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Wednesday, September 19, 2012

Why it’s better to rent than buy | Investing | Financial Post

Why it’s better to rent than buy
David Kaufman | Sep 14, 2012 12:49 PM ET | Last Updated: Sep 19, 2012 12:10 PM ET
More from David Kaufman

Does it make more sense to buy or rent a home from an investment perspective? It’s a question I get asked more than any other. The answer, in an era of historically low interest rates and perpetually rising real estate values, appears to be obvious: buy.
Just ask any real estate agent and they’ll tell you, “Don’t pay your landlord’s mortgage for him,” or “Build equity for yourself instead of flushing your money down the toilet,” and our favourite, “There has never been a better time to buy.”
It all sounds pretty convincing, but it’s wrong. Unless you need the security blanket of owning your home, it is nearly always a better financial move from an investing standpoint to rent rather than buy. The reason: People rarely consider three major costs of owning a home.
1. The round-trip costs of buying and selling
The largest expense when buying a home is the land transfer tax. In most jurisdictions, this can amount to at least 1.5% of the purchase price. In the Greater Toronto Area, it’s closer to 4%, which comes close to the rent you would pay on a similar residence for an entire year. And, keep in mind, this is paid in after-tax dollars.
When you sell your house, you will also pay about 5% in commissions. Throw in moving costs and legal expenses, and the total cost of buying and selling a home approaches 10% of the purchase price.
If you buy a home for $800,000 and sell it five years later for an impressive $950,000, your net profit (excluding the hefty annual costs discussed below) is about $80,000 — or a compounded annual return of a paltry 1.6%. That’s not a typo. True, this calculation doesn’t figure in the so-called benefit of leverage, but we’ll get to that in a minute.
2. The operating costs of ownership
The largest cost of ownership is invisible. It’s the opportunity cost of not having invested your downpayment somewhere else. As the above point demonstrates, you don’t have to take a lot of risks to outperform the equity appreciation of your home, even in most bull markets.
The other costs of home ownership aren’t invisible at all. Property taxes, mortgage interest, maintenance and a variety of other miscellaneous expenses quickly add up. If you’ve ever had a leaky roof, frozen pipes, a pool to take care of, or a predilection for home improvements, you know this to be true.
Of course, homeowners aren’t on the hook for paying rent, but the operating costs generally far outpace the rent that would apply to the same residence.
3. The impact of a mortgage
It is generally assumed that buying a home means taking out a mortgage, especially with interest rates at historic lows. Mortgages used to be a vehicle that homebuyers used to buy an asset well beyond their means. The goal was to pay it off over 20 or 25 years, just in time for retirement, when the home they lived in would become their physical nest egg.
This has morphed over time to the point where buyers access the maximum amount of leverage available to them at purchase and take the longest possible amortization period available. They enter into mortgages knowing that their monthly payment is close to the maximum they can afford (assuming they stay employed and won’t have any costly unexpected events), confident that if they ever run out of money, they can just extract more equity from the ever-increasing value of their home.
This isn’t preparing for retirement. This is preparing for job interviews in your seventies when you should be enjoying cocktails after a round of golf.
If you would like to run some of the numbers comparing buying vs. renting for yourself,click here for an excellent online Excel template that is geared specifically to Canadian homebuyers. The New York Times has also published a very detailed interactive online calculator that may be useful.
The bottom line is that using leverage to buy a home presumes the value of real estate will always go up. Historically, the value of residential real estate has increased more or less in lockstep with inflation, meaning that the buying power of your equity will be the same 20 years after you buy a home as when you bought it.
The same people who think buying a home with 15% down is a sound investment would never dream of applying 600% leverage on any other investment. Most conservative investors, for whom capital preservation is the primary objective, eschew any leverage at all in their investments because leverage works both ways: It magnifies gains, but magnifies losses as well.
In the case of an 85% mortgage, it is imperative to understand that a 15% decline in the value of the home results in a 100% loss of the equity forming the downpayment. The vast majority of your mortgage payments in the first five years is interest on your debt. If you sell your house after that time following a 15% market correction, you end up with nothing after you pay down your outstanding mortgage principal.
If you try to refinance your mortgage in that scenario, you will have to “re-up” on your equity, assuming you can get a new mortgage at all. This is a tame version of what transpired in the U.S. in 2007-08. It is not fantasy; it can happen here and it will happen here.
It’s just a matter of time.
David Kaufman is the president of Westcourt Capital Corp., a portfolio manager specializing in the construction and management of investment portfolios using traditional and alternative asset classes and investment strategies.

