As a homeowner that’s carefully dissected this argument from all angles for a period of over 3 years, I can confidently say that no; under many circumstances, home ownership is NOT the best investment.  Far from it when compared to stocks or other investments.

Good to have one?  Of course – but if you do it the wrong way, it could annihilate you financially.  Here’s a mainstream newspaper finally admitting it;   Keep in mind here that 50% of US homeowners are now officially “underwater” on their mortgages when realtor fees are factored in.  FIFTY PERCENT!

Is home ownership really a smart investment?

http://www.thestar.com/article/1091881–is-home-ownership-really-a-smart-investment

If Toronto fireman Alexander Gunn was alive today, he might well feel like the Warren Buffett of his times.

The semi-detached home he bought in Toronto’s Riverdale neighbourhood for $1,200 in 1906, sold in November for $825,000.

Conventional wisdom has it that buying a home is one of the smartest things we can do. If you have been lucky enough to live in the Greater Toronto Area, especially in the last 10 years when house prices have doubled, that would be true.

But over the long run, is home ownership such a great deal? To find out Moneyville took a close look at Gunn’s house over the last 105 years.

Here’s what we found: Adjusted for inflation, an investment in the stock market would have yielded a better return, including all the ups and downs — starting with the 1929 stock market crash that ushered in the Great Depression.

Toronto was still rebuilding from the Great Fire of 1904 when Alexander Gunn was promoted to district captain after years of climbing the ladder at the city’s No. 3 firehall at Yonge and Carlton Sts. With his new responsibilities came a pay hike, from $850 to $1,000 a year.

It was the nod he needed to buy his first home.

The three-storey house in what is now known as Riverdale was brand new, part of a development on what had been fields where locals grew food to sell at market. It promised good luck: A shamrock had been crafted into its soaring gable, most likely by Irish immigrants who helped build these turn-of-the-century subdivisions.

Each day on his way to work, Gunn would have headed down Broadview Ave. with its sweeping view of the downtown and watched the burned-out city being rebuilt.

He would have kept warm at night in front of the house’s wood-trimmed fireplace and watched through its lead-glass windows as thousands more homeowners flocked to the area after 1912 when Danforth Ave. was paved and, later, the Bloor Viaduct erected across the Don Valley.

Gunn paid just a little more than a year’s salary for the modest house on a 20 foot by 112.5 foot lot. Today, a buyer would pay a fortune, relatively speaking — about five times their annual income given that the average price of a GTA home in October was $465,000 and the average household income $82,000, according to the Canada Mortgage and Housing Corp.

Gunn and his family lived at 56 Simpson Ave. for more than four decades, through two World Wars, the Great Depression and the remarkable transformation of Toronto.

The house changed hands just four times before its most recent sale. And the average annual gain over the 105 years, adjusted for inflation, was just 3.9 per cent.

“If I had to give new homebuyers some advice, it’s that houses aren’t always the ultimate investment. You should never bet the farm on the house, so to speak,” says Francis Fong, an economist with TD Economics.

Fong and his colleague Sonya Gulati helped Moneyville adjust prices for inflation and compare the appreciation of the home against Toronto Stock Exchange returns.

The challenge was to compare apples to apples. We had the home’s sale price going back to 1906, but the Bank of Canada’s inflation records don’t begin until 1914. Toronto Stock Exchange records start in 1919.

So we opted to track gains from 1947 onward, seven years after Gunn’s death, when the house sold for $6,300. We found that in those 64 years, the house appreciated at an average annual rate of 2.3 per cent, adjusted for inflation. (Inflation averaged 3.9 per cent during the same period, largely because of spikes in the 1970s and early ’80s.)

The TSX, on the other hand, did marginally better — producing average returns of about 3 per cent.

But when the everday costs of a house were included, things likes taxes, maintenance and upkeep, 56 Simpson fared much worse

“A house is not a good investment. It is a roof over your head,” says James McKellar, director of the real estate and infrastructure program at York University’s Schulich School of Business.

These days, homeowners in hot markets like Toronto and Vancouver may feel they have hit the jackpot: Most Toronto homes have virtually doubled in price over the last decade and in Vancouver they have almost tripled.

But once you factor in the other costs — interest on the mortgage, new kitchens, bathrooms, furnaces and electrical updates, “you’re lucky to make anything,” says McKellar. Studies have shown that it’s $800 a month cheaper to rent a 1,000-square-foot home than to own it, he notes.

“By any empirical study, houses do not inflate. They are a cost. But we all have to live somewhere.

“Calling a house a good investment is a process of rationalization. The last thing you want to admit is that, ‘I bought the house because I fell in love with it.’”

