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Why older seniors should rent instead of buy

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After 18 years of ups in many Canadian markets, you always should wear armour before telling someone to rent instead of buy. With armour firmly in place, I believe that there are times when this definitely makes more sense.

Don’t get me wrong. I believe that your principal residence is usually a great investment, and one with the obvious advantage of being an investment you can actually live in as opposed to just being a line on a statement. The biggest problem with buying a home is that the transaction itself can be very costly and depending on where you live, it can be very difficult to sell in a timely manner if you need to.

If we take a 76-year old-couple who are considering selling their current home and downsizing — one of the basic questions is are you looking to buy something new or rent?

Some people fear renting because they may be forced to move from a property. While this can be a legitimate concern, it largely depends on who you are renting from. If you are renting from an individual for whom this is their only rental or they are planning to take over the space personally at some point, then it is a real risk. If, however, you are renting from a professional property manager with a long track record, then the risk becomes very small.

In addition to this, “the Residential Tenancies Act is actually extremely helpful with respect to protecting the tenure of a tenant” says Michael Baum, a real estate lawyer in Toronto with the firm Harris, Sheaffer LLP. He goes on to say “landlords have very limited rights of termination even on expiry of term. This makes it very favourable for such a renter.”

For those who have been home owners for the past 50 years, it is sometimes an odd concept to consider renting. It is almost a point of pride. “I am a home owner, not a renter.” I understand that sentiment, and if it is important to someone then that should clearly factor in the decision.

But before letting pride be the driver of the decision, let’s look at a few facts:

  • Prices can indeed fall and take years to recover. In 1989, the average sale price of a Toronto home was $273,698. In 1996 it had fallen over 27% to $198,150. It took 13 years for the 1989 sale price to be reached again. In Vancouver, a detached home cost $180,000 in 1981 and dropped 39% in just over a year to $110,000. It took 7 years for prices to recover to their 1981 level.
  • You can easily lose $40,000 in land transfer tax, and other ‘special fees.’ This depends greatly on where you live. In some places, this isn’t an issue. If someone in Toronto wants to buy a $1-million condo, they will pay $32,200 in land transfer taxes. In addition, especially with condos, there can be a variety of gas and electricity hook-up fees, development fees, deposit verification fees, that add up to several thousand dollars.
  • What happens when you eventually sell the condo? The biggest thing is that you are faced with another set of real estate commissions for selling the condo that wouldn’t have existed if you rented. If you are paying 5%, then you would have $50,000 in selling fees on top of the money you might spend to prepare the condo for sale.
  • What if you need to move for health reasons? This is a big concern. If someone’s health declines, sometimes there is a need to move fairly quickly. This doesn’t necessarily mean that a condo or house must be sold immediately, unless the sale is needed to free up cash flow. While in some markets, a sale can happen in a matter of days for a good price, in other markets it could take months, and if there is some pressure to get it sold, the selling price will likely take a hit – costing even more.

Based on the issues above, my sense is that you should really plan on living somewhere for at least six years if you are planning to buy a property. That will at least give some time to amortize the big costs of buying and selling. If you think there is a decent chance of being in a property for less than six years, then financially you are betting on strong real estate growth for it to make financial sense. While that is certainly possible, it is a financial bet that may not pay off.

There is no clear right or wrong answer on the buy versus rent discussion, but for those with greater uncertainty over the next five to 10 years, you may want to consider renting for financial reasons as well as greater overall flexibility.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 30th September 2014.

What is your mortgage number?

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Most people want their mortgage to be paid off.

While in some cases, if the after tax debt costs are low enough, and there are alternatives to use that cash for higher growth, then having a mortgage can actually add to your wealth.

Nevertheless, for those who want to be mortgage free, here are a few essentials to empower you in the mortgage process.

