By Lois A. Vitt, Ph.D.
A major principle to keep in mind when considering whether to become an investor in housing is risk tolerance. To answer the question of your risk tolerance level in home investing consider the factual information: Your age, income, experience, savings, future need for cash, and investing time horizon. They are important considerations to realize about yourself.
Also give some time to consider other realities like market timing, mortgage interest rates, inflation, credit availability and rental and selling markets, over which an aspiring investor has no direct control. Like buying stocks “on sale” in a down market, a savvy real estate investor can decide whether a fluctuating marketplace in housing offers investment opportunities that are simply unavailable in a marketplace that is roaring upward.
If we listen to the experts in real estate investing, emotion should be locked out for investors in second homes. “Gee that is a gorgeous home—just look at that view,” is not appropriate, they might say, until after you’ve run the numbers and made an informed investment decision. In other words, don’t “fall in love” with your investment real estate until it has earned its way into your affections. Love of a home or other residential housing, however, does sway many second home purchasers and this type of emotion can lead to serious mistakes.
The same excitement, anticipation, and anxieties are often present when buying a second home, especially if its purpose in our lives is to bring relaxation, recreation, and social enjoyment as a place for vacationing. Still, the cautions that exist in our primary home purchases must also be present when considering a second home. In addition, lessons from the psychology of investing in the capital markets also apply to investing in real estate as written about by David Dreman in his book “Investor Overreaction,” and Richard A. Geist in “The Emotions of Risk.”
People in general are over-confident when it comes to their estimates of the earnings potential of their investments. Of course there are always nice surprises, but chances are that you will be overoptimistic about the investment potential of your second home.
In real estate, like the stock market, people forget. Not only are homeowners overoptimistic about the prospective price appreciation of their homes, analysts and other experts are overoptimistic about general market trends.
The evaluation of risk, by definition, contains important subjective elements and considerations. It is not purely rational, nor can it be if we are to be helped in our investment evaluations and decisions by our “emotional intelligence.”
Fear and greed are the psychological concepts that drive the markets it is often said, but psychologist Lola Lopes insists that most investors react less to greed and more to hope. Nowhere is that more visible than in both primary and second home investment.
“Fear induces an investor to focus on events that are especially unfavorable, while hope induces him or her to focus on events that are favorable,” writes Hersh Shefrin in discussing the theories of Dr. Lopes. The fact that a homeowner will insist that his or her home is still worth its full value, despite a decline in neighborhood prices or even the overall economy, isn’t based in greed. But is a hope as Dr. Lopes knows well. Only if and when it becomes absolutely necessary to sell a home in a down market will a homeowner finally, reluctantly, accept the fact that the value of his or her home is less than it was before.
Second Homes as Rentals
Homes held strictly for rental, and not for personal use, are diverse and defy categorizing. A rental home can be a cooperative in a big city, a duplex in an aging neighborhood, a bungalow in a suburb, farmland in a rural area, or a condo unit in a coast resort.
The owners of these properties can live anywhere. Although many investors prefer to own property they can access easily, many people who relocate choose to rent the home they are leaving rather than sell it. With enough cash flow, price appreciation and/or property management, this can be a good investment decision.
Rental property investing is a small business that can help owners gain financial independence. If you choose to hold or purchase one or more investment homes to rent, you are your own boss. You can set your own goals, make your own decisions, and work at your own pace. The return from a rented home can be in cash flow or in price appreciation or both. As long as the home is cared for and your carrying and maintenance costs are covered, you have little to worry about, except a steep decline in the housing market just when you want to sell.
Published August 5, 2010
About the Author
Lois A. Vitt is a housing expert and financial sociologist, and is the author of "10 Secrets to Successful Home Buying and Selling", the first book to demystify the psychological forces behind our housing decisions. To learn more about Lois and this book, visit www.RealtyStudies.com.
