Peter Kinch, explains how to keep calm and keep investing even in the midst of market turbulence.
Video transcript below:
Peter Kinch, founder, Peter Kinch Mortgage Team, Dominion Lending Centres
Peter Kinch: One of the biggest fundamentals that made Canada strong during the recession, one you know where other countries were being dramatically affected by the recession was the fact that we have a very very strong financial banking system. And with a conservative banking system and the same conservativeness that investors were upset about, because they weren’t offered enough money at flexible terms, was the very system that saved us when everybody else you know kind of blew up.
So number one we had the banking system was really strong. Also Canadian companies had reserves in their bank account so to speak. And they were a little bit flush with cash and in many ways Canada didn’t get hit as hard as other countries. So we didn’t have the big bubble and we didn’t have the big dip. So we were kind of very steady with that and since then, businesses, companies and individuals have strengthened their financial positions. Banks have even got more conservative, so if we ever were hit with another second wave of global recession, Canada is again, yet again in the strongest best position to absorb that. In fact Mark Carney and Jim Flaherty recently came out and said, that we have wigglewood. We have the room to absorb some recessionary impact from the United States.
So again what this all translates to is, solid safe returns for Canadians and when international issues grow, I wouldn’t be surprised to see an increase in foreign investment in real estate which will only further solidify our position as a safe harbour. The single most vulnerable person is the individual who is over leveraged, has decided to quit the day job to become full time real estate investor and all of a sudden values and, vacancies soar and values drop. That individual has nothing to fall back on, no cash reserves, no job, they can’t make their mortgage payments because they got too high vacancies and they can’t quit property sell the property because now the property is in some cases worth less than the actual mortgage. That person is you know guaranteed to close to bankruptcy situation.
We saw this happen in Canada, we are not immune to that. So my message to individuals in today’s market is don’t forget the lessons we just learnt 2 years ago. 2 years ago when in 2008, 3 years ago, in 2008, we saw the hype of sub prime prices followed by the global recession and those who were over leveraged and in my opinion irresponsible got burnt. And I see that tendency returning now because people are forgetting those lessons very quickly.
So the way to both proof yourself or prevent that from happening again is just understand some very solid fundamentals. If it were me, I would really be focusing on debt reduction, creating a little bit of buffer, because when you talk about the wiggle room, the Bank of Canada for example says we have got wiggle room, because they raised rates by 4, interest of 1% on prime. So they had to cut back, they didn’t actually drop interest rates to stimulate the economy, it was the American scam. They were already at [round five then].
Well the same is true for us individual investors, if you take advantage of these historically low rates, so lower your debt and accelerate your debt reduction, two things will happen. Number one, if we do have a drop in values or increase in vacancies, at least you have a lower debt position to work from and survive. If rates do go up and you’ve got lower, if you [particularly mention the] low interest rates lower your mortgage debt and rates go up, yes you have higher interest rates to pay, but on a lower principal balance.
So again you will absorb it. Plus if you set you payments a little bit higher today in anticipation of future rate hikes. Not only will you accelerate your debt reduction, but you will adjust your personal budget to already accommodate future rate hikes, so that it won’t be a payment short factor. So these are ways that simple practical ideas on how Canadians can adjust or take advantage of today’s security at low rates to adjust for future uncertainty.