Financial planners advise clients on how best to save, invest, and grow their money. They can help you tackle a specific financial goal—such as readying yourself to buy a house—or give you a macro view of your money and the interplay of your various assets. Some specialize in retirement or estate planning, while some others consult on a range of financial matters.
Don’t confuse planners with stockbrokers — the market mavens people call to trade stocks. Financial planners also differ from accountants who can help you lower your tax bill, insurance agents who might lure you in with complicated life insurance policies, or the person at your local Fidelity office urging you to buy mutual funds.
Anyone can hang out a shingle as a financial planner, but that doesn’t make that person an expert. They may tack on an alphabet soup of letters after their names, but CFP (short for certified financial planner) is the most significant credential. A CFP has passed a rigorous test administered by the Certified Financial Planner Board of Standards about the specifics of personal finance. CFPs must also commit to continuing education on financial matters and ethics classes to maintain their designation. The CFP credential is a good sign that a prospective planner will give sound financial advice. Still, even those who pass the exam may come up short on skills and credibility. As with all things pertaining to your money, be meticulous in choosing the right planner.
Typically, financial planners earn their living either from commissions or by charging hourly or flat rates for their services. A commission is a fee paid whenever someone buys or sells a stock or other investment. For reasons we’ll explain later, you may want to avoid financial planners who rely on commissions for their income. These advisers may not be the most unbiased source of advice if they profit from steering you into particular products.
A growing number of financial planners make money only when you pay them a fee for their counsel. These independent financial planners don’t get a cut from life insurers or fund companies. You might pay them a flat fee, such as $1,500, for a financial plan. Or you could pay an annual fee, often 1% of all the assets—investment, retirement, college-savings and other accounts—they’re minding for you. Others charge by the hour, like lawyers.
You might also encounter financial planners who cater exclusively to the rich and refuse clients with less than $250,000 to invest. Don’t take it personally—hugely successful planners would just prefer to deal with big accounts rather than beginner clients. You want a planner who’ll make the time to focus on your concerns and is interested in growing with you.
Should You Use a Financial Planner?
You can certainly go it alone when it comes to managing your money. But you could also try to do it yourself when it comes to auto repair. In both areas, doing it yourself is a brilliant idea for some, and a flawed plan for many, many others. Mastering personal finance requires many hours of research and learning. For most, it’s not worth the time and ongoing effort.
As you get older, busier and (it is hoped) more wealthy, your financial goals – and options – get more complicated. A financial helper can save you time.
Financial planners can also help you remain disciplined about your financial strategies. They’ll make the moves for you or badger you until you make them yourself. Procrastination can cause all sorts of money problems or unrealized potential, so it pays to have someone riding you to stay on track.
We’re not suggesting that you ignore personal finance and turn over all your concerns to an adviser. But even if you know the basics, it’s a comfort to know that you have someone keeping watch over your money.
It may sound crazy to give someone 1% of your annual assets to manage them, but you get a buffet of advice about almost anything related to personal finance. The price becomes sensible when you consider that you’re paying to establish a comfortable retirement, save for your child’s college or choose the right mortgage when borrowing hundreds of thousands of dollars.
How to Find the Right Financial Planner
It’s best to go with a certified financial planner (CFP), which is an instant signal of credibility – but not a guarantee of same. To start, ask people like you if they can recommend a planner. If you have kids, ask a colleague who also has children. If you’re single and just out of college, check with a friend in the same boat. If possible, you want to find a planner with successful experience advising clients in the same stage of life as you.
For more leads, check the National Association of Personal Financial Advisors (NAPFA). These planners are fee-only, which means their only revenue comes from their clients. They accept no commissions at all and pledge to act in their clients’ best interests at all times. In many respects, NAPFA standards meet or surpass the requirements needed for a CFP credential.
Another good bet could be a planner in the Garrett Planning Network, a group of certified financial planners who all pledge to make themselves available for smaller projects for an hourly fee. All of the members of this network are CFPs or they’re actively working towards this designation. It may be that you just have a handful of questions, and someone here could help you without charging too much.
A few more tips for finding the best planner for your situation:
Consider the planner’s pay structure. You typically want to avoid commission-based advisers. Planners who work on commission may have less than altruistic incentives to push a certain life insurance package or mutual fund if they’re getting a cut of that revenue.
But fee-based advisers aren’t perfect. Advisers earning 1% of your annual assets might be disinclined to encourage you to liquidate your investments or buy a big house, even if those are the right moves at a particular point in your life, because their fee would shrink.
If you’re starting out and don’t have a trove of assets, an planner who charges by the hour could be the best fit. These planners are best for when your needs are fairly simple. Typically, hourly planners are just building their practice, but that usually means they’ll take the care to get your finances right. After all, they’re relying on your recommendation to grow their business. Finally, many experienced advisers do hourly work because they enjoy working with younger clients who can only afford to hire someone at that rate.
Look for a fiduciary. In short, this means the planner has pledged to act in a client’s best interests at all times. Investment professionals who aren’t fiduciaries are often held to a lesser standard, the so-called sustainability standard. That means that anything they sell you merely has to be suitable for you, not necessarily ideal or in your best interest. This point is critical, and should be a deal breaker if a prospective planner is not a fiduciary.
Run a background check on your planner. Start with these two questions: Have you ever been convicted of a crime? Has any regulatory body or investment-industry group ever put you under investigation, even if you weren’t found guilty or responsible? Then ask for references of current clients whose goals and finances match yours.
Check to ensure the credentials the person claims to have are current. Google them, see who administers the designation, then call that administrator to verify that the credential is valid. If your advisor is a CFP, discipline records are located here.
Beware of market-beating brags. Warren Buffet outperforms the market averages. There aren’t a lot of people like him. If you have an initial meeting with an adviser and you hear predictions of market-beating performance, get up and walk away. No one can safely make such guarantees, and anyone who’s trying may be taking risks that you don’t want to take.
Asking someone whether they’ll beat the market is a pretty good litmus test for whether you want to work with them. What they should be promising is good advice across a range of issues, not just investments. And inside your portfolio, they should be asking you about how many risks you want to take, how long your time horizon is and bragging about their ability to help you achieve your goals while keeping you from losing your shirt when the economy or the markets sag.
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7.02.2010
Traffic Tickets in Ontario
If you have had the unfortunate luck to have a traffic infraction then you should get familiar with some sources that can help you to possibly save on some of the expenses. Whether you have done a DUI or impaired driving then you can check out the links below.
Autoshow: http://www.autoshow.ca/2008/
AutoTrader: http://www.autotrader.com/
Car Insurance: http://www.insurancehotline.com
Maps: http://www.maps.google.com
Ministry of Transportation: http://www.mto.gov.on.ca/
Parking Tickets: http://www.toronto.ca/parkingtickets/
Speeding Tickets: http://www.torontotraffictickets.com/speeding.html
Search Engines: http://www.Google.ca
Traffic Tickets: http://www.torontotraffictickets.com
Toronto Police: http://www.torontopolice.on.ca/
Wikipedia: http://en.wikipedia.org/wiki/Traffic_ticket
Ontario Traffic Tickets: Ontario Traffic Tickets - fights your Ontario traffic ticket.
