Wednesday, February 28, 2007

The Bear Cave

Update: I am awaiting the release of the Fraser Valley Real Estate Board and Greater Vancouver Real Estate Board statistics for the month of February and I will post when I get a copy and I am able to do my analysis for month end.

Hey, its time for the bear cave again. In the spirit of all things bearish we could talk about the following:

  • How real estate prices must decline 20% - 25% so normal, hard-working people can afford to purchase a home.
  • How yesterday's selloff on the market was really no big deal - at least to the bulls - because as all bulls know - all you need is unbridled optimism for the market to continue to rise. Forget about those fundamentals since it's just about the spin.
  • How rampant speculation seems to be par for the course these days whether we are talking about real estate, stocks, mortgage backed securities, high-yield debt, etc?
  • Whatever else has got your knickers in knot. Just don't ask me to untie them.

Tuesday, February 27, 2007

Worst risk to market? Subprime mortgages

The story quoted below appeared in the February 26 USA Today outlining some extremely serious credit problems in the US right now that are only just beginning to materialize. No, we are not immunized against these types of financial risks in Canada. Our economy is tightly intertwined with the US Economy and we have our fair share of "Subprime Lenders" here in Canada, including:

I fully expect that we will follow the US market, perhaps not as deeply or as sharply, through this credit contraction and home price correction. As seen in the US, home prices merely have to not appreciate for a credit crunch to become a problem and the vicious cycle will start.

By Sue Kirchhoff, USA TODAY
WASHINGTON — Growing trouble in the subprime mortgage industry poses the greatest risk to financial markets right now, according to a survey of business economists to be released Monday. The forecast by the National Association of Business Economics (NABE), which polled 47 top economists, called the subprime sector a more serious concern than hedge funds, which came in second.
Subprime mortgage lenders provide higher-priced loans to consumers with impaired credit. Defaults and delinquencies among subprime borrowers have jumped since late 2006, and a number of lenders have shut down or scaled back their operations.
On Wednesday, for example, shares of subprime lender NovaStar Financial plummeted more than 42% to $10.10 after it announced a fourth-quarter loss of $14.4 million. Company officials said they weren't sure they'd post a profit in the next five years.
While the NABE finding illustrates concern about escalating problems in the subprime sector, it doesn't mean economists expect the difficulties to spark broader financial stress. Overall, they expect steady economic growth in 2007. "The outlook for consumer spending, which is the one that might be hit the highest by mortgage delinquencies and defaults, was actually revised upward," says Carl Tannenbaum, NABE president and an economist at LaSalle Bank.
The economists predict that the U.S. economy will expand at a 2.5% to 2.6% annual rate in the first half before accelerating to around 3% later this year. Growth is expected to average 2.8% for the year, in line with earlier NABE reports.
Housing will continue to be the biggest drag on growth. After five years of a boom market, housing starts have plunged in the past year.
The jobless rate, now 4.6%, is expected to inch up to 4.7%, the NABE says. Corporate profits, which rose by an estimated 19% last year after taxes, are projected to rise by a far more modest 5% in 2007.

Monday, February 26, 2007

More Apartment Supply for Surrey

More on Surrey Developments. Who is going to buy all of these condos?

Ooooh, ooooh, ooooh, I know, I know - - - - - IT'S THE SPECULATORS SILLY. Very few of these people are actually buying these units to actually live in them. Housing is not for living in, it's for investing dummy!

By Kevin Diakiw - Staff Reporter - Feb 23 2007

21- and 25-storey structures planned for 108 Avenue and West Whalley Ring Road. Two more huge residential towers are in the works for Whalley. Century Group Lands Corporation plans to build two structures – 21 and 25 storeys – at 108 avenue and West Whalley Ring Road. Total cost of the project is expected to be about $75 million. Located across the street from the Gateway SkyTrain station, the towers will contain a total of 452 suites. Graham McCollum, vice-president of development for Century Group Lands, said if all goes well, the buildings should be complete by 2009. The project proposal will go to public hearing Monday. It’s the second large project announced in the Whalley area in the past week. An 1,100-unit project was announced Monday, only a few blocks away on 108 Avenue. McCollum said the area is gaining market momentum. “This particular area is obviously an area in transition, so we want to be part of it,” McCollum said, adding access to SkyTrain was key in choosing the location. He predicts more development like it in coming years. “I bet 10 years from now, that area is going to look totally different than it is now,” McCollum said. The project is before Surrey city council Monday at 7 p.m.

More Developments:

Land rush in Whalley

Residents in North Whalley should get ready to welcome new neighbours. Quattro Phase One, a 140-new home development near Gateway Station, sold out in four hours, scooping up $36 million in the process. Homebuyers lined up hours in advance to lay claim to the Lower Mainland's least expensive housing project with units starting as low as $119,900. The 10-acre development has drawn so much attention that the second building will be fast tracked, giving priority to bidders who missed out on the first building. In total eight buildings will be constructed, offering units that increase in price at $10,000 increments.

