Thursday, February 25, 2010

Popping the Vancouver Real Estate Bubble

After my last post, a friend of mine suggested that the housing market in Vancouver is about to burst. As much as I've been curious about the concept of over-inflated housing prices, I've avoided the subject because its been a great mystery to me. With my friend's comment though, I decided it was time to peer into the depths and contemplate the consequences.

The first thing I discovered was that bubbles are often discovered only after they pop. In other words, it's very hard to say with any certainty whether the market is currently in a bubble or not. I'm sure we all get the sense that housing prices in BC are incredibly high, but are they high due to natural supply and demand, or is it far more sinister? Some economists even argue that "bubbles" don't actually exist.

In order for there to be a bubble, people would have to be paying more for a home then they feel it is worth. I have to ask the question. Why would anyone do that?

I think the truth is that many of us have been told that renting is throwing your money away. We feel that we don't have any choice but to pay whatever price the housing market is asking. We also have a consumer driven mentality that pushes us to buy the biggest home we can get. Even if it's outside of our current means.

Vancouver is the most expensive city in the most expensive province in Canada to live in. Yet, most of us don't see moving as an option. We love it here and are willing to pay the price. Even if we grumble about it.

Speculating investors can force the prices up faster than we're doing on our own though. Hopefully the changes recently made by the government will slow this down and not crash the market. I'm not sure the exact percentage of speculators in the Vancouver market or the effect this will have.

Sure there will be corrections as the economy goes through its various ups and downs. Housing shortages and surpluses occur from time to time affecting the market pricing as well. In the end though, I think we're doing this to ourselves and don't really see this as a bubble. At least not one that will burst.

Living here is a choice. As long as we are willing to pay whatever it costs us to live here the prices will continue to rise. Only when we change our choices as a whole, will things change. I wouldn't hold my breath waiting for the world to change around us. If you're waiting for that crash to buy into the market, I predict you will be waiting a very long time.

Our best defence is to live within our means, pay off the mortgage quickly and move up slowly. If you're willing and able you could even move to a more affordable place to live.

If you're not in the market, you might want to wait for a market correction. Buy when everyone else is selling. However, I don't think even then housing here will be considered "affordable."

Monday, February 22, 2010

Changes to the Mortgage Rules

Starting April 19th, borrowers will have to qualify for a five-year fixed-rate mortgage even if they opt to apply for a lower variable rate. You will also only be able to borrow up to 90% of the value of your home, instead of the previous 95%. Finally condominium investors will need 20% down to invest instead of the previous 5%.

So, how does this effect us? Well, hopefully it doesn't. Hopefully you've made the decision to live well within your means.

I think variable rate mortgages are a great thing. The reason I like them is because they're generally lower than the 5 year fixed rate, which means I have more money to put towards the principle. That's right I'm still paying the 5 year fixed rate or more when I don't have to. By buying a house I can afford and paying it off quickly I actually end up owning the larger house sooner. All this I discussed in Home Sweet Home.

As for borrowing 95% of your home, I don't really see that as a problem, as long as you're not digging a deeper hole. Debt doesn't have to be a bad word. It all depends on what the money is to be used for. Consumer debt on the other hand is a very bad word. I'll come back to this in a future post. Overall though 90% is not going to hurt us that much and protects the poor decision makers a little from themselves.

Finally, the only way you're making money investing in real estate with 5% down, is if your speculating and flipping. I'm not an investor yet myself, but common sense tells you this is just a bad idea. I saw the effects of this when the housing market crashed here last and people were left owning condos they couldn't afford. Too much risk for me!

I've been researching owning a rental property which I plan to do in the future. Even with 20% down the profit margin is very small. The real money is made only when the property sells and you have to be able to stick it out long term. With 5% down you're using your own money while you wait for prices to rise. If it doesn't happen for years to come, how long can you afford multiple mortgages?

Overall, I think these changes are for the best. They won't cause a major crash or restrict the market too much, which could be devastating to the economy right now. They still allow people to overspend, which while not very smart, is everyone's prerogative. They do prevent the majority of Canadians from going overboard though and seeing as these mortgages are backed by the government, it helps prevent the rest of us from being stuck with their bill.

So what are your thoughts? Is it enough? Should they have done more? Did they do too much?

Thursday, February 18, 2010

Life Insurance

Now here is a topic that most of us don't like to think about too often. This and estate planning often get ignored for as long as possible. However, if the unthinkable does happen, I don't think anyone of us wants to leave our loved ones hurting both emotionally and financially.

Like everything financial, you should try to keep emotion out of it as much as possible. Maybe even more so with Life Insurance and Estate Planning. I'm not saying that someone selling these services would tug at your heart string on purpose, but...

