Fortune Magazine recently pointed out that the new normal of our economic lives includes a return to renting rather than owing. A 2010 Harvard study showed between 2004-2009, the number of renters has increased 10%. With real estate values continuing to show no steady acceleration trend in the U.S. and the theory that those with negative equity in their homes will have to convert to renters, it bears watching whether this will become a longer term trend.

Having said that, there is now an open pro-renter policy lobby.  Specifically, Richard Florida, while not the first to suggest it but certainly the most famous given he is the “it” boy of economics, argues that a distorted home ownership rate slows an economy’s ability to recover from downturns given many people are rooted to location rather than being able to pick up and pursue opportunity. The more practical consideration is whether debt-strapped governments can continue to allocate resources to support home ownership.

What seems to be happening is the recognition that certain people do not have to economic means to own a home and the market should be allowed to correct itself.

Every year, Canadian Lawyer Magazine releases its legal fee survey. The survey’s accuracy is subject to some question since it depends on the voluntary participation of lawyers cross country. With a relatively small sample size of almost 600, a regional concentration or a cluster of results in the low or high end of the fee schedule can distort the results. Nevertheless, the survey does provide some broad guidelines on how much you should be paying for a lawyer.

If you are an average employed Canadian, the most likely reasons to see a lawyer are: (i) draft a will; and (ii) sell or purchase a home; and (iii) documenting a divorce. For the middle transaction, a simple sale of a house costs on average $827  (the $827 average does not include the cost of title insurance, taxes and disbursements). A purchase and sale will, on average, run a typical Canadian almost $1,300 based on the survey results.

Lawyers charge on average $344 for a “simple” will (one presumes a simple will is all to spouse and then all to kids in the event spouse pre-deceases the testator) and $156 for a power of attorney. It is not clear whether this is for one power of attorney or $156 for each of power of attorney for personal care and power of attorney for property. Assuming it is $156 for each power of attorney, estate planning would cost approximately $650.00 before taxes.

However, in the age of multiple marriages, kids from different relationships, deceased with assets in other jurisdictions, testators which are deeply in debt, support obligations to elderly parents or grown children is there such a thing as a simple will anymore? I will post on this in a future post but wills and estate planning are become less than simple as the family unit evolves.

Under the heading of “only the lawyers get rich”, lawyers charge on average $1,200 for  an uncontested divorce and over $12,000 for a contested divorce including a high of over $50,000; the high fees for a contested divorce probably arises from child custody disputes/arrangements.  It is for this reason that the family bar has begun to move towards collaborative family law. It is definitely an option worth exploring if you are contemplating or are in the middle of a separation.

Obviously, you get what you pay for in life so use the survey results only as a broad guide. On a more practical level, do try to actually engage in a conversation with a lawyer rather than starting out with “how much does it cost?”

All law is contextual so even if you do not like the price quote, a conversation or consultation will at least flesh out some issues you may not have been aware of. A good analogy would be you would not hire a contractor to renovate the kitchen without having them actually look at it first.

If you do not know how to find a lawyer, call your local law society. Most have referral services. The Law Society of Upper Canada, which regulates lawyers in Ontario, has finally made their lawyer referral service free after charging a modest fee for years.

…is actually not fire or theft of property but water damage.  On August 19, 2005, Toronto experienced up to 150 mm of rain in a 2-3 hour period.  The Insurance Bureau of Canada estimated $40 million of water damage claims were paid to compensate insurance policy-holders from mostly basement damage. The City of Toronto alone spent $34 million to fix the damage.  An insurance broker recently commented to me  that home insurance policies were originally drafted for fire damage in mind. But, with advances in home building technology, the greater worry for insurance companies is water damage.

As we move into spring and summer, water damage tends to manifest itself in two distinct ways. The first is obvious basement flooding. The second, and less obvious, is mold damage which occurs when moisture accumulates either from outside or inside and there is not sufficient ventilation to expel the moisture.

The issue with mold damage is many insurance companies will not cover damage if mold pre-existed a flood. For example, a poorly designed home may not ventilate moisture properly; a bathroom without a ventilation fan is a good example. Alternatively, the homeowner may not have used a particular room much and not noticed that mold had grown before flooding occurred.