Sunday, February 25, 2007

City of Surrey Development Permits - SUPPLY, SUPPLY, SUPPLY

I was curious about how many development permits were issued and in process during 2006 in the City of Surrey so I did some data mining and discovered a few things:
  1. There is a CRAP LOAD of development ongong and slated to begin here in the beginning of 2007 (over 11000 housing units in the City of Surrey).
  2. 4000 units permitted in the last 12 months
  3. 7300 units entered into the approval process in the last 12 months (not including approvals)
  4. In North Surrey the story is Condos (over 3500, which does not include those currently under construction)
  5. In South Surrey and Cloverdale the story is townhouses and yet more townhouses (3300 townhouses in development or slated for development in those two areas alone)
  6. A surpisingly large number of senior's related developments (over 1500 units)
Note: Not all of those development permits applied for will be approved but I also did not go farther back than January 2006 to look for applications. Even assuming 1000+ units drop out of the process we are still looking at over 10000 units scheduled to be in construction or begin construction sometime in the next 12 months. I think the introduction of all of this supply will put some very serious price pressure on the market in the next 12 to 18 months.

Friday, February 23, 2007


From TD Economics - Released on February 20, 2007


  • Planning surplus estimated at $2.8 billion in FY 06-07
  • Further black ink targeted over the next few years
  • 10% personal income-tax cut the budget’s centrepiece
  • Announced measures to address the affordable housing challenge
British Columbia’s Golden Decade continues at full throttle, .... Today, the government turned the spotlight on the province’s housing challenge, although many of the measures presented today will accomplish multiple aims.

Fiscal 2006-07 another banner year
Owing to a booming economy, total revenues stormed in $2.7 billion higher than planned .... Not all of the windfall flowed through to the bottom line, as the government booked an additional $900 million in spending, some of which was related to new measures announced today, such as the establishment of a $250 million Housing Endowment Fund. Meanwhile, with the risks to 2006-07 forecasts now having diminished, the government has scaled back its forecast revenue allowance by $550 million. If not used, the remaining $250 million cushion would transform the year-end tally to $3.15 billion, surpassing last year’s rosy performance and the highest on record.

Tax cuts to take a bite out of revenue growth

The cornerstone of this year’s budget on the tax side was an announced 10% reduction in personal income taxes for individuals earning up to $100,000, effective January 1, 2007. Although this tax cut was “sold” in the budget as a measure that will help defray the costs of home ownership, the implications are much broader. Indeed, at this threshold or lower, B.C. will surpass Alberta as the jurisdictions with the lowest PIT bill among the provinces. The measure is slated to save an individual earning $50,000 per year $315 and $864 for someone earning $100,000.

Other more modest tax reduction initiatives tabled today included an increase in the threshold for the First Time Home Buyers’ Program for property transfer tax exemption, a beefed up Home Owner Grant and sales tax rebate for the purchase of hybrid cars. Together, these measures are projected to shave about $1.5 billion from revenues.

Program spending is expected to increase by a moderate rate of 4% per year during the forecast period, with much of the increase front-end loaded into 2007-08. There were a slew of housing-related measures, including increased funding for shelter beds, a lifting of the shelter rate for individuals on social assistance and housing support for low income seniors. Still, the usual suspects – health care and education – were far from forgotten. In fact, new funding in these areas still accounted for more than half of the total new spending.


Tax supported debt

Bottom Line
British Columbia’s improving fiscal path, and falling debt burden, continue to increase its flexibility in confronting head on the province’s longer-term challenges – a fact recently supported by Moody’s decision to upgrade the province’s credit rating to AAA. While housing topped the headlines today, the environment is poised to become a dominant theme in future budgets. The good news is that taking measures to improve the environment – and at the same time dealing with the province’s Achilles Heel, weak productivity – are not mutually exclusive goals. The benefit to both areas of shifting the overall government revenue mix from income taxes to consumption taxes/user fees is case in point.

I don't comment much on politics because it tends to get emotional but I couldn't resist commenting on the BC Budget for 2007 because of the spin it has been given - making housing more affordable for BC residents.

Clearly, by allowing BC residents to keep more of their own money by reducing income taxes and the property transfer tax, it will free up more money to spend or save. They may decide to spend it on housing but they may not. Economically speaking, giving potential buyers or renters more money actually gives incentive for prices to rise, assuming demand will rise with the 'newfound wealth' we will all experience (a few hundred dollars a year is hardly worth writing about but every little bit counts)!

That said, if prices rise, supply should increase as well, providing some downward pressure on prices but I think we've already seen the supply situation explode so I'm not sure the budget will have any significant effect on the housing situation relative to these effects given the relatively minor nature of the tax cut. Assuming the the BC government knows that the BC housing situation is precarious on the pricing front, I am wondering at this point whether the government is going to try to 'take credit' for improving affordability in the future by positioning the budget this way.