Thursday, August 5, 2010
Understanding house prices
A home may be one of the biggest investments you ever make. Saving up a down payment is just the first step. Find out more.
What factors affect the value of a home?
•Location: Real estate people always say “Location, location, location.” That’s because the area you live in will be the biggest factor affecting your home’s price. It’s smart to buy a home where housing prices are likely to increase. Also, the people who may buy your home from you one day may be willing to pay more for a home that is close to schools, sports centres, stores, services, and so on. Keep that in mind as you look.
•The condition of the home and the property it is on: Does the home need a lot of repairs? How is the roof, plumbing, and electrical wiring? A home in good repair may be worth more. Also, the condition of the outside of the home, the lawn, gardens, driveway, and trees will all affect the value of a home. These are the first things that buyers see, and are together known as curb appeal.
•Renovations and updates: An older home might need some work to keep it safe, modern, and comfortable. If you are buying at a home that has had some renovations, check the quality. When you do work on a home you own, do it as well as you can. Poor work can lower the value.
•The economy: There are some things you can’t control that affect house prices, like interest rates. Higher interest rates mean it costs more for a mortgage, so fewer people buy homes. When that happens, the prices of homes can fall. Lower interest rates, on the other hand, can boost buying and drive prices up. House prices often go up for a while, and then come down a bit. Try to find out as much as you can about how prices are changing, or may change, when deciding to buy or sell a home. Often there will be stories in the paper about housing prices.
How much is my home worth today?
If you’re considering buying a home, or you just bought one, you know how much it’s worth. But if you’ve owned your home for a while, its value has probably changed. Here’s how you can find out how much it’s worth now:
•Call a real estate agent: Ask them for an estimate of your home’s value. You may be able to get an agent to do this for free, because they hope to get your business in the future.
•Ask an appraiser: Your bank or a real estate agent should know a number of appraisers. Banks use them to estimate house values before they approve mortgages. You can also look in the yellow pages. An appraiser will charge a fee for the service.
•Check to see what other homes in your area have sold for recently: Compare your home with similar ones that have sold. Unless you keep up with what’s happening in your area, this information may be hard to get. Ask your real estate agent if you can’t find it yourself.
How much will my home be worth in the future?
To estimate a home’s future value, you will have to do some informed guessing. Start with finding out what has happened to prices in your location over several years.
This chart shows how house and condo prices in several Canadian cities changed from 1990 to 2010. Note that real estate prices in Toronto went down a lot between 1990 and 1996 and took a number of years to climb back. Still, the average growth for these cities since 1990 was almost 8 per cent, almost double the historical average of 5 per cent a year.
What factors affect the value of a home?
•Location: Real estate people always say “Location, location, location.” That’s because the area you live in will be the biggest factor affecting your home’s price. It’s smart to buy a home where housing prices are likely to increase. Also, the people who may buy your home from you one day may be willing to pay more for a home that is close to schools, sports centres, stores, services, and so on. Keep that in mind as you look.
•The condition of the home and the property it is on: Does the home need a lot of repairs? How is the roof, plumbing, and electrical wiring? A home in good repair may be worth more. Also, the condition of the outside of the home, the lawn, gardens, driveway, and trees will all affect the value of a home. These are the first things that buyers see, and are together known as curb appeal.
•Renovations and updates: An older home might need some work to keep it safe, modern, and comfortable. If you are buying at a home that has had some renovations, check the quality. When you do work on a home you own, do it as well as you can. Poor work can lower the value.
•The economy: There are some things you can’t control that affect house prices, like interest rates. Higher interest rates mean it costs more for a mortgage, so fewer people buy homes. When that happens, the prices of homes can fall. Lower interest rates, on the other hand, can boost buying and drive prices up. House prices often go up for a while, and then come down a bit. Try to find out as much as you can about how prices are changing, or may change, when deciding to buy or sell a home. Often there will be stories in the paper about housing prices.
How much is my home worth today?