Back To School - Finance 101 - Money Saving Tips and Q&A -

Back To School - Finance 101 - Money Saving Tips and Q&A -

Q&A - User Submitted & Answered By @TD_Canada

Q1: RESP contributions — is there an age restriction for making contributions in a child's name? Are there limitations to government grants?
Q2: At what age should a child have his/her own bank account?
Q3: What are some good tips to sticking to your budget?
Q4: Should I let my child apply for a credit card as soon as they turn 19? I heard it was good to establish credit.
Q5: What are some of the loans or line of credit that can benefit post graduate students and what's the usual requirements.
Q6: Should I get a student line of credit to pay my school expenses with? What's the interest and how does the payments work?
Q7: Is it wise to borrow at low interest rates to invest in RRSPs or TFSAs?
Q8: My Bank just told me I could up the limit on my card but I use nowhere close to the limit, should I do it?
Q9: How do I save for my child’s higher education living on bare minimum wage?
Q10: Is it better to pay for purchases with cash or credit cards?

Q1: RESP contributions — is there an age restriction for making contributions in a child's name? Are there limitations to government grants? (Submitted by @matschkean)
There is no age restriction when making a RESP contribution, however you do need your child’s SIN to open the account. Here are a couple of factors that you should be mindful of:
  • A Registered Education Savings Plan allows each beneficiary (child) to receive a lifetime contribution of $50,000.
  • A RESP can be opened for 35 years; but contributions can only be made until after year 31.
  • The year the child turns 17 is the last time they can receive government CESG grant/bonds; however unassisted contributions (no grant) can continue to be made until the lifetime maximum is achieved.
  • The federal government will match contributions up to 20% or $500 per year for every child in the plan. This is called the Canada Education Savings Grant (CESG). Some families may also qualify for the Canada Learning Bond (CLB) which is an additional top up of 10-20% on the first $500 of contributions in a year for every child. By the time your child goes to school, they could receive up to $7,200 of ‘free’ government money, in addition to your contributions and the income earned within the account.
  • Investments held within a RESP for your child grows tax-free which means your returns are increased.
To learn more about RESPs you can visit the CRA Website.
Here are some other sites you may find helpful: the first is an RESP calculator which can project how much you need to save today, in order to have enough money available once your child is ready for school. Theother site will give you a breakdown of how much grant money you will receive based on your annual contributions into the RESP plan.
Back To Questions 

Q2: At what age should a child have his/her own bank account? (Submitted by @greenurlifenow)
It’s never too early for a child to have their own bank account. In fact, a parent or guardian can even open an account while the child is still an infant. There are some key advantages to opening an early account for your child. Parents can deposit and save their child’s birthday or monetary gifts for when they're older. As the child continues to grow, the parent can then demonstrate the concept of saving money by either incorporating an allowance or simply showing them how to put coins into a piggy bank. When they are older, your financial institution can give the child their own debit card and access to view their accounts online.
By promoting financial literacy and educating your child about the proper techniques of saving and money management, you will help them form good financial habits that they’ll be able to use in the future. Most financial institutions offer a youth account (available for minors) that has minimal or no monthly fees and offers unlimited deposit/withdraw transactions. Once the child becomes age of majority (based on their province), then they can convert this youth account into a student account that would transition them into their years of post secondary education.
Back To Questions 

Q3: What are some good tips to sticking to your budget? (Submitted by @tkwan23)
As a rule, most students have limited funds so it’s important to make the most of what you do have. Even if you have received a bursary or have a part-time job, the monthly costs do add up.
Here are some tips I find helpful:
  • Stay organized: You have to be able to keep track of all the money coming in (part-time jobs, bursaries, student loans, income assistance, etc.) and all the money going out (tuition, books, rent, food, etc.). The idea is not to spend more than you bring in.
  • Create a budget and stick to it. I recommend that you start with a look at your last three months of bank statements and bills for a realistic view of your spending habits and expenses. Now it’s time to work on a budget. A great tool can be found on TD's cash flow calculator, you can even print out a report and analyze your spending. If your main concern is sticking to your budget, allow yourself to spend a certain amount on things like entertainment and clothes per month. Once you meet that budgeted amount, you’re going to have to cut yourself off from spending more.
  • Don’t forget to create an emergency fund. Make sure your budget lets you put away some money to take care of unexpected costs. You may have to fix your car or pay for some extra tutoring. Unfortunately these instances pop up more often than most people think and it’s always better to be prepared for them.
Back To Questions 

Q4: Should I let my child apply for a credit card as soon as they turn 19? I heard it was good to establish credit (Submitted by @donnaelle)
Anyone can apply at age of majority but the advice of a parent really counts. Credit cards are convenient and can be a real help especially for students living away from home who need to make an important purchase. It’s also a good way to help younger adults build up a credit history to help them borrow in the future.