Wednesday, February 21, 2007

‘Yaletown’ planned for Whalley

An article as seen in the Surrey Leader
By Kevin Diakiw
Staff Reporter
Feb 21 2007

A $600-million development planned for Whalley, described as “the missing piece of the puzzle” will transform the troubled area into an upscale neighbourhood, proponents believe.

For decades, the depressed site around 108 Avenue near King George Highway has been Surrey’s ground zero for drug dealing, prostitution and petty crime. A five-and-a-half acre parcel of vacant property at 108 Avenue and East Whalley Ring Road is overgrown and has often been a site of tent cities of homeless.

Development firm Tien Sher wants to build an 1,100-dwelling community using the vacant property and nearby land occupied by the Flamingo Hotel. CEO Charan Sethi said Monday the 10-acre development will convert the area into the next “Yaletown,” referring to the upscale neighbourhood in Vancouver. The first phases will be four, four-storey apartments with a total of 470 condominiums with ground floor commercial development. In addition, Sethi is planning four high rise apartment buildings just to the west. “We’re in the process of purchasing the Flamingo Hotel and the two properties south of that as well,” Sethi said. “We have firm contracts on all three properties.” Pete Nichols, of Whalley Printers, which is across the road from the proposed development, expects positive change in the area. “It’s going to be fantastic for this end, because it finally frames this area from 108 (Avenue) to 100 Avenue,” Nichols said. “It finally puts north of 104 on the map.” He pointed out other areas of Whalley have benefited from similar developments.

Four 28-storey residential towers at 100 Avenue and a 1,600-unit urban village planned for 102 Avenue and 133 A Street, along with the Central City tower, home to SFU, have begun to transform the south end of Whalley.

All of those projects, including this latest plan, have been partially fuelled by a 2003 reduction in development cost charges, which were dropped by 60 per cent. That incentive expires this June, but city council is considering an extension.

The Tien Sher development is the missing piece of the puzzle, according to Lesley Tannen, executive director for the Whalley Business Improvement Association. “When we’re trying to revitalize the commercial and business sector, what is the one thing that all of those businesses need?” Tannen asked. “They all need more feet through the doors.” She said once that happens, it will create an “ever-increasing and positive upward spiral.”

Mayor Dianne Watts agrees. “It’s a key area within the city centre,” said Watts. “It has typically been a depressed area ... the development will certainly improve that.” Sethi is expecting to break ground on the first phase in May, with completion about 18 months later. “That’s if everything goes well, I just hope our labour shortage doesn’t affect us too much,” Sethi said.

Since Monday’s announcement, Sethi said he’s been inundated with interested buyers.
“The phone is ringing off the hook right now,” he said. “We’re taking registration and sales people will begin making appointments for Saturday.” Studio apartments in the first phase start at $120,000, he said.

The tower portion of the project has to proceed through the city’s public hearing process. - For more information, visit the company’s website at or call 604-581-8000.

I think that some of these developments in Whalley will help improve the area quite a bit and I am actually looking forward to seeing more people move into the area. By my estimation there are more than 6000 residential housing units at some stage of development or permitting in the North Surrey area right now, which equates to nearly $2 billion of construction investment. I am just curious as to where all of these people are coming from and where they are getting the money to buy all of these condos.

Investing - Registered Retirement Savings Plans

Its that time of year, during the month of February, when we hear non-stop commercials from the major financial institutions about RRSP this and RRSP that. Get a loan. Invest now. It goes on and on. I wanted to briefly comment on this fervour in an informing way that I hope will dispel some myths and encourage some sound behaviours.

What is an RRSP?

Quite simply, an RRSP is an account that is registered with the Canada Revenue Agency as a retirement savings account. This registration allows investments held within the account to grow without the yearly impingement of taxation on the investment earnings. This registration also causes the CRA to allow RRSP contributors to deduct the contribution from their income and deferring that taxation until the contributor withdraws the funds. There isn't really much more to it than that.

It works like this:
January 7th, 2007, Joe puts $1000 into an RRSP account and buys a 4% GIC. During 2007 he earns $40 of interest income which he is not taxed on because it is within a RRSP account - this protection continues until he withdraws the money from the account. He also receives a slip as a confirmation of his contribution and he is allowed to deduct that from his 2006 income resulting in a $200 to $400 tax refund, depending on his marginal tax rate. Don't worry about the CRA though, Joe will pay those taxes back plus more when he withdraws his money, hopefully in retirement!

If Joe invested that same amount of money in a non-registered account he would pay $8 - $20 of taxes on his $40 of interest income every single year, depending on his marginal tax rate. Of course that taxation reduces his overall rate of return.

Why is an RRSP account good or bad?

Canadians, given the right circumstances, should use RRSP accounts for the obvious benefit of allowing the investment earnings to be untaxed until withdrawal. From what I see, this is not why most Canadians have an RRSP account. Most have simply just followed the advice of their financial institution not really giving much thought to actual retirement or investment planning. This isn't necessarily a bad thing since it encourages people to set aside money for the future, something that is quite important, but it is generally done with the care and planning it should be done with.