If you’re considering buying a home, or you just bought one, you know how much it’s worth. But if you’ve owned your home for a while, its value has probably changed. Here’s how you can find out how much it’s worth now:
•Call a real estate agent: Ask them for an estimate of your home’s value. You may be able to get an agent to do this for free, because they hope to get your business in the future.
•Ask an appraiser: Your bank or a real estate agent should know a number of appraisers. Banks use them to estimate house values before they approve mortgages. You can also look in the yellow pages. An appraiser will charge a fee for the service.
•Check to see what other homes in your area have sold for recently: Compare your home with similar ones that have sold. Unless you keep up with what’s happening in your area, this information may be hard to get. Ask your real estate agent if you can’t find it yourself.
How much will my home be worth in the future?
To estimate a home’s future value, you will have to do some informed guessing. Start with finding out what has happened to prices in your location over several years.
This chart shows how house and condo prices in several Canadian cities changed from 1990 to 2010. Note that real estate prices in Toronto went down a lot between 1990 and 1996 and took a number of years to climb back. Still, the average growth for these cities since 1990 was almost 8 per cent, almost double the historical average of 5 per cent a year.
More signs the Toronto housing market is cooling off
The Toronto Star
Published On Thu Aug 5 2010
By Tony Wong
Business Reporter Home sales in the Toronto market are cooling rapidly off in the second half of the year, with a 34 per cent drop in July compared to a year earlier.
This is the third consecutive month of falling sales, according to figures released by the Toronto Real Estate Board today.
In June, sales had dipped by 23 per cent. But this has been the steepest drop yet, with sales dipping to 6,564 in July compared with 9,967 a year earlier.
“The level of July sales remained below the expected long term trend. The market has become more balanced,” said TREB president Bill Johnston.
Total sales through the first seven months are still up by 12 per cent, thanks to record sales during the first half of the year.
The average price for July transactions was $420,482, representing a six per cent increase over last year.
Meanwhile, building permit figures for Toronto released by Statistics Canada today also show that developers are less bullish about the housing market moving forward.
Building permits in the Toronto area fell by 15.3 per cent in June over May thanks to a drop in residential building intentions in both the single detached and high rise segments. Non-residential buildings such as commercial and industrial projects showed an increase, but not enough to offset the drop in residential permits.
Published On Thu Aug 5 2010
By Tony Wong
Business Reporter Home sales in the Toronto market are cooling rapidly off in the second half of the year, with a 34 per cent drop in July compared to a year earlier.
This is the third consecutive month of falling sales, according to figures released by the Toronto Real Estate Board today.
In June, sales had dipped by 23 per cent. But this has been the steepest drop yet, with sales dipping to 6,564 in July compared with 9,967 a year earlier.
“The level of July sales remained below the expected long term trend. The market has become more balanced,” said TREB president Bill Johnston.
Total sales through the first seven months are still up by 12 per cent, thanks to record sales during the first half of the year.
The average price for July transactions was $420,482, representing a six per cent increase over last year.
Meanwhile, building permit figures for Toronto released by Statistics Canada today also show that developers are less bullish about the housing market moving forward.
Building permits in the Toronto area fell by 15.3 per cent in June over May thanks to a drop in residential building intentions in both the single detached and high rise segments. Non-residential buildings such as commercial and industrial projects showed an increase, but not enough to offset the drop in residential permits.
Wednesday, August 4, 2010
Mortgages can have downside
Published: August 03, 2010 3:00 PM in the Comox Valley Record
“Beware of more than just the rates when you’re shopping for a mortgage,” say mortgage brokers Paul Healey and Karen Ewing, partners at Invis in Comox Valley.
With rates near all-time lows, many people are now seeking mortgages for a home purchase, to help with debt consolidation through a home equity loan, or even for an investment property purchased during this buyer’s real estate market.
Unfortunately, too many people are wooed by low rates and don’t realize there are huge differences between one company’s mortgage and another — differences that can be costly if a consumer is not careful.