New Jersey Traffic Tickets: New Jersey Traffic Tickets - Providing New Jersey traffic ticket attorney services.
New York Traffic Tickets: New York Traffic Tickets - New York traffic ticket attorneys ready to fight all of your New Jersey and New York traffic tickets.
Autoshow: http://www.autoshow.ca/2008/
AutoTrader: http://www.autotrader.com/
Car Insurance: http://www.insurancehotline.com
Maps: http://www.maps.google.com
Ministry of Transportation: http://www.mto.gov.on.ca/
Parking Tickets: http://www.toronto.ca/parkingtickets/
Speeding Tickets: http://www.torontotraffictickets.com/speeding.html
Search Engines: http://www.Google.ca
Traffic Tickets: http://www.torontotraffictickets.com
Toronto Police: http://www.torontopolice.on.ca/
Wikipedia: http://en.wikipedia.org/wiki/Traffic_ticket
Ontario Traffic Tickets: Ontario Traffic Tickets - fights your Ontario traffic ticket.
New Jersey Traffic Tickets: New Jersey Traffic Tickets - Providing New Jersey traffic ticket attorney services.
New York Traffic Tickets: New York Traffic Tickets - New York traffic ticket attorneys ready to fight all of your New Jersey and New York traffic tickets.
Are you looking for a life partner?
http://www.canadianbusiness.com/my_money/planning/retirement_rrsp/life_expectancy/tool.jsp?ref=ln
If you're looking for a life partner then maybe you'll want to forget about the online dating systems and use this calculator to determine if they should join your net worth as an asset. (secretly ducking from my wife!) lol
Try it for fun!
If you're looking for a life partner then maybe you'll want to forget about the online dating systems and use this calculator to determine if they should join your net worth as an asset. (secretly ducking from my wife!) lol
Try it for fun!
Interesting financial definitions
Asset-backed commercial paper (ABCP) is a form of short-term debt created when an issuing party (usually a bank or other financial institution) agrees to pay a given sum of money to a recipient, typically a company in need of immediate cash or other liquid assets, in exchange for the recipient's sale of certain assets to the issuer as collateral, in addition to the recipient's promise to pay back the sum in between 90-270 days.
The issuing party, after purchasing receivables from the company desiring to issue ABCP and thus obtaining rights to the cash flows they create, then channel those cash flows into the ABCP it eventually sells to private investors.
A benchmark is a proxy for a market, economy, class of equity, or sector, generally setting a standard against which the performance of a stock, bond, mutual fund, commodity, or other security is measured.
Benchmarks are also used to gauge the health of a market, sector, or entire economy.
Call price is the price, specified at issuance, at which a bond or preferred stock can be redeemed by the issuer. It is also referred to as the "redemption price".
Forex (FX) is short for foreign exchange and refers to the trading of one currency for another. Unlike stocks or futures, currency trading is an over-the-counter market with no central exchange.
Currencies typically trade in pairs such as the EUR/USD or USD/JPY. Currencies common to Forex tend to be the most liquid currencies such as the U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD).
Margin is a term given to borrowed money (and associated accounts) used to purchase securities. When an investor buys stocks, bonds, futures contracts, currencies, or other equities with this borrowed money, she is said to do so "on margin".
Functionally, margin can be thought of as a simple loan from a broker to augment one's position in a security. This requires, however, that a certain minimum of the investor's own money be available either in the investment or simply inactively held in the account. This minimum amount is generally some percentage of the loan total issued by the brokerage and is called the "margin requirement" or "minimum margin requirement". If the value of the investor's stake in the security falls below the minimum margin requirement, the brokerage will typically issue a #Margin Call or, in some cases, automatically sell off the security to recoup or prevent further losses.
Though each exchange sets the limits for margin transactions, brokerages offer margin buying to their clients at varying rates beyond the brokerage mandated limits, though never in violation of them. For example, an exchange may have a minimum margin requirement of 25%, but a brokerage might instead impose a 30% minimum margin requirement on its clients.
The size of the initial loan made by a brokerage is some percentage of the original money the investor puts up and is called the "initial margin requirement" or "initial margin limit". Typically the maximum balance a broker will allow to remain outstanding with such a loan is 50%. The reasons why this is common practice have their roots in the Great Depression, as excessive amounts of land-speculative margin debt (typically around 90% of the total value of the speculated land) combined with manifold concurrent margin calls have been cited as major causes Black Friday in 1929 and consequently the Great Depression. As such, somewhat more conservative margin limits have been imposed to prevent a similar catastrophe from reoccurring.
Margin debt is usually incurred with either the hope or expectation that subsequent increases in the stock's value will cover the remainder of what is owed to the broker, thus eliminating the buyer's debt (and possibly creating a profit).
The Price to Book Ratio (alternately Price to Book, Price to Book Value, Price/Book, P/B, or P to B) is a financial metric used to compare a company's book value to the share price at which it is currently trading. It is generally calculated by dividing the share price by the book value per share, though it can also be calculated by dividing the company's market capitalization by the total book value listed on the balance sheet.
The Price to Book Ratio varies dramatically between industries. A company that requires more assets (e.g. a manufacturing company with factory space and machinery) will generally post a drastically lower price to book than a company whose earnings come from the provision of a service (e.g. a consulting firm).
Price to Book is often used to gauge a stock's relative value. A company trading at a low price to book, particularly when compared to other companies in its industry, is thought to be undervalued relative to its share price. However, a low price to book could also be an indication of negative forward looking investor confidence (e.g. poor earnings projections) or a disproportionate amount of Intangible assets on the books, depending on which version of the calculation is used (see below section on tangible vs intangible). As such, when used for security analysis, price to book is often coupled with metrics such as P/E, PEG, Return on Equity, and the Current Ratio to get a better snapshot of the company as a whole.
Unsecured Loans are loans that are not backed by collateral. This is in contrast to secured loans, wherein the borrower must pledge some asset (e.g. real estate, personal property, investment securities) to the lender should he default on the loan.
Unsecured loans are sometimes called "signature loans" because the bank has nothing but your signature. If the borrower goes into default they cannot posses any of your belongings; rather, they can report you to credit reporting companies and taint your credit.
Typically, unsecured loans are issued on the basis of the borrower's credit rating, though it should be noted that all loans lacking a collateral pledge (including informal loans between friends) are technically unsecured loans. For borrowers who don't have any collateral to pledge, these unsecured loans may seem attractive. However, since there is an increased risk for the bank, most of the times the interest rates are higher.
Commercial Paper is a notable unsecured loan.
The issuing party, after purchasing receivables from the company desiring to issue ABCP and thus obtaining rights to the cash flows they create, then channel those cash flows into the ABCP it eventually sells to private investors.
A benchmark is a proxy for a market, economy, class of equity, or sector, generally setting a standard against which the performance of a stock, bond, mutual fund, commodity, or other security is measured.
Benchmarks are also used to gauge the health of a market, sector, or entire economy.
Call price is the price, specified at issuance, at which a bond or preferred stock can be redeemed by the issuer. It is also referred to as the "redemption price".
