Volatility in Europe:
To many of us Canadians, it may seem that the problems in Europe, although interesting, won’t affect any of us in any real way.
I’m not so sure. The Euro continues to make daily headlines. Why? Because they simply can’t fix its problems… if it could be done, it would have been done by now.
Investors from Europe and around the world are buying US treasuries in large quantities because they feel that it’s the safest place to put their money. This is the only reason the US dollar isn’t dropping further (at the moment) - it’s like the European boat is sinking faster than the US boat… but they are both sinking.
The US congress is completely incapable of creating any compromise over even minor budget reductions. The country continues to spend way above its means and simply creates that money with printing presses. I know what happens to people who continually spend more than they make – it’s simple…..bankruptcy. The US has re-mortgaged so many times, that it would be the same as you or I having a mortgage for double the value of our house. Something has to give.
The EU countries are now being hit with downgrades from the rating agencies. Greece, Italy, Portugal, Austria, and probably France are all technically bankrupt. I believe that the “dominos” will start to fall shortly, and that they will fall all the way to Canada and to the United States. These “failures to pay” will be called “defaults” but what they really mean is insolvency, or more accurately, bankruptcy.
The World Bank is stating openly that we should prepare for a global meltdown.
Volatility in Canada
Our policy makers are showing their concern over the level of debt that the average Canadian is holding. About a year ago I wrote about how the CMHC had to stop loaning money to home purchasers who had only a ~ 2% down payment. Coincidentally a few days later, rules changed the minimum down payment to about 8%. At the same time, the maximum amortization period was reduced from 35 years to 30 years.
Today, Mr. Flaherty says he is considering “a housing intervention.” This would mean that he would be looking at anyone buying a home (or refinancing) having to produce (probably) a minimum of 15% down payment. I believe he should also reduce the maximum amortization term to what it has been for about the last 100 years - 25 years. The logic to this is simply that we would not have a mass of homeowners giving their keys back if the market fell 15% - which could happen. A 25 year amortization means that homeowners start creating some extra equity sooner rather than later. (The difference in monthly payments is relatively small.
Certain markets are going to be hit harder than others. In fact, certain markets may be hit while others are not. Major candidates for correction would be condo markets in Vancouver, Toronto and to a lesser extent Montreal. Single family homes in Vancouver and Toronto will be strongly affected by foreign money (which has artificially increased prices) leaving the market, as the global crisis affects earnings and savings in other parts of the world.
Our mortgage rates are going through a small war, with bankers outdoing each other to get you signed up for larger loan payments. Lovely. Just when we should be cautious about our indebtedness - as we tread water – the banks are throwing us a rock instead of a life jacket.
My Advice:
Make sure you do not have any consumer debt. If you do, make it a priority to pay it off. If you can’t afford to buy something for cash… you can’t afford it. I was fortunate to be taught early in my business career that you should “pay cash for depreciating assets and finance appreciating assets.” I received this advice when I was about 20 and I've never forgotten those words. I can also tell you that if you follow this basic rule you will be financially stable for life.
If you hold US stocks, either directly or through mutual funds, consider selling them… NOW. If you want to stay in the market, consider Canada and pick stocks that have a history of paying quality dividends.
Now... you’ll like this... look at buying real estate, not necessarily for your family but possibly for investment, meaning income property. This could be a single family home, a duplex or a small apartment building. We have proved without a doubt that holding real estate on a long term basis is one of the best investments you can make. I believe that generally (and especially now) properties that have a rental value of $1800-$2800/month are safe. Good real estate market or bad, families need a roof over their heads, and tenants who can afford that level of rent tend to have and keep jobs.
If you are able buy country property, do it, especially if you can create a large garden… even better if you can occasionally rent it.
Next month, I’ll give you more specifics on why you should be considering real estate and the undisputed advantages of owning it.
John Deakin