BurnRate.ca - Do you spend too much?

From CBC News.

More than half of Canadians under 50 spend their disposable incomes without thinking about their financial futures, suggests a study released Thursday. I encourage you to go to http://www.mackenziefinancial.com/en/burnrate/index.html to check out the resources that Mackenzie has setup. In particular the videos are quite funny and may hit a little close to home for some.

The Burn Rater Test

1. Have you gone shopping and/or bought things to make yourself feel better?
2. Have you spent money in your account near the end of a pay period, because you knew you were about to get paid again?
3. Have you hidden purchases from family or friends, or told someone you paid less for something than you actually did?
4. Have you bought things you wanted, without considering the longer-term impact of the cost on your personal finances?
5. Have you entertained family or friends at home or at a restaurant more than you could afford?
6. Have you used your credit card to buy something when you didn't have enough money in your bank account to pay for it?
7. Have you avoided looking at your bank account or balance because you were concerned about how much money you've spent?
8. Have you regularly bought things on the spur of the moment?
9. Have you gone shopping (not including grocery shopping) two or more times a week?
10. Have you focused on spending today ahead of creating a budget or financial plan for the future?
    

The Burn Rater spending test, commissioned by Mackenzie Investments, found 24 per cent of respondents under age 50 are overspenders and 32 per cent show overspending tendencies.The term burn rate refers to how quickly disposable income is spent. Questions included: "Have you gone shopping and/or bought things to make yourself feel better?" and "Have you spent money in your account near the end of a pay period, because you knew you were about to get paid again?"Dr. Sunghwan Yi, a professor of marketing and consumer studies at the University of Guelph who helped develop the test, said people who overspend have a hard time making ends meet and trouble saving for the future.

Researchers asked 1,169 adult Canadians to complete an online survey of 10 questions on their spending habits that could be answered yes or no. The polling was conducted by Decima Research in December.

A respondent who answered yes to up to three of the questions was considered a controlled spender, while anyone who answered yes to four to six of the questions showed overspending tendencies. Anyone answering yes to seven or more questions was categorized as an overspender.

The study found Canadians are busy shoppers, with 45 per cent hitting the stores, not including for groceries, twice or more weekly. More than half of Canadians admitted to being impulse buyers, while 37 per cent of respondents under 50 and 22 per cent of those over 50 said they have hidden purchases or told someone they paid less for an item than they actually did.
Many Canadians said they rely on retail therapy for a pick-me-up, with 60 per cent of those under 50 and 47 per cent over 50 making purchases to make themselves feel better.
And when they're spending, almost half of Canadians use their credit cards to buy something when they don't have enough money in their bank accounts to pay for it.

Young, middle-aged not planning for future

Thirty-seven per cent of Canadians said they are not planning financially for the future. Forty per cent under 50, and 21 per cent over 50, said they focus on spending today rather than making a budget.

Sunghwan said he was surprised by the findings, especially "the great divide between under 50 versus over 50 people."

On average, Canadians under 50 answered yes to 4.35 of the test questions, compared to 2.88 for those 50 and above. Only five per cent of respondents over 50 were considered overspenders.

The findings suggest younger and middle-aged people "tend to basically spend money without thinking about their financial future," Sunghwan told CBCNews.ca, adding they "don't seem to appreciate the fact that the retirement age is quickly approaching and this realization often comes as they reach the age of 50, but it's way too late.

"We need to really encourage younger Canadians to start saving money and to develop a healthy habit of saving and investing as early as possible."

Curb your spending

Sunghwan said the study showed a concerning pattern of young and middle-aged people focused "on now rather than the future."

He said the most important changes people can make to improve their spending habits and start saving for the future are creating budgets and using cash instead of credit, because "people tend to feel greater pain when they hand over cash than when they are using a credit card."

He also recommended that Canadians arrange for a set amount of pay be automatically transferred to their savings and investing accounts.

"This way you save first and use the remaining money as necessary, instead of the other way around," he said. And for the impulse shoppers, he said, "Try to walk away for at least 24 hours if you're about to buy something on impulse… during this 24 hours, you are likely to realize that the things you are about to purchase on impulse are not really that important."

Correction Scenarios

Some discussion took place on the previous post about how a correction may play out in our local real estate market. Will it be fast? Will it be slow and steady? Will it look like previous busts? How will unemployment or a recession factor in? What about the olympics or other psychological factors?

Here is a pictoral illustration to give some food for thought - click to enlarge.


If we accept the premise that housing in Vancouver is overvalued based on fundamental analysis of the assets and the earnings or imputed earnings that these assets can earn, then we must evaluate how this overvaluation will be corrected.