Forex (FX) is short for foreign exchange and refers to the trading of one currency for another. Unlike stocks or futures, currency trading is an over-the-counter market with no central exchange.
Currencies typically trade in pairs such as the EUR/USD or USD/JPY. Currencies common to Forex tend to be the most liquid currencies such as the U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD).
Margin is a term given to borrowed money (and associated accounts) used to purchase securities. When an investor buys stocks, bonds, futures contracts, currencies, or other equities with this borrowed money, she is said to do so "on margin".
Functionally, margin can be thought of as a simple loan from a broker to augment one's position in a security. This requires, however, that a certain minimum of the investor's own money be available either in the investment or simply inactively held in the account. This minimum amount is generally some percentage of the loan total issued by the brokerage and is called the "margin requirement" or "minimum margin requirement". If the value of the investor's stake in the security falls below the minimum margin requirement, the brokerage will typically issue a #Margin Call or, in some cases, automatically sell off the security to recoup or prevent further losses.
Though each exchange sets the limits for margin transactions, brokerages offer margin buying to their clients at varying rates beyond the brokerage mandated limits, though never in violation of them. For example, an exchange may have a minimum margin requirement of 25%, but a brokerage might instead impose a 30% minimum margin requirement on its clients.
The size of the initial loan made by a brokerage is some percentage of the original money the investor puts up and is called the "initial margin requirement" or "initial margin limit". Typically the maximum balance a broker will allow to remain outstanding with such a loan is 50%. The reasons why this is common practice have their roots in the Great Depression, as excessive amounts of land-speculative margin debt (typically around 90% of the total value of the speculated land) combined with manifold concurrent margin calls have been cited as major causes Black Friday in 1929 and consequently the Great Depression. As such, somewhat more conservative margin limits have been imposed to prevent a similar catastrophe from reoccurring.
Margin debt is usually incurred with either the hope or expectation that subsequent increases in the stock's value will cover the remainder of what is owed to the broker, thus eliminating the buyer's debt (and possibly creating a profit).
The Price to Book Ratio (alternately Price to Book, Price to Book Value, Price/Book, P/B, or P to B) is a financial metric used to compare a company's book value to the share price at which it is currently trading. It is generally calculated by dividing the share price by the book value per share, though it can also be calculated by dividing the company's market capitalization by the total book value listed on the balance sheet.
The Price to Book Ratio varies dramatically between industries. A company that requires more assets (e.g. a manufacturing company with factory space and machinery) will generally post a drastically lower price to book than a company whose earnings come from the provision of a service (e.g. a consulting firm).
Price to Book is often used to gauge a stock's relative value. A company trading at a low price to book, particularly when compared to other companies in its industry, is thought to be undervalued relative to its share price. However, a low price to book could also be an indication of negative forward looking investor confidence (e.g. poor earnings projections) or a disproportionate amount of Intangible assets on the books, depending on which version of the calculation is used (see below section on tangible vs intangible). As such, when used for security analysis, price to book is often coupled with metrics such as P/E, PEG, Return on Equity, and the Current Ratio to get a better snapshot of the company as a whole.
Unsecured Loans are loans that are not backed by collateral. This is in contrast to secured loans, wherein the borrower must pledge some asset (e.g. real estate, personal property, investment securities) to the lender should he default on the loan.
Unsecured loans are sometimes called "signature loans" because the bank has nothing but your signature. If the borrower goes into default they cannot posses any of your belongings; rather, they can report you to credit reporting companies and taint your credit.
Typically, unsecured loans are issued on the basis of the borrower's credit rating, though it should be noted that all loans lacking a collateral pledge (including informal loans between friends) are technically unsecured loans. For borrowers who don't have any collateral to pledge, these unsecured loans may seem attractive. However, since there is an increased risk for the bank, most of the times the interest rates are higher.
Commercial Paper is a notable unsecured loan.
Spirepoint | Tracking Your Stats
Spirepoint | Tracking Your Stats
Thanks for Spirepoint providing another valuable posting on real estate investing.
Tracking Your Stats
Have you ever found yourself struggling to answer the following questions?
* How much profit does each of your rental properties make?
* How much cash flow does each property generate?
* Am I properly leveraging the equity in my properties?
* Am I over-leveraging my properties?
* What is my return on investment?
If you can't answer these questions by running a report in your accounting system, then you're not alone. Many investors get so caught up in managing the day-to-day operations of rental real estate, that they don't have time to ensure the bookkeeping is done correctly, let alone determing performance statistics for their properties.
As we've said in the past, good bookkeeping can make you money. However, good bookkeeping alone is not enough. You need to be able to run reports and 'track your stats' to determine how well your investments are performing.
Profit vs. Cash Flow
Many people confuse making a profit and generating cash flow, but in accounting, they are very different things. One way to understand the difference is to think of profit as theoretical and cash flow as reality.
What does that mean? Let's use an example
You own a rental property with a mortgage payment of $1500 per month. It's a new mortgage, so most of the payment is going towards paying the interest owed (e.g. $1400), and a very small amount goes towards paying back the mortgage (e.g. $100).
In accounting, the $1400 interest paid shows up as an expense on your Profit & Loss statement, but the $100 mortgage repayment shows up on the Balance Sheet. So to most people, while it may appear as though you have a mortgage expense of $1500, in accounting software, it shows up quite differently.
Now let's look at how that same mortgage payment affects cash flow. When that mortgage payment comes out of your bank account, it doesn't matter that $1400 was allocated to interest and $100 to repaying the mortgage. The fact remains that your bank account is now $1500 lower than it was beforehand. If you look at a Cash Flow Statement, you'll see that the cash comes right out of your pocket.
So why should all of this accounting stuff make a difference?
Well, a Profit & Loss statement tells you how much money you earned in theory and as a result, how much income tax you will need to pay the government. And more importantly, a Cash Flow Statement shows you where your cash is going (and if you don't know that, your cash will eventually disappear and you won't know why).
Out of all the accounting reports available, a Cash Flow Statement is the most important yet most underutilized report available. Professional investors learn to track their profits AND their cash flow on a regular basis. This allows them to know if they are making money (in theory) and if they have enough cash to pay the bills (both critical items to know for any investment).
Leveraging Your Properties
How many times have you heard a new investor wanting to do a 'nothing down' deal? It seems that many investors have limited cash (or none at all), yet they still want to buy property.
The problem with nothing down deals is the amount of leverage used. Now there's nothing wrong with leverage, but people always seem to forget that leverage is a double-edged sword - it can magnify your gains, but it can equally magnify your losses. Also, in real estate, increased leverage increases the size of your mortgage payments, which as a result, reduces your cash flow.
Normally this is not a problem for professional investors who know how to balance between the appropriate amounts of equity and debt. But many new investors tend to overleverage their properties, reducing or eliminating cash flow, and then a year later, they are forced to sell the property because they can't afford it.
Here is an example of how leverage can cause real losses to new real estate investors:
* A new investor buys a duplex at market value with a 10% down payment. That means there is 10% equity, and a 90% mortgage.
* Since the mortgage amount is so high, cash flow is almost break-even.