Consumers should talk with a mortgage broker who will ask the right questions before researching the best mortgage products available for each individual’s unique situation.
For instance, the terms of some loans include huge penalties for pre-payment, even if someone is selling the property.
Most mortgages charge the borrower the greater of three months’ interest or the “interest differential,” which is the difference between what the borrower would have paid in interest and what the lender can get by relending the money to a new borrower for that time period.
These penalties can be substantial and truly blind-side a borrower. For example, when a borrower wants to sell his house two years into a five-year mortgage, the company can charge the difference between the rate on the mortgage and the rate being offered on new mortgages. This calculation can differ dramatically from lender to lender.
So, if prepayment or a future move may be in the picture, the broker will look for a mortgage that allows pre-pays or does not have an interest-differential penalty.
Pre-payment penalties are not the only mortgage trap. Some people are sadly surprised when they want to refinance for some reason, but the mortgage won’t allow it.
Another important term to consider is “portability.” That simply means that a borrower can take his or her mortgage with him upon selling the property, which is a significant perk if rates go up.
The rate and terms of the mortgage are simply moved over to the new property and carry on as it was. An experienced broker can review these with a borrower to be sure the loan fits the borrower’s needs.
Even when a mortgage is portable, there may be limitations. For instance, some lenders will only lend for a home in a certain geographic area. If the borrower has any thought of moving during the time of the loan, portability should be discussed with the broker to avoid being shocked when that is not allowed.
“Beware of more than just the rates when you’re shopping for a mortgage,” say mortgage brokers Paul Healey and Karen Ewing, partners at Invis in Comox Valley.
With rates near all-time lows, many people are now seeking mortgages for a home purchase, to help with debt consolidation through a home equity loan, or even for an investment property purchased during this buyer’s real estate market.
Unfortunately, too many people are wooed by low rates and don’t realize there are huge differences between one company’s mortgage and another — differences that can be costly if a consumer is not careful.
Consumers should talk with a mortgage broker who will ask the right questions before researching the best mortgage products available for each individual’s unique situation.
For instance, the terms of some loans include huge penalties for pre-payment, even if someone is selling the property.
Most mortgages charge the borrower the greater of three months’ interest or the “interest differential,” which is the difference between what the borrower would have paid in interest and what the lender can get by relending the money to a new borrower for that time period.
These penalties can be substantial and truly blind-side a borrower. For example, when a borrower wants to sell his house two years into a five-year mortgage, the company can charge the difference between the rate on the mortgage and the rate being offered on new mortgages. This calculation can differ dramatically from lender to lender.
So, if prepayment or a future move may be in the picture, the broker will look for a mortgage that allows pre-pays or does not have an interest-differential penalty.
Pre-payment penalties are not the only mortgage trap. Some people are sadly surprised when they want to refinance for some reason, but the mortgage won’t allow it.
Another important term to consider is “portability.” That simply means that a borrower can take his or her mortgage with him upon selling the property, which is a significant perk if rates go up.
The rate and terms of the mortgage are simply moved over to the new property and carry on as it was. An experienced broker can review these with a borrower to be sure the loan fits the borrower’s needs.
Even when a mortgage is portable, there may be limitations. For instance, some lenders will only lend for a home in a certain geographic area. If the borrower has any thought of moving during the time of the loan, portability should be discussed with the broker to avoid being shocked when that is not allowed.
House prices now 4.2% over peak: A regional breakdown
John WoodsTHE GLOBE AND MAIL
House prices still strong
Canadian house prices rose 1.3 per cent in May from a month earlier, and now stand 4.2 per cent above their pre-recession peak, according to a Teranet-National Bank composite house price index. It marked the 13th straight month of increases and the second that prices rose in each of the six regions it covers. National Bank economist Marc Pinsonneault contrasted that to the real estate market in the United States, where prices are down almost 30 per cent from their peak. In Canada, year over year, the index is up 13.6 per cent. The index differs from the measure used by the Canadian Real Estate Association.
