Canadian Housing Market Sense

Finally an article that makes sense in commenting on why housing prices aren't about to implode in Canada as in the US and the UK. Read the CTV article Why the Housing Market is Not Set to Melt Down.

Oct.31 update - BMO Capital Markets publishes a 3 pager on the differences between Canada and US home mortgage lending and personal debt which supports the idea that there will not be a housing price collapse and mortgage crisis in Canada.

Strange Results in UBC Study that Says Canadian Real Estate Over-Priced

Last week I dumped on CBC for misrepresenting the study by UBC prof Tsur Somerville and student Kitson Swan titled Are Canadian Markets Over-Priced?.

Today I look at the same study from a different tack - its contents. It pains me to criticise my MBA alma mater but the conclusions - that houses in certain cities are over-priced by as much as 25%! - don't look right and they don't seem justified.

The first strange result in the study is that the cities with the cheapest houses are said to be the most over-priced. Look at the table below using numbers copied from the report.

Apart from the suspicious pattern, the conclusions about individual cities like Ottawa seem positively crazy. Slicing $80,000 (25% of $320,000) or so from the price of a house in Ottawa would make it equivalent in real value (i.e. after removing inflation) to the price in 1984 per this chart taken from the UBC Centre for Urban Economics and Real Estate website.

As they say, thanks for nothing.

The paper states it is "treating housing simply as a financial asset". What investor would be willing to take on something with zero return over 24 years? Were Montreal houses also to lose 25%, the amount they are said to be over-priced, they would be back to 1975 values in real terms (again, see the UBC website for the chart)!

In other words, I doubt whether houses can be valued purely as an investment. The type of house examined in the study is the traditional suburban family home - single family detached houses. My guess is that such houses have their rent determined by the main rental market and that rent has little effect on the value/price of the house. Probably, the owners are making sure that rental covers their cash costs on an after-tax basis and are only thinking of the appreciation in the house price or capital gain as a bonus or source of extra profit.

The study authors themselves acknowledge possibilities other than a price rise or decline to balance their equation:

• "If we underestimate the rate of expected house price appreciation, we will predict an equilibrium house price that is too low, below the actual figure, potentially suggesting a market is over priced that is really not." (p.3) A case in point is Ottawa, which comes out by their estimation with an expected rate of capital appreciation of only 2.7% (that's why I highlighted it in red in the previous table), much less than any other city and only half that of Toronto and Vancouver. Maybe their estimate of future Ottawa price appreciation is way too low? Add 2% to Ottawa's expected growth rate, which would make it comparable to all the other cities and presto, Ottawa is not over-priced at all.
• "Changes in the economy and in interest rates will yield different results." (p.3) If interest rates fall, the proper house price goes up according to the study's formula. A Bank of Canada policy decision to lower rates could thus instantaneously solve the problem of over-priced houses by the author's measure - no need for prices to actually fall.
• "The assumption about rents presumes that this is the correct expected flow of revenue from the unit." (p.3) If rents rise, then the problem of over-priced houses disappears.
  

That's not to say there are no over-priced markets in Canada where prices might stagnate or fall slowly or suddenly. But if there are any such cities amongst the ones examined in the study, I'd bet more on the highest-priced ones like Vancouver, Toronto and Calgary than lowly Ottawa, Montreal, Winnipeg or Halifax.

If the authors really wanted to come to a definite conclusion as they did, rather than a much less certain "might be over-priced by one measure whose assumptions are debatable" which is what I think is all they can claim, then they should have carried out the other tests they mention on page 1: "historic rates of price growth, comparing price growth with income and population growth, or measuring price to income ratios." If these other tests all came to the same conclusion I would have much more faith in the study's bold assertions.

Those who think that their house is a wonderful sure-fire investment are well advised to take note of the series of charts in the study's appendix showing the evolution of historical prices. Every major Canadian city in the study has had a lengthy period in the 1980s and 90s when real prices fell significantly and stayed low. Pity the person in Regina who bought a house in 1982 and had to wait till 2008 - 26 years - before they got their money back after inflation, let alone made a return.

