We can look at our economy for a clear example. I came across an ad on Facebook that said, “MasterCard Canada Interns Wanted”; if you clicked the ad, it sent you to MasterCard's Facebook fan page, and informed you to “like” the page in order to see the job posting. This form of connection between employers and employees is very common –according to JobVite Social Recruitment Survey, 80% of companies use social networks in their assessment of potential employees. I researched MasterCard's intern position further, and found that it required a “creative” aspect expressing yourself, and explaining why you would make a great intern. Examples of creative submissions include blog posts, a Facebook page, video, photo, or a Tweet. It’s hard to believe that one Tweet is all it takes to show your creativity! All of these are forms of social media, and clearly, being familiar with them is an essential requirement in order to acquire a job with a large firm.
The job market is just one example of how social media is integrated in our society. Social media’s reach is global; with a few clicks, you can reach the entire world. Large companies spend more time and money on social media than you would think. According to the Social Media Marketing Industry Report by the Social Media Examiner, “The majority of marketers (58%) are using social media for 6 hours or more each week, and more than a third (34%) invest 11 or more hours weekly.” The more time that is spent, the more money it costs them. The major advantages to social media marketing by companies are that social media generates more business exposure, increases traffic, and improves search rankings. Advertising on Facebook alone can allow you to reach your exact target audience – Facebook gives you the option to choose your audience by location, age and interests; all of which are posted on people’s Facebook pages. Companies who use a wide variety of social media have the advantage of being able to understand their market better by communicating with consumers directly through tweets and comments. Using this kind of feedback is what improves a business, allowing them to integrate consumer suggestions and essentially, generate more revenue.
|P/E Ratio (TTM)||21.19||26.10||20.31||11.83|
|Price to Sales (TTM)||1.43||2.04||1.78||11.18|
|Price to Book (MRQ)||1.68||1.90||3.98||0.93|
|Price to Tangible Book (MRQ)||0.99||2.09||4.09||1.08|
|Price to Cash Flow (TTM)||8.00||10.80||15.10||8.33|
|Quick Ratio (MRQ)||0.73||0.86||0.66||0.54|
The phrase of the day is Discretionary Income. This is defined as the amount of an individual's income that is left for spending, investing or saving after taxes and personal necessities have been paid. After watching fuel prices rise 5 cents per litre in the GTA this past weekend, we have been taught quite the lesson in available discretionary income. Average gas prices now sit at $1.29/L in Canada while food prices continue to rise and our overheated real estate market reignites. The last thing we need are higher interest rates.
First, never think a house is an investment plan or a retirement strategy. Those days are gone, and won’t return until after the next market crumble. Second, never eschew diversification. Real estate is just one asset class you should own. Third, the worst thing you can do is have too much of your net worth in a home. When the market turns, and it will, you would lose a bundle and see what’s left turn stone cold illiquid.
So here's where we get to rentals. A discussion I had with a colleague last week motivated me to create this quick video. Although the debate is not verbatim, the general ideas were the same. Sadly, this is really how most Canadians think.
In addition, I was more than compelled to blog about this topic after reading one of the most "unbiased" blog posts out there - a house-pumping agent from the Bosley Real Estate Brokerage. His argument remained that you would always be poor being a renter and you will never achieve the "Canadian Dream". Lest we forget how quickly sentiment changed in the US. Are we all delusional up north?
Is it always more advantageous to own a home over renting? Most definitely not. Renters in the US and several places in Europe over the last few years have outperformed owners, who are continuing to see their homes depreciate now well into their fourth-year. But let's skip the semantics and dive right into the calculations. You may find these types of calculators all over the internet, but I have made it extremely convenient as you can just use this spreadsheet. The rates and payments can be tinkered as you please, which will automatically adjust the payments and savings. Several assumptions have been made, which have conveniently been included for you.