* The investor is new to real estate, and doesn't understand that there can be unforeseen expenses on a regular basis (e.g. roof repairs, tenant damage, etc.). One major expense can easily force the property to be negative cash flow. Already this 'investment' can cost the investor money every month.
* If the market slows down and property values are reduced by for awhile, the value of the duplex could easily be worth less than the mortgage owed. If the investor is forced to sell the property due to negative cash flow, they could easily lose their 10% investment.
Professional investors know leverage is a tool and track the loan-to-value (LTV or % of the mortgage) for each property they own, as well as their entire portfolio.
Return On Investment (ROI)
Many investors get excited when they see the potential returns offered through real estate investing. They run the numbers a few times, and then jump in both feet to buy a duplex, triplex, etc.
That seems to be the last time they even think about return on investment, or if they do think about it again, they use their original numbers.
For example:
* Joe buys a triplex and calculates his 'return' to be 29% based on cash flow
* Three years later, the value of the triplex has increased, and so he calculates his new ROI based on the new values
* He tells everyone he knows he's making a huge return on his property
There are a few problems with this scenario:
* In real estate, ROI often fluctuates because original calculations are done 'pro-forma' (estimated)
* Actual cash flow is usually quite different from projected cash flow (e.g. a tenant skips 1 month of rent, utility costs increase, the roof suddenly needs replacing, cash flow is negative and you have to personally contribute cash to pay the bill, etc.)
* Many investors include mortgage pay down and appreciation as part of the ROI calculations. The problem is you never truly know your return until the property is sold and all closing costs are paid.
Professional investors know that, at best, mortgage pay down and appreciation are 'estimates' and should be calculated separately from cash flow. Cash flow returns should be calculated annually and compared to the original estimated ROI. This allows the investor to determine if the investment is performing adequately.
As you can see, accurately calculating real estate statistics can be a bit more involved than what most investors do. It is not difficult or complicated, but it does take some work and should be done on an ongoing basis to assess investment performance.
If you don't understand some of the basic accounting concepts described above, you should start learning today. Accounting is the language of money, business and investing, and if you don't understand the language, how can you expect to understand what's going on? Take the time to learn this important skill and track your stats - you won't regret it.
Thanks for Spirepoint providing another valuable posting on real estate investing.
Tracking Your Stats
Have you ever found yourself struggling to answer the following questions?
* How much profit does each of your rental properties make?
* How much cash flow does each property generate?
* Am I properly leveraging the equity in my properties?
* Am I over-leveraging my properties?
* What is my return on investment?
If you can't answer these questions by running a report in your accounting system, then you're not alone. Many investors get so caught up in managing the day-to-day operations of rental real estate, that they don't have time to ensure the bookkeeping is done correctly, let alone determing performance statistics for their properties.
As we've said in the past, good bookkeeping can make you money. However, good bookkeeping alone is not enough. You need to be able to run reports and 'track your stats' to determine how well your investments are performing.
Profit vs. Cash Flow
Many people confuse making a profit and generating cash flow, but in accounting, they are very different things. One way to understand the difference is to think of profit as theoretical and cash flow as reality.
What does that mean? Let's use an example
You own a rental property with a mortgage payment of $1500 per month. It's a new mortgage, so most of the payment is going towards paying the interest owed (e.g. $1400), and a very small amount goes towards paying back the mortgage (e.g. $100).
In accounting, the $1400 interest paid shows up as an expense on your Profit & Loss statement, but the $100 mortgage repayment shows up on the Balance Sheet. So to most people, while it may appear as though you have a mortgage expense of $1500, in accounting software, it shows up quite differently.
Now let's look at how that same mortgage payment affects cash flow. When that mortgage payment comes out of your bank account, it doesn't matter that $1400 was allocated to interest and $100 to repaying the mortgage. The fact remains that your bank account is now $1500 lower than it was beforehand. If you look at a Cash Flow Statement, you'll see that the cash comes right out of your pocket.
So why should all of this accounting stuff make a difference?
Well, a Profit & Loss statement tells you how much money you earned in theory and as a result, how much income tax you will need to pay the government. And more importantly, a Cash Flow Statement shows you where your cash is going (and if you don't know that, your cash will eventually disappear and you won't know why).
Out of all the accounting reports available, a Cash Flow Statement is the most important yet most underutilized report available. Professional investors learn to track their profits AND their cash flow on a regular basis. This allows them to know if they are making money (in theory) and if they have enough cash to pay the bills (both critical items to know for any investment).
Leveraging Your Properties
How many times have you heard a new investor wanting to do a 'nothing down' deal? It seems that many investors have limited cash (or none at all), yet they still want to buy property.
The problem with nothing down deals is the amount of leverage used. Now there's nothing wrong with leverage, but people always seem to forget that leverage is a double-edged sword - it can magnify your gains, but it can equally magnify your losses. Also, in real estate, increased leverage increases the size of your mortgage payments, which as a result, reduces your cash flow.
Normally this is not a problem for professional investors who know how to balance between the appropriate amounts of equity and debt. But many new investors tend to overleverage their properties, reducing or eliminating cash flow, and then a year later, they are forced to sell the property because they can't afford it.
Here is an example of how leverage can cause real losses to new real estate investors:
* A new investor buys a duplex at market value with a 10% down payment. That means there is 10% equity, and a 90% mortgage.
* Since the mortgage amount is so high, cash flow is almost break-even.
* The investor is new to real estate, and doesn't understand that there can be unforeseen expenses on a regular basis (e.g. roof repairs, tenant damage, etc.). One major expense can easily force the property to be negative cash flow. Already this 'investment' can cost the investor money every month.
* If the market slows down and property values are reduced by for awhile, the value of the duplex could easily be worth less than the mortgage owed. If the investor is forced to sell the property due to negative cash flow, they could easily lose their 10% investment.
Professional investors know leverage is a tool and track the loan-to-value (LTV or % of the mortgage) for each property they own, as well as their entire portfolio.
Return On Investment (ROI)
Many investors get excited when they see the potential returns offered through real estate investing. They run the numbers a few times, and then jump in both feet to buy a duplex, triplex, etc.
That seems to be the last time they even think about return on investment, or if they do think about it again, they use their original numbers.
For example:
* Joe buys a triplex and calculates his 'return' to be 29% based on cash flow
* Three years later, the value of the triplex has increased, and so he calculates his new ROI based on the new values
* He tells everyone he knows he's making a huge return on his property
There are a few problems with this scenario:
* In real estate, ROI often fluctuates because original calculations are done 'pro-forma' (estimated)
* Actual cash flow is usually quite different from projected cash flow (e.g. a tenant skips 1 month of rent, utility costs increase, the roof suddenly needs replacing, cash flow is negative and you have to personally contribute cash to pay the bill, etc.)
* Many investors include mortgage pay down and appreciation as part of the ROI calculations. The problem is you never truly know your return until the property is sold and all closing costs are paid.
Professional investors know that, at best, mortgage pay down and appreciation are 'estimates' and should be calculated separately from cash flow. Cash flow returns should be calculated annually and compared to the original estimated ROI. This allows the investor to determine if the investment is performing adequately.
As you can see, accurately calculating real estate statistics can be a bit more involved than what most investors do. It is not difficult or complicated, but it does take some work and should be done on an ongoing basis to assess investment performance.