What I see on a day to day basis is the obsession with the yearly tax deduction and a general lack of care and a misunderstanding about the actual investment choices within the RRSP account. The majority of people display their misunderstanding by referring to an RRSP as an investment - it is not an investment - it is only a type of account which can hold investments. The annual obsession is also harmful in another way, which is, not encouraging a regular dollar-cost-averaging plan which would involve regular monthly or weekly contributions. This method is far more disciplined and results in more savings and better investment growth over the long term. It also helps people avoid things like RRSP loans and the mad scramble for cash at a tough time of year.

All of that said, many Canadians do make good choices about using RRSP accounts for the obvious benefits and do understand the positives and negatives associated with these accounts.

What are some of the social behaviours you have witnessed regarding the RRSP season?

Tuesday, February 20, 2007

The Bear Cave

Here is your chance to discuss anecdotes of silly speculators, flipped out flippers, negative cash-flow ninnies, etc. Please keep it clean and on topic.

I heard a story recently of a real estate agent buying 3 pre-sale condos in the Whalley area of Surrey. No assignments allowed so this agent must take possession. These condos have no chance of positive cash flow given the price and the current rents in the area. What will happen if these condos don't sell? Don't sell above the price paid? What if this agent's income goes down and the mortgages don't get paid?

Seems like really poor diversification as far as an investment strategy goes. Too risky for me. Do you have any stories?

Monday, February 19, 2007

An illustrated guide to the coming real estate collapse

I thought these illustrations over at iTulip were worthy of posting. Some really good analysis in an article by Michael Hudson, a Distinguished Professor of Economics at the University of Missouri. Please check out the whole article for yourself at iTulip. I did not want to reproduce the whole article here since much of it applies only to the US housing market. Most of what these images are communicating apply very directly to the Canadian and Vancouver real estate markets.

I love this last one. I don't want to be that guy nor do I want any of my family or friends to be attacked by the negative equity shark.

What to do now?

I find myself a little uncertain about what to do this morning with the sudden departure of two of the brave bubble bloggers, the most prominent of whom was the infamous, and mysterious VHB or Van-Housing-Blogger.

Given the significant loss of the VHB's data driven real estate analysis I hope to continue in the same thread regarding the real estate market analysis you find here. When I started this blog I did not want to simply duplicate the VHB's analysis so I endeavoured to create some unique and interesting ways to look at the real estate market, especially in the Fraser Valley. Additionally, I felt I could add value and complement the VHB by discussing other financial matters and I plan to continue to do so.

Given the VHB's departure, my intentions for the immediate future include:
  1. adding some more Greater Vancouver Real Estate Board statistics and analysis since previously I would have only been duplicating the VHB
  2. adding a potential guest poster or two to relieve the burden of posting on my busy life
  3. adding a post once per week to discuss anecdotal real estate stories
  4. continuing the gong show
  5. continuing investing segments
  6. continuing the Fraser Valley Real Estate Board statistics and analysis
  7. continuing to follow the local and national news
I welcome your thoughts and suggestions especially regarding who you may like to see as a guest poster.

Saturday, February 17, 2007

Real House Prices

Just thought I'd add some flavour for the weekend food for thought with some dandy charts tracking house prices adjusted for inflation. First the chart tracking Greater Vancouver house prices since 1975. Hmmmm . . . . looks like Q2 2006 is an all time high. I know we are down from that high now.
Then the chart tracking US house prices. Hmmmm . . . . same thing here.
I wonder if we could see 'real' house price declines.

Thursday, February 15, 2007

Gong Show #6 - Carrying a Credit Card Balance

This week's gong show isn't a dubious financial product but rather a dubious financial behaviour. The financial behaviour of carrying a balance with a credit card company is sure to cost a lot of money, make the user poorer, make the credit card company shareholders richer, and increase unnecessary consumption.

Paying for things with a credit card isn't bad in itself. It is one of many ways to conduct financial transactions and a very convenient one at that. Using a credit card for necessary purchases and collecting points or getting cash back is actually a very smart financial behaviour provided the user pays the credit card balance in full every single month. This is where most people get into trouble, they don't have the cash to pay the balance in full when their bill arrives. Those stainless steel appliances lose their lustre quickly when you have been paying interest at 17% for two years after you bought them on that shiny new Visa card.

Lets play with that scenario for a moment. Your dishwasher broke, now you need to buy a new one. You have the cash and can afford the $500 for a nice new dishwasher that will work just dandy but your at the store and that set of stainless steel appliances really catches your eye. The salesperson does a great job at persuading you to buy the new set and you are convinced that your life will be 10 times better with these shiny new marvels of modern technology. You plunk down the Visa and $5000 later you walk out of the store convinced you have done the right thing. Remember now that you could only afford to pay $500 but you paid $5000. Its 4 weeks later and now the bill arrives with a balance of $5000 and you only have $500. You wake up at this point and think, "Wow, how am I going to pay this off." then you look over at your appliances and think, "It was worth it. I will pay it off later." and you pay $500.

