Following are the highlights from a telephone conversation with Jean-Francois Perrault, Chief Economist Scotiabank and John Webster, President and CEO Scotia Mortgage Corporation which took place on Thursday, April 9, 2020 at 4:30 p.m.
First, it’s not all bad news. While I’ll have to include some unpleasant information in order to provide a complete picture, that is not the focus.
There’s a document floating around the internet from Goldman Sachs. Have you seen it? It’s a private client summary regarding the coronavirus. 1,500 companies dialed in to this call.
For the record, Goldman Sachs has said the summary text was not authorized by them and it contains erroneous information which was not used during the call. Still, there seems to be a consistent message here. I wanted to share this with everyone because I do believe in much of what is being said. Have a read. It’s a summary but a bit lengthy. I strongly recommend reading the entire summary as the message in the end is positive and is in line with historically recovery patterns.
Remember all those pessimists who were calling for a housing bubble or collapse?
If you listened to them and rented for the past eight years, how much would you have lost? How much would your rent have increased since then? And would you still be able to rent that condo or house… or would your landlord possibly have plans to sell it and leave you out in the cold?
We used to expect an economic slowdown or recession every five years. But something happened after the last big recession in 1990. Since then, there has really only been one recession: in 2009.
This came off the heels of the infamous US subprime mortgage crisis that crippled most of the world’s economies for years. Yet, in Canada, we got off relatively easy. Our slowdown lasted less than a year.
Rising house prices could make you rethink buying a home.. Could renting be better today? With the average home price in Toronto around $500k and the National average at $356k, renting might look more attractive. And for certain situations, like short-term accommodations and retirement living, it does make sense. But I’m not convinced that renting is right for most of us.
Some simple rules of thumb to remember when buying real estate:
you should plan on owning the home for at least 7 years. This will amortize or spread out any associated expenses with the purchase or sale of your home.
buying for investment should be a long term play.. again, 7 years is usually long enough to take us through any economic cycle of ups and downs.
forgot buying for a quick flip. Unless you are a professional renovator with a deep pockets, don’t try to imitate people on HGTV (yes, it’s another 4 letter word we shouldn’t repeat in public).
don’t buy at your maximum debt servicing ratios…. stretching yourself thin when interest rates are at record lows isn’t smart.
speaking of interest rates…. make sure to qualify yourself with an interest rate of 5.00% or higher.. this is a more realistic rate than today’s 3.09%… just plan for rates to go up… when they do, you’ll be prepared…
we won’t get into buying a rental property here… it requires more explanation.. but for many, it’s an even better investment than buying your principal residence… a topic we will discuss at a later date.
Type in Rent vs Own or Rent vs Buy on google, and you’ll find several recent articles on the subject. This one, from the Financial Post, stood out…. it’s against owning. The article explains that you will be better off, financially, if you rent… They even give an online calculator to prove the point…. Okay, let’s take a closer look at this calculator… Ah, there’s where we have a difference of opinion…. Their calculator assumes you can earn an annual 7.00% Return on Investment outside of Real Estate… And they are using annual house appreciation rate of 2.00%.
Hmmm, how many people have made an average annual return of 7.00% in stocks, bond, mutual funds over the past 5, 10, 15 or 20 years??? Most the people I know are still looking to match the stock market highs of 2000 or recover their investments from the 2008 crash. And using a 2.00% annual appreciation rate for real estate? Come on, let’s get real! Try typing in more realistic numbers like 5.00% investment return and 5.00% house appreciation and see what you get… And that 5.00% investment return is being generous. Real Estate becomes the winning choice…
We also have to factor in the intangibles. Not having to worry about moving because your landlord is selling… and not having to move the kids…. and just plain pride of ownership… There is something to be said for owning your home.. People tend to care a little more about the home they own.
Here’s another article from the Globe and Mail that isn’t against owning but is advocating you save up a larger down payment. I like the philosophy. Wait and save… but don’t wait for house prices to go down… that just hasn’t worked… Timing the market is always a tough thing to do…So even if house prices fall over the next few years, you’ll probably end up spending more on your mortgage as these record low interest rates are expected to go up over the next few years.. Here’s a calculator I found through The Star’s Moneyville. I typed in some numbers using today’s averages… rents, house price, mortgage rate, inflation rate, etc…. the results showed buying would save you over $400,000 over a 25 year period. Try it out.. see how it would fit your situation.
Last week we saw 5 yr fixed mortgage rates hit 2.99% for the first time ever (these are full featured mortgages, not No Frills products). But these rates didn’t last long… just 3 days later, bond yields spiked up and mortgage rates followed… 5 yr fixed rates now sit at 3.09%.
The 5 year Govt of Canada bond yields are up 0.30% since July 24th, and are currently sitting at 1.42%. That’s a 26% increase in 2 weeks. These bond yields have a direct effect on 5 yr fixed mortgage rates. If bond yields continue to go up, we could see mortgage rates go up further. Looking further ahead, the 2yr Govt of Canada bond yields provide us with a 6 month outlook… they have also gone up from 0.93% to 1.16%, a 20% increase… if the yields stay at this level, we should look for rates to go up slightly…
Still, these are historical low rates… anything under 4.00% is ridiculously low… We haven’t seen 5 yr fixed rates under 4.00% for over 40 yrs.. This isn’t time to panic…it’s still a great time to borrow money…
This seems to be an ongoing pattern. Rates go up temporarily, then they drop… they go up, then they drop… We’ve been stuck in this cycle for over 2 years. But hey, who’s complaining? Not anyone with a mortgage….not any real estate investors… this means money is cheap….. and it makes investing in real estate a very attractive option.
For those of us with a pension or if you are heavily invested in stocks, bonds or mutual funds, then you won’t like these low rates as they are keeping your Return On Investment very low…… Personally, I have some money in mutual funds and some stocks…..I started with my RRSP in 1990…. they were supposed to be a safe, long-term investments…. The only problem is, I’ve never made any positive return… Sound familiar? The only ones making money are the Fund Managers (with their 2% Management fees) and Investment Advisors (with their 5% or 6% Deferred Sales Charges).
I lost my appetite for stocks and mutual funds, in 2000… the year of the dot com, dot bomb, internet stock market crash… the markets have been a roller coaster ride ever since… I got off that ride in 2004 and have never looked back.
If you’re looking for investment strategies in mortgages and real estate, drop me a line or give me a call… I’d be happy to share some of my knowledge and experiences of others that are enjoying positive returns elsewhere.