Canada Mortgage and Housing Corporation has very good tips to fight mold in your home and what to do in the event your home is flooded. Good luck.

Somewhere along the way, one typically becomes a stocks/bonds person or a real estate person. I very rarely come across someone who invests large portion of their savings in both. The complexity of understanding and executing stock/bond investing or real estate investing successfully generally precludes someone from becoming proficient in both.

Through a geographic accident, I manage a rental property for a family member. Basically, I live close to the property so, by default, I am the person the tenant calls when something goes wrong. I use the term “manage” loosely given, as long time readers know, I am a stocks/bond investor so my function is basically to receive the calls and do something to fix the problem. Given I am not a handy person by nature, the do something typically involves calling someone else to fix the problem; I acknowledge my limitations readily.

The only thing I really having going for me as a property manager is that I reply quickly. Given that I don’t have any proficiency to fix anything of consequence, the least I can do is acknowledge the tenant’s pain quickly and someone else will be fixing the issue. I sometimes wonder if I got this job because I am a lawyer by training; the thinking being I am used to dealing with people with problems so what’s one more problem to tackle?

The last time there was a problem with the property, I was out of town. My fill-in basically told the tenant to call such and such a person to look at the appliance issue. I ended up receiving the email from my fill-in and my response was to strongly advise my fill-in to call the person for the tenant. After all, if the tenant is paying you good money, they do expect a little customer service when things go wrong. It is analogous to buying a car still on warranty and the dealership telling you how to fix the car instead of doing it for you.

Ultimately, this little fable does highlight one large difference between stock/bond investing and real estate investing which is often over-looked. Both types of investing require some financial acumen and understanding of cash flow management. But real estate investing does require some customer service skills. Certain personalities are simply more fit to be landlords than others.

Real estate investing is not just investing in land. It is about customer service. Good customer service reps know how to weed out bad potentials immediately by asking the right questions, keep the good customers through quality service, hire other good customer service reps and convince the customer to pay for a price increase without voting with their feet.

Is the customer always right or reasonable? Of course not. But we have all seen situations where a good customer service rep basically says no to someone and makes the disgruntled customer somehow understand it or actually agree with their position.

I recently helped someone move from an apartment building that was 50% empty. Why?  Having exchanged some correspondence with the property management corporation over a legal issue, one could see that the property management company was extremely bad handling tenants (slow response time and basically rude) and the super was missing his two front teeth and was pretty creepy looking.

One would not eat at a restaurant if the hostess was missing her two front teeth and the wait staff was rude. Why would one rent from a place with the same type of customer service?

To get back to my original point, if you are at the fork in the road where you have to pick between stock/bonds or real estate just ask yourself whether you have the tolerance to deal with people and provide good customer service even through gritted teeth or would you rather remove the human element out of the equation altogether.

The Canadian Real Estate Association (CREA) owns MLS in Canada.  In response to the Competition Bureau’s (the “Bureau”) allegations that it was engaging in anti-competitive practices, CREA members voted to change the way its members could access MLS; in essence, members could access MLS by offering more than just the traditional brokerage service  whereas they were previously prohibited from doing so. However, the member passed the changes with one little wrinkle- any of the local real estate boards could opt out of this system; in other words, it had the optics of change but not real change.

Seeing a too cute by half solution, the Bureau came down hard and fast and will now take the matter to the Competition Tribunal (in a nutshell, think of the Tribunal as a Court and the Bureau as Crown Attorneys).

Very few personal finance topics tend to provoke such highly charged emotional responses as the commission paid to real estate agents (see the comments in Canadian Capitalist’s post about real estate agents). If nothing else, the internet is the perfect mud slinging machine and the back and forth between pro and anti real estate agents tends to ignore minor details like the facts.

I have written a lengthy post on the MLS fight before but I wanted to rehash some myths being raised by both sides.

People can list on mediums other than MLS which means MLS is not anti-competitive

Way back in my third year of law school I took competition law. Pulling out my textbook, the section that the Bureau is bringing an application under, abuse of dominant position, requires the Bureau to prove one or more person to “substantially or completely controls” an industry, engage in anti-competitive behaviour and such behaviour would lessen competition in the marketplace.

Merely claiming there are other channels to list real estate does not make the behaviour anti-competitive. The test, in part, asks whether the player has dominant market position and is exercising it in a manner which is anti-competitive.