Catharine Grossi is proud to admit that. She and her husband Paul bought 56 Simpson for $462,500 back in 2001 because they were keen to move back to the city from the suburbs.

“When I saw that so much of the original house was there, and it was updated . . . That was good for me. I loved it as soon as I saw it.”

She became fascinated by the home’s history — she spent a day at the City of Toronto archives — and details such as its original fireplace, century-old exposed brick, the shamrock.

The house proved to be the perfect place for Grossi’s two sons and daughter to drop their bags after university or stints abroad.

Grossi wasn’t thinking so much about the gains she’s made, but rather the life she’s lived at 56 Simpson when the house sold Nov. 4. She and Paul are downsizing into a home two doors from their daughter and her newborn twins.

Grossi asked just one thing when her realtor called to say there had been an offer at asking price: “Do they love the house?”

James McKellar gets that.

He has lost money in the housing market: About $25,000 in the wake of the oil patch bust in Calgary in 1983 and $35,000 on a Boston home during the ’90s recession.

He now owns a home in Moore Park.

“The big drawback of renting is that it doesn’t give you the emotional satisfaction of owning,” he says with just the slightest chuckle.

“At the end of the day, when you go home and make dinner and relax, the numbers really don’t matter.”

Also read:

How we paid off our mortgage in three years

Why I sold my house and rent instead

What an awesome story with some great ideas!  Just had this blog sent to me:

The following is an amalgamation of “family economy” stories from EO families who have implemented the family financial system laid out in Richard and Linda Eyre’s new book, The Entitlement Trap: How to rescue your child with a new family system of choosing, earning, and ownership. The Eyres can be reached at www.TheEyres.com.

My spouse and I got to thinking one day how “nuts” it was to accumulate money and wealth, but never teach our kids how to handle it or even how to have the financial savvy necessary to thrive in this topsy-turvy economic world they are growing up in.

We realized that we had an economy in our own home, but it was essentially a welfare and entitlement economy.  Kids asked for money (or toys or whatever) and got them.  They felt that they deserved whatever they wanted and whatever their friends had, without working or waiting.  And the “allowances” they received were essentially hand-outs.

• Were we setting them up for failure?
• Was our indulgence fostering an entitlement attitude?
• Were we undermining their initiative and motivation and even their entrepreneurial spirit by giving them too much?

Then we ran across a bold claim by authors and popular EO speakers Richard and Linda Eyre, who said that we could create a little microcosm of the real economy within our own homes. Specificallt, they suggested:

• Instead of “allowance” or hand outs on Saturdays, we could have “pay days,” where the amount kids got was directly proportionate to how many of their tasks they remembered and completed and kept track of.
• Instead of an open wallet or purse, we could establish a “family bank” of a big chest with an impressive lock on it and a slot in the top where kids put a slip each day showing how many tasks they finished (signed or initialed by a parent or tender).
• Instead of cash, each child could have a checkbook with a check register to keep track of and let them deposit or withdraw from their account in the family bank (which would pay interest on the portions they elected to save).
• And instead of them living like entitled prince and princesses in their castle, there could be simple tasks they were responsible for … from cleaning a public area of the house or kitchen to having the initiative to get homework and music practice done without prodding and before dinner.

We introduced the “family economy” to our kids, explaining that they could earn much more money on this scheme than they had been getting as allowance, but that the catch was that they now had home responsibilities to keep track of and that they now would buy all their own “stuff.”

The elementary and middle school kids went for it immediately.  They were flattered by the responsibility and persuaded by the adult-like recognition of having their own checkbook and account in the family bank.  They loved having more money and having responsibility to buy their own stuff.

The teenagers were a little less enthusiastic, until we took them out to dinner and talked about the fact that they had only two or three years left at home before they went off to college and that this “family economy” would make them more independent and prepare them to handle their own financial affairs once they were living away from home.

The learning moments started almost immediately. I had my 9-year-old son with me on a trip to the mall, and he brought his family checkbook and almost immediately started asking, “Can I have this?” or “CanI have that?”  Instead of the “no, no, no” answers of previous shopping trips, I replied, in my best banker imitation, “You can have whatever you want to buy.”

He had me hand down a toy to him and then asked a question he had never asked before, “How much is it?” I showed him the price tag and then he suddenly handed the item back to me. “Put it back, they want twenty dollars for that— they must think I’m stupid!”

Our daughter blew all of her money on a pair of $120 jeans and had no money left that weekend when her friends wanted to go to the movies.  “Mom, what can I do?” Again in my non-emotional banker’s role, I said, “Sorry, I feel your pain.  Maybe you better budget a bit better next week.”

