investing. It is a field that has become more accepted lately, particularly since 2002, when Princeton University psychologist Daniel Kahneman was awarded the Nobel Prize in Economics for, as the Swedes put it, integrating "insights from psychology into economics, thereby laying the foundation for a new field of research."
Kahneman is a director at Fuller & Thaler, a firm whose other namesake is Richard Thaler, a prominent University of Chicago behavioral economist and a frequent collaborator with Kahneman. Two of the funds the firm manages that use behavioral methods have beaten Russell benchmarks from their inception through the first quarter of this year. Not surprisingly, Fuller & Thaler is not the only firm using such techniques. Firms ranging from J.P. Morgan to AllianceBernstein say they seek to capitalize on the faulty investor mind.
For instance, Fuller & Thaler likes to pay close attention to analysts who may be anchored on a stock, not raising their earnings-per-share estimates enough even though positive information has come out about the company. Fuller & Thaler's investment team pounces before the analysts realize they were wrong. As Kahneman said in an interview, "I think that betting on mistakes of people is a pretty safe bet."
Good for them. My interest in talking to the likes of Kahneman, Thaler and other behavioral economists and personal finance advisers -- besides confirming that I am not dumb -- was to understand these mistakes and what there is to do about them. "I don't think you can fix what's in your head," Thaler said. "What you can do is train yourself to say, 'This is a risky situation, and this is the kind of situation where I get fooled.' "
I asked Kahneman what fools us most frequently. That was simple, he said: overconfidence. "It's the idea that you know better than the market, which is a very strange idea," he said. "Individual investors have no business at all thinking they can do better."
Why do we? "It's because we have no way of thinking properly about what we don't know," Kahneman said. "What we do is we give weight to what we know and then we add a margin of uncertainty. You act on what you think will happen." That's what I did by buying Citigroup. But Kahneman added, "In fact, in most situations what you don't know is so overwhelmingly more important than what you do know that you have no business acting on what you know." Oops.
Barbara Warner, a financial planner with Warner Financial in Bethesda, said she sees a lot of overconfidence among two groups of people: relatively new investors to the market (me), particularly recent business school graduates (not me), and retirees (never, with my investment sense). The latter group can be exceptionally frustrating. "Now they have entirely too much time on their hands to devote to CNBC and Money magazine," she said. "People suddenly think they are smarter than they used to be because they have more time to pay attention to it."
That's a disastrous situation, Kahneman said: "The more closely you pay attention, the more you do things. And the more you do things, the worse off you will be." For proof, he pointed to groundbreaking research done by one of his former students, Terrance Odean, now a professor at the University of California at Berkeley. Odean has written that "overconfidence gives investors the courage of their misguided convictions."
He has gathered trading records from discount brokerage houses for hundreds of thousands of investors, and in several published studies, he has shown that when people had a choice of two stocks to sell, more often than not they sold the stock that did better in the future and held on to the one that did worse. And when they bought something new, they tended to buy a stock that did worse than the stock they just sold. As Kahneman once told Odean, "It is expensive for these people to have ideas."
It is particularly curious when investors hold on to losing stocks, as I have done with Citigroup. This is a function of something called loss aversion, a discovery that helped Kahneman win the Nobel Prize. Thaler, Kahneman's close colleague, put it this way: "Loss aversion refers to the fact that we're wired in such a way that losing money hurts more than getting money feels good." So let's say a hundred bucks falls out of my wallet, lost forever. Under loss aversion, this hurts a lot more than it feels good to find $100 that somebody else lost.
When it comes to trading, this helps explain why we would want to hold on to losers. Selling the loser, even though it gives us a tax write-off, causes us to admit we have lost. So we do something that makes us feel better: We sell the winners. This feeds our overconfidence. But as Odean's research has shown, we often sell winners that still have some winning to do. That puts stocks with upward momentum on the market for less than they are really worth long-term, allowing savvier investors to snap them up.
"What I believe is that individual investors probably as a group create the dynamics by which they lose money and institutions make money," Odean said. "They create mispricings."
Along with several co-authors , he has published a somewhat depressing study about just how much wealth can be lost by everyday investors just because they trade. Looking at data from every trade made by all investors in Taiwan from 1995 to 1999, Odean discovered that the "aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points," which includes trading costs. If investors had simply bought the index and not traded at all, they would have done about 3.5 percent better. The amount of money lost was equivalent to 2.2 percent of Taiwan's gross domestic product.
So what should mere humans do about all of this?
Like most things human, it depends on which one you ask. Odean said he saw two options: Be dumb and let others make money off you, or just buy a no-load index mutual fund and stop focusing on beating the market. Kahneman said there was no one-size-fits-all advice, but he liked the idea of having one sure thing and one long shot. The personal finance planners say investors should stick with them -- they get paid to understand this stuff, and to win. Of course, they are humans too, which means they could be prone to the same problematic behaviors.
As for me, I'm taking some responsibility for myself, which is probably where everyone should start. Earlier this week, I logged in to my Schwab account. I sold my Citigroup shares, at a loss. I'm going to push the money into an index fund. The move felt bad, no doubt about it. I didn't fix what was in my head, but I did fix what my head had done.
Friday, June 27, 2008
Thursday, June 26, 2008
CANADA’S HOUSING BOOM COMES TO AN END - TD Economics
Under the category of "Well No Sh*t Sherlock." Comment in italics are mine.
CANADA’S HOUSING BOOM COMES TO AN END
June 26, 2008
Over the past couple of years, TD Economics has repeatedly forecast that Canada’s major real estate markets would experience a significant cooling. In fact, housing remained stronger for longer than we had anticipated, largely due to increased affordability through new financing options, such as no money down or extended amortizations. Regional economic strength related to the commodity boom also helped to fuel unsustainably elevated home price growth in the west. Nevertheless, our last Special Report on Canada’s housing market, Canada’s Red Hot Real Estate Markets to Cool (April 10, 2008), stressed that there would be a significant adjustment in real estate activity in 2008-09, with national average home price growth slowing sharply from the 11% posted in 2007 to a low single digit pace. There is now clear evidence that this slowdown has taken hold. The year-over-year price growth for existing homes in Canada’s major markets fell to only 1.1% in May, down from 8.6% just four months earlier. The trend has been broadly based, but it has been particularly sharp in some of the markets that had experienced the most dramatic price growth. Calgary and Edmonton home prices in April and May fell to below year-earlier levels. The combination of significantly higher listings, reflecting the desire of homeowners to take advantage of the past increase in prices, and weaker demand, due to the past erosion in affordability, are leading to declining sales and softer price performance across the country, but particularly in the west.
The key question is how far the recent trends will extend and whether Canada will experience a broad based housing correction. In our opinion, sales are likely to continue to decline in the coming quarters and price growth will slip to 2% on a national average basis in 2008 and rise only to 3.5% in 2009. However, this national average will mask very different regional price trends. Most markets will see low to mid single-digit gains, but Saskatchewan and Manitoba will continue to post double-digit gains in the near term followed by a significant cooling in 2009 – with the risk of a mild price correction in the major cities that have recently experienced extraordinary price growth. Alberta will have further weakness in the near term, as Calgary and Edmonton will likely see prices continue to fall for another 3 or 4 quarters, dropping 8% to 10% from their peak, after which prices should stabilize and start rising at a low single-digit pace. Aren't we already down that far?
Cashing in, not foreclosing
From an economic perspective, the recent behaviour of Canada’s real estate markets and the outlook for 2008/09 can be best explained in terms of the trends in supply and demand – the interaction between which determines prices. Wow, I could be a bank economist too!
On the supply side, past price performance has strongly encouraged additional supply in both the new and existing home markets. Housing starts averaged a strong 234,000 units in the first quarter. While we expect new home construction activity to remain robust, starts should gradually edge down to a lower level of around 200,000 units over the course of the next 18 months.
We had anticipated an increase in new listings as a result of solid price gains in the last couple of years, but the recent surge in new listings has been far greater than anticipated. The jump in supply of homes for sale is assuredly an attempt to take advantage of the past home price appreciation on the part of homeowners and real estate investors.
It should be stressed that the rise in listings does not reflect homeowners of principal dwellings desperate to sell, and this is the dominant difference between the Canadian and U.S. experience. Indeed, the U.S. has been characterized by an abnormal rise in delinquencies and foreclosures or large negative equity positions. In Canada, speculators may be quickly dumping properties on the market to get out while the times are good, but individuals that have a principal dwelling are not under financial duress. This distinction is crucial to evaluating the impact of weaker home price performance on personal wealth and consumption. Canadian consumers are also nowhere nearly as leveraged through their home equity as American consumers are. Except in Vancouver where people are overleveraged to the max.