RENT VS OWN EXAMPLE:
Using the example provided in the above spreadsheet, having a conservative 10% down-payment on a $325,000 condo results in a $292,500 mortgage. Using the current 5-year FRM @ 4.04% over 30 years, a monthly mortgage payment of $1403.19 is determined. Factor in maintenance fees, taxes and utilities and we have a grand total of $2051.03/month. Contrast to renting the same property @ $1275. With utilities and extras, a total of $1370 is needed - or a savings of $681.03. This NXT Condo was used as reference, which currently lists for the aforementioned price. This difference saved by renting can be used towards stocks, corporate bonds and income trusts, which, if invested wisely, could outperform real estate. In this context, the whole risk-vs-reward comes into play. Homes are currently perceived to be more solid and stable investments simply because the market has not yet told us otherwise.
At the end of the day, the winner in the rent-vs-own battle is dependent on several factors. Interest rates, mortgage policies, initial down-payment, rental fees, the overall real estate market and alternative investments all weigh on the decision. For now, you will have an extremely difficult time convincing me Canadian home ownership is the best investment out there.
Rent vs Own Comparison can additionally be found here
As wild herds swarm the Apple stores across Canada to get first dibs on the iPad2, alternatives quickly come to my mind. One of these is the soon-to-be launched PlayBook by RIM.
Research in Motion has recently announced that it will launch its sleek new tablet device, the PlayBook across North America April 19 this year. Pre-orders are currently available by electronic retailers, such as Best Buy and Future Shop. The tablet will be available in 16, 32 and 64GB sizes at a price ranging from $499-$699.
So what's the general consensus thus far on the PlayBook? It seems the negative sentiment over RIM in the last few years is being extended and extrapolated into the future, with traders immediately ridiculing the new tablet. Investors have coined terms for the company such as "Retreat in Motion" and "Dead Corpse Walking". Shares in RIM have plunged off the $144 highs of 2008, never looking back. Much of this is believed to be caused by 2 driving factors - lack of innovation and inferior marketing.
Research in Motion announced 2010 Q4 earnings March 24, of which they beat estimates on the bottom line by $0.02, coming in at $1.78 earnings per share. 14.9 million smartphones were sold for the quarter, a record number for RIM as they continue to expand in emerging markets. However, shares plunged as much as 12% in intraday trading Friday due to 2011 Q1 guidance at $1.47-1.55 EPS, which came in at least $0.10 less than analysts expectations. This was determined from the expectations of selling 13.5-14.5 million smartphones for the next quarter, which left the stock closing at $55.78. (TSE:RIM)
Jim Balsillie and co. appear to be sacrificing some short-term profits to remain competitive in the smartphone & tablet market. It is expected that they will to pour funds into R&D over the next quarter to expand BlackBerry AppWorld - easily one of the biggest disadvantages of Blackberry at the moment. Buying and utilizing QNX platform back in April, 2010, Research in Motion expects to be delivering QNX-based smartphones into the market in 2012. RIM has also been actively acquiring small start-up software companies, such as tinyHippos, to expand its application services. RIM has identified the urgency of action and is taking all steps necessary to promote the PlayBook and expand its application-base to remain competitive. RIM's strengths still lie in its ability to deliver to the business world, as well as its expanding growth into emerging markets. However, RIM will ultimately need to prove themselves in the tablet market to be a viable player. Until then, the stock will remain in a downtrend, as pessimism will continue to grow towards this behemoth.
So how well does the PlayBook stack up to its competition? Below are the specifications of some of the major tablet devices:
The PlayBook will technically have the ability to run Android applications, however, the process could be rigorous and rather difficult. In addition, current models will only have WiFi capability, rendering cellular capabilities impossible until the 4G models are released. Blackberry Bridge is a temporary alternative, whereby emails and calendars may be retrieved from your Blackberry via Bluetooth, as well as the ability of using your phone as a hotspot. This is highly disadvantageous, as it only appeals to existing Blackberry enthusiasts. The PlayBook has the ability to play Adobe Flash videos and does so quite well.
Other great features about the PlayBook include micro USB, micro HDMI and micro SD, along with its sleek-compact size.