If you don't understand some of the basic accounting concepts described above, you should start learning today. Accounting is the language of money, business and investing, and if you don't understand the language, how can you expect to understand what's going on? Take the time to learn this important skill and track your stats - you won't regret it.
RBC's analysis on the affordability of housing in 2010
Affordability erodes again in the first quarter of 2010
Canada’s housing markets started 2010 the same way they ended 2009: firing on all
cylinders. While a boon to sellers, the resulting strong home price increases,
however, have hurt housing affordability across the country. At the national level,
RBC affordability measures rose for the third consecutive quarter, moving up between
0.4 and 0.9 percentage points, depending on the housing type (a rise in the
measure represents a deterioration in affordability). A small decline in the average mortgage rate that prevailed during the first quarter and further gains in household income provided minor offsetting effects. The cumulative rise in the measures since the middle of last year has reversed roughly one-quarter of the improvement in affordability that took place during most of 2008 and the first half of 2009. Overall in Canada, RBC measures are now moderately above their long-term average; yet they are still well below the most recent peaks reached in early 2008, suggesting that home ownership costs are starting to bite typical Canadian households but not dangerously so at this stage.
From a regional perspective, significant deterioration in affordability occurred once again in British Columbia (particularly for bungalows and two-storey homes), although the worsening trend was generalized across all provinces. Alberta was the
sole exception, registering small improvements in the first quarter. RBC measures
deteriorated quite strongly in Saskatchewan and Manitoba (for most housing types)
but more modestly in Ontario, Quebec and Atlantic Canada.
Looking ahead, further erosion in affordability is likely to take place in Canada in
the coming 12 to 18 months. The main cause will be an anticipated rise in interest
rates, which are currently at exceptionally low – and clearly unsustainable – levels.
As the Bank of Canada moves toward ‘re-normalizing’ its interest rate policy during
the latter half of this year and in 2011, higher mortgage servicing costs will reverse much of their sharp decline last year in Canada. The five-year fixed mortgage rate (the benchmark used for the RBC affordability measures) has already initiated its upward march and climbed to its highest level since January 2009 in early May.
The resulting degree of housing un-affordability in Canada, however, is unlikely to
exceed recent peak levels. First, we believe that the spectacular rally in housing
prices in the past year will soon run its course. There is increasing evidence that
supply (in both the existing and new home markets) is finally responding more
forcefully to very strong demand and that local markets across the country are
headed toward more balanced conditions – after having been very (and, in some
cases, extremely) tight for the better part of the past year.
At the same time, that red-hot demand for housing is likely to cool during the
second half of this year, as factors that fuelled it dissipate. The fulfillment of pentup
demand created during the recent market downturn, which brought in a wave of
buyers has probably already ceased to be a driver. More recently, continued demand strength has been sustained by factors that either will start reversing or are
transitory in nature.
As noted above, rock-bottom interest mortgage rates – undoubtedly the rally’s
most powerful driver – are set to rise in the next year and a half. Consequently,
their positive effect will progressively fade. At the margin, widespread expectations of higher rates might well have caused some buyers to hurry their home purchasing decision (to lock-in low rates), thereby bringing forward some demand
that would have occurred at a later point. Also at the margin, the July 1
introduction of the HST in Ontario and British Columbia likely prompted some
buyers to ‘beat’ the tax, shifting forward activity that would have taken place after July 1 in those provinces. The combination of increased supply and flat or easing demand is expected to stabilize housing prices in Canada – with outright declines possible in some markets.
Another factor contributing to keep un-affordability levels below previous peaks
in the period ahead will be the effect of a recovering economy on household
income. Sustained economic growth in Canada during the remainder of 2010 and
2011 is expected to support steady job creation and income gains. This should
partially mitigate the effect of rising mortgage servicing costs on family budgets.
British Columbia — Unaffordable and becoming riskier Rapid price increases are quickly undoing last year’s improvement in affordability in British Columbia. In the first quarter, RBC affordability measures surged between 0.9 and 4.0 percentage points, by far the sharpest deterioration among the provinces. In the past three quarters, the measures reversed between one-third and one-half of their sharp drop in 2008 and early 2009. B.C. housing markets have been on a tear since last summer – with resale activity fully recovering to predownturn levels by the end of 2009 – although some signs of slowing have emerged since the beginning of this year. Nonetheless, the strong price momentum has continued largely unaffected in recent months, returning RBC affordability measures closer to their all-time highs in early 2008. Such poor affordability levels represent an element of risk for the province’s markets.
Alberta — Bucking the trend
The Alberta housing market continued to buck the Canada-wide deteriorating trend in affordability in the first quarter. RBC affordability measures eased between 0.1 and 0.6 percentage points, the only province to show declines. This further extended the significant drop in the measures since the end of 2007, a trend that only briefly halted last summer. In contrast to most other provinces, house prices remained relatively tame in Alberta, keeping the cost of homeownership in check. In the first quarter, all RBC measures were at or below their long-term averages, suggesting that affordability remains at favourable levels.
Saskatchewan — Getting tougher on the wallet
Owning a home in Saskatchewan took a bigger chunk of household budgets in the first quarter. This more than reversed a small decline in the last three months of 2009. RBC affordability measures rose between 0.9 and 1.6 percentage points, representing some of the stronger increases in the country (although trailing far behind British Columbia). After flattening or declining marginally in previous quarters, housing prices picked up notably in the province in the first few months of this year; however, with sales slowing and the number of homes available for sale growing more recently, further price increases are unlikely to be as hefty in the near term. Despite the deterioration in the first quarter, affordability measures remain well off the peak levels of early 2008 – which were also the all-time highs in
Saskatchewan.
Manitoba — Crossing the line
Manitoba’s market has been a full participant in the strong housing market rally.
Although resale activity recently eased a little from the super-charged levels of
late last year, prices for most housing types surged ahead early in 2010. This
eroded affordability in the first quarter for all but one housing type. RBC’s measures climbed between 0.6 and 1.8 percentage points (for condominiums, townhouses
and bungalows), with only two-storey homes remaining flat. With these latest increases, most affordability measures for the province have now moved above their long-term average. The sole exception is bungalows where the measure equalled the long-term average. The affordability situation is thus crossing the line where tensions on household budgets intensify.
Ontario — Not letting up
The Ontario housing market recently showed few signs of letting up. In the early
months of this year, resales activity remained in top gear – even reaching record
highs – and, despite rapidly increasing selection for buyers, home prices continued
to escalate. In fact, property values attained never before seen levels in many
parts of the province. This has undermined affordability, which has been on a
generally deteriorating trend since the middle of 2009. In the first quarter, RBC
affordability measures rose between 0.2 and 0.4 percentage points, further reversing
the significant improvement that took place in 2008 and early 2009. While still
well below peak levels, most of the measures now stand above their long-term
averages (except for the bungalow benchmark). This suggests that some unaffordability stress is building in Ontario.