The fun really starts at this point and this is when the credit card company starts salivating at the prospect of you paying off those appliances for the next 3 - 4 years. If you were diligent and paid $160 per month for 3 years and managed not to buy anything else impulsively you would have paid $1277 in interest plus the $5000 in principal. That sale price on the appliances isn't so attractive now that you have added 25% to the total cost.

The big problem for most people is that they never actually pay off their purchases and they end up 10 years later still paying interest on the appliances they bought and have long since lost the showroom lustre. This is because two years into the plan they broke down and convinced themselves that they deserved a vacation and put that onto their card and two years after that the car's transmission needed replacing and so on and so on. It never ends unless you get real disciplined, buckle down and stop spending. Pay off that credit card balance as soon as possible. Go without things until you do. Reward yourself only after you have fully paid off the card and saved up for a new purchase.

Good old fashioned common sense will go a long way. Refuse to pay interest on consumable items and depreciating assets except as a last resort. You will be the one rewarded in the long run.

Monday, February 12, 2007

Real Estate Price Compression

There has been a lot of talk around the bubbleshere about the concept of 'price compression' which is the tendency of prices of real estate in the suburbs to compress up to the price level in urban areas. There are a few good analysis pieces on this phenomenon that I have read. The best of these articles is from iTulip.

I have now put together a cursory analysis on this topic by comparing the median detached benchmark prices in the Greater Vancouver area (urban) with the median detached benchmark prices in the Fraser Valley (suburban) from January 2005 to present.

What this limited data tells me is that the price compression phenomenon does occur and has occured substantially in the Greater Vancouver and Fraser Valley real estate markets over the past two years. The data is not perfect but I would expect that a higher volume of data would tell a similar story to what we seem to observe anecdotally. That is, potential home purchasers are rational in that the seek value for dollar spent on a home purchase and what $500,000 can buy in Langley is a far cry from what $500,000 can purchase in Van West. People seem to be willing to commute long distances to get more house for their dollar thus driving demand and prices up in the suburbs.

As affordability has worsened in the urban areas people sought out cheaper housing in the suburbs and drove up prices in the suburbs more than prices were driven up in the urban areas. In early 2005 you could hypothetically have traded your GV benchmark detached home for 1.6 simlar Fraser Valley properties. Now, in 2007, you would only get 1.4 FV detached properties in the same exchange.


Apparently price compression is not a purely geographical affair but also a housing type compression. This leads me to believe that as detached prices move out of affordability for people they choose the next best option and move down the housing food chain to attached dwellings or apartments. This chart demonstrates that change in the Greater Vancouver area over the past 6 years. Apartments have gained proportionally more in price versus detached housing types.

I think this is pretty profound stuff here. What are your thoughts?

Friday, February 09, 2007

Fraser Valley Real Estate Market - January Analysis

So I finally got a few moments to work on some of my data and charts for the Fraser Valley Real Estate Board's January statistics release and here are the results.

The house price indes is up 1.4% after 3 straight months of declines putting the index value equal to the September 2006 level.

Active listings have decreased from the October high of 7438 to the January level of 6099 which is 29% higher than the January 2006 active listings of 4722 and marginally higher than the January 2005 active listings of 5950. Seems like a fairly normal seasonal variation.

Median prices have been stagnant for the past 7 months with no significant changes since June 2006. It seems like there is no rush to buy or sell in this market.

And lastly, the comparison of the Months of Inventory and the Quarterly Price Changes for the past two years. Still showing an exceptionally strong inverse correlation of -0.81 the months of inventory are at a moderately high level right now at 6.1 and quarterly price changes are non-existent.

The next few months will tell the story of things to come. We could see further stagnation and more inventory with low demand and subsequent price decreases. Conversely, we could see a resurgence of demand and tighter supply. I don't see the latter scenario as very likely given poor demand at the current price levels and all of the units under construction right now and due to complete in the next few months.

Thursday, February 08, 2007

Gong Show #5 - Financial "Planners"

For the gong show today I am gonging so-called financial planners who actually don't write financial plans. Why call yourself a financial "planner" if you don't actually write a financial plan for your client? Aren't you just a glorified salesperson?

I fail to understand why someone is permitted to be called a financial planner if he/she doesn't actually write financial plans. Most of these so-called financial planners do sell investment and/or insurance products but fail to integrate the implementation of these products into a complete financial picture for their clients.