The bottom line is that everything changed … and evolved. We negotiated an interest rate that the bank would pay on the part of their earnings that they saved. They made small-consequence mistakes weekly, and learned from them.  The “earned ownership” that they felt for their money transferred to the things they bought with it, and they began to feel pride in things and take care of them. They negotiated with us for “matching funds” when they were saving for a bigger ticket item. They began to become financially savvy before our very eyes as we tried to make our little family economy a true macrocosm of the real world economy.

To sum up:  They became more and more entrepreneurial!

Great blog post yesterday by Garth Turner over at www.greaterfool.ca

“Sure, I know the images are compelling. Long lines of young people snaking around a new housing development complex someplace in suburban GTA, Vancouver or Calgary. Camping out all night. Living off Tim’s. Peeing in the bushes. Desperate to get inside and buy a new house in 14 minutes. Then staggering into the sun in a post-coital HGTV kinda haze, sales agreement in one hand, mortgage doc in the other, feeling great about being ravaged.

The first-time buyer is the holy grail of real estate. Lenders like the big banks court them. Developers drool over them. A whole housing industry creates products for them. And politicians suck up to everyone, with the creation of misleading programs like the Home Buyers Plan.

Like the wood that fuels a fire, these hormonal young things give energy to an entire real estate market, starting the climb on a property ladder which ends up creating an endless chain of sales and sells. Well, endless until now.

There’s mounting evidence – despite the high-profile events where TV news cameras are always invited – that the kids may be taking a pass. In fact, this is a prime explanation for a phenom that’s tricked many people and which answers the question, why are prices going up when sales are going down?

You know what I mean. For the last six months, sales of houses in key markets like Toronto, Calgary, Vancouver, Edmonton and Winnipeg have tanked on a year-over-year basis. And yet average prices have held firm or even (like in the GTA and the Lower Methland) shot higher. Days ago I recounted the orgiastic grunts of pleasure which could be heard over Richmond and Surrey as the latest property assessment arrived, showing a delighted population that they’ll soon be paying more in taxes.

But how can prices swell like a gland while sales seek Cialis?

One explanation (not a bad one) is tumbling listings. As fewer homeowners put their properties on market, the competition between the remaining buyers results in average prices rising, even as sales levels fall. After all, prices are far more volatile on any market (including stocks) when trading is thin.

But here’s a better reason: a seriously declining number of young buyers is resulting in falling sales of cheaper (starter) homes, which leaves more activity (in relative terms) in the pricier end of the market. So, average prices rise. That this is a statistical quirk may be of no interest to most of us. But the fact realtors then beat the crap out of us with the same old stick – buy now or forever be priced out – is highly relevant. And wrong.

At least one real estate guy gets this, and I was alerted to his blog after he complained about mine. (See? I have a purpose.) Norm Fisher crunched the numbers in his Saskatoon market and found a big 18% drop last year in the sale of houses under $300,000, and a corresponding 13% rise in deals for places worth more than that. Of course, this would account for the fact that real estate had a crappy year in Skatch, and yet houses ‘cost more.’

But they haven’t really risen in price. Only the average price is higher. Lots of houses are falling in value, at the same time they remain unsold. And I think Norm has highlighted a situation which is now affecting every market in the country – certainly the ones I have done a sales analysis for.

This also suggests 2011 could well be the year the fire starts to go out. As I have been saying for some time, sales drop first, prices second – especially when the first-time buyers start to fade. And why would this happen? Let us count the ways.

First mortgage rules stiffened a bit in April, with first-timers having to qualify for five-year loans. Now it looks like F is poised to strike again at the urging of the big (scared) banks, who are having a few kittens over the 5/35 mortgages out there. (As I have told you, these high-risk loans now account for the vast majority of all new ones).

Second, interest rates rose in 2010 with the Bank of Canada hiking its key rate three times, jacking VRMs a similar amount. And while five-year money declined for a few months as bond yields tanked, all that’s now in the rear-view mirror.

Third, debt. We’re drowning in it, the kids included. In fact, young couples coming out of university today sometimes already have student loans the size of mortgages. Look for this to continue as the feds trim their contributions to education, a la Britain.

Fourth, this is the year Mark Carney slips the whoopee cushion under the middle class. Interest rates will be rising just as soon as the little nipper figures he can do it without murdering the economy. The central bank boss is determined to cut back on cheap credit, now that we’re all hopelessly addicted to it. Such a joker.

Fifth, the virginal young among us may have too many hormones, but they’re also totally wired. They can see and smell real estate deflation taking hold. With teensy down payments, they know any drop in prices can wipe them out in a weekend. Why buy now, when houses may well be cheaper in six months? Why self-destruct just like mom and dad? It’s amazing what six years of post-graduate studies can do to a mind.