To get a card, your 19 year old will have to apply and meet certain conditions to be approved including showing the ability to pay. If he or she is approved then you should talk about how to use credit responsibly -- try to pay in full each month, always pay on time and keep the spending under control. Getting behind on card payments or getting into too much debt can impact their credit rating which they'll need in order to borrow in future, or even rent an apartment and in some cases, get a job.

If you don't think your teenager is ready for this then you may want to consider getting them a supplementary card on your account so they have the benefits of a card and you can see how they handle it.
Back To Questions 

Q5: What are some of the loans or line of credit that can benefit post graduate students and what's the usual requirements (Submitted by @djemzine)
A number of lenders offer Student Lines of Credits specifically aimed at post graduate students (obtaining your Masters of Ph.D.) and professional students (programs of Chiropractic, Dental, MBA, Medical or Optometry, Pharmacy or Veterinary). The requirements can vary from bank to bank. However, some usual requirements are:
  • Providing proof of enrollment/registration of an approved accredited school however, some exceptions may apply.
  • Being able to service the debt you will be taking on. This may mean applying with a co-signer; however, some exceptions may apply.
  • Some lenders, depending on your program, may have you complete a Student Budget Worksheet in the applications process.
For more information regarding post graduate Student Lines of Credits at TD, click here.
Back To Questions 

Q6: Should I get a student line of credit to pay my school expenses with? What's the interest and how does the payments work? (Submitted by @chi_amy)
A Student Line of Credit (SLOC) can help pay for your tuition, books, laptop computer and supplies if you don’t have the funds to pay for it yourself. Student Lines of Credit tend to feature a competitive interest rate, which can vary depending if you are an undergraduate or a post graduate student. In terms of how the payments work, while you are in school and for up to 12 months after graduation, you will be paying interest only on the balance you use. To see more Frequently Asked Questions related to TD’s Student Line of Credit, click here.
Other options you may want to consider to pay for your school expenses can be:
Back To Questions 

Q7: Is it wise to borrow at low interest rates to invest in RRSPs or TFSAs? (Submitted by @mrdisco3)
Given today’s low interest environment, it can be very tempting to borrow money, but what you use that money to purchase will determine whether it’s ‘good’ or ‘bad’ debt. Fortunately, RRSP loans fall into the good debt column – debt that allows you to invest in your future and helps you get ahead in the long run (vs bad debt which tends to result from consumer spending that doesn’t pay off in the future).
A RSP loan can be a great way to invest into your future because:
  • The money that you put in will grow tax-deferred, which means your investments will grow quicker than if it was held outside of your RSP.
  • The contribution you make into a RSP is tax-deductible. This means that when you’re filing your annual tax return, you can include the contribution as a deductible amount that will reduce your taxable income. This will result in you having to pay lower taxes or you may even receive a tax credit (which can be put towards further savings or debt repayment)
  • When you’re ready to purchase your own home one day, or, if you’d like to continue your education, you may be eligible to borrow money from your RSP. To learn more about the Home Buyers Plan, check out this link or the Lifelong Learning Plan.

Back To Questions 

Q8: My Bank just told me I could up the limit on my card but I use nowhere close to the limit, should I do it? (Submitted by @jennthanasse)
The credit card limit increase was probably offered to you based on your positive credit rating and determined that you would be a good candidate for more credit. Now, this is a very important time for you to consider how credit can help or hurt you. Some students get in over their head with too much credit at a young age when they don’t know how to handle it. The offer of an increased limit can really help you out but may hurt you if you borrow more than you can afford to pay back.
While a credit card with a higher limit does have its advantages, like the ability to make larger purchases, and the availability of funds in case you need them, it can also have disadvantages. You may be tempted to spend more or carry a balance which means you will pay more in interest. Or you might be late with or miss a payment, which could affect your ability to get credit in the future or even to do things like rent an apartment.
Back To Questions 