OK, so the question is how much do we need and what kind? Some people will tell you how much you need without knowing anything about you. Avoid these people. The truth is the amount of life insurance you need will vary depending on the situation you're in.

Life Insurance is an expense and not a lottery ticket. You should only buy what you need and no more. After all, the insurance companies aren't giving this money away!

People should buy life insurance so that when they die, their living estate combined with their insurance proceeds can allow for the proper winding down of their financial affairs and provide the desired standard of living for their dependents. -- The Wealthy Barber

If you are single and have no kids, chances are your living estate (what you own) is probably sufficient. If not, the insurance you're going to need is very minimal. If you're married with 4 dependent children and your wife is a stay at home mom, then your needs will probably be quite a bit higher. There are a lot of people in Canada that either have way too little or way too much life insurance.

Your living estate plus your insurance proceeds must provide for the following:

1. All debt must be paid off.
2. Enough capital must be available to cover future lump-sum obligations.
1. Funeral Expenses
2. College Expenses
3. Enough capital and other sources of income present to provide sufficient cash flow to support your dependents.
4. Inflation.

You should always insure the person or people on whom you or your family is dependent upon. For a single income family, this is the money earner. However, if the stay at home mother/father were to pass then a burden is left with the surviving parent for child care expenses. In this case the stay at home parent should still be insured enough to pay off the debt and to provide enough for child care until the children are old enough to take care of themselves.

If both parents are working and making good money, the insurance isn't really needed for the spouse. There is no financial devastation. If both parents were to die though the children would be left with nothing. So, in this case it makes sense to insure the parents and only pay out when both have passed.

When we think about this, we generally only talk about family members. If you are partners with someone in a business deal though, it may be important for you to consider insuring them as well. Too much to cover here, but just think about everyone who is dependent on you and everyone you are dependent on.

So based on the above, should you insure your children? I think the answer to that is no. Remember this is an expense that it used to insure that the dependents of the insured won't be financially devastated. While this would be very emotionally devastating, it won't be financially. Well no more than any other unexpected expense. You'll recover, but the reverse is not true if you were to die and leave them with nothing.

The only other argument for insuring children is that they may not be insurable later in life. However, only an infinitesimal number of people are turned down for life insurance when they first apply for it. In life you can't avoid all risks. There are alternatives for them if this happens to be the case as well. Personal savings, working spouse, etc.

There are basically two types of Life Insurance, Term and Whole Life. They are exactly what they sound like. One is for a certain term (number of years) and the other is for your whole life. Term is less expensive, but whole life offers an additional bonus in that it has a investment portion.

So, why would I recommend Term? Well for one, the investment or savings that whole life offers is just YOUR money. When you want to use it they offer to loan it to you and charge you interest. Interest on your own money?!? Second, the investment return for Life Insurance is typically not as good as you could get on your own. So if you buy term insurance, you can invest the money you're saving and use it later for free. Finally, eventually you're no longer going to need insurance. Your children will leave home, your debts will be paid off and your assets will more than cover any final expenses you have.

The Wealthy Barbers advice: Buy renewable and convertible non-participating term insurance. This gives you more flexibility than you'll probably need.

A mortgage life insurance is just a life insurance policy with a declining balance. It may be cheaper than a standard life insurance policy, but make sure you are comparing apples to apples.

Banks and auto loan companies will often want try to convince you to insure your debts as well. This may or may not be a good idea, depending on your situation. When your accounts are settled they will take your debts from any assets you have. If you don't have enough assets to cover your debts they won't be passed on to anyone unless they are co-signed. So the only debt you'd be leaving behind is your funeral costs. So if you don't have any assets or insurance to cover your accounts, why would you care if the loan is paid either?

Monday, February 15, 2010

Starving Yourself

Have you ever starved yourself for any period of time? I'm not talking about a diet, although I'm sure some could qualify. I mean just ignoring those hunger pains and then when the food is put in front of you just want to gorge yourself.

Well lately I've been feeling the urge building in myself. Not with food but with finances. With my wife in school about to finish her second degree and me going to get my first, money has been tight. I've had a decent paying job thankfully, but with few student loans and a mortgage, it's been pretty tough.

The finish line is drawing near now though! She's done in May and will hopefully have a full-time job to go with it! So I can't help but think of what we'll be able to do with the extra cash. The list of wants has been growing the whole while she was in school and we now both feel the desire to gorge ourselves.

However, we all know that you're always left with a sick feeling in your stomach when you do eat too much too quickly and I don't think this would be any different. So, I figured I better start planning how to handle it.

I've already created a budget to account for most of the money. More towards our mortgage, retirement, and debt repayment. All those fun things. Don't worry it also includes a little more mad money, car savings, clothing budget, etc.

I do however think we need to celebrate! I plan to take my wife out for dinner somewhere nice to celebrate. I think we both deserve that. I also figure we could buy something we've wanted for awhile as a gift to ourselves. Not sure what that is yet... too many choices.