Quebec — Bursting at the seams
The historic run in the Quebec real estate market continued largely unabated in
the first few months of 2010. With red-hot local markets such as Quebec City
continuing to lead the way, new marks in overall buying activity and property
values have recently been set in the province. Such heated conditions, however,
have further eroded affordability with RBC’s measures moving higher between
0.4 and 0.5 percentage points in the first quarter. Although these increases represented mild deteriorations on their own, they came on the heels of more substantial rises (in most cases) in the two previous quarters. All Quebec affordability measures now exceed their long-term averages, having reversed between onethird and almost two-thirds of their declines in 2008 and early 2009. Any further
rise in homeownership costs could have a more visible adverse effect on housing
demand in the province.
Atlantic — The Goldilocks market?
Atlantic Canada’s housing market appears to be in that special zone: not too hot,
not too cold – but just right. Demand for homes remained brisk at the start of 2010
– especially in areas such as St. John’s – with resales volumes continuing to
recover markedly from the 2008 downturn. Pressure on the market, however, has
been largely alleviated by increased availability of homes for sale. Those broadly
balanced conditions have, therefore, contained the general pace of price increases
in the region. Overall, housing affordability in Atlantic Canada is among the more
attractive regions in the country. RBC measures were unchanged (for a standard
townhouse) or rose modestly by up to 0.4 percentage points (for a two-storey
home) in the first quarter. The majority of the measures, however, were still below
their long-term averages, which would indicate a little undue stress caused by
homeownership costs in the region.
Vancouver — Gone too far?
The super-charged Greater Vancouver Area market has been at the forefront of the
spectacular rally in residential real estate activity in Canada in the past year; however, there are signs that the market might have begun to react negatively to the
significant deterioration in affordability since the middle of 2009. More specifically, seasonally adjusted home resales fell noticeably in the first quarter, after surging in each of the previous four. At this stage, it is unclear the extent to which the 2010 Winter Olympics and Paralympic Games disrupted activity during the period, but the weight of very poor affordability likely played a prominent role. In the first quarter, RBC affordability measures continued to surge, moving up between 0.5 and 4.8 percentage points. With the level of those measures now far above their long-term averages and inching closer to the all-time highs reached in early 2008, housing demand in Vancouver is likely to weaken further in the period ahead, taking some steam out of prices.
Calgary — All in moderation
The housing market rebound turned out to be a much more subdued affair in
Calgary compared to most of the other major markets in Canada. After posting
strong gains in the early stages of the rebound, resale activity has slowed considerably since the fall – likely reflecting the lack of traction in the city’s job recovery.
Meanwhile, home prices have maintained an upward trajectory, yet the overall
pace has fallen short of the national average. In the first quarter, the increase in the costs of home ownership in Calgary was roughly equal to or slightly smaller than household income growth, leaving RBC affordability measures hovering around
the zero mark – down from as much as 0.5 percentage points (two-storey home) to
up as much as 0.2 percentage points (standard townhouse). Affordability continues
to be attractive in the city with RBC measures near long-term averages.
Toronto — Still flying high
The Toronto market is giving few hints of being afraid of heights. Since taking
flight last year, very strong demand propelled sales of existing homes to recordhigh
altitudes in late 2009 and the early part of 2010. While sellers finally joined
the aerial show in recent months – attracted by highly favourable conditions to
them and, possibly, reflecting the desire to ‘beat’ the HST that will raise the costs of commissions paid by sellers starting July 1 – they are still outnumbered by
buyers. Bidding wars and quick sales continue to be common. This has sustained
strong upward pressure on home prices, which further ascended above earlier peaks. Consequently, affordability generally continued to erode in Toronto in the first quarter. RBC’s measures crept up between 0.3 and 0.6 percentage points for three of the four housing categories, although condos eased by 0.1 percentage point. All affordability measures now exceed their long-run averages in the Toronto market, suggesting that the dizzying flight might soon run into some turbulence.
Ottawa — Charting a record-breaking path
The Ottawa area market continued to chart a record-breaking path in the first few
months of 2010. Driven higher by flocking motivated buyers, home resales grew to unprecedented levels early this year. This strong demand added upward pressure on pricing, accelerating the pace of increase relative to the subdued gains recorded during second half of 2009 – despite the fact that more homes were being put up for sale. The higher prices eroded affordability in the area in the first quarter, with the RBC measures rising between 0.3 and 1.0 percentage points, which reversed most of the surprising improvement in the fourth quarter.
Although demand momentum is likely to remain brisk in the very near term, the
historically elevated costs of homeownership in the Ottawa area could well
become a factor deterring buyers later this year. All RBC measures are above their long-term averages.
Montreal — On a winning streak
Hockey fever might cause its share of highs and lows, but as far as the Montreal
housing market is concerned, the fever has squarely been on the upside so far
this year. Home resales have enjoyed an impressive run since the spring of 2009,
setting new all-time highs during the fall and winter. Similar to the effect of the
local hockey team’s play-off prowess, the strong performance of the Montreal area
market has attracted many fans. Eager buyers do not appear to be the least put off by some notable deterioration in affordability since last summer or a persisting dearth of properties available for sale (although new listings have begun to increase more recently). In the first quarter, RBC affordability measures for Montreal rose between 0.6 and 0.9 percentage points, pushing the levels further above their long-term averages. Worsening affordability could pose a challenge to the market’s winning streak.
Our standard housing affordability measure captures the proportion of median pre-tax household income required to service the cost of a mortgage on an existing housing unit at going market prices, including principal and interest, property taxes and utilities; the modified measure used here includes the cost of servicing a mortgage, but excludes property taxes and utilities due to data constraints in the smaller CMAs. This measure is based on a 25% down payment and a 25-year mortgage loan at a five-year fixed rate and is estimated on a quarterly basis. The higher the measure, the more difficult it is to afford a house.
RBC Economics Research’s housing affordability measures show the proportion of median pre-tax household income required to service the cost of mortgage payments (principal and interest), property taxes and utilities on a detached bungalow, a standard two-storey home, a standard town house and a standard condo (excluding maintenance fees).
The qualifier 'standard' is meant to distinguish between an average dwelling and
an 'executive' or 'luxury' version. In terms of square footage, a standard condo
has an inside floor area of 900 square feet, a town house 1,000 square feet, a
bungalow 1,200 square feet and a standard two-storey 1,500 square feet.
The measures are based on a 25% down payment and a 25-year mortgage loan at a five-year fixed rate and are estimated on a quarterly basis for each province
and for Montreal, Toronto, Ottawa, Calgary and Vancouver metropolitan areas. The measures use household income rather than family income to account for the growing number of unattached individuals in the housing market. The measure is based on quarterly estimates of this annual income, created by annualizing and weighting average weekly earnings by province and by urban area. (Median household income is used instead of the arithmetic mean to avoid distortions caused by extreme values at either end of the income distribution scale. The median represents the value below and above which lie an equal number of observations.)
The housing affordability measure is based on gross household income estimates
and, therefore, does not show the impact of various provincial property tax
credits, which can alter relative levels of affordability.
The higher the measure, the more difficult it is to afford a house. For example,
an affordability measure of 50% means that home ownership costs, including
mortgage payments, utilities and property taxes, take up 50% of a typical
household’s pre-tax income.
