Wednesday, November 30, 2005


Rates Rise: now what ?

And I thought I was the only one knowing it! Over the past three days I have received six telephone calls and four e-mails all from alarmed people (one my own niece) very concerned about rising mortgage interest rates, and all asking the very same, panicking question: ‘Now what’? For one thing, you could try doing nothing about it – it normally works well for me and, who knows, perhaps with a little luck tomorrow interest rates will drop. For another thing, you may want to hug your Teddy Bear – and buy one also for your friendly neighborhood banker, turned overnight into a voracious T-Rex.

When you last went shopping for a mortgage you found yourself facing an array of options, from a six-month ‘open’ to a 10-year ‘closed’ and everything in-between. And chances are you didn’t quite grasp or paid attention to the differences among all those many options, mostly because you never envisioned a time of interest rates increase. Now that the tide is changing direction, of course, the basic question becomes the most important: which option is the best to minimize mortgage costs? To answer this, let’s take a look first at a few definitions.

For starters and contrary to popular belief a mortgage is not a loan. It is both an interest in land created by contract and a type of security for a debt. In essence, a mortgage is not a debt but, rather, the evidence of a debt. More importantly, a mortgage is a transfer of a legal or equitable interest in land on the condition that the interest will be returned when the terms of the mortgage contract are fully satisfied. This usually means upon repayment of the underlying debt. Mortgage Law originated in the English feudal system as early as the 12th century. At that time the effect of a mortgage was to legally convey both the title of the interest in land and possession of the land to the lender. This conveyance was ‘absolute’, that is subject only to the lender’s promise to re-convey the property to the borrower if the specified sum was repaid by the specified date. If, on the other hand, the borrower failed to comply with the terms, then the interest in land automatically became the lender’s and the borrower had no further claims or recourses at law. There were, back in feudal England, basically two kinds of martgages: ‘ad vivum vadium’, Latin for ‘a live pledge’ in which the income from the land was used by the borrower to repay the debt, and ‘ad mortuum vadium’, Latin for ‘a dead pledge’ where the lender was entitled to the income from the land and the borrower had to raise funds elsewhere to repay the debt. Whereas at the beginning only ‘live pledges’ were legal and ‘dead pledges’ were considered an infringement of the laws of usury and of religious dogmas, by the 14th century only dead pledges remained and were all very legal and very religious. And, apparently, they are still very religious in the 21st century.

Mortgages are better known to consumers by their re-payment schemes:

Interest Accruing Loans

Typically used by builders, an interest accruing loan is one on which no payment of interest and no repayment of principal are required to be made during the life of the loan. These type of loan may be ‘closed’, i.e. booked at an interest rate fixed throughout the term of the loan or ‘open’, that is with a fluctuating rate. In effect, in this type of loan the lender actually to the borrower the additional amount corresponding to the interest payable during the term.

Interest Only Loans

Typically preferred by lenders, in this type of loan the borrower contracts out to make fixed payments of only interest to the lender, with the principal due in one lump sum at the end of the term. Obviously, the principal amount never increases because interest is discharged at fixed intervals.

Straight-Line Principal Reduction Loans

Favored in the United States and continental Europe, this type of loan has an equal amount of principal repaid every interest compounding period plus interest for the period. For example, a mortgage may call for complete repayment of principal over a fifteen-year period through monthly payments of interest, so that 180 payments will be made in the entirety of the term of the loan. The principal balance and the amount of interest due decrease over time.

Constant Payment Repayment Schemes

Favored in Canada, England and throughout the Commonwealth, these can be fully amortized or partially amortized. Payments are equal throughout the life of the loan and consist of both principal repayment and interest. However, as each payment installment becomes due, an increasing portion of the principal is repaid, thereby reducing the outstanding balance on which interest is charged during the next period. As a result of the decreasing principal balance on which interest is charged, interest as well decreases over time thereby increasing the amount of principal repaid each subsequent installment. When fully amortized, the principal balance is fully repaid at the end of the term. However, most loans are partially amortized so that repayment of principal plus interest are calculated so as to repay the debt over an amortization period which is longer than the term of the loan. This means that at the end of the term of the loan the principal ourstanding balance must either be paid off or it is refinanced for an additional term. Also, because of the way payments are structured, early payments consist largely of interest and little repayment, so that typically the principal outstanding balance at the end of the first terms is large.