Once the new budget is in place and we feel the restrictions lifted a little, I think the feeling of starvation will fade away. We will eventually be able to achieve all the purchases we wanted, but it's just going to take some time to save up the money. That's still a nicer feeling that the bloated feeling of going deeper into debt.

Thursday, February 11, 2010

Plastic Debt

Like just about anything else, credit cards can become a problem if they are abused. And just like I would recommend avoiding alcohol or gambling if you have a problem controlling it, I'd recommend avoiding credit cards for the same reason. But, just like most other vices they aren't evil in and of themselves.

The Wealthy Barber suggests avoiding credit card use altogether. Which is probably the safer route to take for the general masses. If you aren't doing well at tracking how much you're spending then this might be the way to go. After all if you are spending cash you can watch your account balance to see how much money you have left at any given point.

I heard some great advice a few months ago. A credit card should be considered a method of payment and not a method of finance. So whether you pay by cash, debit card, or credit card you shouldn't spend more than you can afford to. If you do that than it really doesn't matter how you pay and it just becomes a method of payment.

I'll talk about borrowing money sometime in the future, but I think you already know that 19% is a bad deal. So if you do need to finance something, look elsewhere. Heck, I'll even give you a better rate than that. ;)

For any of this to work, you don't want to carry a balance on your credit card. So when the bill comes in pay it in full. Which should be no problem if you stick to the budget you created.

So if you can afford to pay cash, why would anyone use a credit card?

Well besides the convenience, and the ability to shop online, you can also earn rewards probably faster than any other rewards program. Everything from free gas to mortgage payments to trips around the world.

These rewards can add up quite quickly if you use your card a lot. In fact I put everything I can on to my card. I just recently switched over most of my bills to the credit card just to increase my points. If I get a student loan or a bursary, I still put the tuition on my Visa and then use the loan amount or bursary to pay the Visa. I'd throw my mortgage on there if they'd let me, but they don't seem to like that for some reason. ;)

I used to avoid annual fee cards like the plague too, but now I welcome them. I pay $20/year on my card which doubles the points I collect. For each $100 I spend I get $1 in bonus dollars. Without the $20 fee I'd have to spend twice as much for the same benefit. That extra $20 will get me about $250 in bonus dollars this year, so well worth it.

Now there are lots of bonus cards to chose from and I thought about writing a posting on that as well, but I have decided against it. I'm using the Desjardins Visa myself and I use the bonus dollars to go into an RRSP. It has a better return on the points for this than any of the others I looked at. I contemplated an Air Miles or Aeroplan Card, but I didn't like the restrictions (limited airlines, dates/times, etc). The flight cards might work out better money wise, but I'm happy with what I'm getting. I might change my mind in the future, but regardless my spending is working for me.

After all, it's free money for just spending what I normally would anyhow!

Monday, February 8, 2010

Lowering Our Propensity to Consume

First off, I apologize for the title. Being a straightforward personal finance blog I shouldn't use the big economic terms. However, I have to admit that I just love saying propensity. Go ahead... try it... you'll like it!

"Propensity to Consume" is our natural inclination to spend. I figured at some point I'd steer the conversation towards ways that we can save a few dollars here and there. All personal finance blogs eventually do, so this is just the heads up.

The goal of any personal finance blog is to try and help others (and myself) become more financially educated. The ultimate purpose of that, is to of course become wealthier. If you weren't interested in that, there are better things to do with your time than read this. Like researching the next coolest gadget to buy.

I'm not referring to getting wealthier so that we can all roll around in money. Money is just a means to an end. Wealth gives us options and the freedom to follow our dreams. To not live in fear of losing your job, to stop working altogether one day if you so choose, or to travel the world if you so desire. Each person will have his or her own reasons for doing so of course and the list goes on and on.

There are only 2 ways to become wealthier. Either make more money or spend less. If you're always increasing your spending as your income increases though you never get further ahead. Also, for most of us making more money right now is not an option. I will of course discuss making more money from time to time, but I imagine the majority will be more about saving.

I didn't use to be frugal at all. This has actually just been a gradual change for me. I used to hate using coupons and shopping around for a better deal. In fact, frugal is sometimes seen as a negative trait (i.e. cheap). However, frugal just means to not be wasteful. Let's face it, we all have unlimited wants, but our income will always be limited. By carefully managing our funds we can ensure we are working towards our goals and not wasting our limited funds on items that don't truly make us happy.

In the book "The Millionaire Next Door," it describes a typical millionaire driving a used domestic vehicle, living in a rural area in a modest home, and still cutting out coupons. There is a good chance that the people you see driving the fancy cars and living in the expensive homes are living pay cheque to pay cheque and are constantly in fear of losing their jobs. These people probably have a great income, but their propensity to consume exceeds their income.