A few more important distinctions also bear noting as the U.S. housing bust struggles to find a bottom, which naturally arouses fears that a similar unwinding could take place in Canada.
First off, many of the seeds that sowed the current U.S. housing bust were never planted in Canada. Interest rates and mortgage rates were significantly lower for significantly longer in the U.S., especially in the case of adjustable-rate mortgages (ARMs) with low initial teaser rates. The bulk of surging delinquencies on mortgage loans occurs precisely when the rate adjusts to a higher level. ARMs never took hold in Canada. No spike in mortgage payments means no spike in delinquencies. As economic conditions will be weaker over the forecast horizon than they were in 2007 and mortgage rates likely modestly higher, delinquencies in Canada will only rise to reflect domestic economic conditions. A surge to high levels is nowhere on the horizon.
Furthermore, it wasn’t just that borrowing costs were lower in the U.S. than in Canada. Overall lending conditions in the U.S. had eased to the point of becoming much too lax, introducing a systemic default risk, which is now a reality. Subprime mortgages were a significant chunk of originations in 2006-07. Not so in Canada, where they peaked at 5% in 2006 before vanishing. In the U.S., the additional supply of homes for sale as a result of ‘involuntary’ listings and / or foreclosures more often than not reflect desperate households trying to minimize their loss. In Canada, voluntary sellers are trying to maximize their capital gains. The difference is far from trivial.
It is also telling that the run-up in prices in the U.S. was, for many large markets, not supported by economic fundamentals. As per Nevada, Arizona, California, and Florida, it seemed to be driven much more by speculative activity. In Canada, markets whose economies have been booming are those whose housing markets caught fire. Witness the experience of Calgary, then Edmonton, and now Regina and Saskatoon. No mention of Vancouver - but why? Could it be because we have excessive speculative activity? Valuations in these markets also started below national levels and arguably had some catching up to do, contrary to the hottest U.S. markets during the run-up which were already higher than the U.S. average. This is unlike Vancouver where we've seen already high house prices rise to levels that are completely detached from rents, incomes or anything remotely resembling a fundamental level.
Finally, financing and economic conditions are largely more supportive of local demand in Canada. Lending has not tightened nearly as much as it has in the U.S. And, as noted above, lending never became as lax. For example, the vast majority of mortgage applicants in Canada were income-tested on the basis of the 3-year or 5-year posted rates; whereas in the U.S. it was common to either dispense with income testing or test on the basis of the low introductory teaser rate. Furthermore, the credit crunch has hit U.S. lenders’ balance sheets harder. The bulk of mortgage origination in Canada is sourced at well capitalized financial institutions. Homes currently being listed in Canada, if priced reasonably, will find buyers who can finance their purchase. In the U.S., despite much lower prices, financing is often hard to obtain, even for credit-worthy potential buyers. The recent Federal Reserve cuts to the policy rate by a full 3¼ percentage points have had little traction into relief on mortgage rates. Clearing the large inventory overhang is all that more difficult in such circumstances that are simply not present in Canada.
The main conclusion is that there has been an increase in supply (i.e. new listings and new home construction) in Canada . That will act to dampen home price appreciation and create a pullback in prices in selected cities where markets went too far, too fast. However, the increase in supply in Canada will pale in comparison to the dramatic surge experienced in the U.S. that caused the worst American housing correction since the Great Depression.
Decaffeinated sales
On the demand front, the dominant theme is that the past price appreciation in Canada has eroded affordability, reducing demand for new and existing homes. Nowhere is this truer than in Alberta and British Columbia. National sales did remain elevated for longer than expected, but are now pulling back more sharply than even our spring forecast due to reduced affordability and greater supply. The year-to-date (as of May data) percentage drop in sales for Canada’s major markets seems dramatic at -12.5%, but sales are in fact simply returning to the solid levels typically experienced in the three years (2004-06) prior the 2007 sales boom. (See sales charts for some major markets at the end of this report.)
Just as Calgary and Edmonton led the way up in sales growth, they are now leading the way down. Home sales in these two cities were down 34% and 30%, respectively, year-to-date as of May. However, Edmonton resale activity is tracking close to 2005 levels, while sales in Calgary are faring worse and look likely to revert back to 2004 levels, near 26,000 units. Our base-case scenario for Alberta home sales for the remainder of 2008 builds in an even greater decline in sales in the near term before levelling off late in the year for a net annual sales drop of 40%. As a result, after two years of percolating over 70,000 units sold, Alberta is more likely to record sales volumes in the 40,000-50,000 unit range this year and next.
The return to norm in resale activity is not confined to Alberta, and nor did we expect it to be. Our April forecast had sales declines for all provinces, except three (Saskatchewan, Manitoba, and Newfoundland & Labrador) that represent only 5% of the national total sales. Only Manitoba is disappointing our April forecast. Sales in Winnipeg are down by an unexpected 3.5% year-to-date, implying a likely sales decline of about 4% in Manitoba in 2008 – but this is only a shift from marginal sales growth to a marginal sales drop.
Sales are also weaker in other parts of the country, with British Columbia and Ontario sales down by more than 10%. Softer demand is therefore not an Alberta-specific theme. While affordability had not eroded to the same degree in other markets, it also had not improved for most markets, on a quarterly basis, since late 2006. Affordability remains at challenging levels for many potential buyers in Vancouver specifically, but also Toronto. Resale activity in Vancouver is tracking significantly below last year’s levels and we expect sales for 2008 as a whole to end up almost 20% lower than 2007. Toronto is expected to experience 10% lower sales.
Affordability to improve
Based on our assessments of supply and demand, what are the prospects for the next 6-12 months? Over this time span, both sides of the market are unambiguously pointing to softer price growth in most major markets. Just how soft, is a matter of location. For Canada as whole, we expect existing homes to appreciate by only 2% this year, a downward revision from our last forecast of 6%. Slower price growth – or declines in certain cities – but still solid underlying economic fundamentals will lead to an improvement in affordability. However, the relatively high prices in many markets will remain a key factor crimping demand.
Looking beyond the next 12 months, as affordability improves in some markets or stabilizes in others, and demand slowly absorbs homes being listed, we expect demand to start pulling prices forward at a slightly quicker pace in the second half of 2009. However, because the current rebalancing has abruptly shifted conditions from seller’s market territory to balanced market conditions in many cities, the price weakness will probably extend into next year. As a result, while prices will improve in 2009, the annual average resale price growth will still be modest at around 3.5%. I don't see prices going up as an 'improvement' - how does that help my family's financial situation exactly?
Turning to a regional perspective, Saskatchewan’s major markets offer an exception to the cooling trend on an annual basis, but this is mostly a question of timing. The price surge above 30% growth came late last year and much of that momentum is being carried into this year. But if Regina and Saskatoon follow the path just recently threaded by Calgary and later Edmonton – and we think they will – Saskatchewan’s price growth will have come back down to earth by early next year. We are looking for 2-3% price growth in 2009, with a risk of a mild price correction.
On the flip side, every other province, except Newfoundland & Labrador, and most notably the four largest provinces in the country, will experience significantly weaker home appreciation this year compared to last. Alberta will most likely experience a slight depreciation of 1-2% in home values on an annual basis. This correction will be concentrated in its largest urban markets of Calgary and Edmonton, where prices are expected to fall by 2-3%, with the rest of the province faring better. After stunning cumulative price gains of 45-65% in the last two years in those markets, our base-case forecast builds in a peak-to-trough correction of 8-10%. Our expectation is that monthly data will show year-over-year price declines for another 2-3 quarters of data (the typical duration of home price corrections in Canada), out to the first quarter of 2009. Alberta prices should then start growing again, albeit modestly at 1-2%, on a year-over-year basis. So TD Economics is basically forecasting home price declines in inflation adjusted dollars for quite some time.
Affordability has been a key issue in Canada’s most expensive market, Vancouver. Outside Alberta, where sales are down about 30% year-to-date, British Columbia is experiencing the largest percentage drop in sales year-to-date at close to 15%. This is not surprising given how strong sales (over 35,000 units) had been over the last six years. Vancouver has recorded a surge in listings since March, enough to bring the supply/demand relationship into balanced territory. Vancouver had not been balanced, by this measure, since late 2000. We therefore expect price growth to be subdued in the next 12-18 months. As a result of higher-than-expected listings, we now forecast 5% home price growth for the province as a whole this year (down from our spring forecast of 9%) and a similar outing next year – both a far cry from the 15% annual average home appreciation recorded over the last 3 years. We'll see how that works out!
Ontario and Québec homes have appreciated at a steady 6-7% rate over the last three years. Both provinces are expected to record only about half as much (3-4%) home price growth over the forecast horizon. Options have improved for potential homebuyers in Québec due to more listings, making the slowdown mostly a supply story. Meanwhile, the softer price growth in Ontario’s existing home market will be most closely related to a cooling in demand, resulting in weaker sales due to challenging affordability, particularly in the Greater Toronto Area.