"But we do not believe that acceleration in the Teranet-National Bank index will be sustained," he said in a research note. "... The number of existing homes sold has declined in each of the three months ending last June, and it did so to a much larger extent than the number of new listings. This heralds a deceleration in home price inflation, especially since a harmonized sales tax (HST) was introduced on July 1 in Ontario and B.C."
Among the gains:
•Ottawa, 2.3 per cent month over month, 11.4 per cent year over year
•Montreal, 1.8 per cent and 8.5 per cent
•Vancouver, 1.2 per cent and 17.1 per cent
•Calgary, 1.2 per cent and 7.8 per cent
•Toronto, 1.1 per cent and 16 per cent
•Halifax, 0.7 per cent and 5.6 per cent
•Ottawa, 2.3 per cent month over month, 11.4 per cent year over year
•Montreal, 1.8 per cent and 8.5 per cent
•Vancouver, 1.2 per cent and 17.1 per cent
•Calgary, 1.2 per cent and 7.8 per cent
•Toronto, 1.1 per cent and 16 per cent
•Halifax, 0.7 per cent and 5.6 per cent
Monday, August 2, 2010
Why Canadians aren’t pumped about saving
Study finds a disconnect between our beliefs and behaviours when it comes to retirement planning
Dianne Nice
Globe and Mail
Published on Sunday, Aug. 01, 2010 12:00AM EDT
Dianne Nice
Globe and Mail
Published on Sunday, Aug. 01, 2010 12:00AM EDT
Saving for retirement can be a bit like trying to get in shape: You need to start slowly, work at it regularly and don’t expect to see immediate results.
But like those fad-diet articles that line the checkout aisles, with their countless tips for losing weight, retirement savings options can be overwhelming. And when your tummy’s rumbling, it’s tempting to just buy a chocolate bar today and put off the diet – or the saving – until tomorrow.
The same psychological barriers that prevent us from shaping up may also be keeping Canadians from bulking up their retirement savings, according to a new report by the BMO Retirement Institute. The report, based on a Strategic Counsel survey of 2,034 Canadians 35 years of age or older, suggests certain behavioural roadblocks, including “paralysis of choice” and “immediate gratification,” are creating a disconnect between what Canadians believe they should be doing to prepare for retirement and what they are actually doing.
Almost 90 per cent of Canadians believe retirement planning should begin before the age of 35, according to the poll. Yet 40 per cent of non-retirees admit they have done no retirement planning at all. The problem isn’t ignorance, says Tina Di Vito, head of BMO’s Retirement Institute. “We know what we need to do, we know when we should do it, we just don’t make it a priority.”
More than eight in 10 non-retirees who have not started saving said they are more concerned about current needs, such as their mortgages and other debts, than their retirement.
This is particularly true for those aged 35 to 44, who are more likely to say they overspend (53 per cent), have debt (88 per cent) and worry about it (25 per cent). Of that group, half said they felt they had fallen behind in their retirement planning, and 44 per cent said they were dissatisfied with the amount they had saved.
“Clearly, this age bracket represents a period when people are buying houses, paying mortgages and raising children, and the thought of diverting funds to retirement takes a back seat,” the report states. “Yet it is also a crucial period of wealth accumulation – a stage of life still far enough away from retirement to permit the magic of compound interest to play its role.”
More than 40 per cent of non-retirees admitted they spend more than they should, saying they wanted the “good things in life.” And more than a quarter said they felt they should “eat, drink and be merry” because they may not live to old age.
Lower-income respondents were more likely to report that they felt overwhelmed by too much information, yet they also said they find pension plans, RRSPs and other retirement savings accounts confusing.
“The idea of starting a regular retirement savings program can be overwhelming for many people,” Ms. Di Vito said.
As with exercising, however, no pain, no gain. Once you establish a routine, your healthy habit can become second nature.