Goldman Sachs: the Warren Buffett Seal of Approval

This morning Bloomberg reports that Warren Buffett has invested $5 billion in Goldman Sachs. I'm glad to learn that Warren agrees with me :-) on GS since last week I took a flyer with some "play" money and bought 10 shares at $114 and change. Now that Warren is in, I feel a profit coming on. I'm holding out for $160.

I must admit this doesn't exactly fit with the buy and hold indexing strategy that I normally follow. What the heck, one has to have a bit of fun and thrills, especially now that markets have been so negative. As Mr. Buffett has remarked, the time to really make money is when times are at their most negative - in other words now. The reason I picked GS is that the general run of commentary lauds them as the best and the strongest. Someone has to survive and eventually thrive when things go bad and they seem to be the best choice.

Which Online Broker to Choose?

Online brokers vary quite a bit in their features and services, so choosing the one that is best for you out of the fourteen available may require some comparison shopping. Here's my suggested shopping list.

1) Does the broker offer all the Account types (RRSPs/RIFs, RESPs, LIRAs/LRIFs, Trust accounts) and choice of Securities (mutual funds, fixed income) you need?

2) Are Fees and Commissions competitive? Compare:

• trading fees / commissions - the cost per share or per trade for buy/sell transactions; the rate may be much lower with a larger account balance
  
• administration fees - for account balances below a minimum size, there is often a quarterly or annual charge
• bond commissions - you pay a commission buried in the price when buying and selling bonds as Rob Carrick of the Globe and Mail explains; it's hard to compare brokers for that reason but see some of the blogs below for discussion
• foreign exchange - when trading US stocks or bonds it is necessary to convert to/from Canadian dollars; the broker will do it for you but you pay an implicit commission through the exchange rate charged. Within registered accounts like RRSPs, a few brokers allow you to keep a US dollar cash balance, which is advantageous if you intend to sell a US stock and then buy another since you avoid a round trip through Canadian dollars with a commission on each leg of that round trip.

3) How much will you need Tools and Research like stock data, news feeds, analyst reports, sorting and ranking tools and personal financial planning aids such as investor education documents, retirement planners, asset allocation and portfolio design tools?

4) Have a look at each broker's website to see if the Website Interface and Usability will make it frustrating or easy to invest.

5) Happily, Online Security and Investor Protection are uniformly good enough all round in my opinion to remove those as make-or-break worries about brokers.

6) Is live telephone Customer Service there when you need to fix problems with minimum hassle or carry out special non-automated transactions? Opinions on the brokers vary, so read the blogs and newspaper reviews and take none as the ultimate answer.

7) Are you best with a Best-of-Breed broker or One-Stop-Shopping?
The independent brokers may have the lowest per share trading costs but the banks offer online integration with banking, simplifying tracking of investments and enabling quick movement of money among accounts.

Assessments and Ratings

• Stingy Investor has a list of Canadian discount brokerages with their trading commissions and links to the broker websites.
• Canadian DRIP Primer has a more up to date list of Canadian discount brokers.
  
• Canadian Capitalist briefly reviews many of the brokerages in linked posts
• Million Dollar Journey compares online brokers, focusing on the independents
• Rob Carrick of the Globe and Mail rated online brokerages back in Oct. 2007

I've been a client of BMO Investorline for over ten years and though they aren't perfect (US dollars in registered accounts please!), I've discovered that the others are not either. BMOIL does a very competent job for me and I can recommend them. I also have an RESP account with TD Waterhouse, where I've had a generally positive experience.

Finally, if you sign up with a broker and they don't serve you well, you can transfer to another broker.

TD Waterhouse to Offer Online Trading on Global Markets

Rob Carrick spilled the good news in his article Against the Tide in today's Globe and Mail that TD Waterhouse will begin offering online trading in European markets followed by the Far East this fall. Excellent!

This capability has already existed for some time in their UK service, while in Canada, so far as I know, only HSBC InvestDirect currently offers global trading. Hopefully, other discount brokers will follow suit, further enabling international diversification by DIY investors.

Current Markets: More Like the Lemming Myth or the Reality?

Myth: lemmings sporadically commit collective suicide by running off cliffs into the sea.
Reality: lemming populations experience very wide swings on a regular basis, ranging from near extinction to huge booms, but there is no evidence of mass suicide in their behaviour.