Bottom line
Between 2005 and 2007, Alberta was skewing the national existing home market figures to the upside. Late in 2007 and early in 2008, Alberta home price growth came back down to earth, converging with national figures. The latest provincial real estate data show that Alberta is now more than a percentage point below the country’s average in terms of home price growth. In the past, we presented figures excluding Alberta to measure the impact of this particular market. As an example, Alberta boosted the national price figure by as much as 2½ percentage points in 2006. The distinction became irrelevant once Alberta had cooled back down to the national pace.
This exercise is once again relevant, and we are re-introducing these ‘ex. Alberta’ measures. Outside Alberta, we expect existing home to appreciate by about 3% this year. Including Alberta – which we think will record a 1.5% price decline – brings the national forecast down by nearly a full percentage point to 2%. For 2009, Alberta’s expected home price growth of 2% will not differ enough from the rest of the country to pull down significantly our forecast 3.5% for the nation as a whole.
The demand side of the home market is behaving largely as we forecast in the spring. Sales are down from the banner year that was 2007, but they are back to the average levels experience in 2000-05 in Calgary and Edmonton. Toronto sales have cooled, but they are still on pace with with elevated 2004-06 levels. Vancouver sales are one of the few cities where sales have dropped well below the levels experienced earlier this decade, and one cannot help but notice that this is also the market where affordability had become the most problematic. No kidding! I hadn't noticed!
Meanwhile, the supply-side is booming. This is helping to rebalance markets that had been in seller’s territory for an extended period of time, which is favourable to affordability and future demand. Recall that since 2002, Canadian resale home prices grew at an annual average rate of 10.2%, so a softer price performance in 2008-09 should not be too surprising. It is also a positive development that markets are cooling before the Bank of Canada embarks on another cycle of interest rate hikes. In our spring report, we highlighted the risk of a still hot housing market running into a monetary policy tightening cycle. It is currently not financing conditions which are causing demand to cool, but slowing economic conditions overall along with the lagged impact of past erosions in affordability caused by price surges in specific markets. History suggests that when a tightening of monetary policy cuts through a hot market, things can unwind in a disorderly fashion. Canadians will remember the bust of the late 1980s as a prime example. Cooling home markets also help to alleviate inflationary pressures which in turn diminish the need for further interest rate hikes. We do not expect the Bank of Canada to start hiking interest rates before economic growth ratchets back up towards 3% in the second half of 2009. Canadian housing markets should be cruising at a healthier, more sustainable pace by then.
CANADA’S HOUSING BOOM COMES TO AN END
June 26, 2008
Over the past couple of years, TD Economics has repeatedly forecast that Canada’s major real estate markets would experience a significant cooling. In fact, housing remained stronger for longer than we had anticipated, largely due to increased affordability through new financing options, such as no money down or extended amortizations. Regional economic strength related to the commodity boom also helped to fuel unsustainably elevated home price growth in the west. Nevertheless, our last Special Report on Canada’s housing market, Canada’s Red Hot Real Estate Markets to Cool (April 10, 2008), stressed that there would be a significant adjustment in real estate activity in 2008-09, with national average home price growth slowing sharply from the 11% posted in 2007 to a low single digit pace. There is now clear evidence that this slowdown has taken hold. The year-over-year price growth for existing homes in Canada’s major markets fell to only 1.1% in May, down from 8.6% just four months earlier. The trend has been broadly based, but it has been particularly sharp in some of the markets that had experienced the most dramatic price growth. Calgary and Edmonton home prices in April and May fell to below year-earlier levels. The combination of significantly higher listings, reflecting the desire of homeowners to take advantage of the past increase in prices, and weaker demand, due to the past erosion in affordability, are leading to declining sales and softer price performance across the country, but particularly in the west.
The key question is how far the recent trends will extend and whether Canada will experience a broad based housing correction. In our opinion, sales are likely to continue to decline in the coming quarters and price growth will slip to 2% on a national average basis in 2008 and rise only to 3.5% in 2009. However, this national average will mask very different regional price trends. Most markets will see low to mid single-digit gains, but Saskatchewan and Manitoba will continue to post double-digit gains in the near term followed by a significant cooling in 2009 – with the risk of a mild price correction in the major cities that have recently experienced extraordinary price growth. Alberta will have further weakness in the near term, as Calgary and Edmonton will likely see prices continue to fall for another 3 or 4 quarters, dropping 8% to 10% from their peak, after which prices should stabilize and start rising at a low single-digit pace. Aren't we already down that far?
Cashing in, not foreclosing
From an economic perspective, the recent behaviour of Canada’s real estate markets and the outlook for 2008/09 can be best explained in terms of the trends in supply and demand – the interaction between which determines prices. Wow, I could be a bank economist too!
On the supply side, past price performance has strongly encouraged additional supply in both the new and existing home markets. Housing starts averaged a strong 234,000 units in the first quarter. While we expect new home construction activity to remain robust, starts should gradually edge down to a lower level of around 200,000 units over the course of the next 18 months.
We had anticipated an increase in new listings as a result of solid price gains in the last couple of years, but the recent surge in new listings has been far greater than anticipated. The jump in supply of homes for sale is assuredly an attempt to take advantage of the past home price appreciation on the part of homeowners and real estate investors.
It should be stressed that the rise in listings does not reflect homeowners of principal dwellings desperate to sell, and this is the dominant difference between the Canadian and U.S. experience. Indeed, the U.S. has been characterized by an abnormal rise in delinquencies and foreclosures or large negative equity positions. In Canada, speculators may be quickly dumping properties on the market to get out while the times are good, but individuals that have a principal dwelling are not under financial duress. This distinction is crucial to evaluating the impact of weaker home price performance on personal wealth and consumption. Canadian consumers are also nowhere nearly as leveraged through their home equity as American consumers are. Except in Vancouver where people are overleveraged to the max.
A few more important distinctions also bear noting as the U.S. housing bust struggles to find a bottom, which naturally arouses fears that a similar unwinding could take place in Canada.
First off, many of the seeds that sowed the current U.S. housing bust were never planted in Canada. Interest rates and mortgage rates were significantly lower for significantly longer in the U.S., especially in the case of adjustable-rate mortgages (ARMs) with low initial teaser rates. The bulk of surging delinquencies on mortgage loans occurs precisely when the rate adjusts to a higher level. ARMs never took hold in Canada. No spike in mortgage payments means no spike in delinquencies. As economic conditions will be weaker over the forecast horizon than they were in 2007 and mortgage rates likely modestly higher, delinquencies in Canada will only rise to reflect domestic economic conditions. A surge to high levels is nowhere on the horizon.
Furthermore, it wasn’t just that borrowing costs were lower in the U.S. than in Canada. Overall lending conditions in the U.S. had eased to the point of becoming much too lax, introducing a systemic default risk, which is now a reality. Subprime mortgages were a significant chunk of originations in 2006-07. Not so in Canada, where they peaked at 5% in 2006 before vanishing. In the U.S., the additional supply of homes for sale as a result of ‘involuntary’ listings and / or foreclosures more often than not reflect desperate households trying to minimize their loss. In Canada, voluntary sellers are trying to maximize their capital gains. The difference is far from trivial.
It is also telling that the run-up in prices in the U.S. was, for many large markets, not supported by economic fundamentals. As per Nevada, Arizona, California, and Florida, it seemed to be driven much more by speculative activity. In Canada, markets whose economies have been booming are those whose housing markets caught fire. Witness the experience of Calgary, then Edmonton, and now Regina and Saskatoon. No mention of Vancouver - but why? Could it be because we have excessive speculative activity? Valuations in these markets also started below national levels and arguably had some catching up to do, contrary to the hottest U.S. markets during the run-up which were already higher than the U.S. average. This is unlike Vancouver where we've seen already high house prices rise to levels that are completely detached from rents, incomes or anything remotely resembling a fundamental level.
Finally, financing and economic conditions are largely more supportive of local demand in Canada. Lending has not tightened nearly as much as it has in the U.S. And, as noted above, lending never became as lax. For example, the vast majority of mortgage applicants in Canada were income-tested on the basis of the 3-year or 5-year posted rates; whereas in the U.S. it was common to either dispense with income testing or test on the basis of the low introductory teaser rate. Furthermore, the credit crunch has hit U.S. lenders’ balance sheets harder. The bulk of mortgage origination in Canada is sourced at well capitalized financial institutions. Homes currently being listed in Canada, if priced reasonably, will find buyers who can finance their purchase. In the U.S., despite much lower prices, financing is often hard to obtain, even for credit-worthy potential buyers. The recent Federal Reserve cuts to the policy rate by a full 3¼ percentage points have had little traction into relief on mortgage rates. Clearing the large inventory overhang is all that more difficult in such circumstances that are simply not present in Canada.