CREA has put up an interesting defense; it is a trade association of real estate agents which compete against one another and not a single legal entity like a corporation. In other words, implicitly, it knows it cannot win the argument it does not exercise dominant market position because a vendor can list on Craig’s List.

However, CREA raises an interesting question.  How can a trade association exert dominant market position when its members compete against one another? If a settlement is not reached, this has all the makings of a precedent setting case.

MLS is not being smashed.

The Bureau’s allegations boil down to CREA is not allowing agents to access MLS unless they offer the full complement of traditional real estate brokerage services (listing, showing, negotiating and helping close a property for listing agents).

Thus, real estate agents are right in saying that clients can always negotiate commission rates. However, if the agent continues to be forced to offer full service, why cut the rate? The same for less is a bad bargain for real estate agents and no capitalist should fault them for holding the line. Furthermore, I am not sure I would want to hire a real estate agent who was such a poor negotiator with me.

But the bottom line is that MLS is not going to be thrown open like a library for the entire public to access. If one references the American settlement, the Department of Justice recognizes the sunk costs of MLS and has given the owners of MLS protections to ensure agents who want to merely list properties and nothing else protect MLS. More practically speaking, MLS, like any other intellectual property, will be licensed for a fee to those who want to set up virtual MLS sites (allowable in the U.S. now).

Make no mistake, MLS will continue to exist. For those who suddenly believe they can hire an agent to list a home for $99 or some crazy low price, licensing fees will probably ensure that MLS does NOT become a dollar store for consumers.

This is the end of traditional real estate brokerage as we know it.

There’s a certain foaming at the mouth by some members of the anti real estate agents group that this will be the end of traditional real estate services as we know it and that 40% real estate commissions would be the norm (the 40% off offer scream new agent, desperate agent or Larry MacDonald sure lives in a nice neighborhood where house are selling themselves; I hope its #3) . As mentioned above, the Bureau’s desire appears to be to allow agents choice to the public- either full service or mere listing of properties or something in between.

Discount brokerages have been around for years for day traders. Do it yourself will kits have been sold for decades and tax preparation software has been sold for about the same time as almost every middle class household owned a computer. Yet, people still hire investment advisors, lawyers and accountants. What may end up happening is that the thin wedge of the market where the vendors or purchasers are ragging DIYers or the house will basically sell itself will be lost to the traditional real estate agent.

However, fundamentally, some people still need real estate agents. It is a little insulting to broadly characterize all real estate agents as “merely” posting, showing then selling a home. More often than not, the good agents deal with the soft side of selling or buying homes- the sheer roller coaster ride many vendors and purchasers have. As the saying goes, you get paid for the grief and not for the work.

I don’t think, if the Bureau wins, there will be a mass mitigration to minimum service real estate agents. In fact, the Bureau may have picked the right fight at the wrong time. If the real estate market does indeed cool down, people may seek the comfort of a real estate agent rather than engaging in a for sale by owner route.

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As an unintended consequence, the American experience shows that allowing choice may actually give the real estate boards more revenue streams and could potentially consolidate the industry further. Some of the more innovative local real estate boards are now offering listing services only. Backed by decades of fees from traditional brokerage services, these ventures have much deeper pockets than independent brokerage firms and could merely outlast their smaller competitors in a price war.

Alternatively, in large urban areas, the trend has been to build real estate teams. What happens if an aggressive team hits the market first with listing only services as well as traditional brokerage services? With junior associates devoted solely to selling listing services and large working capital from traditional brokerage services, will we actually see a consolidation of the industry into mega-teams (remember what happens to many internet ventures- they consolidated quickly into a dominant player or two)?

Would a potential Bureau win result in  more types of services being offered but concentrated in the hands of a few players?

Congrats to Veselin who won a free copy of the QuickTax tax preparation software.

As many Canadian taxpayers know, the Home Renovation Tax Credit (HRTC) was a one year tax credit for eligible home renovation expenses incurred between January 27, 2009 to February 1, 2010. The 15% credit applies for eligible expenses between $1,000 to $10,000 (here is a full summary of the HRTC).