The cute wee lemming (thanks to the Animal Picture Archive for the photo) for some reason (is it their very innocence and defenselessness that exposes them to abuse?) is the subject of a long ago vicious character assassination, perpetrated by that icon of goodness the Disney Company (see Lemmings, Dying on Camera and at Snopes), which has rooted itself in popular thinking as the above myth. For the reality, have a look at the Hinterland Who's Who on lemmings, which sets outs the various theories about why lemming populations vary so much of which suicide isn't a credible one. Living in the Arctic of Canada, Norway and other countries, lemmings in truth are fascinating creatures - e.g. from the Hinterland article, "How such a small mammal, already under a severe thermal stress, can muster enough energy to breed in an arctic winter, and what factors determine when winter breeding will occur, are still mysteries." Non-Canadian readers may wonder the same about the human population but Canadians know they heroically manage to do it for the good of the species.

So, the big investing question, given the big market declines and the demise of a bunch of significant market players in recent days, which analogy with lemmings applies - collective suicide, i.e. the financial system imploding through the suicidal(?) refusal of banks to lend to one another, or a normal though very large swing in fortunes? I think I prefer the reality analogy despite the fact that many lemmings do die during the downswing.

And oh, despite seemingly catastrophic declines to "near extinction" levels, lemming extinction never happens and there is always a subsequent recovery. I like the way the Hinterland article concludes "the tundra ecosystem is gathering its resources in preparation for the outburst of energy that will come with the next lemming year."

Real Estate Gloom and Doom is Latest Canadian Media Fad

Real estate prices have been falling in the US so the same must be true in Canada, right? That such must be the case seems to be the compulsion of mainstream media these days. Witness stories like CTV's headline Average Home Price Drops 5.1% and last week's CBC Urban Real Estate Values Set to Plunge.

Fortunately, the Internet allows one to dig a bit, go back to the original source and check the tone and slant as well as the facts. In neither case does the negativity of the story match the source.

The CTV article comes from a Canadian Real Estate Association press release with the, shall we say, slightly less dire title Fewer new MLS® residential listings in August. The press release is mainly about a drop in activity, not prices, and that drop is from record levels. As for the headline price decline, it is an average that was influenced by retreats after large run-ups in a handful of major markets like Vancouver, Victoria, Calgary and Edmonton. CREA's economist puts out a more balanced view, "Sales activity is down in a number of resale housing markets in Western Canada that earlier posted hefty price increases. Prices continue rising in other markets where price gains have been more modest." As the press release says "average prices recorded year-over-year gains in 20 of 25 major markets". In direct contradiction to the atmosphere and and context of the US situation, CREA says "there is no real estate bubble that will burst and send prices to new lows". Now CREA may be wrong about certain markets (like Vancouver, which seems to me the most over-priced by far) but why is CTV not reporting the way CREA presents the data?

CBC's effort is based on an academic study from UBC called Are Canadian Housing Markets Over-Priced? The paper does answer yes, certain ones are over-priced by up to 25% (I very much doubt the conclusions in the paper as I will explain in another post), but it does not specify how the price re-adjustment will occur. The paper says "House prices can correct through sharp rapid declines, through longer and slower declines, or by staying essentially flat for a long period." The study authors go through the usual prevarication that they do NOT know which of the possibilities will happen. So please, CBC editors, don't put words in their mouths and pick the most sensational option. Or does CBC want to be known as tabloid press?

Signs of the Time We Live In

A 24 year-old arrives for his first day at work as a trader at Lehman in London only to find that everyone has been fired and he will have no job (see BBC It's Like a Massive Earthquake. His starting salary was to be £45,000. A Head Teacher (a Principal in Canadian terms) of a primary school in Scotland, responsible for 300 children and a staff of 20 after 30 years experience earns a few thousand more. Perhaps like those in the tech industry where the crash forced lots of smart, ambitious people into other industries where their talents could be applied to better uses, this young man might also redirect his future?

A UK consumer misses their payment of a very small balance on a credit card. Instead of happily letting the balance accumulate interest and perhaps even increasing the credit limit as in former times, the UK credit card company freezes the account and tells the person that this is for their own good! Person pays off balance (with punitive fee) but is unable to make purchases on the card for a week. Economy gets zero discretionary spending during that week. Said person had never previously missed a payment, this one being forgotten due to the small amount. Said person also has zero other debt and healthy bank balance that could easily support a balance ten times the amount paid late. Is the financial sector in a state of panic tightening that will unduly restrict spending and deepen the recession now underway?