The main conclusion is that there has been an increase in supply (i.e. new listings and new home construction) in Canada . That will act to dampen home price appreciation and create a pullback in prices in selected cities where markets went too far, too fast. However, the increase in supply in Canada will pale in comparison to the dramatic surge experienced in the U.S. that caused the worst American housing correction since the Great Depression.
Decaffeinated sales
On the demand front, the dominant theme is that the past price appreciation in Canada has eroded affordability, reducing demand for new and existing homes. Nowhere is this truer than in Alberta and British Columbia. National sales did remain elevated for longer than expected, but are now pulling back more sharply than even our spring forecast due to reduced affordability and greater supply. The year-to-date (as of May data) percentage drop in sales for Canada’s major markets seems dramatic at -12.5%, but sales are in fact simply returning to the solid levels typically experienced in the three years (2004-06) prior the 2007 sales boom. (See sales charts for some major markets at the end of this report.)
Just as Calgary and Edmonton led the way up in sales growth, they are now leading the way down. Home sales in these two cities were down 34% and 30%, respectively, year-to-date as of May. However, Edmonton resale activity is tracking close to 2005 levels, while sales in Calgary are faring worse and look likely to revert back to 2004 levels, near 26,000 units. Our base-case scenario for Alberta home sales for the remainder of 2008 builds in an even greater decline in sales in the near term before levelling off late in the year for a net annual sales drop of 40%. As a result, after two years of percolating over 70,000 units sold, Alberta is more likely to record sales volumes in the 40,000-50,000 unit range this year and next.
The return to norm in resale activity is not confined to Alberta, and nor did we expect it to be. Our April forecast had sales declines for all provinces, except three (Saskatchewan, Manitoba, and Newfoundland & Labrador) that represent only 5% of the national total sales. Only Manitoba is disappointing our April forecast. Sales in Winnipeg are down by an unexpected 3.5% year-to-date, implying a likely sales decline of about 4% in Manitoba in 2008 – but this is only a shift from marginal sales growth to a marginal sales drop.
Sales are also weaker in other parts of the country, with British Columbia and Ontario sales down by more than 10%. Softer demand is therefore not an Alberta-specific theme. While affordability had not eroded to the same degree in other markets, it also had not improved for most markets, on a quarterly basis, since late 2006. Affordability remains at challenging levels for many potential buyers in Vancouver specifically, but also Toronto. Resale activity in Vancouver is tracking significantly below last year’s levels and we expect sales for 2008 as a whole to end up almost 20% lower than 2007. Toronto is expected to experience 10% lower sales.
Affordability to improve
Based on our assessments of supply and demand, what are the prospects for the next 6-12 months? Over this time span, both sides of the market are unambiguously pointing to softer price growth in most major markets. Just how soft, is a matter of location. For Canada as whole, we expect existing homes to appreciate by only 2% this year, a downward revision from our last forecast of 6%. Slower price growth – or declines in certain cities – but still solid underlying economic fundamentals will lead to an improvement in affordability. However, the relatively high prices in many markets will remain a key factor crimping demand.
Looking beyond the next 12 months, as affordability improves in some markets or stabilizes in others, and demand slowly absorbs homes being listed, we expect demand to start pulling prices forward at a slightly quicker pace in the second half of 2009. However, because the current rebalancing has abruptly shifted conditions from seller’s market territory to balanced market conditions in many cities, the price weakness will probably extend into next year. As a result, while prices will improve in 2009, the annual average resale price growth will still be modest at around 3.5%. I don't see prices going up as an 'improvement' - how does that help my family's financial situation exactly?
Turning to a regional perspective, Saskatchewan’s major markets offer an exception to the cooling trend on an annual basis, but this is mostly a question of timing. The price surge above 30% growth came late last year and much of that momentum is being carried into this year. But if Regina and Saskatoon follow the path just recently threaded by Calgary and later Edmonton – and we think they will – Saskatchewan’s price growth will have come back down to earth by early next year. We are looking for 2-3% price growth in 2009, with a risk of a mild price correction.
On the flip side, every other province, except Newfoundland & Labrador, and most notably the four largest provinces in the country, will experience significantly weaker home appreciation this year compared to last. Alberta will most likely experience a slight depreciation of 1-2% in home values on an annual basis. This correction will be concentrated in its largest urban markets of Calgary and Edmonton, where prices are expected to fall by 2-3%, with the rest of the province faring better. After stunning cumulative price gains of 45-65% in the last two years in those markets, our base-case forecast builds in a peak-to-trough correction of 8-10%. Our expectation is that monthly data will show year-over-year price declines for another 2-3 quarters of data (the typical duration of home price corrections in Canada), out to the first quarter of 2009. Alberta prices should then start growing again, albeit modestly at 1-2%, on a year-over-year basis. So TD Economics is basically forecasting home price declines in inflation adjusted dollars for quite some time.
Affordability has been a key issue in Canada’s most expensive market, Vancouver. Outside Alberta, where sales are down about 30% year-to-date, British Columbia is experiencing the largest percentage drop in sales year-to-date at close to 15%. This is not surprising given how strong sales (over 35,000 units) had been over the last six years. Vancouver has recorded a surge in listings since March, enough to bring the supply/demand relationship into balanced territory. Vancouver had not been balanced, by this measure, since late 2000. We therefore expect price growth to be subdued in the next 12-18 months. As a result of higher-than-expected listings, we now forecast 5% home price growth for the province as a whole this year (down from our spring forecast of 9%) and a similar outing next year – both a far cry from the 15% annual average home appreciation recorded over the last 3 years. We'll see how that works out!
Ontario and Québec homes have appreciated at a steady 6-7% rate over the last three years. Both provinces are expected to record only about half as much (3-4%) home price growth over the forecast horizon. Options have improved for potential homebuyers in Québec due to more listings, making the slowdown mostly a supply story. Meanwhile, the softer price growth in Ontario’s existing home market will be most closely related to a cooling in demand, resulting in weaker sales due to challenging affordability, particularly in the Greater Toronto Area.
Bottom line
Between 2005 and 2007, Alberta was skewing the national existing home market figures to the upside. Late in 2007 and early in 2008, Alberta home price growth came back down to earth, converging with national figures. The latest provincial real estate data show that Alberta is now more than a percentage point below the country’s average in terms of home price growth. In the past, we presented figures excluding Alberta to measure the impact of this particular market. As an example, Alberta boosted the national price figure by as much as 2½ percentage points in 2006. The distinction became irrelevant once Alberta had cooled back down to the national pace.
This exercise is once again relevant, and we are re-introducing these ‘ex. Alberta’ measures. Outside Alberta, we expect existing home to appreciate by about 3% this year. Including Alberta – which we think will record a 1.5% price decline – brings the national forecast down by nearly a full percentage point to 2%. For 2009, Alberta’s expected home price growth of 2% will not differ enough from the rest of the country to pull down significantly our forecast 3.5% for the nation as a whole.
The demand side of the home market is behaving largely as we forecast in the spring. Sales are down from the banner year that was 2007, but they are back to the average levels experience in 2000-05 in Calgary and Edmonton. Toronto sales have cooled, but they are still on pace with with elevated 2004-06 levels. Vancouver sales are one of the few cities where sales have dropped well below the levels experienced earlier this decade, and one cannot help but notice that this is also the market where affordability had become the most problematic. No kidding! I hadn't noticed!
Meanwhile, the supply-side is booming. This is helping to rebalance markets that had been in seller’s territory for an extended period of time, which is favourable to affordability and future demand. Recall that since 2002, Canadian resale home prices grew at an annual average rate of 10.2%, so a softer price performance in 2008-09 should not be too surprising. It is also a positive development that markets are cooling before the Bank of Canada embarks on another cycle of interest rate hikes. In our spring report, we highlighted the risk of a still hot housing market running into a monetary policy tightening cycle. It is currently not financing conditions which are causing demand to cool, but slowing economic conditions overall along with the lagged impact of past erosions in affordability caused by price surges in specific markets. History suggests that when a tightening of monetary policy cuts through a hot market, things can unwind in a disorderly fashion. Canadians will remember the bust of the late 1980s as a prime example. Cooling home markets also help to alleviate inflationary pressures which in turn diminish the need for further interest rate hikes. We do not expect the Bank of Canada to start hiking interest rates before economic growth ratchets back up towards 3% in the second half of 2009. Canadian housing markets should be cruising at a healthier, more sustainable pace by then.