Qualifying income is the minimum annual income used by lenders to measure the ability of a borrower to make mortgage payments. Typically, no more than 32% of a borrower’s gross annual income should go to “mortgage expenses” — principal, interest, property taxes and heating costs (plus maintenance fees for condos).
Canada’s housing markets started 2010 the same way they ended 2009: firing on all
cylinders. While a boon to sellers, the resulting strong home price increases,
however, have hurt housing affordability across the country. At the national level,
RBC affordability measures rose for the third consecutive quarter, moving up between
0.4 and 0.9 percentage points, depending on the housing type (a rise in the
measure represents a deterioration in affordability). A small decline in the average mortgage rate that prevailed during the first quarter and further gains in household income provided minor offsetting effects. The cumulative rise in the measures since the middle of last year has reversed roughly one-quarter of the improvement in affordability that took place during most of 2008 and the first half of 2009. Overall in Canada, RBC measures are now moderately above their long-term average; yet they are still well below the most recent peaks reached in early 2008, suggesting that home ownership costs are starting to bite typical Canadian households but not dangerously so at this stage.
From a regional perspective, significant deterioration in affordability occurred once again in British Columbia (particularly for bungalows and two-storey homes), although the worsening trend was generalized across all provinces. Alberta was the
sole exception, registering small improvements in the first quarter. RBC measures
deteriorated quite strongly in Saskatchewan and Manitoba (for most housing types)
but more modestly in Ontario, Quebec and Atlantic Canada.
Looking ahead, further erosion in affordability is likely to take place in Canada in
the coming 12 to 18 months. The main cause will be an anticipated rise in interest
rates, which are currently at exceptionally low – and clearly unsustainable – levels.
As the Bank of Canada moves toward ‘re-normalizing’ its interest rate policy during
the latter half of this year and in 2011, higher mortgage servicing costs will reverse much of their sharp decline last year in Canada. The five-year fixed mortgage rate (the benchmark used for the RBC affordability measures) has already initiated its upward march and climbed to its highest level since January 2009 in early May.
The resulting degree of housing un-affordability in Canada, however, is unlikely to
exceed recent peak levels. First, we believe that the spectacular rally in housing
prices in the past year will soon run its course. There is increasing evidence that
supply (in both the existing and new home markets) is finally responding more
forcefully to very strong demand and that local markets across the country are
headed toward more balanced conditions – after having been very (and, in some
cases, extremely) tight for the better part of the past year.
At the same time, that red-hot demand for housing is likely to cool during the
second half of this year, as factors that fuelled it dissipate. The fulfillment of pentup
demand created during the recent market downturn, which brought in a wave of
buyers has probably already ceased to be a driver. More recently, continued demand strength has been sustained by factors that either will start reversing or are
transitory in nature.
As noted above, rock-bottom interest mortgage rates – undoubtedly the rally’s
most powerful driver – are set to rise in the next year and a half. Consequently,
their positive effect will progressively fade. At the margin, widespread expectations of higher rates might well have caused some buyers to hurry their home purchasing decision (to lock-in low rates), thereby bringing forward some demand
that would have occurred at a later point. Also at the margin, the July 1
introduction of the HST in Ontario and British Columbia likely prompted some
buyers to ‘beat’ the tax, shifting forward activity that would have taken place after July 1 in those provinces. The combination of increased supply and flat or easing demand is expected to stabilize housing prices in Canada – with outright declines possible in some markets.
Another factor contributing to keep un-affordability levels below previous peaks
in the period ahead will be the effect of a recovering economy on household
income. Sustained economic growth in Canada during the remainder of 2010 and
2011 is expected to support steady job creation and income gains. This should
partially mitigate the effect of rising mortgage servicing costs on family budgets.
British Columbia — Unaffordable and becoming riskier Rapid price increases are quickly undoing last year’s improvement in affordability in British Columbia. In the first quarter, RBC affordability measures surged between 0.9 and 4.0 percentage points, by far the sharpest deterioration among the provinces. In the past three quarters, the measures reversed between one-third and one-half of their sharp drop in 2008 and early 2009. B.C. housing markets have been on a tear since last summer – with resale activity fully recovering to predownturn levels by the end of 2009 – although some signs of slowing have emerged since the beginning of this year. Nonetheless, the strong price momentum has continued largely unaffected in recent months, returning RBC affordability measures closer to their all-time highs in early 2008. Such poor affordability levels represent an element of risk for the province’s markets.
Alberta — Bucking the trend
The Alberta housing market continued to buck the Canada-wide deteriorating trend in affordability in the first quarter. RBC affordability measures eased between 0.1 and 0.6 percentage points, the only province to show declines. This further extended the significant drop in the measures since the end of 2007, a trend that only briefly halted last summer. In contrast to most other provinces, house prices remained relatively tame in Alberta, keeping the cost of homeownership in check. In the first quarter, all RBC measures were at or below their long-term averages, suggesting that affordability remains at favourable levels.
Saskatchewan — Getting tougher on the wallet
Owning a home in Saskatchewan took a bigger chunk of household budgets in the first quarter. This more than reversed a small decline in the last three months of 2009. RBC affordability measures rose between 0.9 and 1.6 percentage points, representing some of the stronger increases in the country (although trailing far behind British Columbia). After flattening or declining marginally in previous quarters, housing prices picked up notably in the province in the first few months of this year; however, with sales slowing and the number of homes available for sale growing more recently, further price increases are unlikely to be as hefty in the near term. Despite the deterioration in the first quarter, affordability measures remain well off the peak levels of early 2008 – which were also the all-time highs in
Saskatchewan.
Manitoba — Crossing the line
Manitoba’s market has been a full participant in the strong housing market rally.
Although resale activity recently eased a little from the super-charged levels of
late last year, prices for most housing types surged ahead early in 2010. This
eroded affordability in the first quarter for all but one housing type. RBC’s measures climbed between 0.6 and 1.8 percentage points (for condominiums, townhouses
and bungalows), with only two-storey homes remaining flat. With these latest increases, most affordability measures for the province have now moved above their long-term average. The sole exception is bungalows where the measure equalled the long-term average. The affordability situation is thus crossing the line where tensions on household budgets intensify.
Ontario — Not letting up
The Ontario housing market recently showed few signs of letting up. In the early
months of this year, resales activity remained in top gear – even reaching record
highs – and, despite rapidly increasing selection for buyers, home prices continued
to escalate. In fact, property values attained never before seen levels in many
parts of the province. This has undermined affordability, which has been on a
generally deteriorating trend since the middle of 2009. In the first quarter, RBC
affordability measures rose between 0.2 and 0.4 percentage points, further reversing
the significant improvement that took place in 2008 and early 2009. While still
well below peak levels, most of the measures now stand above their long-term
averages (except for the bungalow benchmark). This suggests that some unaffordability stress is building in Ontario.
Quebec — Bursting at the seams
The historic run in the Quebec real estate market continued largely unabated in
the first few months of 2010. With red-hot local markets such as Quebec City
continuing to lead the way, new marks in overall buying activity and property
values have recently been set in the province. Such heated conditions, however,
have further eroded affordability with RBC’s measures moving higher between
0.4 and 0.5 percentage points in the first quarter. Although these increases represented mild deteriorations on their own, they came on the heels of more substantial rises (in most cases) in the two previous quarters. All Quebec affordability measures now exceed their long-term averages, having reversed between onethird and almost two-thirds of their declines in 2008 and early 2009. Any further
rise in homeownership costs could have a more visible adverse effect on housing
demand in the province.