If you own a condo, the HRTC works on two levels: within the unit itself and on eligible expenses spent by the condo corporation. Since the condo corporation spent eligible expenses on behalf of the unit-holders/owners, the HRTC is passed down to each owner/taxpayer on a proportionate basis.

It is important to note that only owners are eligible and occupation of the condo is not necessary to be eligible for the HRTC.  The key is that the condo corporation spent money which, if it was within the condo unit itself, would be classified as an eligible expense.

The amount of the HRTC is determined by the share of your contribution to the total contribution of maintenance fee by all unit-holders/owners. For example, if a condo unit contributed to 1% of the total maintenance fees of the condo corporation, the taxpayers HRTC will be 1% of the eligible expenses.

It is possible to add up eligible expenses both within the unit and by the condo corporation to bump a taxpayer over the $1,000 threshold to claim the HRTC. For example, a taxpayer may have spent $900 on bathroom renovations inside the condo unit; given this is below the $1,000 minimum, this expense cannot be claimed under the HRTC. However, if the proportionate eligible expense incurred by the condo corporation and passed down to the unit-holder/owner is greater than $100, the taxpayer now qualifies for the HRTC.

To claim the HRTC, the condo corporation issues documentation which the taxpayer in the prescribed form. In other words, there is no need for the contractor to invoice each condo and ultimate responsibility for preparation of the HRTC receipt is the condo corporation.

Thus, it is important to ask your condo corporation when the documentation is available and to pick it up. Given the sheer amount of notices that go up in most condos, this may get lost in the shuffle so please do be aware of that condo owners are eligible for the HRTC on the condo corporation level as well. As always, please consult your accountant for specific accounting advice and questions.

For anyone who is interested in investing in real estate, one undoubtedly runs across individuals or groups who speak or write about cash flow positive joint ventures or some other variation of this phrase linking real estate, passive income and investment returns.

The pitches tend to have a familiar refrain: there a generalized notion of positive cash flow related to real estate. However, there are very rarely little specifics mentioned. Read positively, it follows standard sales and marketing tactics: sell benefits and not details. Read negatively, the generality of the pitch seems evasive and troublesome.

Several years ago, I briefly investigated the possibility of investing in real estate. For a wide variety of reasons, I took a pass. Nevertheless, it was interesting to discover just what some of these vehicles were.

The following is by no means an exhaustive over-view of the topic; some of these may not be favor anymore or tweaked to reflect the market. I readily admit this may not be current information and I am more than happy to be corrected for the education of all concerned. But, to dis-spell the mystery of cash flow positive vehicles,  here are some nuts and bolts of some private real estate investment vehicles being offered. I have avoided real estate related securities (other than the one exception below). I have added some quick and dirty pros and cons.