Variable Rate Mortgages

This type of loan differs from a costant payment mortgage because the interest rate charged may be changed during the term of the loan., Generally, these loans are initially set up like standard, partially amortized payment repayment loans based on the current interest rate, Then the rate is revised at fixed intervals and the mortgage repayment scheme is altered as well by changing either the size of the payments or the length of the amortization period, or a combination of both.

Open Mortgages

The term ‘Open’ does not refer, like many people believe, to a fluctuating interest rate. The term ‘Open’ refers to the possibility granted to the borrower to pay off the loan without penalty prior to maturity. In general, lenders do not like Open Mortgages because the early payoff reduces the interest they earn. Open Mortgages can be written either wih a ‘fixed rate’ or with a ‘variable rate’. In Variable Rates Open Mortgages the payment stays the same, but what changes is the ratio of interest to principal. If market rates increase, principal repayment decrease during the life of the loan.

Closed Mortgages

In general, Closed Mortgages offer a better rate than Open Mortgages but the drawback is the borrower is not afforded the right of payoff at anytime. If the borrower intends to payoff the loan, a penalty is applied typically amounting to three months interest payments. If the borrower anticipates making only fixed payments and no early payoffs, Closed Mortgages are usually preferable.

Convertible Mortgages

These are yet another variation of the same product wherein the rate is fixed for an initial period, say six months or even one year, with the provision that at any time during this period the borrower mat ‘lock in’ into a longer term with little or no cost. This is clearly the best mortgage if rates are in a downward trend.

Now that I have managed to drive you up the wall, let me point out that another couple of considerations ought to be made by the expert consumer (which, by now, it is definitely not you …):

Fixed v.Variable Interest Rate Mortgages

The choice is whether the borrower prefers the security of fixed payments as opposed to the volatility of the market. Typically, security of fixed interest rates comes at a premium: the borrower can fix the principal repayment and interest for a term ranging from 6 months to 10 years, but the longer the term the higher the rate. On the other hand, Variable Interest Rate Mortgages will fluctuate sometimes literally overnight with the market, but interest rate will typically be less. So really, the choice is between the security of fixed rates and the potential savings afforded by a fluctuating variable rate.

Short v. Long Term

Short Term Mortgages are appropriate when the borrower believes that interest rates will fall substantially by the time renewal date comes up. Alternatively, Long Term Mortgages are suitable when current interest rates are reasonable and it is deemed preferable to lock in so that a budget can be laid out for future fixed payments.

So, again, going back to the original question which option is best to minimize costs? To find out, Canada Mortgage Housing Corporation (CMHC) developed the measure of effective mortgage rate differential between five-year and one-year mortgage rates over five-year moving spans between 1980 and 2005. The model assumes that the borrower has the option every year of taking on a five-year mortgage term or a one-year mortgage term at the rates then prevailing, and that there is no difference in mortgage principal. The results are surprising. CHMC has found that it is cheaper more than 85 percent of the times to opt for a one-year term and roll it over than to take a five-year mortgage up front.

More importantly, CHMC has found that borrowers with Variable Rate Mortgages benefited of substantial savings over each five-year span than their Fixed Rate Mortgages counterparts. Whereas they paid more interest in the short term they ultimately and invariably ended up saving more over the long run, which then gives credo to the belief that security and peace of mind when it comes to mortgages are purely a matter of perception.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Monday, November 28, 2005


The Affordability Crisis

The Affordability Indexes of Greater Vancouver and Metropolitan Toronto, were they measured in degrees Celsius, would be fast approaching the absolute zero or minus 276 degrees these days. And so are the affordability indexes of all other large urban centers in the United States, ranking North America in third place after East Asia and Europe on the scale of the world’s most unaffordable places when it comes to housing. We win the Bronze Medal, so to speak, but I am not so sure there is reason to celebrate. Tokyo and Hong Kong, with an average resale value of U.S. $1,100 and U.S. $900 per square foot approximately have turned into cities of sardines, with people reduced to live in 300 square foot cubicles to afford a roof over their heads. London and Paris, with average resale values of U.S. $700 and U.S. $650 per square foot respectively have turned into cities of renters. By comparison, Vancouver and Toronto with resale values of U.S. $420 and U.S. $430 per square foot respectively are still dirt-cheap - for foreigners, that is, certainly not for Canadians.