“The psychology of doing something puts you in the right frame of mind and helps to establish discipline,” Ms. Di Vito said. “When you can, increase the amount you set aside. The chances are, if you start something, like contributing to an RRSP, you’re going to keep doing it.”
But like those fad-diet articles that line the checkout aisles, with their countless tips for losing weight, retirement savings options can be overwhelming. And when your tummy’s rumbling, it’s tempting to just buy a chocolate bar today and put off the diet – or the saving – until tomorrow.
The same psychological barriers that prevent us from shaping up may also be keeping Canadians from bulking up their retirement savings, according to a new report by the BMO Retirement Institute. The report, based on a Strategic Counsel survey of 2,034 Canadians 35 years of age or older, suggests certain behavioural roadblocks, including “paralysis of choice” and “immediate gratification,” are creating a disconnect between what Canadians believe they should be doing to prepare for retirement and what they are actually doing.
Almost 90 per cent of Canadians believe retirement planning should begin before the age of 35, according to the poll. Yet 40 per cent of non-retirees admit they have done no retirement planning at all. The problem isn’t ignorance, says Tina Di Vito, head of BMO’s Retirement Institute. “We know what we need to do, we know when we should do it, we just don’t make it a priority.”
More than eight in 10 non-retirees who have not started saving said they are more concerned about current needs, such as their mortgages and other debts, than their retirement.
This is particularly true for those aged 35 to 44, who are more likely to say they overspend (53 per cent), have debt (88 per cent) and worry about it (25 per cent). Of that group, half said they felt they had fallen behind in their retirement planning, and 44 per cent said they were dissatisfied with the amount they had saved.
“Clearly, this age bracket represents a period when people are buying houses, paying mortgages and raising children, and the thought of diverting funds to retirement takes a back seat,” the report states. “Yet it is also a crucial period of wealth accumulation – a stage of life still far enough away from retirement to permit the magic of compound interest to play its role.”
More than 40 per cent of non-retirees admitted they spend more than they should, saying they wanted the “good things in life.” And more than a quarter said they felt they should “eat, drink and be merry” because they may not live to old age.
Lower-income respondents were more likely to report that they felt overwhelmed by too much information, yet they also said they find pension plans, RRSPs and other retirement savings accounts confusing.
“The idea of starting a regular retirement savings program can be overwhelming for many people,” Ms. Di Vito said.
As with exercising, however, no pain, no gain. Once you establish a routine, your healthy habit can become second nature.
“The psychology of doing something puts you in the right frame of mind and helps to establish discipline,” Ms. Di Vito said. “When you can, increase the amount you set aside. The chances are, if you start something, like contributing to an RRSP, you’re going to keep doing it.”
CREA lowers housing forecast again
Last Updated: Friday, July 30, 2010 12:04 PM ETCBC News
The number of resale homes sold in Canada is forecast to hit 459,600 in 2010, a 1.2 per cent decline from 2009.
A real estate agent puts up a sold sign in front of a house in Toronto in April. The Canadian Real Estate Association expects home prices to decrease in 2011. (Darren Calabrese/Canadian Press)
In its latest housing forecast Friday, the Canadian Real Estate Association said weaker sales activity in the key spring homebuying season in Canada's four most populous provinces prompted the downgrade.
"The jump in national sales activity earlier this year likely borrowed from the future," CREA president George Pahud said.
And expected interest rate increases to come will do nothing to stoke the real estate fire that burned brightly during the tail end of the recession.
Sales are projected to drop even further, by 7.3 per cent, to 426,100 units in 2011.
The national average home price is forecast to rise 3.5 per cent in 2010 to $331,600, with increases in all provinces. The national average price is then forecast to ease by 0.9 per cent to $328,600 in 2011.
The agency already lowered its 2010 sales forecast at the start of June. At that time, the agency was expecting 490,600 units to be sold this year.
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