Below is a simulation where I'm expecting RIM to go in the short-term. Selling should continue over the next couple months, with a target-low price of approximately $50. An inflection point will be reached, where the stock may break down and retest its previous low, or come back breaking out of the longterm down-trend. I believe this will come out of revelation on the strength in numbers on sales of the PlayBook, as well as forecasts for gross margins on its products. In addition, RIM will be revealing its new lineup of smartphones, which may give the stock a boost.
For obvious reasons, we all want to see RIM succeed. However, RIM's attempt at entering the tablet world via the PlayBook could prove to be extremely difficult, as it may be too little, too late.
Disclosure: At the time of posting, the author had no long or short positions in (NASDAQ: RIMM, AAPL) and (TSE: RIM). Positions can change at any time.
We're living through some interesting times. From civil unrest spreading through Europe to the Middle East, to the reflation of the world economy through excess liquidity injections, to the blazing housing sector in Canada, we're now wandering in unchartered territory. John Maynard Keynes once said that “worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” By collectively making the same poor decisions, we are not later thought of as foolish (see: herd mentality). While I am not advocating Keynesianism (it is arguable that the previous boom-bust cycles ofthe last decade have largely been a direct result of such loose monetary & fiscal policies), the topic du jour flooded by the Canadian media lately has been our overheated real estate market.
And there's good reason. While we see a fourth year decline in housing prices in the U.S.(which have now declined a total of 26% - trumping the Great Depression), we're welcomed with the perpetual, persistent uptick in prices on the home-front. Canadian real estate has been onfire over the past decade, rising year-after-year in price nationwide. The economic downturn of 2008 caused merely a blip in average prices across the country.
Can it really bedifferent here? The old saying goes that the best way to get to where we're going is to know where we came from. Observing the the Toronto Real Estate Board's averages, we can conclude that we've been in an extraordinary bull market since the mid-nineties, with average homeprices appreciating an approximate annual rate of 5.5%, from $203,028 in 1995 to $431,463 by the end of 2010.
Perhaps few people recallthe correction of the nineties. Ah yes, how these times are but adistant memory, as the bidding wars now propel prices up into the stratosphere. Homes can only go up, they say. Falling prices are but a distant memory. If we extend further back in time, we cansee the previous GTA real estate slump lasted approximately 12 years, with prices peaking in 1989 and not returning until the later part of 2000.
Mark Twain said that "history doesn't repeat itself, but it often rhymes." But that's enough with the clichés for one post. The purpose here is to discuss mid to long-term trends which may provide direction Canadian real estate will be heading the next few years. More specifically, we will observe that while prices may continue to climb in the short-term, the prevailing fundamentals for driving prices higher are unsustainable and will inevitably lead to declining valuations in the coming years.
1. The Cracking Dam
Basic economics teaches us that supply and demand dictate price. This can be extended to include speculation and manipulation, which can often ultimately cause distortion in asset classes (but we will get to that later). When we look at current prices based on demand, we must consider its drivers. Demand is funded primarily by household income and access to credit. Since household income has been relatively stagnant for the last 30 years, as seen below, we can conclude that available credit has been a vital driver to appreciating home values.
And this is where it gets interesting.
Canadians have been more than willing to take on increasing debt levels in the last decade - largely due to incentives by both the government and real estate sector. To further spur the market, the Bank of Canada and Federal government colluded to loosen lending standards. The 5-year variable rate was reduced steadily down to 2.25% and 40-year mortgages were introduced. Moreover, HELOCs (Home equity line of credits) were being pumped en masse by the Canadian banks and mortgages were approved to almost anybody who could sign their name on the line. From loosened mortgage availability criteria and record-low interest rates, residential mortgage credit surpassed a staggering $1 TRILLION in 2010 - more than Canada's $555B national debt!
This influx of household income relative to mortgage credit has left the average Canadian family with 7% equity in their home.
Putting this all into context, average prices nationwide now sit at an approximately 5.5x multiple of household income. The multiplier is as high as 9.8x in Toronto & 13.2x in Vancouver, making them some of the most unaffordable cities in the world! Our neighbours down south peaked at a price-to-income multiple of 5.2x - and we know what happened next.