BMO Investorline to Introduce RESP Accounts

BMO Investorline is to fix the anomaly of not offering Registered Education Savings Plan (RESP) accounts for its discount brokerage customers according to a recent note to clients from Connie Stefankiewicz, President & CEO. Good on them, it's about time. I am hoping it will facilitate online contributions with direct transfers of cash (dare we hope even contributions in kind?) from bank accounts or a regular trading account. The RESPs are to begin in "early fall".

Voting for Canadians Abroad

Now that a federal election has just been called, the way to get your money's worth for all those taxes you are paying is to vote. Even if you are out of the country on the date of the election to take place on October 14th, there is a fairly simple way to register and vote by mail (snail mail only, not email alas) by going to this Elections Canada webpage. You need to mail in or fax photocopies of document(s) with proof of identity and a street address (a p.o. box won't do) - e.g. a driver's licence suffices for both.

Since there needs to be time allowed to send in the documents, receive the ballot back by mail, then mail it in before Oct.14th, it needs to be done soon.

Perhaps Elections Canada could consider ways to do this electronically in future. If you can pay your taxes electronically, why not voting?

Update Sept. 23 - Received my ballot today and sent it back to Canada with my vote. That's reasonable response time by Elections Canada considering the mail delay. It should get there in time.

Canadian Federal Election Prediction

The Conservatives are almost sure to win the Oct.14 federal election. As of today, the Intrade prediction market shows a 77% probability that this will happen. People voting with their money in the market is as good as, or better than any CBC poll, in which only 55% of people thought the Conservatives would win.

There's another such market operated by the University of British Columbia Sauder School of Business called the UBC Election Stock Market. According to the CTV News article where I found the link, it's results in the last election in 2006 were right on. It's also saying the Conservatives will will handily and the numbers have gone up since the election call. You can "vote" your money by number of seats, whether there will be a majority, the proportion of popular vote, which of the Conservatives or Liberals will receive a plurality.

Update October 15 after the election.... The UBC market did amazingly well, finishing in the middle of the pack of professional polling outfits. That's especially impressive in that there were only 257 investors taking part over the whole campaign. It's Wisdom of the Crowd indeed.

Bubble Talk from an Insider

Remember Henry Blodget, one of the Tech bubble Wall Street stock analysts merrily hyping tech stocks into the stratosphere back in 1999-2000? He's now doing rather interesting interviews on current market events. A couple of his recent efforts worth a listen are with Robert Shiller, Yale prof and co-creator with Karl Case of the Case-Shiller housing index.

Check out:
Can the US Economy be Made Bubble-Proof? ... answer = no
US Housing Price Decline Could be Worse than the Great Depression

Listening to Mr Blodget's perceptive comments reminds me that his defect was not brains but morals. He knew the companies he was hyping were over-valued but hyped them anyway. I have little doubt that today's credit crisis ,whose negative effects will be felt for years by many innocent ordinary people (and many not-so-innocent ordinary people), was aided and abetted by similar people in banking.

Book Comparison: UK and Canadian Citizenship Test Material

Before you can become a citizen in either of Canada or the UK, you must pass a written test of knowledge about the country. In the case of the UK, those who want to be apply for indefinite leave to remain (i.e. to live in the UK as long as desired without need for further visas, aka permanent residency) must also pass the test.

The purpose of these tests is, as the UK Border Agency explains in its FAQ document, to "... ensure that migrants have an understanding of life in the UK and the requisite skills to allow them to fully integrate.", or, in Canada's case to "... help you prepare to become a Canadian citizen."

How the two books compare? What do they reveal about each country? Are they useful to an immigrant?