So, yeah, I agree with Norm. Except he’s a realtor.

And he’s doomed.”

“Gold, silver continue rally in uncertain times”

Vikram Barhat, November 23, 2010 from Advisor .ca

Contrary to what its dizzying rise would suggest, gold is not one of the best performing commodities. It will, however, continue to be an alternative currency to the U.S. dollar as investors take a flight to safety, according to experts at BMO Harris Private Banking.

Admitting that gold has run too far too quickly, experts at the bank said investors will continue to hoard gold, and other precious metals, as a hedge against devaluing global currencies, particularly the U.S. dollar and euro.

“Gold is not trading on inflation expectations, it’s really trading as an alternative currency to the U.S. dollar,” said Paul Taylor, chief investment officer, BMO Harris Private Banking. “There’s the expectation that the reflation of the U.S. economy is not good for the U.S. fiscal debts and deficit situation.”

The Obama administration endorses a weak currency environment because “that, of course, makes [the U.S.], from a trade perspective, more competitive” but “annoys their trading partners to no end.”

Many investors are unaware that gold has been rising for 11 years now, said Michael Herring, investment strategist and managing director, BMO Nesbitt Burns. “It bottomed at around $252 in 1999 and has since more than quintupled. It’s actually not one of the best performing commodities in the complex.”

Oil bottomed at below $10 and it peaked at about $147 in 2008 and is roughly mid-$80-range right now. Copper has turned in a smashing performance over the same period of time. But gold gets the spotlight. “It is really the reflection of the change in monetary backdrop and the change in monetary response function that we’ve seen out of central banks, most particularly out of the Federal Reserve,” said Herring.

A deepening lack of faith in paper currencies has been driving investors globally to adopt gold as an alternative currency. “If you look at currencies around the world they are all faith-based initiatives,” said Herring. “They are all paper currencies backed by nothing.”

Global currencies have all lost value against a basket of goods at different rates and different times. And the biggest loser of value has been the U.S. dollar.

“I think there is a very large contingent of investors who recognise that the history of central banking over the last 100 years is one of consistent devaluation of the value of currency relative to the basket of goods,” said Herring. “I don’t think there’s any reason to believe that’s stopping. If anything there’s a risk that it will accelerate once again.”

Investors who either can’t afford gold or think it’s overvalued have been turning to silver — commonly dubbed the poor man’s gold. These investors, mainly in Europe, are the reason why the price of silver has really ramped in the last little while.

“With everything that’s going on with Europe, it’s reasonable to believe that Europeans are starting to hoard some silver,” he said.

It’s no secret that the euro is in bigger trouble now than any time since it was formed in 1999. European investors know that and are clutching at silver for support.

“I do think there’s some evidence that folks are seeing the real cracks in the foundation of the euro here and they are hoarding silver,” said Herring, adding that among these may be investors who think that gold has already made too much of a move or that the price of an ounce of gold is too high.

Some experts are going so far as to say the end of euro is nigh, at least in some of its current member states. Jack Ablin, chief investment officer, Harris Private Bank in Chicago is talking endgame. He said if the contagion of debt spreads, the central powers of the EU will cut troubled countries loose from the common currency.

These countries would revert to their pre-euro currency at a pre-set exchange rate, and be allowed to devalue that currency before being allowed back in at some future date.

“Right now, the euro-zone and the euro banks are in somewhat of a denial,” said Ablin. “They don’t want to take a haircut but I do think eventually we are going to see the (Greek) drachma or Irish pound devalue their way back to prosperity.”

Given that they’re all locked together in a single currency, it makes sense at least for now for EU citizens to cling to gold or silver or any hard assets, he said.

Nov. 22 (Bloomberg) — Bank of Nova Scotia, the country’s third-largest bank, offered to buy the shares in DundeeWealth Corp. it doesn’t already own for about C$2.3 billion ($2.26 billion) to increase its asset-management operations.

Scotiabank will pay C$21 for each DundeeWealth share in cash or stock, the bank said today in a statement. The Toronto- based lender owns about 18 percent of the asset manager.

Scotiabank said it will be the fifth-largest mutual fund manager in the country after the purchase, part of Chief Executive Officer Richard Waugh’s plan to expand the bank’s asset-management business.

Over the past three years, Scotiabank has increased its asset-management operations in Canada, purchasing stakes in DundeeWealth, CI Financial Corp., and buying the Canadian business of E*Trade Financial Corp.

Scotiabank fell 23 cents to C$54.42 in 9:39 a.m. trading on the Toronto Stock Exchange. DundeeWealth was halted from trading. The stock closed on Nov. 19 at C$19.47.