Quarterly Migration - VHB Guest Post
The quarterly demographic statistics are out from Statcan here. (PDF) We can expect to see the regular MSM stories about 'everyone' moving to BC. We've covered this to death before.
Population growth is fairly mediocre, either in percentage or absolute terms. This is fascinating because the 1980s and 1990s booms featured huge population growth. Not this time.
Anyway, here is one chart I picked out. This is interprovincial migration. Note that in previous booms we were over +10K a quarter. This 'boom' we haven't even hit 5K. In fact, that big negative outflow from 97Q4 to 03Q3 was really unprecedented. BC lost 58,086 people to other provinces over that period. Between 2003Q3 and 2008Q1, the total interprovincial inflow has been only 44,823. So, we STILL haven't dug our way back to zero from the interprovincial hole we got ourselves in through the late 90s. Sure, there have been international immigrants, but no boom there. We've just been building condos for each other. No problem.
So, next time the water cooler chatter turns to all of those people who are moving to BC from other provinces, you can say, "No actually, I saw the real deal on Langley Financial Planning!"
VHB
Tuesday, June 24, 2008
Q108 BC Real Estate Market - according to Landcor
I just received the Landcor Data Corporation's quarterly synopsis of the BC Real Estate market and here is what they have to say:
Residential sales have mixed results, again
As many would expect, the first quarter of 2008 (Q108) has seen residential property sales in British Columbia drop in number of sales but increase in total sales value, much like the first quarter of 2007 (Q107).
This continued market trend is the result of a cooling off period in the BC residential property market.
2008 First Quarter Residential Property Sales Results - Introduction
Three regions up, three regions down
Currently, the market is seeing an increase in inventory, with properties sitting for longer periods of time; but as the analysis in this report will show, three of the six regional markets in BC are seeing values continue to increase despite the decrease in number of properties sold.
Looking at the 2008 first quarter results at a regional level, Greater Vancouver and the Okanagan, followed by the Kootenay region as a distant third, continue to see an increase in the total sales value of residential properties compared to the first quarter of 2007. What is interesting is that in the Vancouver Island, Fraser Valley and BC North/Northwest regions, the total sales value has declined in the first quarter of 2008, compared to Q107. This is the first Q1 sales value decrease for all three regions in the past 4 years (please note, this finding is based on examining Q1 sales statistics from Q1 2004 - Q1 2008 only).
Out-of-province buyers stay home
Residential property purchases have declined in the first quarter of 2008 for many reasons, one of which appears to the decline of interest from buyers from outside of British Columbia, namely those from Alberta and the United States. The number of buyers from Ontario is comparable to levels seen in the first quarter of 2007, however these purchases account for nearly half of the total value attributed to Ontario buyers in Q107.
The suspected downtown has arrived, but there is no need for alarm After years of historical highs, the market is simply correcting. In 2001, there were 90,704 residential sales, totalling just under $19 billion. Last year the market dipped for a second consecutive year to result in approx. 158,000 sales, but broke another record with a total value of approx. $62 billion. The first quarter of 2008 saw 26,860 residential properties trade hands, totaling $11.695 billion. On average, first quarter sales account for approx. 19% of annual total sales. Using this as a guideline we can expect to see 2008 total sales of over 140,000 transactions for a total value of over $61 billion. This would lead us to expect 2008 total sales counts to reflect 2004 levels, and a total value of sales similar to 2007.
Here is what I found interesting:
- A continued denial that the BC Real Estate market could be entering a period of substantial price declines.
- No recognition of the amount of speculative activity in the real estate market.
- No recognition of the ridiculous level of income required to purchase a home.
- Out of province buyers accounted for approximately 5.5% of all real estate transactions in Q108 which is down substaintially from the 6.1% in Q107.
Have a read through and tell us what you find interesting. Cheers.
Residential sales have mixed results, again
As many would expect, the first quarter of 2008 (Q108) has seen residential property sales in British Columbia drop in number of sales but increase in total sales value, much like the first quarter of 2007 (Q107).
This continued market trend is the result of a cooling off period in the BC residential property market.
2008 First Quarter Residential Property Sales Results - Introduction
Three regions up, three regions down
Currently, the market is seeing an increase in inventory, with properties sitting for longer periods of time; but as the analysis in this report will show, three of the six regional markets in BC are seeing values continue to increase despite the decrease in number of properties sold.
Looking at the 2008 first quarter results at a regional level, Greater Vancouver and the Okanagan, followed by the Kootenay region as a distant third, continue to see an increase in the total sales value of residential properties compared to the first quarter of 2007. What is interesting is that in the Vancouver Island, Fraser Valley and BC North/Northwest regions, the total sales value has declined in the first quarter of 2008, compared to Q107. This is the first Q1 sales value decrease for all three regions in the past 4 years (please note, this finding is based on examining Q1 sales statistics from Q1 2004 - Q1 2008 only).
Out-of-province buyers stay home
Residential property purchases have declined in the first quarter of 2008 for many reasons, one of which appears to the decline of interest from buyers from outside of British Columbia, namely those from Alberta and the United States. The number of buyers from Ontario is comparable to levels seen in the first quarter of 2007, however these purchases account for nearly half of the total value attributed to Ontario buyers in Q107.
The suspected downtown has arrived, but there is no need for alarm After years of historical highs, the market is simply correcting. In 2001, there were 90,704 residential sales, totalling just under $19 billion. Last year the market dipped for a second consecutive year to result in approx. 158,000 sales, but broke another record with a total value of approx. $62 billion. The first quarter of 2008 saw 26,860 residential properties trade hands, totaling $11.695 billion. On average, first quarter sales account for approx. 19% of annual total sales. Using this as a guideline we can expect to see 2008 total sales of over 140,000 transactions for a total value of over $61 billion. This would lead us to expect 2008 total sales counts to reflect 2004 levels, and a total value of sales similar to 2007.
Here is what I found interesting:
- A continued denial that the BC Real Estate market could be entering a period of substantial price declines.
- No recognition of the amount of speculative activity in the real estate market.
- No recognition of the ridiculous level of income required to purchase a home.
- Out of province buyers accounted for approximately 5.5% of all real estate transactions in Q108 which is down substaintially from the 6.1% in Q107.
Have a read through and tell us what you find interesting. Cheers.
Monday, June 23, 2008
May 2008 CMHC Data for the Vancouver CMA
I've had a chance to review the CMHC data for the month of May 2008 and here are the numbers.
New Housing Units Started during May - 1,757 - developers are still starting lots of projects because of the big profit margins involved. Recently I heard that the net profit margin for a suburban condo project is in the 25% - 30% range. Think about that for a minute, after the developer pays for the land, labour, and materials they still make $75k to $150k per unit. Developers have a lot of room to negotiate as prices fall.
New Housing Units Completed during May - 1,696 - developers are still having trouble completing as many units as they are starting for various reasons, including labour shortages. I expect that this will change significantly by the end of the year as lots of infrastructure projects are completed, freeing up labour to complete housing units.
New Housing Units Under Construction during May - 26,316 - near record levels of construction activity. We hit the peak in March and I don't think we'll revisit that peak for 10+ years now.
Completed and Unabsorbed new units during May - 1,422 - this is up nearly 30% from May 2007 but far from the high levels witnessed during the 90s real estate bust. Look for this number to increase dramatically as more housing is completed.
Update: Prices are correlated to supply as shown in this graph. Starts drop off at the same time as prices fall. Completions begin to outstrip starts as the correction happens.
New Housing Units Started during May - 1,757 - developers are still starting lots of projects because of the big profit margins involved. Recently I heard that the net profit margin for a suburban condo project is in the 25% - 30% range. Think about that for a minute, after the developer pays for the land, labour, and materials they still make $75k to $150k per unit. Developers have a lot of room to negotiate as prices fall.
New Housing Units Completed during May - 1,696 - developers are still having trouble completing as many units as they are starting for various reasons, including labour shortages. I expect that this will change significantly by the end of the year as lots of infrastructure projects are completed, freeing up labour to complete housing units.
New Housing Units Under Construction during May - 26,316 - near record levels of construction activity. We hit the peak in March and I don't think we'll revisit that peak for 10+ years now.
Completed and Unabsorbed new units during May - 1,422 - this is up nearly 30% from May 2007 but far from the high levels witnessed during the 90s real estate bust. Look for this number to increase dramatically as more housing is completed.
Update: Prices are correlated to supply as shown in this graph. Starts drop off at the same time as prices fall. Completions begin to outstrip starts as the correction happens.
Wednesday, June 18, 2008
Look out bottom here we come
I've enjoyed reading some of the recent comments. Thank you for participating.
I'm off for a few days so here is an open topic post to discuss the turning of Vancouver's housing market.
