Value of real estate over the short and long term?
Stock market turmoil. Failing banks, insurance and investment firms.
Massive government bailouts of private companies. What does all this
mean to the average Canadian home owner? How will all this affect both
your savings and the value of real estate over the short and long term?
Let’s begin with savings. We’ve fielded numerous calls regarding
investments and where to place monies on hand until the markets settle
down. We’d like to begin by saying we are not economists, but history
tends to repeat itself. So the first thing to do is look at what has
happened during past events and compare to what is happening now in the
marketplace. Keep in mind that although you may not have investments in
the stock markets, the current business climate will affect all of us.
This is big so you should prepare accordingly.
All Canadian banks carry CDIC insurance on most deposits. In a nut
shell, CDIC (Canadian Deposit Insurance Corp) is the Government of
Canada guaranteeing the money you have in a bank should the bank ever
go bankrupt or fail financially. Not all deposits are CDIC insured!
Many banks have trust divisions, or if you have money in mutual funds
they will not be insured. Also, CDIC only insures deposits up to a
maximum of $100,000 per bank per person. If you’re lucky enough (or
worked hard enough) to have more than $100,000 in savings or RRSP
deposits, you should check to ensure you are covered by CDIC
guidelines, regardless of which bank you are with. We do not expect any
Canadian banks to fail, but why take the risk? You can find all the
answers regarding CDIC insurance on their web site at www.cdic.ca .
Let’s now look at interest rates and real estate values. It is very
hard to predict short term outcomes with such market upheaval but we
can make some best guesses based on past events. The recent US bailout
of major investment banks and insurance companies (AIG in particular)
will total over $900 billion dollars to US taxpayers. Why not call it
an even trillion?! Numbers just announced at the time of this writing
show the US deficit for the 2007/2008 year is a record $455 billion
dollars, which does not account for the $900 billion dollar bail out!
Whenever governments expend more than they take in, especially in such
large amounts, inflation will be just around the corner. High inflation
equals high interest rates, as proven in the early eighties when the
prime rate was over 20% in Canada.
The flip side of inflation is deflation, where prices drop due to a
lack of buyers for goods and services caused by high unemployment and
market collapse. This happened during the great depression in the late
twenties and early thirties. The massive bailout above was an attempt
to avoid a repeat of the depression. During the depression unemployment
in the US ran at 25% and almost half the US banks failed. Inflation is
viewed to be the far lesser of the two evils (inflation and deflation),
but it appears almost certain that one or the other is heading our
direction.
If we were to place a bet, and that’s the only way to look at it as
we have never experienced events like this in our lifetime, we would
bet on higher interest rates over both the short and long term as
inflation begins to become the main concern for governments around the
world. Whether or not the economy can afford the higher rates will have nothing to do with the higher rates.
Until government spending is controlled and the value of paper money
becomes grounded the only means to fight rampant inflation is with
higher rates. So the safe bet is to lock in your mortgage for a longer
term and not worry about it. If you are wrong, you are still locking in
at one of the lowest interest rates in Canadian history. If you are
right, you avoid the stress of a variable rate mortgage that may go
much, much higher over the next few years. Variable rate mortgages are your worst bet in times of high inflation.
We haven’t seen high inflation for
almost 20 years, so recent trends showing variable rates performed
better than fixed terms over the past 10 years may not prove to be true
over the next 10 years.
Now is also the time to get rid of any and all debt you possibly
can! This is not a sales pitch, but in times of either inflation or
deflation, cash is king. During times of stock market turmoil real
estate usually outperforms all other investments. We have attached some
recent numbers (see above CMHC presentation) which indicate the
Canadian real estate markets are far better prepared than the US was to
handle any bad times. Having said this, if deflation hits, or rates go
up significantly, the value of real estate may fall. Even now we are
seeing a dramatic decrease in the number of home sales across Canada as
Canadians sit on the fence to see where all this economic turmoil will
lead us.
The safe bet is to consolidate all your debt into your mortgage while rates are low and real estate values are high.
Any credit card debt, RRSP loans (which are usually based on prime
rate), auto loans, etc should be considered in order for you to keep
your total monthly payments at a minimum and protect yourself from the
potential of higher interest rates in the future. If there ever was a
time to batten down the hatches, this is it.
As always, we are here to help and answer any questions you may
have. We still remain extremely positive on real estate markets in BC
and believe there is no better investment over the long term.
Prime should be coming down again this week as Bank of Canada expects to lower its rate once again.
www.davidvalente.com
Prudential Sussex Realty West Vancouver. Committed Service. Real Estate SALES. Real Estate North Vancouver. Real Estate West Vancouver. Real Estate Downtown Vancouver. Real Estate in the Lower Mainland. Buy and Sell Real Estate. Luxury Real Estate, Waterfront Real Estate, Investment Real Estate, First Time Home Buyers. Specialized in Residential Real Estate. Dave Valente. Deep Cove Listings. North Vancouver Luxury Real Estate Agent. Fine Homes International. Dollarton Real Estate. Deep Cove Homes For Sale. Deep Cove Realtor. North Shore Real Estate Agent. Realtor Enter to Win a trip! www.deepcovelistings.com www.davevalente.com 2010 Olympics Vancouver Real Estate.