There hasn't been a shortage of economists, politicians and reporters coming out lately with their own concerns. TD Bank recently issued a report on B.C. being the most endangered, leveraged city in Canada. In their report, they acknowledge our 148% debt-to-income ratio while expressing their concerns overs servicing record debt levels.
Robert Shiller, the economist who forecasted the 1987 market crash, 2000 tech-bust and the US real estate collapse came out with guns blazing,stating that Canadian housing market would fall. His reasoning whyaverage prices haven't tumbled already was over our major oil exports.With oil prices now on the cusp of $100 a barrel, perhaps the Canadianeconomy can chug a while longer.
More importantly, Bank of Canada's Mark Carney was interviewed during CTV's Question Period January 23rd this year, and stated:
Let's put this into perspective. When the Bank of Canada publicly expresses their concerns over debt levels mounting in the country, you can conclude that there is a major problem. Statements like these have potential to move markets and the dollar, especially when it is backed up by hints from the finance minister Jim Flaherty on interest rate hikes.
So what happens when the money stops flowing?
Those in charge of running the country have made it clear that loose lending practices will soon be a standard of the past. Loose monetary policy up until lately has resulted in Canada's real estate market to enter bubble territory. As a result, Jim Flaherty announced January 18,2011 new mortgage rules:
A decrease from 35 year to 30 year amortization periods for loan-to-value mortgages over 80%
Maximum amount to refinance will decrease from 90% to 85%
All economists surveyed by Bloomberg have stated that BoC will raise rates by summer '11.
In addition, some major Canadian banks have already increased the 5-year fixed mortgage rate by 25 basis points in anticipation of future rate increases via the bond market and overnight rate. Couple these factors in with the introduction of HST on new homes over $400K in July, 2010, and we soon see continued pressure to cool the market.
Why does this all sound familiar?
3. The Herd
"But it's different here!"
Is it really? What really makes Canada so impervious to a housing decline? Could it be the conservative securitization of debt by the CMHC via the banks? Or is it that overconfident, zealous lust we now exert over our homes, blindlessly
thinking knowing that they will always go up?
First - on the CMHC : The CMHC (Canadian Mortgage and Housing Corporation) is a Crown corporation whereby assistance is provided to homebuyers and insurance to lenders in case of defaults. The CMHC now has more debt on its books than Canada's national debt - which is ultimately backstopped by the taxpayer should they go the way of Fannie and Freddie. Those who did not to contribute to the massive debt bubble could possibly be left with the bill regardless. Of course, this is an extreme case - but should interest rates rise and force those to default on their loans, the CMHC could be placed in dire straits. More on the CMHC relative to Canada's GDP can be seen by the following graph.
Next - on arrogance. Canadians now feel more confident than government officials and economists with their ability to pay off their mortgages. According to Royal Bank's recent survey, 85% believe they're doing a great job of paying their mortgages. 73% believe they're well positioned to sustain a market crash. In such circumstances, it is so painlessly easy to follow Warren Buffett's classic "be fearful when others are greedy" adage.
Garth Turner could not have stated it any better:
So here we have a classic situation. Houses go up in value, so people perceive them as good investments. They rise further, even better. Like Bre-X. Or pets.com. Or Nortel. Human nature is to crave what other people want. This creates its own demand. Because more people pile in, values rise. Everyone’s opinion is validated. And that breeds more desire. So prices swell. The crowd wins. Emotion becomes fact. And here’s a bank survey to prove it.
So where are we now? New home sales across Canada have dropped 7 straight months, while prices continue to edge higher. In investor-land, this is referred to as a "bearish setup" - that is, increasing price unsupported by volume. We encourage everyone to do more research how bearish divergences typically play out. Couple this in with the supply of properties that will be dumped onto the market this spring, along with our aging population creating future supply and we can see where we may be heading.
What we can determine with near certainty is that the days of constant price growth are coming to an end. Increasing interest rates, aging demographics, record debt and slowing exports will ultimately cause Canadian Real Estate to reverse course. How hard the landing will be will ultimately depend on the crowd.