The Affordability Crisis is a very serious matter indeed. It has economic, political, social and demographic reverberations and repercussions. We have heard it over and over again these past few years: historically low mortgage rates, pent-up demand, low inventories and an improved overall economic atmosphere have all contributed to hot local real estate markets. Which, in turn, have driven prices literally through the roof. But an intelligent analysis of the roots of this crisis, in all fairness, must really reach beyond the mere finger pointing to the relationship between supply and demand. Home ownership is the single most important element in the democratization of prosperity. It is the element of social stability and cohesion and, therefore, an important pillar of a sustainable modern economic capitalistic growth. We do everything with our homes in addition, of course, to live and sleep inside: we use them as collateral for personal lines of credit, we use them to increase our net worth, we use them to establish our hierarchy within society, we use them to improve our own self-esteem and, last but not least, we also use them as parachute of last resort to save us from dire financial straits. Ownership of our homes is everything to us. Now, try to think of a world without such ownership: everything we normally think of as an asset and a credit all of a sudden turns into a liability and a debit – our own personal balance sheet in reverse. That’s how important housing affordability is in our lives.

The primary culprit and cause of the crisis is the ratio between wages and real estate market values. This ratio is entirely skewed to values. Whereas market values in metropolitan areas in Canada have appreciated an average of fifteen percent per year for the past five years - or a total of seventy-five percent since 2000, salaries have increased an average four percent per annum – or twenty percent total. There is, therefore, a fifty-five percent gap, which accounts for the problem buyers are facing today when it comes to go to the bank and qualifying for a loan. And if you think you are out of the problem because you have bought already – well, think again: no buyers, no demand, and lower values. Lenders claim they cannot lower their qualification standards, and that is probably credible in light of how cutthroat the lending business has become. And governments have chipped in already with aid programs especially oriented towards first-time buyers and tax incentives and credits applicable to everyone else. Which, then, leaves consumers with no other choice but to rent – just like in Europe, until such time as a new economic equilibrium is established.

Price dropping has been a steady staple these past few weeks in many markets. Many economists do not envision this as a market downturn, much less the onset of the real estate bubble believers in Apocalypse have been prognosticating all along. The general belief is that we are now facing a ‘deceleration' of capital appreciation – but still an appreciation - now forecasted to hover to on or about five percent in 2006. Real estate, therefore, remains a viable investment venue, but not the gold mine it has been these years past. More importantly, a slower appreciation will allow salaries and wages to catch up and thus to regenerate the pool of buyers, especially first-time Buyers, entitled to take their first steps into the world of real estate

Luigi Frascati

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Real Estate Chronicle

Sunday, November 27, 2005


Up ... Up ... and Up Again !

Stratification in civil engineering refers to the ability to create multi-layer construction, like high-rise building. Stratatization in real estate refers to the ability to create freehold strata lots, as in condominiums and apartments. Stratification and stratatization are the center-point of attention in many municipal planning departments, as vertical construction (also known as elevation construction) takes strong precedent not only in North America but, in fact, all over the world.

One paramount tenet of today’s core urban elevation construction is the requirement that developers provide, at their sole expenses, public amenities that citizens and urban dwellers want. These are public parks, street and off-street illumination, walkways, sidewalks, waterfront, piers etc. etc. The trick to a model urban elevation development is to establish equilibrium between the overall cost of the amenities vis-à-vis the number of condos allowed in the development to permit developers to make a profit. Needless to say, this is an acrimonious point seen by developers as just another unrightful infringement on the part municipal authorities into their right of return on the investment. If given an option, cities normally like to sprawl out but times are beginning to change. Elevated construction cost of streets, sewer, electric and telephone lines (these days all underground in new neighborhoods) and, more importantly, an increased demand by both young and less young for condominium living as opposed to single-family dwellings are all contributing factors to a change of the tide. People nowadays are beginning to cherish more and more the practical, relatively carefree lifestyle afforded by condo-living. And why shouldn’t they? Apartment dwelling brings you closer to all amenities the city has to offer, frees time and energy that can be better invested productively or recreationally, keeps people more in contact with each others and – some dare say – it even slows aging.