1. Investing in 2^nd (or 3^rd mortgages): Million Dollar Journey had a thorough post on investing in 2^nd mortgages. These types of deals are typically found through mortgage brokers or real estate lawyers. Pros: mortgage grants you security to your investment. Returns can be higher than stock returns (8%-12% for 2^nd mortgages 12% + for 3^rd mortgages). Steady cash flow. Can be invested through RRSP and income received on a tax deferred basis. Cons. 2nd mortgage is, practically speaking, not fully recoverable if the appraised value of the home drops or the borrower is not significantly paying down principal on mortgages (in other words, beware the interest only mortgages in an uncertain real estate market). RRSP administrators are known to be difficult.  High returns = higher risks. Some key factors to consider: Borrower’s financial standing and understanding of historical appreciation rates of real estate in that localized area.
2. Co-ownership with a “finder.” In a nutshell, finder has found an income producing property and has secured financing but requires some more money to meet the lenders financing conditions. Investor contributes the remaining down payment in return for a proportionate interest of title and cash flow after finder takes a property management fee.  Pros: Participate in both monthly cash flow and appreciation of real estate. If finder performs property management functions, income is as passive as one can get. Cons. As partial owner, if the roof needs replacing, you may need to make a capital contribution to the property. Cash flow return may be quite modest after expenses and property management fees are paid (mid to low single digits). There are a certain politics involved in determining the finder’s value. Some key factors to consider: Do you trust the finder to be reliable? Understanding the rental market in that localized area. What’s the exit strategy (needs to be formalized in a joint venture agreement).
3. Special purpose loan to a finder. This has multiple variations.  One variation is finder requires a loan for special purpose typically extra capital to acquire a property to flip or capital used to improve a home already acquired to rent out. Investor loans money which can be secured or unsecured depending on negotiations with a quick exit event (sale of home, refinancing once home is improved and can be reappraised etc). Sometimes there is a bonus payment to the investor on exit. Pros: Rate of return can be high given short use of funds. Cons: Is the actual exit event realistic or pie in the sky? Some key factors to consider. Due diligence on possibility of exit is key. For example, can the property actually be flipped for the appreciation claims? Can the units be rented out for what the finder says it can be?
4. Limited partnership units. A quasi real estate and securities investment. A general partner (GP) has identified a property which it will acquire and manage. Limited partners (LP) contribute money to make the down payment. In income producing properties, LP’s receive distributions proportionate to their interests. The GP assumes the liability of the project. The LP’s loss is limited to its investment. Pros. Ability to invest in more sophisticated projects. Losses are capped at money invested. Limited partner offerings can fall under securities law legislation meaning a relatively high level of financial disclosure. Projects tend to be larger scale (apartments, entire condos, commercial premises). If structured properly, can be quite tax efficient. Cons. Depending on jurisdiction, it is only offered to accredited investors (hence it is more popular in Western Canada where the threshold of an accredited investor is lower). Much larger cash contribution required. Cash calls can occur and, given the larger scale of the project, they can be quite substantial per unit. Less control given larger pool of LP holders and GP controls the entire project. Some key factors to consider. GP has the experience and knowledge to manage the project properly. Investor understands the financial statements provided in more sophisticated projects.

Four Pillars has a tangentially related post on purchasing foreclosed properties.

The level of due diligence has to work on at least two levels- on the individual the investor is partnering with (or the potential borrower) and with the property itself. One could argue that it is better invest in real estate with a Grade A partner and a Grade B property than the other way around.

At the end of the day, real estate investing is much like stock investing. One has to conduct its own due diligence thoroughly. Just because the investor can touch and see the investment does not mean there is less opportunity for abuse by the intermediary or it is a good investment. Good luck.

Multiple listing service (MLS) is short-hand for a system that co-ordinates the orderly buying and selling of real estate. One of the key components of the MLS system is a centralized database of listed homes for sale. Owned by real estate associations like The Canadian Real Estate Association (CREA), it can effectively shut out competition by setting their own rules on membership and deny the flow of information to non-members.

Battered by the internet’s race towards to the bottom and a DIY niche, MLS fought back and their tactics struck were seen by some as uncompetitive. As with all things having to do with consumer protection, Canada, better late than never, acted on the allegations of MLS’ uncompetitive conduct, with the Competition Bureau announcing it was challenging how MLS does business.

What exactly is the problem?

MLS is, in practice, a totality of real estate services. For the real estate agents, it is a way for listing agents to publish its compensation along with the property description. For the public, in order to list real estate on MLS, one typically has to buy the bundle of services which includes hiring a real estate agent, using the standardized agreement of purchase and sale forms, negotiating the deal, registering the sale etc.

There are two primary ways around this traditional model. Flat-fee MLS describes a real estate agent posting a property for sale on MLS for a customer with no other services provided; The compensation is paid immediately. Think of the investment advisor paid to render an opinion on your portfolio rather than to sell you the full gauntlet of products.

Others attempted to set up internet-based businesses outside of the MLS system. Typically, these allowed customers to search a separate database downloaded from MLS themselves rather than having a broker do it. For the time saved, brokers could, and often did, charge less commission. These types of sites are sometimes known as virtual office websites (VOW) because they operate without traditional bricks and mortar operations.

Various MLS’ prohibited flat fee MLS to prohibit real estate agents competing on price (according to the Canada Competition Bureau, CREA engages in this practice). In other cases, real estate brokers simply did not deal with brokers who set up VOWs or information from MLS was not provided in a timely manner to VOWs.

What has been the solution?

In 2008, the U.S. Department of Justice settled with the National Association of Realtors (the equivalent of CREA) after an investigation of its practices in connection with VOWs (here is the press release). As part of the settlement, VOWs will be treated no differently than the traditional broker. A real estate broker operating a VOWs must be accepted as a member of MLS regardless if she is operating a non-traditional business model. The VOWs shall be provided with timely information and MLS members who do not operate VOWs must treat VOW brokers the same as a non-VOW broker.