Q9: How do I save for my child’s higher education living on bare minimum wage? (Submitted by @lizzyoday)
Although your finances may be tight, it’s great that you are thinking about saving toward your child’s education down the road. Did you know that even with little or no savings you could qualify for $500 from the Government of Canada to get you started? All you have to do is open a Registered Education Savings Plan (RESP). The RESP is a special savings plan to help you save for your child’s post-secondary education. With the rising costs associated with sending a child to college or university, an RESP can really help because the government provides grants while the savings grow tax-deferred until withdrawn. You can contribute to a RESP directly from your chequing account and you may be eligible for receiving two grants that are exclusive to this plan:
  • The Canada Learning Bond (CLB) – You can earn $500 now to help you start saving, an extra $100 each year up to age 15, and an extra $25 to help cover the cost of opening the RSP. The CLB is available to children born after December 31, 2003 and families who receive the National Child Benefit Supplement (NCBS) also known as the “family allowance” or “baby bonus.”
  • The Canada Education Savings Grant (CESG) – The CESG is made up of the basic CESG and the additional CESG. The Basic CESG is a payment of 20% on contributions made to an eligible beneficiary up until the child turns 17 (total grant not to exceed $7200 per lifetime or $500 per year).
You can find out if you qualify for the CLB, get more information on the basic CESG and see if you qualify for the additional CESG by visiting the CRA site.
Try to start saving right away because the sooner you start the more you will save. Even a small amount every month or every paycheck slowly increased over time will make a big difference. Visit TD’s simpleeducation savings tool calculator here.
Back To Questions 

Q10: Is it better to pay for purchases with cash or credit cards? (Submitted by @greenurlifenow)
The principle of money management teaches you that you should only purchase what you can afford to pay. With good reasoning too, because you’ll live within your means, not incur any debt and possibly save along the way. This is a great way to live, however the problem with only paying cash is that you won’t be establishing a credit history that’ll one day be important for larger purchases like buying a home or even paying for rent. Your credit history will follow you through school and into the working world so you want to ensure your credit rating is positive because it will be one indicator for lenders to decide on your ability to carry and pay back debt.
If you’re financially responsible and ready to establish credit, then starting with a secured credit card may be one option to consider because the card is secured against the savings balance in your account. Here are some tips that can develop positive spending habits and a positive credit history:
  • Always pay the minimum monthly payment on your credit card statement.
  • To avoid paying interest, treat your credit card like cash, by only charging purchases you’ll be able to pay for in full.
  • Make your payment on time — write in or program your monthly due date in your calendar for an instant reminder.
Check out TD's site to learn more tips about student life and paying for school.

Wednesday, September 5, 2012

CAAMP Stats September 2012

CAAMP Header Stats

Welcome to the September issue of CAAMP Stats. For more information on CAAMP please visit


Bank of Canada Interest Rate
July 17, 20121.00 %
September 5, 20121.00 %
October 23, 2012Next meeting date
Source: Bank of Canada
Top of Page

Bank Prime Lending Rate
July 18, 20123.00 %
September 6, 20123.00 %
October 24, 2012Next meeting date
Source: Bank of CanadaTop of Page

Conventional Mortgage - 5 Year Rate* 
June 6, 20125.24 %
July 25, 20125.24 %
August 15, 20125.24 %
Source: Bank of Canada
*Determinant for high ratio mortgage variable qualifying rate
Top of Page

US Federal Reserve Board Discount Rate*
June 20, 20120.00 % - 0.25 %
July 31, 20120.00 % - 0.25 %
September 12, 2012Next meeting date
Source: US Federal Reserve
*US Federal Reserve has indicated it will keep this rate until Q4 2014
Top of Page

Exchange Rate $CDN($US)
July 31, 20120.9971
August 15, 20121.011
August 31, 20121.010
Source: Bank of CanadaTop of Page

Government of Canada Bonds
Bond TypeJuly 25, 2012August 15, 2012August 29, 2012
1 year Treasury Bill0.97%1.17%1.14%
3 year Benchmark
Bond Yield
5 year Benchmark
Bond Yield
10 year Benchmark
Bond Yield
Source: Bank of CanadaTop of Page

Total New Housing Starts (Seasonally adjusted and annualized)
Nova Scotia
New Brunswick
British Columbia
Source: CMHC Housing Now - August 2011 and August 2012. This seasonally adjusted data goes through stages of revision at different times of the year.

Average MLS® Resale Price for Local Markets 
July 2011
July 2012
$ 262,723
$ 268,872
Saint John
$ 158,448
$ 177,955
$ 240,422
$ 266,552
$ 316,936
$ 331,577
$ 342,925
$ 340,352
$ 459,122
$ 476,947
$ 349,235
$ 345,807
$ 238,258
$ 249,175
$ 299,097
$ 323,165
$ 272,548
$ 297,708
$ 397,613
$ 409,670
$ 334,444
$ 337,304
$ 761,673
$ 667,462
$ 467,052
$ 475,768
Source: Canadian Real Estate Association

August Caamp stas 2