Canada's Book: A Look at Canada (2007) - 47 pages
The UK's Book: Life in the United Kingdom - A Journey to Citizenship (2007) - 146 pages

Test Knowledge: - The bar is set much lower in Canada: its test only requires a pass mark of 60% vs 75% in the UK, and if you fail, you can go for an interview with a Citizenship judge who can decide if you meet the knowledge criteria despite the test result. In the UK, fail and you get to try again after paying the £34 fee again (there seems to be no separate fee for Canada's test - It looks to be included with the citizenship application). Plus, if your written English or French is too poor, in Canada they will give you an oral test. Plus, if you are over 54 in Canada, you don't need to take the test at all, whereas it is 65 in the UK. The UK does allow you to take the test in Scottish Gaelic or Welsh ... now I wonder how many people living outside the UK and wanting to immigrate who aren't already citizens can write those languages fluently enough for a written test?

There is lot more to be learned by the immigrant in the UK, despite the fact that only chapters 2 to 6 of the UK book, or 60 pages, is actually test material. A glossary takes up a whopping 30 pages of the remainder, including such obscure terms as "cannabis: an illegal drug that is usually smoked" and "conquered: beaten in battle". But there is only about 40 pages of test material in Canada's book after subtracting a half dozen pages pages devoted to intro material and test suggestions at the end. Those 40 pages contain many photos - just about on every page - and there are many fewer words on a typical page.

Content
Canada book - a combination of politically-correct boosterism and indoctrination on geography and civics written at a grade-school level. Its practical utility is more or less nil, except for explaining how federal voting works.
UK book - practical explanations of all aspects of living, both public/government and private (like buying a house, renting, credit cards, opticians, churches, marriage, employment, sports, driving licenses etc) with web references, addresses and phone numbers. If you do know all this info, then no doubt you will be able to do what you need to cope with life as well as the native-born. But why give and test this info two or even five years after the person has arrived? It's material that someone needs upon or before arrival. In fact, I would recommend this book as a handy all-in-one primer on the practical side of living in the UK for those coming here. For a facts and figures overview of the UK, read the UK Wikipedia entry.

Consider this contrast - the UK book has a section on sports and states that football (soccer for Canadians), rugby, tennis and cricket are the most popular sports. Nowhere in the Canada book does the word hockey even appear. Is that a proper "Look at Canada"? Similarly, the UK book spends several pages detailing ethnicity and religion, whereas the only mention of religion in Canada's book is the phrase "freedom of religion". On the other hand, Canada's book starts off with a chapter on environment and sustainable development where the preaching and talking down to the reader is enough to make one nauseous. The UK book doesn't even mention the environment. At least the Canada book has a map though! One would think the UK to be disembodied country floating in space. Sadly, neither book touches upon literature, fine arts, media, all essential parts of a country I would venture to say.

It seems that to become a UK citizen you need to know the practical "what to do or not do", whereas in Canada you must know the proper way to think and have the correct attitudes.

It is true that advice on practical matters can be obtained on the federal government's Citizenship and Immigration Canada website under Live in Canada Before You Arrive and After You Arrive. Check out the Wikipedia Canada entry for summary and figures.

The Citizenship test itself is thus another way in which Canada is more favourable to immigration than the UK. Maybe it should be no surprise - without immigrants Canada's population would be falling, while the UK has been flooded with migrants from new European Union countries like Poland (who have a right to live and work in the UK and don't need to pass the test) and so doesn't particularly want or need any immigrants from other places (like Canada).

Book Cost and Source: Why should one be obliged to pay anything for the UK publication, which costs £9.99 at the official government publisher TSO? Worse, the government publisher charges more than booksellers such as Amazon, where it costs only £7.52? Why can the UK not publish the document as a pdf like the Canadian book, which is available for free here as a pdf download?

The Test: Now that I've taken the UK's test, I can say that any reasonably intelligent person should be able to pass it on the first attempt with 3-4 hours of studying. If you already have a general familiarity with the answers to the topic areas in the What You Need to Know at the official Life in the UK website, you might even be able to pass without studying at all. Remember that it is multiple choice so it is only testing recognition memory, much easier than having to supply your own answers from nothing. One thing they could state in their background info, which I did not see anywhere, is that the test appears to be customized to the local part of the UK where you live, whether it is Scotland, England, Wales or Northern Ireland. Half the confusion I had studying was keeping straight the different rules for each area like education, water rates etc. It took me all of 5 minutes to complete the 24 questions, including double-checking all my answers, out of the 45 minutes allotted - a skoosh, as the Scots say. Some smarty-pants young woman finished before me, harrumph!