None of the so called experts have declared it yet but the Greater Vancouver real estate market is definitively over the hump with sales plunging, listings skyrocketing and its all downhill from here. Just wait until we get some momentum behind us.
Where will the market bottom?
Will we overshoot to the downside?
Will fundamental values be restored?
What is fundamental value?
How long will this process take?
What lessons can we learn from other bubbles bursting around the world?
I heard an anecdote yesterday of a developer who is trying to unload the last few condo units in a decent project but they just aren't selling at the asking prices. The developer is currently asking $365,000 but would accept $275,000. My question is - if they want to get rid of it so bad, why don't they just drop the ask price? Oh, I know, greed. They'd like to see if there is another greater fool out there who doesn't have the cajones to go in with a ridiculous lowball offer. If you are buying right now make ridiculous lowball offers. Developers and long term owners have a lot of margin to work with so they may surprise you and accept.
mohican out.
Saturday, June 14, 2008
Past Price Declines in the Vancouver Real Estate Market
In the past 30 years the Vancouver area has witnessed 4 major periods of real estate price appreciation and 3 subsequent periods of price declines. We are awaiting the 4th subsequent period of price declines which seems to be starting now.
For the historical perspective:
In nominal dollars:
From 1975 to 1981 real estate prices in Vancouver rose 240% and subsequently declined 35% over 18 months.
From 1982 to 1990 real estate prices in Vancouver rose 115% and subsequently declined 11% over 12 months.
From 1991 to 1995 real estate prices in Vancouver rose 44% and subsequently declined 14% over 6 years.
From 2001 to 2008 real estate prices in Vancouver rose 116% and subsequently declined ??? TBD ???.
In real inflation adjusted dollars:
From 1979 to 1981 real estate price in Vancouver rose 120% and subsequently declined 51% over 5 years.
From 1985 to 1990 real estate price in Vancouver rose 70% and subsequently declined 15% over 9 months.
From 1991 to 1994 real estate price in Vancouver rose 35% and subsequently declined 23% over 5 years.
From 2001 to 2008 real estate prices in Vancouver rose 87% and subsequently declined ??? TBD ???.
In Summation
All I can really say about the past price movements in the Vancouver market is that after every price runup there has been a price decline. Well duh!! Personally I would rather focus on the following criteria, which is the ratio of rent payments to mortgage payments.
As I have mentioned before, my formula for determining a purchase price for a property that I'd like is this:
{Fair Price} = [1/{Five Year Fixed Mortgage Rate}] * [{Annual Rent} - {Property Taxes + Maintenance}]
For example:A townhouse rents for $1500 per month has maintenance of $150 per month and property taxes of $150 per month. The five year fixed mortgage rate is approximately 5.9% right now.
{Fair Price} = [1/0.059] * [{1500 * 12} - {150 * 12 + 150 * 12}]
{Fair Price} = [17] * [18000 - 3600]
{Fair Price} = $244,800
Where I am looking to purchase this means that I am looking for a price decline of approximately 30%. Rents could increase as well but I see this as being unlikely since I haven't heard of too many people getting huge raises recently to be able to afford sizeable rent increases.
For the historical perspective:
In nominal dollars:
From 1975 to 1981 real estate prices in Vancouver rose 240% and subsequently declined 35% over 18 months.
From 1982 to 1990 real estate prices in Vancouver rose 115% and subsequently declined 11% over 12 months.
From 1991 to 1995 real estate prices in Vancouver rose 44% and subsequently declined 14% over 6 years.
From 2001 to 2008 real estate prices in Vancouver rose 116% and subsequently declined ??? TBD ???.
In real inflation adjusted dollars:
From 1979 to 1981 real estate price in Vancouver rose 120% and subsequently declined 51% over 5 years.
From 1985 to 1990 real estate price in Vancouver rose 70% and subsequently declined 15% over 9 months.
From 1991 to 1994 real estate price in Vancouver rose 35% and subsequently declined 23% over 5 years.
From 2001 to 2008 real estate prices in Vancouver rose 87% and subsequently declined ??? TBD ???.
In Summation
All I can really say about the past price movements in the Vancouver market is that after every price runup there has been a price decline. Well duh!! Personally I would rather focus on the following criteria, which is the ratio of rent payments to mortgage payments.
As I have mentioned before, my formula for determining a purchase price for a property that I'd like is this:
{Fair Price} = [1/{Five Year Fixed Mortgage Rate}] * [{Annual Rent} - {Property Taxes + Maintenance}]
For example:A townhouse rents for $1500 per month has maintenance of $150 per month and property taxes of $150 per month. The five year fixed mortgage rate is approximately 5.9% right now.
{Fair Price} = [1/0.059] * [{1500 * 12} - {150 * 12 + 150 * 12}]
{Fair Price} = [17] * [18000 - 3600]
{Fair Price} = $244,800
Where I am looking to purchase this means that I am looking for a price decline of approximately 30%. Rents could increase as well but I see this as being unlikely since I haven't heard of too many people getting huge raises recently to be able to afford sizeable rent increases.
Thursday, June 12, 2008
This One is for the Kids - RESP
From HRSDC:
A Registered Education Savings Plan (RESP) is a special savings account that can help you, your family, or your friends save early for your child’s education after high school.
The Government of Canada allows savings for education to grow tax free until your child named in the RESP enrolls in education after high school. The child named in an RESP is known as a beneficiary. A parent, grandparent, other relative, or friend, can open an RESP for a child. The person who opens an RESP is called a subscriber.
Benefits of Having an RESP
When you have an RESP, you can start saving immediately for your child's education in the future. Many parents wonder how much to save. They also wonder how soon they should start. The answer is simple. Save as much as you can afford. Start today. By starting early, tax-sheltered earnings on your savings can grow surprisingly quickly.
Further, if you are saving for your child’s education, the Government of Canada will help you with special saving incentives that are only available if you have an RESP, including the Canada Education Savings Grant and the Canada Learning Bond.
Your RESP Provider
You can open an RESP through an RESP provider. RESP providers include most financial institutions, such as banks and credit unions, as well as group plan dealers and financial services providers. It is important to choose an RESP provider carefully. Your provider has a role to play throughout the life of your RESP, which can remain open for a maximum of 26 years:
At the start, your RESP provider will help you decide on the type of RESP that best meets your needs. You can choose from three general types of plans: family plans, individual plans, or group plans.
After you decide on the type of plan that meets your needs, your RESP provider will give you advice about making your money grow with wise investments.
When it is time for your beneficiary to start using the RESP, your RESP provider will administer the payments and ensure that they are made according to the terms of your plan. If the beneficiary does not continue education after high school, your RESP provider will ensure that your contributions are returned to you and tell you how much income you made on those contributions. Your provider will also see that any additional money paid into the RESP by the government is returned to the government.
Some RESP providers charge service fees. Some may also limit the amount of money you can put into your plan and tell you how often you can contribute. Before you open an RESP, ask the RESP provider to explain any fees, limits, penalties or requirements to make regular payments that may apply.
Steps to Opening an RESP
Opening an RESP is not difficult. In fact, you just need to take a few simple steps:
Ask your RESP provider about your investment choices. Some RESP providers offer a variety of investment choices while others have a set investment plan.
It is important to take your time. Ask your RESP provider questions about your investment choices, including the advantages and risks of each. Some of your investment choices may have service fees or penalties. It is important to ask for a list of the fees or penalties that may apply.
Type of Plans - Choosing the Right RESP For You
You can choose from three general types of RESPs: family plans, individual plans, or group plans.
Family Plan
In a family plan, you can name one or more children as beneficiaries of the RESP, but they must be related to you. They may be your children, adopted children or grandchildren.
A family plan may be a good choice if:
An individual plan is for one beneficiary and the person does not have to be related to you.
An individual plan may be a good choice if:
A group plan is offered and administered by a group plan dealer, and each plan has its own rules. Usually, group plan dealers must invest the money in low-risk securities such as bonds, treasury bills and guaranteed income certificates (GICs). Generally, you have to sign a contract agreeing to make regular payments into the plan over a certain period of time.
In a group plan, your savings are “pooled” with those of other beneficiaries (or children) of the same age. The amount of money each child gets is based on how much money is in the pool, and on the total number of students in the pool who are in school that year.
You can name only one child in a group plan and the child does not have to be related to you. If the child does not continue with education after high school, your group plan dealer will tell you what will happen.
A group plan may be a good choice if:
Using Your RESP
As soon as the child named in your plan is enrolled in a qualifying educational program, he or she can start receiving payments from the RESP called Educational Assistance Payments (EAPs).
Qualifying Educational Programs
Usually, a qualifying educational program is a course of study that lasts at least three weeks in a row, with at least 10 hours of instruction or work each week. A program at a foreign educational institution must last at least 13 weeks.