  1. A rate is a rate, is a rate, right?
    Most Canadians will secure a mortgage exclusively by trying to find the lowest interest rate.  While the interest rate is very important, the majority of Canadian will have to break their mortgage and pay a significant penalty because of the conditions that were attached to that great rate.  Don’t treat your mortgage like a commodity.  The structure of your mortgage and what you would like to achieve with it is more or equally as important as the interest rate for it.
  2. What is the plan for your mortgage
    Do you have an accelerated plan for your mortgage?  You should not just put your mortgage on auto-pilot and resign to the amortization that was set for you by your lender.  Have a goal to pay it off faster.  Your mortgage plan should fit into your overall life plan.  Many people try to be mortgage free at all cost and by doing so they neglect their greater financial plan.  By doing so they end up having to raise a mortgage in their old age to support themselves.
  3. Just sign the mortgage offer
    85% of Canadians sign the mortgage offer that is presented to them by their financial institution.  We have great financial institutions in Canada, but they don’t have natural incentives to provide borrowers with the lowest interest rates.  It is up to each borrower to make sure that they have the best interest rate for their conditions.  Look at all your options and don’t be afraid of the small mortgage lender that will provide you with excellent products.
  4. Can a refinance get you ahead?
    Many people are afraid of refinancing their mortgages because of the penalties associated with it.  What if this could be done by keeping your payment the same and reducing your mortgage by 5 years?  Before you decline the opportunity to refinance your mortgage or just rush into it allow a professional to do the benefit analysis for you.  If you do it for the right reasons you could save tens of thousands of dollars and reduce your mortgage by many years.

Article submitted by Jacques du Preez of Mortgage Allies jacques@mortgageallies.ca 1-888-707-4995

How to tell if a neighbourhood is improving

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Whe19655032_sn you’re looking for a new home, you want to find one in a great neighbourhood – or, at least, in a neighbourhood that is on the upswing. How can you tell if a particular area is improving? Here are some common indicators:

  • Pride of ownership. Take a walk around the neighbourhood. Do you get a sense that people take good care of their homes? Are the lawns mowed? Is the landscaping trimmed? Are flowers planted? Homeowners are more likely to look after their properties when they like where they are living.
  • Home improvements. Are people investing in their homes? Are they getting their driveways re-done? Their windows replaced? Are there signs of home improvement projects? If so, this is a clear indication that homeowners like the area enough to invest in their properties.
  • Real estate sales activity. Do homes tend to sell quickly in the area? Do they sell for a good price? If so, the neighbourhood is probably in demand. If people want to live there, it’s a desirable area.
  • Business investment. Are businesses investing in the surrounding area? Is there an increase in the number of upscale shops, health clubs, restaurants, and other commercial enterprises that often locate near desirable neighbourhoods?
  • Community involvement. Are there signs that the community plays an active role in the look and lifestyle of the neighbourhood? Are there neighbourhood picnics, yard sales and other get-togethers? Check Facebook.com to see if the neighbourhood has a community page.
  • City plans. Find out what plans the city has for the area. Will there be road improvements done in the near future? Are there any major construction projects on the schedule, such as a new school or community centre. Although such projects can be disruptive in the short term, they may improve the neighbourhood – and, as a result, boost the value of any home you buy – in the long-term.

Of course, the best way to find out the desirability of a neighbourhood is to talk to a good REALTOR(r) who knows the area.  The Worgan Team has been helping clients for over 50 years of combined service, and have moved over 1600 families.

If you are thinking of making a move or investment in real estate, and would like some honest advice, please feel free to give us a ring.

Compliments of Myrna, Russ & Todd Worgan, Sales Representatives Sutton Group Signature Realty Inc. 905-286-5888
www.theworgans.com

Canada – good 2013 growth or not?

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Bank of Canada governor Mark Carney says Canada’s economy is in the midst of what he believes will be a successful transition from over-dependence on borrowing to production. The transition will however include continued weakening of the Canadian housing market, but deliver stronger exports.

This multi-year transition has been implemented since the collapse of the asset-backed commercial paper (ABCP) market back in 2007, when skittish investors fled the stock markets and banks. Mr. Carney, the then-recently appointed governor of the Bank of Canada, recognizing the potential for disaster if the proposed restructuring didn’t get done, stepped in and played a large role in getting the job done successfully and saving Canada from Armageddon. Since then the economic restructuring and stimulus has played out well according to Mark Carney.

“I think what we’ve done successfully, time will tell, is we’ve pivoted from stimulating household demand — housing market and household borrowing for consumption — kept employment up, and we’ve pivoted to focus on investment and exports,” Mark Carney told the Feb. 17, 2013 CTV Question Period program.

He went on to say; “That’s a difficult rebalancing, but what we’re seeing without question is a very constructive evolution of Canadians’ attitude towards debt and towards the housing market and it is moving towards a much more sustainable equilibrium,” said Carney, who is about to leave his job to take over the helm of the Bank of England this summer.

Mark Carney agreed that the doubling of Canadian home prices in only a few years is “certainly not normal and you certainly shouldn’t expect it to continue to perform like that.” He continued; “We’ve seen the adjustment of the (Canadian) housing market, we think there’s a bit more to come over the next couple of years.”