Add on top higher energy and fuel cost, a rampant affordability crisis and shrinking profits and one can easily see how vertical development is favored by consumers. Cities, particularly in North America, are becoming more and more energy inefficient. It costs too much to commute from one side of town, where you live, to the other side of town, where you work, even if you carpool or use public transit. It takes too long to keep and maintain 2,500 square feet of home when, in fact, most people enjoy them only over the week-end. Moreover, property taxes in many metropolitan areas are beginning to reach a threshold wherein they are no longer affordable. This is due to the fact that tax mills applied by municipalities are percentages of assessed values, and with the buoyant real estate markets of recent times these values have gotten out of hand. And finally, baby boomers have now become empty-nesters with children already out of the house and, as such, five-bedroom homes are no longer neither wanted nor needed. Bottom line, therefore, is that consumers demand smaller living quarters, and more affordable.

Of course, the drawbacks of a higher population density are overuse of infrastructures, some of them aging, concentrated traffic and green space. Nobody wants to live in a concrete world full of vehicles and, therefore, environmental concerns are very high on the list. Historic considerations are also at stake, as in many cities certain neighborhoods have historic landmark designations. From a urban economics point of view, this entire surge of vertical developments is very interesting. It is not a question of rejecting or favoring growth. It is more a question of accommodating it. This process of balancing demand with growth is referred to as “New Urbanism”. Although relatively new as a practical discipline, New Urbanism has deep historical roots that date back, in fact, to the advent of the electric rail car all the way back in 1887. This date is important because it freed people from animal power (horses and carriages) and allowed them to relocate where land was cheap. Thus, especially in North America, cities developed horizontally following the topography of New York and Chicago. Paradoxically, it was New York and Chicago that also led the way in the ‘20’s and ‘30’s to what was termed back then as the “Skyscraper Phenomenon”, but the reason as to why both New York and Chicago began their debut and race in vertical urban development had more to do with the geographical boundaries imposed by their respective locations – which constrained and limited horizontal expansion, than by demographic concerns or market demand. In fact many consumers of the ‘20’s and ‘30’s disdained living into skyscrapers and most high-rise buildings were conceived as workplaces, not for residential living.

Nowadays, ‘new urbanites’ even point at the correlation between denser living and obesity. Not only, they say, densification allows for lower cost of infrastructure, transportation and public places. They also decrease the need for driving and parking allocation and increase the walkability of denser neighborhoods – resulting in leaner and fitter dwellers. And, finally, there is also the sheer political factor. Nowhere is vertical urban development more visible than in China, where Guang-zhou, Beijing and Shanghai have all become landmarks of the new Chinese economic prosperity.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Saturday, November 26, 2005


It’s a corrupted … corrupted … corrupted World !!

As everything else in the Science of Economics, corruption has a very well defined function. Not a positive function, to be sure, but very well defined. Corruption is in fact viewed as a barrier to economic development, a relic of the past wherein ambition and good will are impeded to flourish for the common good of society. As such, unfortunate people that live in a corrupted society are locked into a never-ending cycle of misery.

Corruption is economically defined as a practice or set of practices of dishonesty so widespread and powerful to interfere with the natural flow of process and equilibrium of free-market economic forces such as supply and demand. Whereas dictatorships or other undemocratic forms of government are by their own very nature corrupted, corruption is very much real in democracies as well. The general tendency of corruption is to create “oligopolies” – from the Greek words ‘oligos’ [few] and ‘polis’ [power] – that is market situations that are controlled or dominated by few. Oligopolies are, of course, similar to monopolies and more detrimental in many respects.