Qualifying educational programs include apprenticeships, and programs offered by a trade school, CEGEP, college or university.
RESP funds can be used for full or part-time study in a qualifying program.
When Your Beneficiary Does Not Continue Education After High School
If your child decides not to continue education after high school, you may be able to:
A Registered Education Savings Plan (RESP) is a special savings account that can help you, your family, or your friends save early for your child’s education after high school.
The Government of Canada allows savings for education to grow tax free until your child named in the RESP enrolls in education after high school. The child named in an RESP is known as a beneficiary. A parent, grandparent, other relative, or friend, can open an RESP for a child. The person who opens an RESP is called a subscriber.
Benefits of Having an RESP
When you have an RESP, you can start saving immediately for your child's education in the future. Many parents wonder how much to save. They also wonder how soon they should start. The answer is simple. Save as much as you can afford. Start today. By starting early, tax-sheltered earnings on your savings can grow surprisingly quickly.
Further, if you are saving for your child’s education, the Government of Canada will help you with special saving incentives that are only available if you have an RESP, including the Canada Education Savings Grant and the Canada Learning Bond.
Your RESP Provider
You can open an RESP through an RESP provider. RESP providers include most financial institutions, such as banks and credit unions, as well as group plan dealers and financial services providers. It is important to choose an RESP provider carefully. Your provider has a role to play throughout the life of your RESP, which can remain open for a maximum of 26 years:
At the start, your RESP provider will help you decide on the type of RESP that best meets your needs. You can choose from three general types of plans: family plans, individual plans, or group plans.
After you decide on the type of plan that meets your needs, your RESP provider will give you advice about making your money grow with wise investments.
When it is time for your beneficiary to start using the RESP, your RESP provider will administer the payments and ensure that they are made according to the terms of your plan. If the beneficiary does not continue education after high school, your RESP provider will ensure that your contributions are returned to you and tell you how much income you made on those contributions. Your provider will also see that any additional money paid into the RESP by the government is returned to the government.
Some RESP providers charge service fees. Some may also limit the amount of money you can put into your plan and tell you how often you can contribute. Before you open an RESP, ask the RESP provider to explain any fees, limits, penalties or requirements to make regular payments that may apply.
Steps to Opening an RESP
Opening an RESP is not difficult. In fact, you just need to take a few simple steps:
- Get a Social Insurance Number (SIN) for anyone you name in your RESP as a person you are saving for. There is no fee to get one, however, certain documents are required.
- Apply to the Canada Revenue Agency for the Canada Child Tax Benefit if your family net income is $75,769 or less. This form is generally provided at the hospital where your child was born.
- Decide on the type of RESP you want to open.
- Decide on the type of investment that will make your money grow.
- Put some money into your RESP.
Making Your Money Grow
Ask your RESP provider about your investment choices. Some RESP providers offer a variety of investment choices while others have a set investment plan.
It is important to take your time. Ask your RESP provider questions about your investment choices, including the advantages and risks of each. Some of your investment choices may have service fees or penalties. It is important to ask for a list of the fees or penalties that may apply.
Type of Plans - Choosing the Right RESP For You
You can choose from three general types of RESPs: family plans, individual plans, or group plans.
Family Plan
In a family plan, you can name one or more children as beneficiaries of the RESP, but they must be related to you. They may be your children, adopted children or grandchildren.
A family plan may be a good choice if:
- You want all, or any one of the children named in the plan, to be able to use the money;
- You want to decide how to invest the money, either on your own or with the help of a financial advisor; and
- You don’t necessarily want to make regular monthly payments.
An individual plan is for one beneficiary and the person does not have to be related to you.
An individual plan may be a good choice if:
- You want to save for a child who is or is not related to you;
- You want to decide how to invest the money, either on your own or with the help of a financial advisor; and
- You don’t necessarily want to make regular monthly payments.
A group plan is offered and administered by a group plan dealer, and each plan has its own rules. Usually, group plan dealers must invest the money in low-risk securities such as bonds, treasury bills and guaranteed income certificates (GICs). Generally, you have to sign a contract agreeing to make regular payments into the plan over a certain period of time.
In a group plan, your savings are “pooled” with those of other beneficiaries (or children) of the same age. The amount of money each child gets is based on how much money is in the pool, and on the total number of students in the pool who are in school that year.
You can name only one child in a group plan and the child does not have to be related to you. If the child does not continue with education after high school, your group plan dealer will tell you what will happen.
A group plan may be a good choice if:
- You can make regular payments into the RESP;
- You prefer to have someone else decide how to invest the money for you; and
- You are fairly sure that the child you are saving for will continue education after high school.
Using Your RESP
As soon as the child named in your plan is enrolled in a qualifying educational program, he or she can start receiving payments from the RESP called Educational Assistance Payments (EAPs).
Qualifying Educational Programs
Usually, a qualifying educational program is a course of study that lasts at least three weeks in a row, with at least 10 hours of instruction or work each week. A program at a foreign educational institution must last at least 13 weeks.
Qualifying educational programs include apprenticeships, and programs offered by a trade school, CEGEP, college or university.
RESP funds can be used for full or part-time study in a qualifying program.
When Your Beneficiary Does Not Continue Education After High School
If your child decides not to continue education after high school, you may be able to:
- Wait for a period of time, he or she may decide to continue studying later;
- Use the money for a brother or sister who does continue education after high school;
- Transfer the money into a Registered Retirement Savings Plan (RRSP) to help you save for your retirement.
- Withdraw your personal savings, tax-free.
Tuesday, June 10, 2008
Chilliwack at 7.9 Months of Inventory in May 2008
Well the Chilliwack and Area Real Estate Board released their lowly 1 page statistics package and things aren't looking too bright in the upper Fraser Valley these days if you're trying to sell a home.
May 2008 witnessed a total of 239 residential sales compared to 396 last May for a whopping 40% drop in sales year over year.
May 2008 also saw inventory climb to 1897 active residential listings compared to 1026 last year for a dizzying 85% increase in active listings.
Whoa!
The press release is pretty glum too:
The Board's MLS® system recorded $83,573,500 worth of sales this May. That's a 10 per cent decrease from the total posted this past April, and a 39 per cent drop from the total in May 2007.
A total of 267 properties traded hands through the Board's MLS® system in May 2008, which is eight per cent lower than the total from April and 39 per cent fewer than in May 2007.
"We're seeing low levels of consumer confidence in our region," said Board President Trude Kafka. "These low levels, combined with rising prices for food and fuel, are just a few of the reasons people are not making big ticket purchases."
The total value of home sales recorded through the Chilliwack and District Real Estate Board's MLS® system this May was $75,457,255 – which is 13 per cent lower than the total from April 2008, and 38 per cent below the amount posted in May 2007.
In all, 239 homes were sold through the Board's MLS® system this May. That's 10 per cent less than in April, and 40 per cent less than last May.
The average price of homes sold through the Board's MLS® system this May was $315,721, which is three per cent less than the average from April 2008 and three per cent higher than the average from May 2007. The Board cautions that the average residential price is a useful figure only for establishing trends and comparisons over a period of time. It does not indicate an actual price for a home due to the wide selection of housing available in the area.
A total of 643 new residential listings were added to the Board's MLS® system this May, a 16 per cent jump from May 2007. As the month came to an end, there were 1,897 active residential listings on the Board's MLS® system.
May 2008 witnessed a total of 239 residential sales compared to 396 last May for a whopping 40% drop in sales year over year.
May 2008 also saw inventory climb to 1897 active residential listings compared to 1026 last year for a dizzying 85% increase in active listings.
Whoa!
The press release is pretty glum too:
The Board's MLS® system recorded $83,573,500 worth of sales this May. That's a 10 per cent decrease from the total posted this past April, and a 39 per cent drop from the total in May 2007.
A total of 267 properties traded hands through the Board's MLS® system in May 2008, which is eight per cent lower than the total from April and 39 per cent fewer than in May 2007.
"We're seeing low levels of consumer confidence in our region," said Board President Trude Kafka. "These low levels, combined with rising prices for food and fuel, are just a few of the reasons people are not making big ticket purchases."
The total value of home sales recorded through the Chilliwack and District Real Estate Board's MLS® system this May was $75,457,255 – which is 13 per cent lower than the total from April 2008, and 38 per cent below the amount posted in May 2007.
In all, 239 homes were sold through the Board's MLS® system this May. That's 10 per cent less than in April, and 40 per cent less than last May.
The average price of homes sold through the Board's MLS® system this May was $315,721, which is three per cent less than the average from April 2008 and three per cent higher than the average from May 2007. The Board cautions that the average residential price is a useful figure only for establishing trends and comparisons over a period of time. It does not indicate an actual price for a home due to the wide selection of housing available in the area.