Will earnings / rents grow to meet current prices? This would require a near doubling of local rents. I think most people would agree that this would devastate the local economy as the labour pool would dry up rapidly and many businesses would shut down due to the expense of operating here.

Will prices undergo a minor correction while rents increase modestly and interest rates are lowered? This is possible although trouble in the internation mortgage and credit markets would indicate that lenders may be unwilling to lend money to purchase real estate.

Will prices correct very quickly thus restoring a fundamental valuation to local real estate assets? This is also possible and perhaps even the most likely outcome given several possible events.

Here is the way I see things:

As the US enters recession it is likely to effect many industries here in Vancouver. This, combined with a wrapping up of several mega projects (Canada Line, Highways Improvements, Convention Centre, Condo Developments) during the next 12 - 18 months will drive unemployment up rapidly.

This unemployment will cause two things:
1) Developers will fast-track current housing projects as labour becomes available and
2) Unemployed or underemployed workers will leave and / or put up their homes for sale as they are unable to make the payments.

A wildcard in all of this is the amount of 'speculator owned' housing inventory out there. It is impossible to quantify at this moment but, if anecdotes are to be proved correct, this accounts for perhaps tens of thousands of underutilized or unutilized housing stock that could be put onto the market very quickly.

What do you think?

January 2008 FVREB Statistics

The Fraser Valley Real Estate Board has released the statistics package for January 2008 today. Here are the highlights:

Prices are stagnant since August 2007.

Inventory is ballooning and sales are falling.

The crash is coming - like a slow moving train wreck.

"There were 956 MLS® sales processed in January, a decrease of 4 per cent compared to the 1,001 sales processed the same month in 2007. However, there was an 18 per cent increase in new listings in January 2008 compared to the number received in January last year – 2,850 new listings compared to 2,425. January’s total active inventory at 7,554 listings finished 24 per cent higher than the 6,099 active listings during January 2007."

We also had the highest months of inventory number in recent history at 7.9 months at the current sales pace to sell through the entire inventory. Inventory typically increases dramatically from January through to the fall. Sales typically rise as well. With affordability constraints what they are I believe sales will trend lower than past years during 2008.

Click on the chart to enlarge.

Median prices are at the same level as last summer.

The house price index is at the same level as August. Year over year price changes continue to trend downwards. Even if prices don't change at all in the next 3 months we will hit an annual price change of 0%. I believe the rush to the exits will begin in earnest after that point as people realize the game is up.

Radley over at the Calgary Real Estate Blog inspired me to change the way I display price changes vs. months of inventory. The scatterplot indicates the high negative correlation between months of supply and quarterly price changes and we should look for this correlation to remain strong as 2008 unfolds. We have low sales, the highest annual starting point for inventory in the Fraser Valley ever and thousands of new units set to complete during the year. Bearish indeed.

These numbers are the most bearish since I've been following the local real estate market (since late 2005) and even more bearish than I expected. Sales were lower and new listings higher. I don't want to get too ahead of myself here, because people's behaviour is generally mystifying, but if January is any indication, 2008 will be the year of the turnaround in prices. How far down could we go? Perhaps San Diego can give us a clue.

FVREB President Says "There Is No Bubble"

I saw this gem of an article in the Langley Times over the weekend. Bold comments are mine.




Rows of for-sale signs advertise new homes along 208 Street in the new Yorkson Neighbourhood area of Willoughby. What a classic graphic?! I see this scene in my neighbourhood on every other street. These home cost over $600,000.

Rob NEWELL/Langley Times

British Columbia has the dubious honour of having Canada’s least affordable housing, according to RBC Economics. New BC Motto - Best Place on Earth - Impoverishing or driving out one family at a time.

But prospective buyers waiting “for the bubble to burst” could wait a long time, says Kelvin Neufeld, president-elect of the Fraser Valley Real Estate Board. “There is no bubble,” said Neufeld on Wednesday. Now Mr. Neufeld where do you get your paycheque from? Is it perhaps based on the continual transacting of real estate business? Would your income decline or disappear if house prices declined? YES! Ding, ding, ding, mohican wins - Mr. Neufeld's pay is derived from the value of real estate and he has a vested interest in keeping prices high - not that he can do anything about it except flap his gums.

A new report on housing issued last week by RBC indicates that B.C. is the least affordable province in Canada in which to purchase a home. However, the province’s housing affordability is expected to improve modestly in 2008, barring the unexpected of course - like the housing market crashing, the report says.

Neufeld said he doesn’t see the market correcting itself in the dramatic manner experienced in the early 1980s - what only -25% or so. Neufeld, a long-time Surrey realtor with Macdonald Realty Olympic, said he was selling subdivision homes in January, 1980, at $130,000. By November that year, homes in the same subdivision were selling at $350,000 to future bankruptcy claimants.