This is in stark contrast to what a real financial planner will do, which is follow these six steps:
  1. Setting goals and objectives is the first step of any financial planning process - if you do not know where you are going, how can you know when you get there, or even decide which route to take? Setting goals and objectives is the foundation of any sound financial plan.
    No matter where you are heading, you need to assess where you are now, and what you already have in place for the journey.
  2. Data gathering will ensure that your personal documents are up-to-date and that you know your current financial situation.
  3. Heading in a general direction won't guarantee success in reaching your final destination. Before heading out on your journey, do your analysis and find solutions. This strategy will assist you in reaching your stated goals and will provide you with a roadmap to help you achieve these goals.
  4. Your financial plan should confirm that your goals are achievable, and appropriate recommendations will help define what you need to do to ensure that you reach these goals.
  5. A financial plan is only helpful if the recommendations are put into action. Implementing strategies will assure you reach your destination.
  6. Finally, follow-up and annual reviews are critical to ensuring you maintain a clear focus in order to succeed.

Wednesday, February 07, 2007

Strategic Asset Allocation

Last week, I talked about Modern Portfolio Theory and ways in which an investor can lower risk and increase returns by limiting 'unsystematic' risk by choosing appropriately diverse investments. This week I will discuss the most important decision that an investor can make - Strategic Asset Allocation.

What is Asset Allocation?

First off, asset allocation is simply the decision an investor makes about what percentage of his/her assets will be invested in a specific class of investment vehicles. The different investment vehicles would commonly include:
  • Cash (bank accounts, cash balances, t-bills and other money market instruments)
  • Fixed Income (government bonds, corporate bonds, high-yields bonds, and GICs,)
  • Large Capitalization Equities ($10 billion + corporations with large and typically stable businesses, large companies typically pay dividends)
  • Mid-Cap Equities (mid-sized companies of $1 to $10 billion capitalization)
  • Small-Cap Equities (small companies with capitalization of less that $1 billion)
  • Canadian Equities (companies with a stock listing in Canada)
  • US Equities (companies with a stock listing in the USA)
  • International Equities (companies with stock listings outside of North America)
  • Emerging Markets Equities (companies with stock listings outside of the developed world)
  • Real Estate (land and/or buildings)
  • Art, Collectibles, and Precious Metals
  • Futures, Options, Short Selling
The risk and potential return for these different asset classes would typically look like this:

Note: Typically, real estate, art, collectibles, precious metals, futures, options, and short selling are all considered 'more risky' or more volatile even than small-cap stocks.

Why is Asset Allocation so Important?

Asset Allocation is important to the investor for one main reason, that is, it can ensure the investor is in an appropriately balanced portfolio for his or her risk level. For example, a young professional with a high income and a long time before needing his/her investment funds, may be able to accept higher volatility in his/her portfolio, thus allowing a greater allocation to stock based investments. Or conversely, an elderly retiree may need a regular income from his/her investments and may not be able to accept higher volatility in his/her portfolio.

This first investor should probably have a higher weighting to stock based investments because of the long time horizon and the potential for much higher returns (say 8% for stocks and 4% for fixed income) and the second investor should have minimal exposure to stock based investments because of the potential volatility. These are general guidelines of course and do not constitute specific investment advice for your particular situation.

What is the right Asset Allocation for me?

This is a difficult question and a very personal one but the quick answer is that your asset allocation should change based on three things:

  1. Your personal willingness to accept volatility in your investments - be honest - how would you feel if your investment lost 10% in six months? What would you do?
  2. Your time horizon. How long before you need the money?
  3. Your amount or ability to absorb losses. How much money can you afford to lose before it would affect your lifestyle?
If you can accept volatility, have a long time horizon, and can afford to have losses before it affects your lifestyle you can have a higher weighting to stock based investments even up to 100% depending on how strong your feelings are toward those three factors. If you cannot accept volatility, have a short time horizon, and cannot afford losses without it affect your lifestyle then you must maintain a higher weighting in fixed income investments even up to 100% fixed income depending on how strong your answers are to those three questions.

I hope that helps and I look forward to hearing your comments or answering your questions.