In order to expose and fight corruption, several watchdog agencies have sprouted all over the world in recent times. The most credible and thorough of them all appears to be Transparency International (TI), based in Berlin, Germany. TI is the only watchdog agency entirely financed by the private sector, and with a policy of emphatically refusing governmental contributions. It is also the largest, with over 85 chapters around the globe and surveying 64 countries. TI is the creator of the Corruption Perception Index (CPI) report that neatly locates each country surveyed on a score from 1 (very high level of corruption) to 10 (clean score). CPI findings are astounding and at the same time remarkable. They speak a lot about how government and institutions are perceived and how wealth, culture and lifestyle influence the development and spread of corruption through all levels of society. More than two-thirds of the 159 countries surveyed show a serious and worrisome level of corruption, and nearly half of them scored no better than 3. The worst, in fact, are Chad, Bangladesh, Turkmenistan, Myanmar and Haiti – also the poorest countries in the world.

On the other hand, wealth is no deterrent against corruption. For instance, in Canada and Ireland there is a marked increase in the level of corruption in 2005 over 2004 and 2003, whic has increased progressively over the past ten years. Canada scored an 8.4 and Ireland a 7.2 in 2005. The classification, from best to worse, of the G7+1 industrialized countries is as follows: U.K (8.6), Canada (8.4), Germany (8.2), U.S.A. (7.6), France (7.5), Japan (7.3), Italy (5.0) and with Putin’s Russia scoring a very low 2.4. The G7 are all eclipsed by the scores of the scandinavian countries, with Finland (9.6), Denmark (9.5), Sweden (9.2) and Norway (8.9).

The three winning runner-up are Iceland (9.7), Finland (9.6) and New Zealand (9.6) and the three worst countries, in descending order, are Haiti (1.8), Bangladesh (1.7) and Chad (1.7). Norway (8.9), Australia (8.7) and Austria (8.6) all registered improvements over 2004. China has scored a meager 3.2, quite a contrast with Hong Kong (8.3) and Taiwan (5.9).

Unfortunately, Central and South America, notorious powerhouses of corruption, have lived up to their reputation. Save and except for Chile that sets the example with an enviable score of 7.3, the rest of the pack lags well behind: Uruguay (5.9), Costa Rica (4.2), El Salvador (4.2), Colombia (4.0), Cuba (3.8), Brazil (3.7), Mexico (3.5), Peru (3.5), Honduras (2.6), Nicaragua (2.6), Bolivia (2.5), Ecuador (2.5) – and somebody should inform Hugo Chavez that Venezuela is the last at 2.3.

The lessons are clear: risk factors such as government secrecy, inappropriate influence of elite groups and distorted political finance apply to both wealthy and poorer countries, and no rich country is immune to the scourge of corruption. Stamping out corruption and implementing reforms are critical to realizing the crucial human and economic development goals that all people are entitled to.

Luigi Frascati


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Real Estate Chronicle

Thursday, November 24, 2005


Estates and Interests in Land.

A distinction is commonly made at law between two types of properties: real property and personal property. Real property generally consists of land and whatever is erected, growing upon or affixed to the land. The term "real estate" has a precise historic origin: in England real actions could be taken in court in respect of land and personal actions could be taken in respect of other types of property. Therefore, a distinction between real property and personal property was developed over time. In Canada - as opposed to the United States or continental Europe - the application of English law has inherited one of its fundamental concepts: the land itself is not owned. This is because English law focused not on ownership of land but, rather, on possession of land. The result is that the land itself is not owned or otherwise subject to ownership. Instead the person who has the right to possession is entitled to exercise certain proprietary rights over the land. The only one thing that is subject to ownership is an "estate" in the land.

An "estate" is an abstract legal concept that can be best characterized as a "bundle of rights". In other words, the owner of an estate has certain rights he can exercise over the land. These rights are limited in nature and are incapsulated at common law in the Doctrine of Estates. Estates still in existence today are the Fee Simple Estate, the Life Estate and the Life Estate Pur Autre Vie.


The Fee Simple Estate is what we ordinarily think of as "ownership" of real property. A fee simple owner has more rights over the land than any other owner. Originally the word "fee" meant that the estate could be inherited and "simple" meant that there was no qualification on the type of heir that could inherit it. In practicality that meant that the owner could leave the fee to his heirs in a will. And in the absence of a will, the fee could go to whomever could prove that he was the nearest heir to the deceased owner. A Fee Simple is also known as a freehold estate, that is held by a free tenant, and it can be held for an unlimited period of time. An interesting situation that applies to Fee Simple estates even today is that if the owner does not make a will and no heirs can be traced, then the property will "escheat" or revert back to the Crown much the same as in old times.