So, when I am bitten with the consumer bug, I ask myself if this purchase is worth delaying my goals for. Very rarely is the answer "yes."

Thursday, February 4, 2010

The Olympics are Almost Here

Like it or not, the Olympics are almost upon us. Roads are closing, buses are crowded, and the costs have escalated. So you have to wonder if it's all really worth it.

My wife asked me the other night whether I thought the Vancouver Olympics were going to make money or not. So I figured I'd be remiss to not write about it.

I guess the first part is determining how you actually calculate a profit or loss when you're looking at the Olympic games. I read an interesting article in this months CGA magazine that said things like the road improvements and increased security won't be included in the costs for the Olympic committee (VANOC). In other words, these costs are going to be coming from us, the tax payers.

The article also mentioned that costs have increased while sales were lower than expected due to the recession. However, it is yet to be seen if this will result in a loss or not. Even though there have been a lot of games recorded to have made a profit, there has been a lot surrounding these games that have made things more difficult for VANOC. My personal feeling is that the games will probably be around the break-even point. I guess we'll have to wait and see though.

I think more importantly, the benefits will go far beyond the actual events. Athletes, crews, officials, family members, and fans will all be crowding our streets. More people means increased revenues for surrounding businesses. For example, I talked to an employee at a local McDonald restaurant and she told me they already noticed a large increase in business and had to actually change some of their processes to account for it. Hopefully when people see how beautiful it is here tourism and immigration will increase bringing higher than expected future profits.

Also, while a lot of these projects were done specifically for the Olympics, they're not going anywhere after the Olympics is over. If planned well these new facilities will be able to bring in future profits. Plus we all get to enjoy the new roads to Whistler.

The timing for a lot of construction workers probably couldn't have been any better considering the slow down in the housing market and the recession. These projects all mean lower unemployment. This leads to less employment insurance payouts and more income tax revenue for the government. These workers then spend the money they earn which gets taxed and gives another business more money. In economic terms this is called an economic multiplier. Government spending increases income, which people spend, which increases income, etc, etc.

Of course the government will tax this increase in income, for both individuals and businesses. This of course brings in more revenue for the government and allows them to recoup the cost surrounding the games. Even the worst case predictions that I read expect this money to be recouped in no more than 10 years in tax revenue alone.

I know one complaint was that the money was not spent on the homeless or health care. While I think these are noble expenses I don't think these things would have paid for themselves like the Olympics will be able to. To me this is like saying paying down the mortgage is the most important expense. That doesn't mean you don't buy groceries or keep your eyes and ears open for investment opportunities.

So while this is going to be inconvenient for us for the next little while, I do think its going to be a good thing for this city, province and country. As always I'd love to hear your thoughts? Don't be shy!

Monday, February 1, 2010

Easier Said Than Done - Part II

Continued from part 1...

So here's the budgeting experience so far:

I'm using Quicken to track all our expenses. It really helps to see trends and quickly check previous numbers. Turns out just entering in the purchases isn't enough though. So, I went in and updated the budget number so that I could more easily track how we're doing.

The first thing I noticed was that that I hadn't updated some of the expenses. It makes a big difference when my actual Life Insurance expense is twice the budgeted amount for example.

The second thing I noticed was that while we were mostly on budget for the budgeted items, we added some non-budgeted items. These weren't accounted for elsewhere, so we ended up overspending for the month. For example, we bought some movies earlier this month, but there is no budget for it. So if we stick to the budget for everything else, we're still left going over budget. Buying the movies is fine as long as we recognize that something else has got to give.

The third thing I realized was the importance of categorizing items properly. The two biggest examples of this were vacation spending and loans. When we went away for my wife's birthday, we bought alcohol and food for the trip. We also bought a few items that some friends had asked us to pick up. The problem was that these items were all categorized as food. You can just imagine what that did to our food budget. So to track these expenses more accurately, I actually created two new categories: Vacation:Food and Loans.

Lastly, I noticed that our small "savings accounts" weren't being tracked at all. Haircuts, car maintenance, eye glasses, etc. These are expenses that I've broken down into monthly payments, so I that I'm not hit with a huge bill when the time comes. This month was the time we buy the cat his 20lb bag of cat food for example. That kind of throws that budget out.

Once I get this under control, I should be able to find more money to throw at the debt. For example, I budget 250/month for gas. If I only spent 200 one month it's not likely I'll need 300 for the next month, so I can then throw this extra money towards the debt. Also, the next time the car maintenance comes around I'll actually have some money set aside for it.

So, I'm going to keep working at it and I'll let you know how it goes. Overall, I say I appreciate more now than ever the importance of watching your spending closely.

So how do you keep track of your finances? What's working what's not? Do you think it's worth the effort?