Things are heating up in the Toronto housing market. Stats released for the month of November indicate that both sales and prices are increasing at a faster rate year over year.
Most surprising to me was the +16% increase in prices and +23% increase in sales year over year for detached homes in the 416. Low interest rates for the foreseeable future and a lack of supply have really pushed up the value of these types of properties.
The condo market was also fairly robust in the 416 with +12% sales growth and +10% price growth year over year. Interesting to see the comparison to the 905 area where the average price of a condo declined slightly year over year.
Source: Toronto Real Estate Board
How have different stock indexes performed in November and YTD?
The TSX was up 0.26%, but it lagged most other indexes with the exception of the FTSE 100. The Nikkei posted the strongest gain at close to 9% for the month.
How have these same index performed year to date?
All are up, except the Shanghai index, which is down about 4% YTD. The TSX is up ~6.5% YTD, but has lagged it’s peers in the US by quite a bit.
Implications? Consider being overweight the Shanghai index and underweight the Nikkei going forward given their relative performance over the past year? Will the TSX catch up to it’s US peers or will the US indexes decline?
At the request of Justin I have updated my Income Tax Calculator to include Newfoundland and Labrador.
If you are one of the half million “Newfoundlanders” out there give it a try.
The rockstars over at RateHub.ca have created an awesome infographic that summarizes Canadian mortgage stats for 2013.
A few high level trends that I absorbed were..
- ~80% of people with mortgages went with fixed rate in 2013
- Use of brokers is rapidly increasing (31% in 2012 –> 40% in 2013)
- 80% of Canadians expect Canadian housing prices to continue increasing
- The Y/Y growth rate of total mortgage debt is slowing (a good sign since Canadian’s already carry a high level of debt).
As a side note, if you haven’t tried my new Mortgage Payment Calculator I recommend you give it a go.
What is an Exchange Traded Fund?
An Exchanged Traded Fund or “ETF” for short, is a type of investment fund that is traded on a securities exchange or through a broker-dealer similar to a regular stock. ETFs are purchasable by pubic investors and represent an ownership interest in a basket of assets that may include stocks, bonds, currencies or commodities.
ETFs can be bought and sold throughout a trading day and typically trade close to their net asset value. Net asset value is just a fancy term for the value of the underlying securities held within the ETF. Changes in investor demand for an ETFs will cause it to trade above or below net asset value at times, but it should never be to far off or opportunities for arbitrage (ability to make a risk-less profit) will arise.
ETFs are a relatively new type of investment product, having got their start in the early 1990s, but only started to become popular in the early 2000s. Personally I believe demand for ETFs really started to take off because investors have become fed up with the high level of fees associated with mutual funds.
Why Should I Invest in ETFs?
Many investors find ETFs attractive because of their low expense ratios, tax efficiency and ease of diversification, while still maintaining many of the same characteristics and feature as common stock (limit orders, short selling, & options).
- Low Costs - ETFs typically have lower costs compared to other investment products, specifically mutual funds. This is because most ETFs are not actively managed, do not incur costs related to investor redemptions/purchases and generally have low marketing, distribution and accounting expenses. Most ETFs have a MER (management expense ratio) of less than 1%, where by comparison most mutual funds have MERs greater than 2%. This difference in fees can have a substantial impact on your long term portfolio value, which is why more and more investors are adding ETFs to their portfolios.
- Tax Efficiency – ETFs are tax efficient relative to other investment products because they generally do not turn over their portfolio securities very frequency, which leads to capital gains.
- Diversification - ETFs allow investors to quickly, economically and easily diversify their portfolios without much effort. Most ETFs follow an index, which provides inherent diversification because they include many securities with different risk characteristics and different correlations to eachother. There are ETFs for broad-based international and country-specific indices, industry sector-specific indices, bond indices, and commodities.
Types of ETFs
There are many different varieties of ETFs out there. Some of the most common are…
- Index ETFs – Most ETFs are index based in the sense that they attempt to replicate the performance of a specific stock, bond, currency or commodity index by holding the same or representative sample of the assets in that index
- Stock ETFs - Any ETF that invests in stocks
- Bond ETFs – Any ETF that invests in bonds
- Commodity ETFs - Any ETF that invests in physical commodities or commodities futures.
- Currency ETFs – Any ETF that invest in currencies
- Leverage ETFs – Often referred to as bear and bull ETF funds. Apply leverage to accelerate returns
How Do I Buy ETFs?
Buying ETFs can be accomplished through your broker. Remember ETFs trade on a securities exchange just like a regular stock. To purchase all you need to do is enter the correct ETF ticker symbol into your broker’s order entry system to execute an ETF trade.
I personally use Questrade as my broker and one of the benefits is that they let you purchase ETFs for free. If I wanted to purchase the iShares S&P/TSX 60 Index Fund ETF with ticker symbol XIU I would submit my order by entering the ticker symbol into the order entry form below.
Canadian ETF Issuers
That concludes my introduction to Exchange Traded Funds. I hope you now understand the basics and why ETFs are seen as attractive investments. Next I will take a look at some of the more popular ETF funds and outline some of the ETF investment strategies out there.
Yesterday StatsCan released the latest inflation stats for October. Overall prices were up 0.7% from October 2012 to October 13th, a slowdown from September where prices were up 1.1% year over year. See the graph below for historical trending of both total inflation and core inflation.
Note: Core inflation excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products).