Two things strike out at me reading the settlement:

• First and foremost, the settlement really speaks to real estate association conduct against its broker members. In many respects, the Department of Justice is settling a civil war between agents who uphold the status quo vs. agents who want to provide different service offerings.
• The settlement protects the proprietary intellectual property of MLS. VOW must take precautions against any customer misappropriating MLS information. The settlement is not about smashing MLS; it is about defusing the information in a responsible way which acknowledges the capital costs of building and maintaining the MLS.

In many respects, the settlement acknowledges that real estate agents can chose to race to the bottom on fee or provide traditional services with traditional compensation. The question comes down to what the customer perceives as value.

What does this all mean to me?

MLS’ get big for a reason; they are smart and ruthless. What did some MLS’ do in the wake of the Department of Justice settlement? They set up their own VOW to compete with the existing VOWs. More service offerings to the consumer is not such a bad thing. After all, a MLS owned VOW can always up sell a customer to full brokerage services.

In Canada, the Canada Competition Bureau has most likely dissected the Department of Justice settlement in a thousand different manners. I would not be surprised if it took a similar approach and, in addition, force CREA to allow flat fee MLS. In many respects, the solution has already been presented to the bureau and, absent a made in Canada spin, it is hard to imagine the bureau taking a substantially different approach. Of course, this is speculation on my part.

The ultimate effect may be a choice between a quantity based model (low margins, high volume) of a VOW and flat-fee MLS and a quality based model (high margins, lower volume). This is not altogether bad for the consumer.

Canadian Capitalist has a post on the MLS’ alleged uncompetitive practices. I found some of the comments have a sky is flying tone to them and others believe this will alter the real estate industry for good. The result will be somewhere in the middle.

Real estate associations and MLS are analogous to the legal profession: an insular, self-governed body which guards its intellectual property like a jealous lover. In the 1980′s, Jane Harvey opened a pure retail law firm to the horror of the profession. All her offices were in malls and she advertised her prices; advertised was prohibited by the Rules of Professional Conduct. In 1987, the Law Society of Upper Canada allowed advertising due in part to Jane being a ground breaker.

Jane Harvey & Associates caused waves in the profession. But, contrary to many people’s beliefs, she did not destroy the legal profession. She merely recognized that there was a niche for cost-effective legal services for the retail market and filled it.  Jane also did nothing to stop fee creep in many lawyers. In other words, the sky has not fallen and Jane may have merely filtered out the weaker market players who could not provide value to their clients.

In some cases, vendors and purchasers will require a full set of real estate brokerage services just like some smaller clients may need a larger law firm to represent them (if your civil liberties are at stake, you really don’t want to hire the lawyer on a fixed price schedule). In other cases, a flat-fee MLS may do them just fine.

However, at the end of the day, you get what you pay for in life and, if given a range of choice, one picks a choice which costs them money because it is unsuitable for their individual context, they live with the consequences of that decision. You cannot deny the option of that person to make that choice  and that mistake and policy-making should not be around this concept.

It will be interesting to see when and how the Competition Bureau rules.

If you are a condo owner or a condo real estate investor investor, or are contemplating investing in a condo, there are a few key factors to consider in 2010.

Maintenance fee escalation on new units: In the last 5-7 years, there have been a staggering number of new condos built in many major urban areas. As recently as 2008, 100,000 condo units were being registered a year in Toronto. In the first few years, maintenance fees can be kept low but in year 2-4, they tend to escalate as reserve funds and repairs begin to occur; condos are like new cars. They run fine for the first few years then you have to start putting money into them.

How great is the maintenance fee increase? I pulled this historical data from my own condo (which is now more than 10 years old). Here are the year to year increases in condo maintenance fees for the first 5 years: 0%, 2%, 15%, 7%, 0%. The spike in year 2-4 (I did not live here then) is probably due to reserve fund contributions given there is no pool, golf simulator or other perks to maintain.

