Weekend Reading: Canada’s Housing Correction Edition
Maclean’s author Jason Kirby wrote this week about Canada’s housing correction, saying, “Canadians are finally getting a taste of what a world with rising interest rates will look like, and one thing is painfully clear: we’re not ready for what happens next.”
National home sales are projected to post a double-digit decline when the final 2018 numbers come in, according to the Canadian Real Estate Association. What’s to blame for this housing correction? Three factors:
- Tougher mortgage stress tests introduced by the federal government to ensure borrowers could qualify at higher interest rates
- Higher interest rates – the Bank of Canada hiked its key interest rate three times to 1.75 percent
- The inevitable slowdown of our decade-long real estate boom (up 56 percent in 10 years)
Not surprisingly, those closest to the housing market (mortgage brokers, real estate agents, home builders) say the federal government is to blame, with tighter lending rules keeping well qualified borrowers on the sidelines.
They say the government regulations were meant to tap the brakes on overheated markets in Vancouver and Toronto, but has caused an unintended ripple across the rest of Canada.
The Bank of Canada moved quickly to hike rates and try to keep pace with the U.S. But now they’re in a predicament. Another two or three rate hikes this year, as many economists had forecast, might cripple a Canadian economy that has become increasingly dependent on household spending. Fail to keep pace with the U.S., however, and risk further weakening of the Canadian dollar.
My take: The stress-test was always a prudent move to ensure borrowers could afford the inevitable rise in interest rates. Housing prices were going to fall eventually, but the question is whether we’ll see a full scale crash in some markets or a soft landing.
A lot of money has been made in real estate over the years, but over the very long term this asset class barely beats inflation – think 2-3 percent increases per year.
A housing correction could help those who were on the edge of affordability, but as we’ve learned over the last decade, trying to time the real estate market is incredibly difficult. Therefore, the decision to buy a home should be a personal one based on your desire to own versus rent, but also your ability to afford everything that comes along with home ownership.
This Week’s Recap:
Back on New Year’s Eve I recapped my year and shared my latest net worth statement.
Then on Wednesday my good friend Kyle Prevost explained where your CPP money goes after it gets deducted from your paycheque.
My wife opened up a new investment account this week. On Monday I’ll share which platform she’s using and why. And later in the week I’ll review a new personal finance book that I’m already calling the book of the year.
Promo of the Week: CoPower Green Bonds
If you missed my review of CoPower Green Bonds in October, you may want to catch up now.
To recap, CoPower offers Canadians the opportunity to earn fixed income at a competitive 5% annually on their 6-year Green Bond. The bonds are eligible for your RRSP or TFSA making them a great way to earn tax-free investment income.
Investing directly with CoPower’s through their online platform is always free, but if you want to hold bonds in a registered account your financial institution may charge purchase and/or administrative fees.
For Boomer & Echo readers, CoPower will cover any purchase fee charged by your bank or broker on CoPower Green Bonds held in an RRSP or TFSA up to a total of $200. To take advantage of this offer complete your investment by February 28th.
Visit copower.me/en/boomer-echo-
Weekend Reading:
Global News columnist Erica Alini shares six painless ways to save $50 a month this year.
How to save more money every month without sacrificing happiness? Behavioural economist Dan Ariely has you covered:
Dale Roberts at Cut the Crap Investing shares some New Year’s resolutions for your financial health.
Oh Canada! The land of maple leaves, mounties, and massive mutual fund fees.
A great post by Preet Banerjee who says avoid second-guessing your portfolio when markets are volatile.
The New York Times shares the simplest annuity explainer they could write:
“At their simplest, annuities offer a guarantee. If you turn over some money, you’ll be guaranteed to get all that money back — plus usually a certain amount more. Or you turn over some money and you’ll be guaranteed a regular check for a certain period.”
Why this 20 percent a year stock picker wishes his edge would disappear.
Evidence-based investor advocate Robin Powell writes an ode to Jack Bogle, investing’s ultimate superhero.
Millionaire Teacher Andrew Hallam explains when the 4 percent rule could fail investors:
“Never assume that low-inflation rates are here forever. And don’t assume that the stock market will perform splendidly in the future. These are unknowns. As such, it’s prudent to maintain conservative levels of withdrawals. They should be lower than 4% for those who pay high investment fees.”
By not claiming CPP until 70, you could get 150 percent of the income you would receive at 65.
A reader lost her husband and wants to know what happens to his Old Age Security pension. Jason Heath explains the limits of OAS survivor benefits.
PWL Capital’s Ben Felix explains the problem with small cap stocks for those looking for a portfolio edge:
Should you own a mortgage in retirement? Mark Seed looks at a case of retiring with debt.
Finally, 35 years ago, Isaac Asimov was asked by the Star to predict the world of 2019. Here is what he wrote.
I look forward to reading about the book you mentioned.
As for housing and stress tests. I didn’t buy my house until I knew I could buy it in full if something drastic happened. Maybe I am too conservative but a mortgage made me crazy. I still got a mortgage for 335k but paid it off in a little under 5 years as I hated the idea of paying more that 2% for a mortgage on renewal. I got lucky and got a variable rate mortgage in 2011 with a prime minus .75 and paid less than 2% from 2011 to early 2016. All the rates were higher in 2016 and no broker or bank was willing to give me the same on renewal so I paid it off.
I know a lot of people stretch themselves to buy a house and I assume that is ok for them. But I always built my life to take career risks that challenged me but also exposed me to getting fired. Having a big mortgage that couldn’t be discharged at any moment felt risky to me. I would rather try new and challenging and financially rewarding jobs than feel like I had to be ultra conservative on a job to make sure I never risked being able to pay a mortgage payment.