A Life Estate is an estate for the life of a person who is called the life tenant. Again it is a freehold estate, but for an uncertain period of time because it terminates upon the death of the life tenant. A Life Estate Pur Autre Vie, on the other hand, is a life estate not for the life of the life tenant but for the life of another person. This would occur in a situation wherein the owner leaves a life estate to the wife and, after his death and after becoming a life tenant the wife remarries and disposes of her property for the life of another person. Needless to say, situations such as these are very rare and are difficult - if not impossible - to sell for value.

In addition to the foregoing, there are bundles of rights that are less than Fee Simple and Life Estates. More specifically, there are three main classifications of interests in land that do not amount to estates: easements, restrictive covenants and profits a prendre.

An easement is, by definition, a privilege acquired by a landowner for the benefit of his land over the land of another. The land receiving the benefit is the dominant tenement, the land over which the right is exercised is the servient tenement. In order to be characterized as such, an easement must have three basic requirements: 1) there must be a dominant and a servient tenement; 2) the easement must accomodate the dominant tenent; 3) the easement must be capable of forming the subject matter of a grant.

Specifically as it relates to the third requirement, the easement must be capable of exact definition. In other words, one must be able to identify its boundaries, and the person granting the easement as well as the person receiving it must have the legal capacity to be grantor and grantee respectively. Whereas a life tenant can create an easement while he is alive, it cannot extend beyond his death. Typical examples of easements are rights of way, rights to light and rights of support like the ones found in elevated construction. Finally, the so called statutory rights of ways are those easements created by act of law and typically in favor of public utility companies.

Restrictive Covenants

A restrictive covenant imposes a restriction on the use of one person's land and the restriction must be negative in nature. Again, there must be three requirements for a restrictive covenant to be characterized as such: 1) it must be negative in nature, for example by imposing a restriction on use; 2) the person who imposes the restriction must retain property which will itself be protected; 3) the burden of the restriction must have been intended by the parties to bind the land.

A "Building Scheme" is a special example of restrictive covenant attaching to two or more lots in a development plan. Often this type of restrictive covenant is used by a developer who is selling lots in a residential subdivision and wants to maintain uniformity in the use of the lots to protect their value. Like a restrictive covenant, a building scheme will be registered against the titles of the lots.

Profits a Prendre

A profit a prendre is the right to enter into another person's land and legally take some profit of the soil, like minerals, trees, fish or game, for the use of the owner of the right. Unlike an easement, it does not need to accompany a dominant tenement and, in fact, may be held as a right per se. Furthermore, it does not need to be granted for a definite period of time. Finally, a profit a prendre cannot be implied by law.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Wednesday, November 23, 2005


On God and Riches.

While far away from me the idea of even remotely criticizing the rightful place of religion in society in terms of history, education and anthropological value, one recurrent economic theme is the change of perspective that today’s distribution of wealth has created vis-à-vis secular religious beliefs. This is so because the tenets of wealth and economics have changed, so that the religious values of yesterday relating to wealth may not be necessarily applicable to our world . That, of course, does not mean that religion has no relevance in today’s world – only that religion must be used carefully when applying its general principles to judge the economic life of our times.

The concept of wealth as seen through religion – especially Christianity - is tempered by the belief that all property belongs to God and that we are trustees – and only temporary at that – of God’s property. The purpose of this entrustment on the part of God is not so much for our own personal satisfaction but, rather, for fulfilling God’s purposes such as, for example, helping the poor and the needy. The pursuit of wealth in the ancient world was fraught with potential problems which made it easy to view those who possessed wealth with moral and spiritual skepticism. However, there are recognizably some important differences between ancient and modern economic systems that account for the strong cautions about wealth as they relate to the past.