Here’s the article:

DETROIT/NEW YORK – General Motors Co prepared for a dramatic return to the stock market on Thursday with what is set to become the world’s largest share offering less than a year and a half after emerging from bankruptcy. GM shares were set to begin trading on the New York and Toronto stock exchanges, capping the first stage of a turnaround that has taken the 102-year-old automaker from near-death in 2008, via a 2009 bailout, to unlikely Wall Street flotation favorite in 2010. President Barack Obama hailed what is already the biggest IPO in U.S. history as a “major milestone” for the company’s turnaround and the entire U.S. auto industry. GM raised $20.1 billion on Wednesday after pricing the shares at $33 each — the top of the proposed range. The IPO values GM at about $63 billion. Including an option that would allow underwriters to sell more shares, GM looks set to raise $23.1 billion, eclipsing the record $22.1 billion raised by Agricultural Bank of China in July. The successful sale offers a partial exit for the Obama administration after its unpopular $50-billion bailout. The rescue left the Treasury with a 61% stake and the automaker with the embarrassing nickname “Government Motors.” // // The government part of the share sale amounts to 23.9% rising to a possible 27.5%. At $33 a share, the partial sale represents a loss of about $9 billion on taxpayers’ original investment assuming the extra shares go at the same price. The GM stock price will need to rise by 47% to just under $49 for the U.S. government to break even on its follow-on stock sales. Trader Stefan de Schutter of Alpha Trading brokerage said: “It’s absolutely remarkable how the sentiment has totally changed over such a short time period … it is evident that investor optimism surrounding the GM IPO is also pushing car stocks in Germany so that is certainly a good sign.” By 1155 GMT the Stoxx 600 European Autos Index was up 2.43%. “It is seen to be a better bet with stronger and clearer financial position after its restructuring and IPO, and that will give investors confidence to hold the stocks,” said William Lo, analyst at Ample Finance Group, adding: “We expect to see about 10% upside (on debut)..” David Buik, senior partner at broker BGC Partners, said the indicative grey market price was $37-37.50, a gain of as much as 13.6%. Even after raising the IPO price and offering size, underwriters had far more potential investment lined up than the deal could accommodate, sources said. Sovereign wealth funds in the Middle East and Asia and other large international investors will account for less than 5% of the total GM offering including common and preferred shares and the overallotments, a source said. China’s SAIC Motor Corp is among shareholders, confirming on Thursday that it bought a 1% stake. The reversal in sentiment toward GM pointed to renewed confidence in an industry that was pushed to the brink of collapse before unprecedented government intervention. It also offers hope for a range of auto-related companies, including smaller automaker Chrysler, that are looking to tap the credit and equity markets in coming months, analysts said. Sergio Marchionne, CEO of Chrysler partner Fiat said the IPO would help to understand the market’s logic in terms of pricing expectations. GM’s initial valuation represents a more than 9% premium to Ford Motor Co — GM’s nearest rival and the only U.S. automaker to have avoided a government bailout. TEST FOR THE NEW TEAM The GM IPO was the first major test for GM’s new management team led by Dan Akerson, 62, a former head of buyouts at The Carlyle Group who was placed on the GM board by the Obama administration. “The new leadership team is doing very good work. Market share is up, prices per unit are up,” said Xavier Mosquet, a senior partner at The Boston Consulting Group who advised the Treasury on its intervention into the U.S. auto industry. Akerson was set to ring the opening bell at the New York Stock Exchange on Thursday to mark the start of GM’s trading under the familiar “GM” symbol it had before bankruptcy. For decades, GM was one of the most widely held and heavily traded shares and its collapse wiped out savings for many small investors including GM retirees and workers. Still, investors clamored for a piece of the GM IPO, sources familiar with the situation say. Retail investors will represent over 20% of the IPO, or more than $3 billion of stock, a source said. Big North American mutual and pension fund investors will account for more than 90% of the IPO, the source said. In GM’s pitch, executives led by Akerson made the case restructuring had left the automaker with sharply lower costs and the ability to withstand a downturn as punishing as the one that took hold in 2008 without losing money. BRIGHT SPOTS … AND THEN EUROPE GM is on track for its first full-year profit since 2004. It has touted its market-leading position in fast-growth emerging markets led by China, and success with redesigned cars like the Buick LaCrosse, as well as the ability to innovate through the crisis embodied Chevy’s Volt plug-in hybrid. Analysts still see challenges for GM, including the overhang of the U.S. government’s 33% post-IPO ownership stake. “I think that GM’s model still very much lags other companies’ models,” said analyst Heino Ruland of Ruland research. “Not only Chrysler and Ford but also European groups. The pricing is also rather high,” he added. Other investor concerns include continued losses in GM’s European arm — $1.3 billion over the past three quarters — and contract talks next year with United Auto Workers. Post-IPO, a union health care trust will keep 13% of GM shares with a board seat representing its interests. UAW President Bob King said on Wednesday that he welcomed a high GM stock price but said his workers would not offer any new concessions next year.