So why do inflation trends matter for Canadians and investors? For one it is an important factor in the Bank of Canada’s decision to increase or decrease interest rates. If inflation is low or trending lower (which is the case right now) the Bank of Canada may delay raising interest rates for a longer period of time to avoid deflation. Deflation is when prices decrease on a year over year basis and can be extremely harmful to the economy and economic growth.
Secondly, lower inflation also means that Canadians experience a smaller loss in purchasing power each year. This is actually a benefit to anyone on a fixed income that is not adjusted for inflation (often the case for retired folks).
As an investor, it is always a good idea to keep tabs on the direction of inflation as it has implications for the direction of interest rates and loss of purchasing power. It is an important input to your overall investment decision making process.
Read the full StatsCan article.
There are many ways to track the performance of your investment accounts out there. One of my preferred ways is through Google Docs because it allows me to list all of my accounts in one place/view and I can pull updated prices automatically through Google Finance.
I pulled together a quick tutorial to demonstrate how you can do it to, as well as a template to get you started.
Step 1 – Signed up for a Google Docs account if you don’t already have one.
Step 2 – Download my investment portfolio tracker template as a starting point
To save a copy to your own Google Docs account simply go to “file” in the main navigation and click “Make a copy…”.
Step 3 – Modify the template to add your own accounts and stock positions
As you can see the template is a fairly simple setup. The stocks I’ve added in the template are just dummy stock and not representative of my own portfolio. You can simply replace these stocks and accounts with your own. All you need to do is enter each stock ticker symbol, company name, the number of shares you own and your average cost per share. The template will automatically pull in the current market price and calculate your gains/losses on each security. At the bottom is a total line to aggregate your total gains and average return per account.
Step 4 – Setup the template to pull current stock prices automatically
The key to updating the current stock price automatically is linking the ticker symbol to the GoogleFinance formula under the “Market Price” column. If done correctly Google Docs should automatically pull in the latest stock price. If it returns an error play with the ticker symbol format until it works.
That’s all there is to it. Now you have a quick and dirty way to track your investment portfolio using Google Docs. Give it a try.
Two weeks ago I took a look at the historical trends for Toronto housing prices since 1967. Related to that topic is a new report that came out from FinchRatings (a credit rating agency) that has predicted a soft landing for the Canadian housing market. Finch has estimated that housing is 21% overvalued in Canada based on long term fundamentals, citing that housing prices have increased 130% since 2011, which has outpaced income growth by 80%. They don’t however predict a housing crash similar to what we saw in the US. Instead their forecast is that housing prices may fall by no more than 10% over the next 5 years.
Nominal home prices in Canada would fall by no more than 10% over the next five years in a down scenario after taking into account momentum and inflation, according to Fitch Ratings in a special report.
Though Fitch projects a decline in home prices, there are several factors that could point to a ‘soft landing’ where nominal prices simply flatten out or experience relatively small reduction.
In real terms, however, long-term fundamentals, as evaluated by Fitch’s sustainable home price model (SHP), identify the Canadian housing market as being 21% overvalued. Canadian national home prices have rapidly increased over 130% since 2001, outpacing income growth over the same period by over 80%. The story is the same for Canadian regions such as Ontario (overvalued by 21%), Alberta (15% overvalued) and British Columbia and Quebec (both overvalued by 26%).
The Canadian economy has a high level of exposure to increasing home prices, according to Director Stefan Hilts. ‘Canadian buyers reaching for homes at high prices are pushing household leverage to record levels, leaving borrowers susceptible to interest rate shocks,’ said Hilts. ‘With a high level of employment and individual net worth tied to the value of the housing stock, a housing downturn could have serious consequences for the overall economy in Canada.’
Nonetheless, several factors could point to a ‘soft landing’ despite the 21% overvaluation in real home prices. ‘The Canadian government has been very proactive with numerous policies specifically targeting a soft landing, which augurs for nominal home prices simply flattening out or seeing relatively small reductions,’ said Hilts.
I tend to agree with their view. I believe housing price growth will definitely slow in the next few years and may even turn slightly negative. I don’t think we’ll see a similar decrease in prices like that we saw in the US after 2007.
Full Article – Finch
The mortgage payment calculator allows you to input your property purchase price, down payment amount, interest rate, mortgage amortization period and payment frequency. With those inputs it quickly calculates what your monthly mortgage payments and displays several other useful stats such as how much interest you’ll pay in total over the life of the mortgage.
The main benefit for users that I see is being able run different scenarios with different inputs to understand what the change in mortgage payment will be. This is helpful in understanding what you can afford and what inputs affect your monthly mortgage payment the most.
I plan to evolve this mortgage payment calculator over time to include more functionality such as.
- Bi-weekly or weekly mortgage payment frequency
- Principal prepayment options with insight into how much faster you can pay down your mortgage with those extra payments
Give it a try. I’d love to hear any feedback or comments.
Using the new Income Tax Calculator that I recently created, I graphed out what the average tax rate is at a given level of before tax income. The graph is below.
If you’re making $200,000 a year you’re paying 36% or just over 1/3 of your income to incomes taxes.
The $90,000 a year mark is when you payout ~25% of your income to taxes. The average income in Canada is much less than $90K, so the average Canadian is not paying more than 25% of their income to incomes taxes. It doesn’t necessarily mean anything, and what really matters is how it changes over time, but it is still interesting to see in graph form.