Not all economists are as confident as Carney on the transition period. The Bank of Canada is projecting economic growth to average about 2% this year, but some private sector analysts believe it will be a more challenging period.

“Suffice it to say, the jury is very much out on whether we have in fact pivoted to exports and investment,” said Bank of Montreal economist Doug Porter, noting that exports are down almost 10 per cent from a year ago, and that capital spending has also softened.

“In this environment, it seems the risks to growth are almost uniformly on the downside for 2013, unfortunately,” Porter added.

A recent Economist survey also confirms our worries about the Canadian real estate market, which indicates that the Canadian real estate market remains the world’s most overvalued despite the recent cooling, see http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home

According to a Jan 23, 2013 article in the Financial Post; Recent reports showed that Canadian home price gains in December were the lowest in three years. Meanwhile, home sales in the Greater Toronto Area have plummeted 50% from the year before. See http://business.financialpost.com/2013/01/23/toronto-housing-sales-plummet-50-in-a-year/?__lsa=28fd-25e0

Professor Robert Shiller of Yale University was interviewed on Feb. 7, 2013 by Trish Regan of Bloomberg TV who asked about why US residents should buy if only to trap their savings in a home. She went on to say, “They’re running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?”

“Absolutely!” Shiller exclaimed. “Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, new ones are better.”

He continued. “So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, “Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.”

At TriDelta Financial we reiterate our cautious stance on buying Canadian real estate and also see merit for many to rent depending on their personal financial situation. For reference see our Jan 2013 article here https://tridelta.ca/The-Canadian-Financial-Planner/2013/01/22/canadian-real-estate-update/

And lastly, CIBC chief economist Avery Shenfeld, who was recently voted the most accurate forecaster of the past two years, says the country’s gross domestic product output will only expand by 1.7 per cent, marking the third consecutive year of losing altitude in the growth statistics since 2010.

Fortunately at TriDelta, we’re tenacious in seeking pockets of growth and opportunities both in Canada and globally.

Article compiled from various media sources by Anton Tucker, VP TriDelta Financial

 

Canadian real estate update

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houseWe continue to believe that Canadian real estate prices have reached the top of the cycle as we have cautioned in various articles,
https://tridelta.ca/The-Canadian-Financial-Planner/2012/11/30/1718/

We have seen a continuous uptread since 2001, which is unlikely to last. Buyers should be very cautious at this stage, particularly with investment properties.

Macleans published a great article on this very topic recently, which is well worth reading, see
http://www2.macleans.ca/2013/01/09/crash-and-burn/

Canadian Business magazine have also published a story in their most recent issue and it too reflects concerns about the Canadian real estate market. For example, George Athanassakos, a finance professor at the Richard Ivey School of Business, expects a “severe correction,” and soon. Read the article, click here

Are Canadian house prices too high?

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I am amazed by peoples fascination with real estate price trends, but it is for good reason being one of our largest purchases. We have also witnessed global real estate price destruction over the past five years yet remain unscathed so far in Canada. Is this about to change?

The volume of warnings of an impending downturn in Canadian housing prices continues to increase despite continued rising prices.

At TriDelta we are now more cautious of real estate values given the significant rise in Canadian consumer debt and global economic woes, but this has been offset by very low interest rates fueling demand.

The Teranet-National Bank house price index showed a national housing price decline of 0.25% in October although the year to date advance remains positive at 3.84%. Regional variances are more pronounced; the Toronto area price decline was 0.6% in October 2012, but remains up almost 7% year to date. Vancouver on the other hand eked out a positive monthly growth of 0.1%, but is down year to date. See http://www.housepriceindex.ca/Default.aspx

I attended a conference this week and listened to two top economists, Paul Ashworth, Chief US Economist, Capital Economics and Avery Shenfeld, Chief Economist, CIBC World Markets. Interestingly they agreed on a dire outlook for Canadian real estate, but differed in the likely extent of the pullback. Paul discussed why his team believed that Canada will suffer a shocking 25% decline, which he described as their “conservative estimate”. Avery predicts a modest correction, but failed to commit to the extent.

Professor Robert Shiller is very in tune with global real estate trends remains pessimistic on our housing market. He along with other experts continue to ring the warning bells and we should take note. Here is another recent article well worth reading:

http://www.businessinsider.com/robert-shiller-canadian-housing-bubble-2012-9

While there are always a number of opinions on the direction of real estate, it now appears that residential real estate prices might be hitting an inflection point. For those planning on having their real estate fund their retirement, now may be the right time to downsize or even to sell and rent.

Article compiled by Anton Tucker, VP TriDelta Financial

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