//

And how do you choose whether to go short or long term on your mortgage when it comes up for renewal?

(Thanks a lot to Angie at TD for forwarding me this)

Now just imagine the family dinner conversation where your brother or sister declares utter confusion at how the prime rate could drop on the same day that rates went up for fixed mortgages. This just doesn’t make sense… or does it? Let’s clarify how fixed-rate and variable-rate mortgages are priced and you’ll see the difference.

Variable rates are tied to your bank’s prime rate, which is based directly on the Bank of Canada rate. The Bank of Canada is our central bank, operating at arm’s length from the federal government. The central bank uses its rate as a tool to achieve the goals of “Low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt.” Our central bank sets the trend for short-term interest rates and has a direct impact on short-term rates for mortgages and lines of credit, as well as rates paid on deposits and investment certificates.

Fixed-term rates, such as long-term mortgage rates, by contrast, are based on the bond market. Generally, a bond is a debt with a promise to repay the principal of that debt, along with interest. Bonds are issued by governments and large businesses. We’ve all heard of Canada Savings Bonds, right? And they are just one type of bond. The “yield” of the bond is the annual rate of return, expressed as a percentage. Bond yields can be volatile and fluctuate in response to various political and economic factors, such as inflation and unemployment figures, and developments in the stock markets. They are increasingly affected by global forces. Long-term mortgage rates (3 years and longer) are based on bond yields, but are less volatile because financial institutions absorb the daily market fluctuations in order to create a more stable rate environment for their customers. Generally speaking, higher bond yields increase funding costs for banks, which in turn leads to increased long-term fixed rates. Conversely, lower bond yields lower banks’ funding costs and lead to lower long-term mortgage rates.

So, short-term rates move with the Bank of Canada’s needs, while longer-term rates are tied to the bond market. The Bank of Canada can influence long-term rates, but it has no direct control over them. This difference in how rates are set is the reason we sometimes see short-term and long-term rates moving in unison, while at other times they diverge.

If it seems difficult to choose between a fixed and variable or long and short mortgage, you don’t necessarily have to choose. Perhaps the easiest and best solution is to break your mortgage into pieces and diversify your borrowing across short and long terms. This is mortgage “laddering,” a concept Canadians know and use to stagger their GIC maturities for diversification, but which surprisingly few of us use for our mortgages. Diversification is an important principal that applies as much for borrowing as it does for investing. By blending different types of mortgages and staggering maturities, you can diversify your interest rate risk, and perhaps minimize your interest costs.

I had a chance to read Garth Turners sobering take on real estate last year. It’s called Greater Fool. Exceptional book by a guy who really knows what he’s talking about. Wanted to touch on a couple things here.

I really like the title choice, it’s a concept that very few are familiar with.

From Wikipedia;

The greater fool theory (sometimes the bigger fool theory, also called survivor investing) is the belief held by one who makes a questionable investment. with the assumption that they will be able to sell it later to “a bigger fool”; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else for an even better price.

This book should be a must-read for anyone looking to scoop up more housing in Canada.

There is NO OTHER item/investment/vehicle/derivative/business where the bank will finance upwards of $500,000 for someone in their twenties, who makes $60K a year, with as little as $10,000 to put down. They not only do it for houses, but they encourage it, and even worse – they’ve made it easy!

Real Estate continues to be the only item that a person with a meager income, can finance a HUGE sum to purchase with as little as 5% (or nothing) down. It’s madness. Could you imagine the outcome if that was allowed in the financial markets?

Our have-it-all culture has encouraged home ownership for everyone – handing out cheap mortgages to anyone that asks. (I was one years ago, at 20 years old with no steady income, I was given a $200K mortgage having only $15,000 to put down. And they say there is no ‘subprime’ lending in Canada? I call bullshit on that one) I bought my last place with 30% down, and would not consider buying with less than 25% down in today’s market. My neighbor just bought his place with 5% down in May, and on paper; he’s already about $50K in the red on his mortgage because of the slight correction we saw last year.