Tuesday, February 06, 2007

They are Making More Land

I found this article quite interesting.
By Jeff Nagel, Black Press, Feb 03 2007

That old adage about land – they're not making any more of it – may not apply when it comes to the hunt for scarce waterfront property in Greater Vancouver. Port officials are now looking at creating a new island in the middle of the Fraser River by diking a muddy bank that has formed in recent decades and turning it into usable industrial land. The potential site is Sapperton Bar, a 1.8-kilometre swath of sediment that has been deposited in the river off New Westminster, between the Pattullo and Port Mann bridges. "It's an emerging island," says Tom Corsie, the vice-president of real estate development for the Fraser River Port Authority. "We wonder if it could be filled and become an industrial island." The concept is at an exploratory stage, but the port authority has talked to consultants about possible access routes. Unlike natural river islets, the bar has formed from human efforts to manipulate the river by installing a series of in-river structures over the last century. One of them – the Sapperton V-Dike – is a triangular outcrop that juts from the river just below the Port Mann and was built in 1936 to redirect currents and stop erosion of the New Westminster shore. But over the decades it has caused sediment to form downstream in Sapperton Channel, to the extent that some trees now survive atop the bar and log booms anchored around it have been pushed back in a widening perimeter. If Sapperton Bar is diked and turned into Sapperton Island – which Corsie says is geotechnically feasible – it won't be the first time the port has looked to the water for land. Annacis Island used to be three smaller islands in the river before they were filled in and developed. The port authority's automobile import terminal at the north end of Annacis sits on 120 acres of land reclaimed from the river. Various other industrial sites along the river have been reclaimed over the years as well, he says, along with farmland in Delta and even the new Vancouver convention centre that will rise on pilings in Burrard Inlet. The new look at taking land from the river is being driven by ever-escalating real estate prices. The port authority has been on a hunt for suitable sites for short-sea shipping terminals as part of a strategy to use the river as a goods-carrying artery and take trucking pressure off local roads. But the port is being outbid by condo developers and thwarted by city councils, which often favour more attractive and lucrative office or residential towers over heavy industry. Another chance for a major industrial site on the river died last summer when the Agricultural Land Commission rejected a developer's plan to industrialize Barnston Island. With a shortage of industrial land intensifying, the port authority is effectively being pushed off the land and into the river. "Land is becoming unbelievably expensive," Corsie said. He estimates about 300 acres could be reclaimed from Sapperton Channel. Building the new island would take much study and need the blessing of the Department of Fisheries and Oceans. Fish and wildlife habitat would have to be measured and any losses mitigated. Hydraulic studies would also be needed. Diking off a large new area to keep the water out would push up the high water line on other dikes along the river – potentially increasing the threat of a flood. Another big question is how the island would be accessed. A simple bridge from the New Westminster shore is one option. But Corsie sees a much bigger possibility. He thinks the island could support a new bridge replacing both the 71-year-old Pattullo Bridge and the 103-year-old New Westminster rail bridge, which is a major bottleneck for goods movement. "If this could support a replacement for the Pattullo Bridge, with access this island would be much more valuable to short-sea shipping," he said. The link could also create a needed connection between the planned North and South Fraser Perimeter Roads, he said. "It's an option we would like TransLink to study," Corsie said. The port authority won't likely spend more money on the idea until it gets a clearer sign of interest from TransLink and the province. TransLink, which owns and operates the Pattullo, has formed a steering committee with the port authority and neighbouring municipalities to study options for the bridge's eventual replacement. "We are aware of the concept," TransLink spokesman Ken Hardie said of the Sapperton Bar site. "To us it looks interesting."

Monday, February 05, 2007

Soft Landing for Housing Starts in 2007 and 2008

Here is a little news for the day. I didn't know we were having any 'landing' let alone a 'soft' one here in Canada. I thought landings were only for the US market. UPDATE: Check the VHB for a great graph that disputes the 'soft landing' myth.

OTTAWA, February 5, 2007 – Housing starts will moderate this year to 209,500 units after reaching 227,395 units in 2006, according to Canada Mortgage and housing Corporation's (CMHC) first quarter Housing Market Outlook, Canada Edition report. Although residential construction will decline, 2007 will mark the sixth consecutive year in which housing starts exceed 200,000 units. Starts will ease further to 195,500 units in 2008.

"Construction activity will continue to moderate as demand for home ownership moves toward more sustainable levels," said Bob Dugan, Chief Economist at CMHC. "Most of the pent-up demand that built up during the 1990s has been absorbed, and higher mortgage carrying costs due to continued strong price growth and modest increases in mortgage rates will contribute to the slower pace of new home construction both this year and next."

Existing home sales, as measured by the Multiple Listing Service (MLS®), remained near record levels in 2006. Sales will ease to 464,550 units in 2007 and to 449,200 units in 2008. Similarly, after five years of strong growth in house prices, the rate of increase in the average MLS® price will moderate to 5.9 per cent in 2007 and 3.3 per cent in 2008 as existing home markets move toward balanced conditions. The strongest price growth will be in Western Canada; with the average MLS® price in Alberta growing by 13.3 per cent in 2007 – after having increased by 29.5 per cent in 2006. Average MLS® prices in Ontario and Quebec will grow by 3.2 per cent and 4.1 per cent in 2007, respectively.

Also included in this issue of the Housing Market Outlook is a forecast of vacancy rates for key rental markets. The average rental apartment vacancy rate in Canada's 28 major centres decreased slightly by 0.1 of a percentage point to 2.6 per cent in October 2006 compared to October 2005. Looking ahead, favourable employment conditions, high levels of immigration, and the increasing gap between the cost of renting and owning will continue to exert downward pressure on vacancy rates. Nevertheless, many renter households will continue to be drawn into home ownership. As a result, the vacancy rate will remain essentially unchanged, inching up to 2.7 per cent in both 2007 and 2008. Strong rental demand will keep the Calgary vacancy rate low at 0.6 per cent in 2007 and 1.0 per cent in 2008. The apartment vacancy rate in Montréal will rise again to 3.2 per cent in 2007 and 3.5 per cent in 2008 as the growing home ownership trend continues to affect the largest rental market in Canada.