Atlantic — The Goldilocks market?
Atlantic Canada’s housing market appears to be in that special zone: not too hot,
not too cold – but just right. Demand for homes remained brisk at the start of 2010
– especially in areas such as St. John’s – with resales volumes continuing to
recover markedly from the 2008 downturn. Pressure on the market, however, has
been largely alleviated by increased availability of homes for sale. Those broadly
balanced conditions have, therefore, contained the general pace of price increases
in the region. Overall, housing affordability in Atlantic Canada is among the more
attractive regions in the country. RBC measures were unchanged (for a standard
townhouse) or rose modestly by up to 0.4 percentage points (for a two-storey
home) in the first quarter. The majority of the measures, however, were still below
their long-term averages, which would indicate a little undue stress caused by
homeownership costs in the region.
Vancouver — Gone too far?
The super-charged Greater Vancouver Area market has been at the forefront of the
spectacular rally in residential real estate activity in Canada in the past year; however, there are signs that the market might have begun to react negatively to the
significant deterioration in affordability since the middle of 2009. More specifically, seasonally adjusted home resales fell noticeably in the first quarter, after surging in each of the previous four. At this stage, it is unclear the extent to which the 2010 Winter Olympics and Paralympic Games disrupted activity during the period, but the weight of very poor affordability likely played a prominent role. In the first quarter, RBC affordability measures continued to surge, moving up between 0.5 and 4.8 percentage points. With the level of those measures now far above their long-term averages and inching closer to the all-time highs reached in early 2008, housing demand in Vancouver is likely to weaken further in the period ahead, taking some steam out of prices.
Calgary — All in moderation
The housing market rebound turned out to be a much more subdued affair in
Calgary compared to most of the other major markets in Canada. After posting
strong gains in the early stages of the rebound, resale activity has slowed considerably since the fall – likely reflecting the lack of traction in the city’s job recovery.
Meanwhile, home prices have maintained an upward trajectory, yet the overall
pace has fallen short of the national average. In the first quarter, the increase in the costs of home ownership in Calgary was roughly equal to or slightly smaller than household income growth, leaving RBC affordability measures hovering around
the zero mark – down from as much as 0.5 percentage points (two-storey home) to
up as much as 0.2 percentage points (standard townhouse). Affordability continues
to be attractive in the city with RBC measures near long-term averages.
Toronto — Still flying high
The Toronto market is giving few hints of being afraid of heights. Since taking
flight last year, very strong demand propelled sales of existing homes to recordhigh
altitudes in late 2009 and the early part of 2010. While sellers finally joined
the aerial show in recent months – attracted by highly favourable conditions to
them and, possibly, reflecting the desire to ‘beat’ the HST that will raise the costs of commissions paid by sellers starting July 1 – they are still outnumbered by
buyers. Bidding wars and quick sales continue to be common. This has sustained
strong upward pressure on home prices, which further ascended above earlier peaks. Consequently, affordability generally continued to erode in Toronto in the first quarter. RBC’s measures crept up between 0.3 and 0.6 percentage points for three of the four housing categories, although condos eased by 0.1 percentage point. All affordability measures now exceed their long-run averages in the Toronto market, suggesting that the dizzying flight might soon run into some turbulence.
Ottawa — Charting a record-breaking path
The Ottawa area market continued to chart a record-breaking path in the first few
months of 2010. Driven higher by flocking motivated buyers, home resales grew to unprecedented levels early this year. This strong demand added upward pressure on pricing, accelerating the pace of increase relative to the subdued gains recorded during second half of 2009 – despite the fact that more homes were being put up for sale. The higher prices eroded affordability in the area in the first quarter, with the RBC measures rising between 0.3 and 1.0 percentage points, which reversed most of the surprising improvement in the fourth quarter.
Although demand momentum is likely to remain brisk in the very near term, the
historically elevated costs of homeownership in the Ottawa area could well
become a factor deterring buyers later this year. All RBC measures are above their long-term averages.
Montreal — On a winning streak
Hockey fever might cause its share of highs and lows, but as far as the Montreal
housing market is concerned, the fever has squarely been on the upside so far
this year. Home resales have enjoyed an impressive run since the spring of 2009,
setting new all-time highs during the fall and winter. Similar to the effect of the
local hockey team’s play-off prowess, the strong performance of the Montreal area
market has attracted many fans. Eager buyers do not appear to be the least put off by some notable deterioration in affordability since last summer or a persisting dearth of properties available for sale (although new listings have begun to increase more recently). In the first quarter, RBC affordability measures for Montreal rose between 0.6 and 0.9 percentage points, pushing the levels further above their long-term averages. Worsening affordability could pose a challenge to the market’s winning streak.
Our standard housing affordability measure captures the proportion of median pre-tax household income required to service the cost of a mortgage on an existing housing unit at going market prices, including principal and interest, property taxes and utilities; the modified measure used here includes the cost of servicing a mortgage, but excludes property taxes and utilities due to data constraints in the smaller CMAs. This measure is based on a 25% down payment and a 25-year mortgage loan at a five-year fixed rate and is estimated on a quarterly basis. The higher the measure, the more difficult it is to afford a house.
RBC Economics Research’s housing affordability measures show the proportion of median pre-tax household income required to service the cost of mortgage payments (principal and interest), property taxes and utilities on a detached bungalow, a standard two-storey home, a standard town house and a standard condo (excluding maintenance fees).
The qualifier 'standard' is meant to distinguish between an average dwelling and
an 'executive' or 'luxury' version. In terms of square footage, a standard condo
has an inside floor area of 900 square feet, a town house 1,000 square feet, a
bungalow 1,200 square feet and a standard two-storey 1,500 square feet.
The measures are based on a 25% down payment and a 25-year mortgage loan at a five-year fixed rate and are estimated on a quarterly basis for each province
and for Montreal, Toronto, Ottawa, Calgary and Vancouver metropolitan areas. The measures use household income rather than family income to account for the growing number of unattached individuals in the housing market. The measure is based on quarterly estimates of this annual income, created by annualizing and weighting average weekly earnings by province and by urban area. (Median household income is used instead of the arithmetic mean to avoid distortions caused by extreme values at either end of the income distribution scale. The median represents the value below and above which lie an equal number of observations.)
The housing affordability measure is based on gross household income estimates
and, therefore, does not show the impact of various provincial property tax
credits, which can alter relative levels of affordability.
The higher the measure, the more difficult it is to afford a house. For example,
an affordability measure of 50% means that home ownership costs, including
mortgage payments, utilities and property taxes, take up 50% of a typical
household’s pre-tax income.
Qualifying income is the minimum annual income used by lenders to measure the ability of a borrower to make mortgage payments. Typically, no more than 32% of a borrower’s gross annual income should go to “mortgage expenses” — principal, interest, property taxes and heating costs (plus maintenance fees for condos).
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