Something to ponder: If a house built in Langley, BC in 2004 for $200K, on a lot worth $100K, sold for $399K new, and again for $700K in 2008, and back down to $600K today…. then what is the real value? The market and it’s greedy speculators all say it can go up in value every couple of months and be treated like an ATM machine. But unfortunately the real intrinsic value of that place is still only about $300K; despite the $600K+ mortgage on it being carried by the most recent buyers. Eventually, the market WILL correct back to these intrinsic values, resulting in a lot of very upset homeowners, living in homes with mortgages WAY larger than their homes value. There is an epidemic of this very situation in the US as we speak. Eventually… the demand softens, and the inventories rise. It won’t take much fundamental changes to take a greater Vancouver MLS ad from $799K, down to $499K in a flash.

Our ‘bust’ is coming. It may not be as bad considering our fundamentals and immigration policies, but it’s coming. The talking heads from the big Real Estate firms use the media to tell us that there is upswing in the markets in Vancouver from time to time so that you will unquestionably buy; and buy inflated properties, so that the mortgages are bigger, and the banks interest payment profits are up. Pretty simple and effective racket for ensuring $10-$20K in interest every year, per family goes to the big banks.

Bush heavily promoted this for the US banks in 2004
http://en.wikipedia.org/wiki/Ownership_society

http://www.newsweek.com/id/163451

As a matter of fact, the entire financial meltdown can be pinpointed to one (of many) crucial mistakes made by the US Government: “Fractional Reserve Banking”

Fractional Reserve Banking, simply put, is a scam put in place in 1903 that allows large institutional banks to hold their customers money 12:1. This means that for every $100 you deposit into an account, that bank is able to loan out $1,200, backed only by your $100. (Smell trouble already??)

Lets say the bank pays you 5% interest annually on your savings; you’ll receive $5 that year on interest. The bank will then loan out their $1,200 (courtesy of you), charge 10% interest on the loan, and receive $120 in interest that same year, on YOUR MONEY. Bank makes $120, you get $5. This is going on today. The banks are the robbers, and they’re robbing from the inside – legally.

Anyway – back to mortgages; in June of 1983 Investment Bankers started packaging together tens-of-thousands of bank owned residential mortgages (just like yours), and started selling them to investors as ‘Collateralized Debt Obligations’ or CDOs. These CDOs were sold all over the world right up until 2007. Then came along the big, blood-thirsty sharks of the industry; massive Insurance conglomerates. AIG stepped in, as well as Fannie Mae and Freddie Mac and they insured these dangerous derivatives with ‘Credit Default Swaps’. They cleverly called them ‘swaps’ and not ‘insurance’, as insurance has to be BACKED by something. This is precisely is why AIG crashed when the mortgage market crashed.

What happened, is that the demand for these profitable CDOs skyrocketed, so the banks had to scramble to keep up with demand, by issuing…. get this… more mortgages (lol). See the problem yet? What started to happen, is that the banks started handing out mortgages to anyone with a pulse, on HIGHLY leveraged bank funds (remember they hold one twelfth of what they actually loan out) in an effort to feed the greedy investment banks, getting rich on CDOs. They were finding ‘victims’ to sign up for mortgages on already-inflated suburban housing, in some cases, requiring no down payment at all.

Banks aren’t fools, they are professional at making money. So if they are prepared to give you 300, 400, maybe $500,000 with NO downpayment, then they MUST be making money somewhere, right? When you sign up for a 25 year mortgage, you are essentially promising the bank in excess of $10,000 per year, in interest payments for the rest of your working life – pure profit to them. Not too mention the profits they make by selling your mortgage out the back door to to some investment house pushing ‘CDOs’…. Ahhh, home ownership, the American dream eh?

Lets also not forget; rates are dirt cheap right now, I’m sure you can handle $2,000 a month @ 2-5% on a small house, but wait until rates go back to 6, 7, 10%. Now try almost $4,000 a month for that same property. What’s going to happen to the market then? It will shift, and there will inevitably be way more supply than demand, resulting in huge declines in value when no on can sell…. Just think – what’s happened to interest rates after EVERY SINGLE other recession?…. We are in for a rude awakening, my fellow mortgage victims

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The ‘intelligent investors’ have to foresee what will happen to home values when rates skyrocket like they did in the 80′s. Rates going way up is happening, it’s just a matter of when.

That chart is adjusted for inflation, what it’s pointing out; is that homes stuck pretty close to that $100K mark (inflation adjusted for that day’s dollars) for over 100 years ….until 9/11. It’s saying that homes climbed over that ‘resistance’ line if you will, beyond 120, 130…all the way up to 200, so do you think perhaps there may be a market ‘correction’ bringing homes back down to that 100 mark? Cutting our average prices in half? Do we have realtors to blame for this? Partially, along with brokers, speculators, developers, greedy sellers, emotional buyers, and predatory lenders.

It’s pointing out a scary trend with regards to the value of your house over say; your income. Your Grandfather probably bought a house for around $5,000 in the 1940′s. Any idea what he made per year in the 40′s? $2,000 a year? $3,000 a year? Probably more.

