By Ozzie Jurock
"We learn more by looking for the answer to a question and not finding it than we do from learning the answer itself." -Lloyd Alexander.
A reader writes: "Ozzie, I liked reading your article on inflation, but you are missing the point. Core inflation is used by Bankers around the world, not because they want to keep the 'real' inflation rate lower, but because food and energy prices are much more volatile and thus the core rate more accurately reflects the overall rate of inflation."
That was the gist of a number of emails (thank you for all of them). Well, I respectfully disagree. I am with Daniel Gross when he argues in Slate: "Imagine that a cardiologist told you that aside from the irregular heartbeat, the stratospheric cholesterol count, and a little blockage in your aorta, your core heart functions are just fine. That's precisely what the government's cardiologist Ben Bernanke, chairman of the Federal Reserve ... has just done."
I was also accused of being a "conspiracy theorist." I do not profess to know what that is. I only state that when food prices run an average increase of more than 15 per cent, energy an average increase of more than 5.6 per cent and we do not mention it - something is wrong. I maintain that we have been and are in the most unreported inflation of all times for more than ten years and the only reason that no one is aware of it, is because we only report the core rate. If the combined rate were reported, interest rates would be forced to be higher, we would not live in this fool's paradise of 1.7 per cent inflation and our governments would be forced to do something about it. The debasement of our money supply could not continue, in the face of much more visible inflation. We - the public - would not let it. Yesterday it was reported that wheat now rose at 48 per cent, soy beans at 62 per cent and rice at 68 per cent. In a way this is a good thing, this will force us to acknowledge the problem. In fact it forced our Bank of Canada to leave interest rates alone and Mr. Bernanke to signal yesterday that he would not lower interest rates either. It also caused the worst two day rout in bonds in 20 years.
For us dear Reader, all the craziness around us ... is aggravated by enormous speculation. I would not be surprised to see interest rates shoot up and oil actually collapse this year. For my "real estate" purposes however ... suffice to say ... that inflation is higher than reported and eventually will settle in yet higher house prices ... after a period of re-adjustment.
In any case, Google the question and you will find many much more eloquent and articled economists than me arguing my point of view.
However, I also received emails like this: "Just finished reading your recent article in the Vancouver Sun. RIGHT ON. Since the fed stopped publishing the m3 in March of 05 they have been printing money like crazy. I think we are in for a ... storm. Keep sounding the alarm bells at least some of us will be standing with assets when it all settles. Great piece."
Here are more questions...
Q: I am ready for retirement and my wife and I want to move to a small town. Would real estate prices rise faster in Comox or Cranbrook? Or should we pick a much smaller town?
A: As retirement markets go, it would clearly be your personal choice. Do you like the ambience of this or that town better, what are hospital facilities and doctors (some small towns like Princeton may not even have a doctor left). Is transportation easy to obtain? However, the question on which market would be better for appreciation is one often asked but to me less relevant. You could look at the fact that Albertans fly into Comox daily and are buying there or that Cranbrook's airport was expanded, but it is not nearly as relevant as the personal deal that you make through adequate research. You don't buy the market you do buy the deal. Spend some time in all the towns you want to retire, subscribe to the local paper and then hire a realtor and make some offers.
Q: What do you think about buying in Palm Springs right now?
A: I receive a lot of these kinds of questions. They also are asked about Scottsdale, Phoenix, California etc. Again they have to do with a "wither the market" question. All markets in the US are under pressure because of the barrage of bad news that continues daily. Even markets that have not been as overbuilt as - say - Miami or San Diego. The question is, what is your purpose? Holiday home or rental? Foreclosure "deal" or Canadian dollar play? The best deals are likely found in new subdivisions where builders have built but not sold... And yes there are deals available in Palm Springs. The only way to find out whether it is for you ... is to go there.
Q: Friends of ours have just purchased a foreclosure franchise. They have been told they can easily make $300,000 to $500,000 a year. Do you think this a good idea?
A: A Foreclosure Franchise? That's a new one on me. I guess, when they are selling franchises they must be expecting foreclosures to be rampant for years. I have seen "easy foreclosure courses" when the sellers of the course tell you that they will supply the names of people in trouble (not possible in Canada because of our privacy laws) and then all you have to do is call the troubled owners and tell them you will assume the mortgage. Well, it may sound easy, but are you willing to fly down there and get the luckless desperate ones to sign the papers? Do you know which papers they have to sign and are you the kind of person that is a happy "grave dancer"? Only you can answer that. The question to ask the marketer is ... if it is so easy, why are you selling franchises?, why don't you buy them all?
Q: Thank you for all your helpful articles. My wife and I are moving to Victoria, and are looking for a fixer-upper that we could renovate and flip. Can you recommend any particular areas to look at? And any specific articles to read?
A: There are a number of good books in your local library on renovation. Just remember ... if you are going to flip ... you must "lipstick" your renovation, basics only, don't try to create the Taj Mahal. Clean, fresh, neat. Spend money on kitchen and bathrooms ... nothing on bedrooms (except paint). Paint and fix the front of the house and nothing on the backyard. I tell my students in our course, that if you want to put a basement underneath your renovation house, I will hit you with my laptop. It is always a self inflicted wound. Make a budget and whatever it is, figure you will spend 50 per cent more.
Q: Where do I find rental vacancy rates in Trail?
A: CMHC publishes the vacancy rates mostly in the fall for all cities in Canada. They have a large press release. You find it here: www.cmhc-schl.gc.ca/en/corp/nero/nere/2007/2007-12-13-0815.cfm. This release shows not only the vacancy rates for 1, 2 or 3 bedroom units but also the average rent paid in those markets. However, Trail (and other smaller centres) are not there. For that you have to dig down. The URL is even longer than the one above. Better to just use CMHC's search button and type in vacancy rate report ... all cities are there.
That's it for this week. If all this is confusing, remember this quote: "...we cannot reject the possibility that the universe is the output of monkeys typing at a computer." -Cover and Thomas, Elements of Information Theory - chapter 7.
I'll be back on June 26, 2008.
Published in the The Vancouver Sun, June 12, 2008
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