At the provincial level, new home construction in British Columbia will trend lower but remain high by historical standards. High levels of consumer confidence, employment and income growth, as well as positive net migration will translate into demand for housing. However, as the resale market moves toward balanced conditions, there will be less spill-over of demand into the new home market. As a result, housing starts will ease from 36,443 units in 2006 to 34,700 units in 2007, and decline to 32,300 units in 2008.

I find it interesting how this report does not mention rampant speculation, or the unsustainably high price levels in many communities and how that may affect demand or supply of housing. Its all about the balance in the market and how great consumer confidence and employment in our province is. What do you think?

Friday, February 02, 2007

Strong Housing Market in Fraser Valley - with some antispin

(Surrey, BC) – The Fraser Valley Real Estate Board reports a strong start to its 2007 Multiple Listing Service® sales and listings selection (no doubt it was a strong month for sales and listings proving once again that rational financial behaviour is uncommon and that there is a greater fool born every minute).

The total number of sales processed in January was 1,001, a decrease of 14 per cent compared to the same month last year when 1,165 sales were processed, however an 18.8 per cent increase compared to the 842 sales processed in January 2005 (Jan '05 was the last time there was anything closely resembling a slump in sales. Jan 2007 was not impressive but not depressing for the real estate crowd and it will be interesting to see what happens over the next few months).

New listings in January increased by 14 per cent compared to 2006 (not a rush to the exits but a solid increase of people wanting to cash out). As well, the Fraser Valley Multiple Listing Service® saw an increase in the number of expensive properties listed. “High-end buyers (who are out of their minds to expect what they are asking) will see that over 75 single family homes listed at one million or more entered the Fraser Valley market in January,” says David Rishel, president of the Fraser Valley Real Estate Board. “There is also a range of choices for average home buyers, with almost 600 homes valued between $250,000 and $500,000 listed last month.” (if you don't mind living in a sketchy 50+ year old house in downtown Abbotsford you can buy something for $250,000)

The Board received 2,425 new listings in January compared to 2,127 during the same period last year, bringing the total active inventory in the Fraser Valley to 6,099, an increase of 29 per cent over last year (a substaintial YOY rise in inventory). The average price of a single-family detached house in the Fraser Valley in January was $494,177 (that price is disgusting requiring a 'lowly' family income of nearly $110,000 to conventionally finance and purchase that home), an increase of just over 11 per cent compared to the same month last year. In January 2006, the average price was $444,771 (when it was still a disgusting price but it 'only' took a minimum family income of $98,000 to conventionally finance and purchase the same home). Townhouses sold for an average of $302,591 in January, an increase of 16.2 per cent from 2006 when they sold for an average of $260,445. The average apartment price went up 18 per cent in one year, from January 2006’s average of $169,473, to $199,995 in 2007. (I wonder where people got the extra money last year to bid up prices so much. Oh ya, that's right there were loose lending standards and people willing to amortize over 35 and 40 years. So they didn't earn the money, they just borrowed it).

It seems that the FVREB is proud to say that real estate prices increased so much in the last 12 months that over 100,000 more families in the Fraser Valley can now not afford to purchase their own basic housing at current prices. Good thing most people bought a while ago.

Thursday, February 01, 2007

Gong Show #4 - CMHC

The Canada Mortgage and Housing Corporation (CMHC) is getting brought to the gong show this week to see what you say about whether they should get the gong.

Who is the CMHC (according to the CMHC spin)?

"Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC is Canada’s premier provider of mortgage loan insurance, mortgage-backed securities, housing policy and programs, and housing research."

What do they do (according to the CMHC spin)?

"CMHC works to enhance Canada's housing finance options, assist Canadians who cannot afford housing in the private market, improve building standards and housing construction, and provide policymakers with the information and analysis they need to sustain a vibrant housing market in Canada."

Why they get the gong (according to me without the spin)?

The CMHC gets the gong from me because I don't think 90% of what they do matters anymore and could be taken care of by the private sector. This would include insuring mortgages and offering those mortgage products to the investing public via mortgage backed securities. Why does a monopolistic government corporation need to do this in a free country like Canada?
We have financial institutions that would gladly make a profit by competitively offering this same service while not risking taxpayers money via government gaurantees on the mortgage backed securities of the CMHC. This would likely result in greater product diversity, lower prices, and more flexibility to the public.
Additionally, as a taxpayer, I am not comfortable risking my hard earned tax dollars to insure these type of lending practices and these silly mortgages loans. These silly mortgages that CMHC insures include interest only, stated income, 100% financed, and second homes. I fail to understand how any of this is in our national interest or why it should be government backed. Why do my tax dollars support the buyers of Canadian Mortgage Backed Securities? Why can't Bay Street and Wall Street take those risks instead of the Canadian public?
Finally, the CMHC's programs have actually made housing more expensive by reducing the barrier to entry (downpayment) to zero. These people, without a downpayment, have bid up prices of real estate in the past few years and made some Canadian real estate markets unnaffordable.
What do you think?