A total of 643 new residential listings were added to the Board's MLS® system this May, a 16 per cent jump from May 2007. As the month came to an end, there were 1,897 active residential listings on the Board's MLS® system.
Monday, June 9, 2008
Vancouver Area May 2008 Housing Starts
VANCOUVER, BRITISH COLUMBIA--(Marketwire - June 9, 2008) - Canada Mortgage and Housing Corporation (CMHC) preliminary figures show that ten per cent more homes were started in the first five months of 2008, compared to the same period last year.
While single detached starts continued to trend down, multiple unit home building, particularly apartment condominium building, was well above last year's."High starts and longer completion times have pushed the number of apartment homes under construction to record highs," said Robyn Adamache, senior market analyst with CMHC. "However, an estimated one-half of apartment units underway are pre-sold, and over the past year, virtually all (98%) units were sold within the same month they were completed. This has left a very lean supply of completed and unsold new apartments on the market.
While the supply of unsold new condominiums has been edging up since last year, it remains at less than one-third of the ten-year average."A similar trend is emerging in the Abbotsford CMA, where multiple unit developments have made a resurgence this year, following a slowdown in building last year. As a result, home starts in Abbotsford were up by one-third, compared to the first five months of 2007.
While single detached starts continued to trend down, multiple unit home building, particularly apartment condominium building, was well above last year's."High starts and longer completion times have pushed the number of apartment homes under construction to record highs," said Robyn Adamache, senior market analyst with CMHC. "However, an estimated one-half of apartment units underway are pre-sold, and over the past year, virtually all (98%) units were sold within the same month they were completed. This has left a very lean supply of completed and unsold new apartments on the market.
While the supply of unsold new condominiums has been edging up since last year, it remains at less than one-third of the ten-year average."A similar trend is emerging in the Abbotsford CMA, where multiple unit developments have made a resurgence this year, following a slowdown in building last year. As a result, home starts in Abbotsford were up by one-third, compared to the first five months of 2007.
Sunday, June 8, 2008
Friday, June 6, 2008
Some Interesting Statistics on Housing in Vancouver
All data is from the 2006 census from Statistics Canada.
The total number of households in Vancouver Census Metropolitan Area: 817,225
Total owners: 531,725
Total renters: 285,045
Change since 2001:
Households: +7.7%
Owners: +14.9%
Renters: -3.6%
Not surprisingly the number of owners rose in the 4 years between 2001 and 2006 but I didn't thiink it would be double the rate of population increase. Surprisingly, the count of people renting fell between 2001 and 2006 even though the population increased.
Percentage of households owning: 65.1%
Percentage of households renting: 34.9%
Number of households spending more than 30% of income on shelter: 265,870
Renters spending more than 30% of income on shelter: 123,050
Owners spending more than 30% of income on shelter: 142,815
Those numbers of people spending more than 30% of household income on shelter costs are just sickening. I had no idea there were so many people in that kind of dire financial position. We are talking about 1/4 of the entire population of the greater vancouver area. I suppose that single people who make average incomes or lower would comprise the majority of those spending 30% or more in addition to the overextended home debtor.
The total number of households in Vancouver Census Metropolitan Area: 817,225
Total owners: 531,725
Total renters: 285,045
Change since 2001:
Households: +7.7%
Owners: +14.9%
Renters: -3.6%
Not surprisingly the number of owners rose in the 4 years between 2001 and 2006 but I didn't thiink it would be double the rate of population increase. Surprisingly, the count of people renting fell between 2001 and 2006 even though the population increased.
Percentage of households owning: 65.1%
Percentage of households renting: 34.9%
Number of households spending more than 30% of income on shelter: 265,870
Renters spending more than 30% of income on shelter: 123,050
Owners spending more than 30% of income on shelter: 142,815
Those numbers of people spending more than 30% of household income on shelter costs are just sickening. I had no idea there were so many people in that kind of dire financial position. We are talking about 1/4 of the entire population of the greater vancouver area. I suppose that single people who make average incomes or lower would comprise the majority of those spending 30% or more in addition to the overextended home debtor.
Thursday, June 5, 2008
Real Estate Price Changes in the Greater Vancouver Area
Well the model predicted a slowing of the 6 month price change but much steeper decline that was witnessed. Partially, this is due to a real pick up in sales during the latter part of the month of May relieving some of the inventory pressure and causing the month to be a little more on the moderate side.
Sales will likely need to fall further and inventory continue to climb for us to see meaningful price drops. Once the price drops start then its game over for the speculators and super-leveraged. I don't know how anyone has really been able to afford the purchase of a home in the Vancouver area the past entire 3 years but the sales pace is finally slowing and that buyer exhaustion point has been reached or at least pretty close.
Prices in the REBGV area for the benchmark single family home did drop last month and it could very well mean that April was the price top. We will see.
Wednesday, June 4, 2008
Tuesday, June 3, 2008
FVREB May 2008
The Fraser Valley Real Estate Board released their monthly statistic package to the public and here are the highlights.
Listings are up - - WAY UP. 33% higher than last year.
Sales are down - - WAY DOWN. 25% lower than last year.
Consequently the Months of Inventory is high for this time of year at 7 MOI.
Note regarding active listings - the FVREB decided to change the way they calculate active listings to a more accurate method but it limits our ability to compare year over year changes to inventory. Using the previous method, inventory would have been approximately 12,400 for an increase of 47% YOY and a MOI of 7.8.
Median Prices were up for detached (1.4%) and down for townhouses (-1.3%) and apartments (-2.2%). Low quality is the first to suffer during a real estate downturn like we are entering right now. The lower quality areas, structures, and housing types go down first and most.
We are well on our way to having negative Year over Year price changes with current annual appreciation for the House Price Index coming in at a lowly 4.5%. I fully expect that number to be negative by fall. The House Price Index in some lower quality areas is already in negative YOY% territory - see the press release for more details.
The price change model using months of inventory to predict future price movements is working well with a predicted MOM% price decline for the next few months on average.
Listings are up - - WAY UP. 33% higher than last year.
Sales are down - - WAY DOWN. 25% lower than last year.
Consequently the Months of Inventory is high for this time of year at 7 MOI.
Note regarding active listings - the FVREB decided to change the way they calculate active listings to a more accurate method but it limits our ability to compare year over year changes to inventory. Using the previous method, inventory would have been approximately 12,400 for an increase of 47% YOY and a MOI of 7.8.
Median Prices were up for detached (1.4%) and down for townhouses (-1.3%) and apartments (-2.2%). Low quality is the first to suffer during a real estate downturn like we are entering right now. The lower quality areas, structures, and housing types go down first and most.
We are well on our way to having negative Year over Year price changes with current annual appreciation for the House Price Index coming in at a lowly 4.5%. I fully expect that number to be negative by fall. The House Price Index in some lower quality areas is already in negative YOY% territory - see the press release for more details.
The price change model using months of inventory to predict future price movements is working well with a predicted MOM% price decline for the next few months on average.
Monday, June 2, 2008
REBGV May 2008 Stats
The Real Estate Board of Greater Vancouver has not released the stats package for May yet but courtesy of Paul B we have much of the data beforehand. Aside from the important price data we can look at sales and inventory to see where the trends may be. As soon as the stats package is released we will look at it in more detail.
Sales were 29% off last year. This is the drop off in sales that I was looking for in order to conclude that 2008 would be the year our correction starts. Indeed it looks like it is happening and future months will allow us to be even more conclusive or not.
One of these things is not like the other! Active Listings have shot up dramatically after a slow start to the year. The active listings are rising due to increased listing activity and a slowdown in buying activity.
One of the more conclusive elements of the data is the non-typical rise in Months of Inventory during May.
More on prices to come later.
The model that jesse and I worked on earlier in the month to correlate inventory with price changes would suggest a monthly price decline of -4% +/- 2% approximately. I am not too confident in the model because we just don't have enough data to be terribly accurate yet but it gives us a 'best guess' and that is better than nothing.
Sales were 29% off last year. This is the drop off in sales that I was looking for in order to conclude that 2008 would be the year our correction starts. Indeed it looks like it is happening and future months will allow us to be even more conclusive or not.
One of these things is not like the other! Active Listings have shot up dramatically after a slow start to the year. The active listings are rising due to increased listing activity and a slowdown in buying activity.
One of the more conclusive elements of the data is the non-typical rise in Months of Inventory during May.
More on prices to come later.
The model that jesse and I worked on earlier in the month to correlate inventory with price changes would suggest a monthly price decline of -4% +/- 2% approximately. I am not too confident in the model because we just don't have enough data to be terribly accurate yet but it gives us a 'best guess' and that is better than nothing.
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