Why this is actually irrelevant

Hence why they did it. H/T VG.

CMHC is an arms-length crown corporation. What this means is that they receive no government direction, and they don't, and that they receive little government funding, and they do; so they must be self-serving and self-sufficient, and they are.

I do agree with Mohican over at the Financial Planning Personal Sanity blog, it is nucking futs. But that said, I don't believe this will have any impact whatsoever on the Victoria real estate market. And here is why (Yes, I've purposefully picked the cheapest investment property I can think of):

2-bed 1-bath condo worth $200K with $1200/year property tax and $150/monthly assessment.

With a 0% down mortgage you'd be mortgaging $215K ($15K insurance premium to CMHC) for a monthly mortgage payment of:


Say you're a RE "investor," you take out this mortgage on this dumpy condo, you rent it out for market rates of around $1.25/SF. So you're getting around $1000/month. But you're paying out
$1222 in mortgage, $100 in tax, $175 in MA for $1497 or a $500ish loss every month. Let's say you squeak out a bit more for rent. You won't get $500, maybe $200. That's irrelevant.

The only "investor" for this deal is actually a speculator betting that they'll make their money in inflation and mortgage paydown. CMHC already ate up 7.5% of your inflation (before interest) and considering that condos are overbuilt and already coming down in price (new ones especially) I don't think we'll see too many banks willing to do this deal. So the "investor" will have to go to the alternative market which means they are paying more interest (not to mention that alt-mortgage funds are extremely threadbare with the credit crunch) and their already negative margins just got more negative.

Now this new product may have broader implications in other segments or markets, but in the local Victoria rental pool where rents are barely 60% of carrying costs for the most part, a 100% down mortgage makes no economic sense whatsoever.

Anyone stupid enough to get into this product deserves to lose their shirt when the market corrects. CMHC may get caught holding the bag, but the debtors get taken into bankruptcy first. The premiums that CMHC will charge are designed to make them money. Pure and simple. This is a huge risk that they are aware of; they built that into their business model. In other less-inflated markets, pretty much anywhere east of Manitoba, this product will be a big time money-maker with limited market implications. CMHC is facing increased competition, they got some free advertising today, I doubt if they got much else.

Is YOUR home the investment you think it is?

The answer to that question is an age-old and apparently endless debate.

I figured we'd have a little fun around here this week. Each day I'm going to comment on some commonplace investments and offer my opinions only--SEEK PROFESSIONAL ADVICE ELSEWHERE BEFORE ACTING ON ANYTHING I SAY, I AM NOT A FINANCIAL ADVISOR--on whether they qualify as investments in the HHV household. If you have a particular product you'd like to see pumped or dumped, email us using the link at the top right.

On with the show...

Is your house an investment? By your house I mean the one you are living in. Here's my answer: probably not.

If you live in a home that you rent, it may qualify as an investment using my definition if it is wholly owned AND providing a net income to the owner. This is the only circumstance where I would say that a home is an investment. But in this case it's someone else's.

How do I get to make that assertion? Because many, not all, but many financial advisors require an investment to provide an almost-immediate financial return.

If you buy a blue-chip stock, you're likely purchasing stable long-term growth and a DIVIDEND--which is an almost immediate return on your investment. If you buy a small cap stock, you're likely speculating on a story and hoping for greater returns in the short term in exchange for waiving your right to demand an almost-immediate return on your investment (few if any small caps pay out dividends). Trading small caps, which I frequently do, is speculating, not investing, and is akin to little more than gambling, but with better odds than a Vegas craps table.

So the rental house you live in is not likely paying out a dividend unless the landlord collects more than she puts out in mortgage, tax and maintenance. The same can be said for owner occupied homes.

How can an owner occupied home possibly be an investment using my definition offered above? Some may argue that having a two-bed mortgage helping suite downstairs means their house qualifies as an investment property. I say Nay Nay. That mortgage helper means you pay less of your own income to your mortgage, but considering that the bank will only count half of what you take in in rent towards earned income for mortgage qualification, you can see how they feel about the "quality" of that "investment." We here at HHV tend to agree with that practice for the most part.

Most people, us included, believe owning is better than renting in the housing market. You're better off to own eventually than never to own at all. Real estate returns in Victoria are averaging about 6% per year for the last 30-odd years. Adjusted for inflation, and again we'll defer to the pros, who advise 4% assumptions, 2% real growth isn't exactly stellar. Stable, yes. Tax preferred, yes. But "outperforms the market", I say Nay Nay.

The only time you realize a gain from your house is when you sell it or borrow against the "equity." I don't think taking a loan out is a good investment, but many real estate flippers turned financial "educators," recommending you leverage your equity to buy and sell distressed properties in dirty neighbourhoods, will argue I am nothing but a nay-sayer who is risk adverse. I'd tell you I'm just not risk-tolerant enough to buy into the shill and suffer the Casey-like consequences. Yes, some people make a lot of money buying and selling distressed properties. But the average income earning citizen in Victoria, in these current market conditions, won't.

Now my previous post was about a friend of mine who is likely to experience a significant financial gain by selling his house and buying another one. He'd argue me blue in the face about how his two homes were the best investments he'd ever made. I wouldn't have much to say to him other than if you weren't leaving town, would you feel the same way buying across or up in this market that clearly has little upward room to grow?

Their income supports their current mortgage comfortably. They could stretch up another $100K or $500-$600/month. But that would be the difference between owning a nicer home and having a family. Yes, that's a personal decision. But it affects financial planning and once again takes money out, not puts money in, so his house isn't an investment if he stays in it, or moves to a more expensive one in town.

Let's recap: a home is an investment when the owner realizes a positive net gain in her income. That's income minus expenses, so the rental suite doesn't count unless it's paying all of your mortgage, taxes and maintenance too. Sure you get a tax-preferred capital gain if you live in it and it gains in value over a year's period. But considering that real YOY real estate returns are hovering around 2% over 30 years, your home is far more likely defined as a forced savings plan rather than an investment.

Tomorrow we'll move on to mutual funds. Post your suggestions for other product topics in comments or via email. And as I always, I invite, or actually in this case I beggingly-demand, that you pick my opinions apart in the comments. I'm hoping this stirs up a lively debate.