In 1981 the real estate bubble did indeed burst, with interest rates reaching as high as 21 per cent later in the year. “We are not experiencing anything like that today,” said Neufeld.
Neufeld says there is really no bad time to “put a roof over your head,” - so why don't you rent, its cheaper so you can save your cash for another day - but advises that real estate is a long-term investment. “I recall when I bought my first house in North Delta . . . (it was) $21,900. I was a young man and my father-in-law told me I was a silly fool, prices couldn’t stay that high, and I was going to (lose everything) and take his daughter down with me.” Another question Mr. Neufeld, how much of your after tax income did it take to purchase that home?

According to the latest RBC report, B.C.’s housing market moved into uncharted territory last year, as affordability deteriorated to its worst levels since the bank began tracking conditions back in 1985, said Derek Holt, assistant chief economist, RBC.

At the same time, a U.S. public policy firm, Demographia, has announced that homes in Vancouver, Abbotsford, Victoria and Kelowna are “severely unaffordable” and among the top most expensive housing markets in six countries surveyed.

“We expect affordability rates to see some modest improvements in 2008 as the province’s housing market reached a peak stress point late last year,” said Holt. The RBC Affordability measure for British Columbia, which captures the proportion of pretax household income needed to service the costs of owning a home in the province, deteriorated across all housing segments as the detached bungalow moved to 67 per cent, the standard two-story home to 71 per cent, the standard townhouse to 50 per cent and the standard condo to 36 per cent.

Slower demand, coupled with a downward trend in the sales-to-listing ratio, has helped ease some of the upward pressures on B.C. home prices. As a result, price gains have started to level off, dropping from 18 per cent in 2006 to 12 per cent last year. An even softer rate of eight per cent is expected for 2008. RBC Economics uses funny math because a 8% increase is still a decrease in affordability according to my simple math.

Neufeld says he is still finding sales are strong in the valley, where not only prospective home buyers are searching for housing, but businesses and industry are relocating. The Canadian banking system is much stricter than the U.S. system, and Canada is not experiencing the sub-prime dilemma affecting both banks and mortgage holders there. The Canadian scenario of 1980-1981 is not in evidence here either. Neufeld said. In 1980, home prices skyrocketed almost overnight, then plunged as mortgage rates went through the roof, and the job market crashed. "We were having huge inflation, then the government put the interest rates up (as high as) 21 per cent.” The realtor Mr. Neufeld apparently is an expert on economic history and monetary policy.

Today, interest rates are in the range of about 5.8 per cent for a five-year term, he said.
And today, “immigration is still huge (myth debunked), and there are still jobs being created (in construction),” Neufeld said. The Lower Mainland is also an attractive place to live for Canadians from across the country. “What we find is, a lot of jobs are coming out here (from the Vancouver area to the Fraser Valley),” he said.

Neufeld said that he has encountered some young buyers who have clubbed together with another couple, or a group of friends buying, to make homes more affordable. Now that is a recipe for disaster. But mostly, younger or first-time buyers are taking advantage of (being enslaved to) a 40-year mortgage, over the traditional 25-year mortgage. In some cases, that can cut the monthly payment by as much as several hundred dollars (Oooooh . . . . can I have one - I want to 'save' a few hundred dollars a month too), he said. Amortized over 40 years, these mortgages can still have a variable term, renegotiable at intervals, just as the 25-year mortgages are, he said.

In Vancouver, according to RBC, affordability deteriorated across all housing segments in 2007, but the pace slowed significantly mid-year. The combination of more modest house-price growth and improved income growth helped restrain the affordability deterioration. The city’s housing market remains robust, with annual price growth around 12 per cent and the sales-to-listing ratio skewed towards sellers.

However, with an increased supply of homes on the market helping to moderate price gains, Vancouver should see some affordability relief later in the year. The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo. The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

The report also looked at mortgage carrying costs relative to incomes for a broader sampling of cities across the country, including Victoria. For these smaller cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to income into account. RBC’s Affordability measures for a detached bungalow for Canada’s largest cities are as follows: Vancouver, 72 per cent, Calgary, 46 per cent, Toronto, 46 per cent, Montreal, 37 per cent and Ottawa, 32 per cent.

According to the U.S. report by Demographia, high housing prices here are not the result of Vancouver being a desirable place to live. According to Demographia, the reason housing prices are so high in the Vancouver area is because of artificial restrictions on the supply of land.
Urban growth boundaries, (in B.C., that’s the Agricultural Land Reserve) should be removed, according to Demographia.

Robert Shiller Video

This video was posted over at Calculated Risk and I figured I would add it for your viewing pleasure here.