In 2009, a guy in White Rock, who makes only $90,000 a year, can buy a home for $750K. Easily.

Starting to see what the trend that Turner is pointing out?

50-60 years ago, peoples homes were only worth about 2 years of income. Now, they’re worth upwards of 10+

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“Your house is not an asset” -Robert Kiyosaki said this many, many years before the “sub-prime housing meltdown”.

Real assets put regular cashflow into your pocket. If you buy a house, and rent it, creating positive cashflow, it has become an asset. If you live in it, it is a liability. This is a reality that 99% of the public are unaware of. It generates capital gains only AFTER it has sold; it is far from liquid, and it is subject to upwards of $20,000 in expenses at close. (realtor fees, closing costs etc)

Stocks, bonds, funds, ETFs, REITs and income trusts are examples of real assets. With one click of the mouse, or one call to your advisor/broker; you’re back in dollars, experiencing profit, and looking for your next investment.  They pay you without any conditions.  You – and you only, own them.  There is no mortgage against them, and you can sell them at a moments notice for little, or no cost.  They don’t have roofs, hot water tanks, needy tenants, property taxes, transfer taxes – and best of all, you don’t need a listing, lawyer, hot market or any subject removals over the course of 6 weeks to turn them back into cash! 

Your home can be considered an investment, however most people that consider this, have 90+% of their net worth in their home. Extremely dangerous – a recipe for being wiped out.

Buying land should be considered an investment, however your ownership should be no more than about 25% of your net worth, as it lags far behind other investment vehicles in the long term. If you rely on real estate alone, good luck.

Housing often depreciates, it’s land that appreciates. Albeit slowly (when considering 20-30 year charts).

Most people in the lower mainland are highly leveraged on their homes. Meaning the bank owns a FAR greater share than they do. How can you even say you “own a home” when a financial corporation holds a loan on it worth 75% of its value? Who has the controlling share? The whole ‘ownership’ concept is simply an illusion. Don’t believe me? Stop paying your mortgage and your property tax and watch the city and the bank fight over who keeps your house. You don’t own it, you merely occupy it and pay for it. You can take a profit when you sell, but it was never actually yours, unless it was mortgage free.

Real estate doesn’t typically put any money in your pocket until you sell. Therefore it can’t be considered an asset. Land is an investment, but not a true asset until actual capital gains are realized. ie; after you sell.

Never confuse being ‘up X amount of dollars’ on paper with actual true ‘in your jeans’ capital gains.

The whole “I bought my place for xxxK and now it’s worth xxxK” is not a true statement, until a deal is closed. Just because your neighbor sold for a profit, doesn’t make your situation any better UNTIL you sell and realize the actual gains yourself. Property assessments and historical sales are indicators, but far from guarantees…

I bought a condo in Downtown Calgary in February of 2006 for $169,000 plus tax. The market exploded upwards, so I listed in May of 2007 for $299,000 after seeing a neighbor make a huge profit. I sold within 48 hours for $306,000 after a flurry of offers. Now that was probably a once-in-a-lifetime boom for such a short period. Fortunately I was able to recognize it and get out at the peak. Those same units are listing for $249,000 today. Do you think the guy that paid 306 for mine is upset? Would I have been upset if I watched the value crawl back down $57K?

….So never try to guess what your real estate is worth, as its all pure BS hype and speculation, UNTIL the NEW BUYER signs on the dotted line. Only THEN can you say what a house is ‘worth’ to a new buyer.

Don’t pay today; what will be higher than tomorrow’s market value. Seek to do just the opposite.

Assets create income: Businesses you own, employees you have that make you more than you pay them, stocks and bonds with dividend yields, rental complexes that pay more in rent than they suck in expense, tow trucks that generate more cash than they cost to operate… these are assets.

Assets put money in your pocket, liabilities take money out. Your house is a liability UNTIL you sell and walk away with capital gains. It costs you money every month, it doesn’t pay you a dime. (and HELOCS suck your future potential gains out prematurely, therefore are not wise to use)

When you’re figuring out your net worth, don’t put your car, bike, truck and big screen tv in your asset column, as they are liabilities, since they drain your net worth, not grow it. It’s very important that people realize this at a young age.

To summarize….In the states right now, houses are trading hands for 250 grand, that were “formally appraised” at 600 grand less than 2 years ago. Never fall into the “my xxx is worth xxx” It’s all BS until you SEE THE MONAY. Most guys that say “my place is worth 1.3″ aren’t selling, because they know the market will only bear about $800-$900K right now, not the inflated price they perceive it to be worth currently.

-B