Maintenance fees are typically included as part of rent in our local condo rental market. Thus, in newer condo units, owners may find their cash flow decreasing as maintenance fees go up. It is difficult to make up these increases since: (i) it is a renters’ market in most places and tenants can vote with their feet; and (ii) in rent control jurisdictions, an owner’s ability to increase rent is limited (for example, rent caps in 2010 are 2.1% in Ontario and 3.2% in British Columbia).

HST: Related to the first issue, HST will affect both condo owners and condo investors. The Globe and Mail summarized the issue with HST and condos very well. If you have bought a new condo which has not been occupied (i.e. you bought on plans), it may be worthwhile to consult your lawyer about the “material adverse change” or “material change” clause referenced in the Globe article.

Vacancy rates. In the U.S., rental vacancy rates rose to 8% nationally in Q4 2009- the highest in 8 years.  In markets where the vacancy rate fell (New York City), the average rents also fell. In Canada, the national apartment (includes condo) rental vacancy rate according to CMHC was 2.8% in October 2009 but, in terms of local effects, there were large increases in Alberta (3% increase) and B.C. (1% increase).

In other words, it is a renters’ market on the whole but all real estate is local in nature so please do investigate  the local vacancy rates and average rent in your market (preferably without a real estate agent who has a bias in the outcome; CMHC stats is a good start).

The above does not mean that one should not become a condo investor. Instead, it should frame an expectation of return for 2010. The one issue which is constant in condo investing is that cost control is not completely your own. The condo board sets the annual maintenance fee.

Thus, as a few practical steps, one should consider the cost side of the condo investing equation carefully by: (i) being active on the condo board; (ii) looking at the cost of financing carefully (there may be a stronger argument for condo investors to lock in mortgage rates  to give certainty of expenses especially in a rent control environment); and (iii) budget maintenance fees 5%-10% higher than they are in running your cash flow analysis.

Good luck.

To paraphrase the words of the SteadyHand blog, is this a financial crisis well wasted? Last week, ING in Canada and the UK warned of the possibility of a real estate bubble in the residential and commercial real estate market spurred by the low interest rate environment. Beside the obvious bubble and double recession concern (a theory I subscribe to), the issue with rising real estate values is that it tends to act as a negative influence on a household’s ability to save more money.

The reasons are both obvious and not so obvious.  Household savings rates were quite robust (9.6% in the 1970′s) until our paper net worth began to multiple manifold in the 1990′s with the real estate and stock market boom. From the 1990′s onward, we ceased really to save and more often than not consumed instead.

However, studies show a negative correlation between the increase in our net worth and our savings rates. This effect is most pronounced for real estate than the stock market. A 2004 study found that for each $1 increase in real estate worth, we saved 8 cents less.  While for each $1 increase in our stock portfolio, we saved 2 cents less (the link to the paper is quite buggy so I did not link it but google “Real Estate Versus Financial Wealth in Consumption” by Benjamin, Chinloy and Jud to read at your own risk).

Some of the reasoning is obvious. Purchasing a home costs a lot of money and we tend to save less money since we have to make a down payment, pay for movers and new stuff for the house. The more subtle reason is that, for most middle class households, we are restricted in tapping our stock portfolio since the majority of assets are locked into non-accessible vehicles like pensions, RSP’s, 401(k). Finally, on a more marco level, it is easier to save more money when interest rates are higher (like the 1970′s) since there can be a healthy return investing in high interest savings accounts; conversely, low interest rate environments encourage leveraging and its associated effects of increased costs of borrowing on a household budget.

From a practical perspective, one tip to save more money would be to simply to turn a blind eye to the value of your home or, more accurately, remember its only paper wealth and not cash in the bank. If you live in a region with depressed real estate valuations, do not bother looking at the price of your home. Instead, enjoy it.

For those trying to be better savers and living in healthy real estate markets, ask yourself if you really need to buy a larger home rather than wanting a larger home. A lot of people I know are rushing to buy real estate because of favorable interest rates, an external stimulus justifying a want, not because they need a larger home, an internal condition necessitating the fulfilment of a need.

From a larger contextual perspective, if the stimulus has worked too well, and a spike in house hold savings rate is only temporary because the government says its time to consume again, then we truly have short memories and we have no one but ourselves to blame if we suffer another financial stress we cannot recover from. Money in the bank smoothes over a lot of personal finance mistakes.