The ancient economic system was largely centered around agriculture, limited commerce and trade with real estate as the predominant productive asset. More specifically, the pool of economic resources was relatively fixed, so that when one person became wealthy it was usually at the expense of someone else. Such an arrangement, naturally, set up numerous opportunities to attain wealth abusively by theft, taxation, or extortion. One of the most common instances of this abuse in the Roman World, for example, was for those who had resources to loan money to the poor at terms they could not repay, requiring what little land the poor owned as collateral. Then when the debtors inevitably defaulted, the lender appropriated their land. The debtors became tenant farmers or slaves or were reduced to dependence on charity. This form of taking advantage of the poor occurred regularly in the ancient world and is possibly the main reason as to why religion came to so frequently condemn exploitation of the poor. In these cases, literally, the rich became richer at the expense of the poor, and when someone was wealthy, more often than not, they acquired their riches through some immoral means. Thus, the wealthy were viewed with suspicion and great emphasis was placed on the potential temptations of becoming wealthy, because society then had so few morally legitimate avenues to acquire wealth.

This is obviously no longer the absolute case in the Post-Industrial Revolution era. Although it is certainly true that the poor continue to be exploited to a certain extent, we have shifted from a relatively immobile economy to a more versatile, vibrant model where wealth is being created instead of simply being transferred. In our economies of scale where the cost of producing an additional good is less than the good produced before it, every time a company manufactures or otherwise produces a certain good wealth is created, and every time a company sells that certain good that it has produced wealth is being redistributed. This is the main reason as to why, in contemporary society, the rich can become wealthy while at the same time the poor can also be better off.

It follows, therefore, that in a modern market economy wealth is constantly being created, so that it is possible for someone to become wealthy without necessarily succumbing to the temptations about which religion has warned humanity for centuries. Which, therefore, in a certain respect balances the Fear of God religion has instilled in man as it relates to wealth with the possibilities created by the redistribution of the Power of Money.

And which, furthermore, if memory does not falter me is precisely what brought the schism between spiritual and temporal powers and separation of Church and State – only said differently ...

Luigi Frascati

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Real Estate Chronicle

Monday, November 21, 2005



The ambivalence of U.S. policy towards China may be perhaps best characterized by the incident of the spy airplane back in 2001. While gathering intelligence off the coast of China, a U.S. Navy EP-3 electronic spy plane, piloted by Lt. Osborn collides in mid-air with a Chinese F-8 and is forced to make an emergency landing at Hainan Island. The Chinese pilot, Wang Wei, is killed in the incident. China charges that the U.S. plane illegally entered Chinese airspace, and detains the 24 U.S. crew members for 11 days. It demands that the U.S. take full responsibility for the incident and issue a full apology. In the end, the United States offers a letter in which it says it is "very sorry" for the loss of the Chinese pilot and "very sorry" that the aircraft landed in China without permission. The damaged U.S. airplane is not returned for three months. Together with the letter of apologies, however, China also gets a U.S. carrier battlegroup of the Seventh Fleet permanently stationed off the coast of Taiwan.

On the other hand, Chinese ambivalence towards the United States can be perhaps best described by the statement of a Chinese official to a visiting American delegation to Shanghai in 2001: "I surely hope that you and the American economy do well in this global slowdown, because your economic interest and your economic development are critical to the welfare of people in Shanghai and China.". This remarks comes at a time while China is intent at stealing U.S. military secrets from Martin Lockheed - and it's caught with both hands in the bag doing so.

And then, of course, American and Chinese joint ambivalence towards the rest of the world must be perhaps encapsulated in the philantropic website maintained at where both sides are trying to convince the rest of us in English - and for those who do not get it the first time around, in Chinese - that seldom have there been in the history of humanity two great pals like the Bald Eagle and the Red Dragon. Well ... well ...

China's giant leap towards a Western-style, capitalistic economy presents an increasingly urgent set of challenges that must be resolved by the leading elite if they hope to sustain the miraculous economic growth, which has averaged eight percent a year for the past decade. When you consider that the People's Republic of China (PRC) has 1.3 billion people, more than four times the population of the United States, the implications of its radical economic transformation are sobering. In 2004 the Chinese added 1.8 million cars to their roads, bringing the national total to well over 10 million. At recent growth rates, the number could very well double every three to four years. Should car ownership ever match that in the United States (135 million vehicles in 2002), there would be about 600 million cars on China's roads - more than all the cars in the world today. A statistical comparison between the two giants compiled by the World Resource Institute of the United Nations reveals even more staggering figures:


AREA : 3,705,820 square miles vs. 3,717,796 square miles

POPULATION : 1,288,700,000 vs. 291,500,000

DENSITY : per square mile 348 vs. 78

ENERGY CONSUMPTION per person : 880 Kg/oil per year vs. 7,960 Kg/oil per year

MEAT CONSUMPTION per person : 104 lbs. per year vs. 269 lbs. per year

PAPER CONSUMPTION per person : 73 lbs. per year vs.730 lbs. per year

AVERAGE NUMBER OF PERSON : 1.1 per room vs. 0.5 per room

WATER USE per person : 116,000 gals. per year vs. 484,500 gals. per year

TV SETS per 1,000 persons : 292 vs. 844

VEHICLES per 1000 persons : 16 vs. 774

Since its onset in 1949 the People's Republic has gone through a lot including a famine where 20 million to 30 million people died in the early 1960s; a cultural revolution that went on into a decade, and with a skyrocketing national suicide rate as well. And yet, never in the history of the world have so many people been lifted from poverty so rapidly. President Clinton, in one of his last speeches, said that 200 million people in China were lifted from absolute poverty from 1978 to about 1999. That's equivalent to about two-thirds of the entire population of the United States in twenty years. The economic achievements, therefore, are huge. But so are the problems. The factors of economic instability are many and worry the leadership. In fact, the leading elite justifies some of the repressive political measures precisely because of what they call "the factors of instability." These factors include a financial and banking system that is basically bankrupt, with bad loans out greater than the real net reserves of the entire banking system. There are perhaps between 80 million to 100-plus million people that are moving from the countryside on a kind of temporary contract labor into the Chinese cities. And yet a large numbers of urban unemployed are getting put out of business from non-competitive state enterprises. As a result China has got urban unemployed, rural unemployed coming into the cities, unsound financial system, and general resentment against a regime that has, in the past, grotesquely mismanaged things. And then, of course, there is the widespread problem of corruption that permeates every facet of society.

Indeed, corruption is not a Chinese characteristic per se. It has, however, developed in a world where old, antiquated and inefficient laws are not being replaced fast enough to keep up with the speed of present times, and the vacuum has to be somehow filled. Experts think that on one hand the economic opening will bring more outside influences and in a way more chaos to the country which is not a bad thing in some ways. But, conversely, experts agree that the leadership will try to keep a tight control so that, at the end of the day, there may actually very well be more human rights violations than ever before. There is also an imbalance of wealth between the thirty-five percent of the population that lives in the cities and the sixty-five percent inhabiting the countryside. There is a system of residence controls. If you are lucky enough to be born in a city - and registered as a city dweller - it's easier for you to get into university. You are in the city, you can work at all the large companies and government agencies in the city. If, conversely, you are registered as a rural person there are very severe restrictions on where you can live and work. And this is actually the biggest human rights problem in China today. You have a majority of this population of 1.3 billion that are, by law, second class citizens. Furthermore, there are the other matters of the more than 20 million people who have no social security net whatsoever to assist taking care of their basic needs, as well as the environmental concerns that the new era of industrialization is bringing up. Of the ten worst polluted cities in the whole world according to the World Environmental Agency, eight are in China. And, finally, the PRC accounts for 23 percent of the global population while supply of fresh water is less than 6 percent.

Yet, the social and economic improvements are huge as anyone who saw China in the '70's will confirm. Three decades ago there were no automobiles, no super markets, no highrise buildings. And there were no consumer goods to speak of. It was a Stalinist society, and a very poor Stalinist society at that. So the economic system has totally changed, and the private sector is now the dominant sector of the economy. It didn't exist at all as late as 1979. The political system has changed as well, albeit not nearly as drastically as the economic system. The China of the twenty-first century is a one-party state without a firm ideological foundation, more similar to Mexico under the PRI than Russia under Stalin. It is certainly difficult today to call China a Communist State, and the regime is no longer the party of workers and peasants. Mao Zedong would be unpleasantly surprised at how things got out of hand. But then, even this political transformation is nothing new to the Chinese. In fact, historically China has often gone through periods of consolidation followed by periods of weakening of the central authority. And the inequality of wealth is just a consequence of it all.

No issue is more pivotal and controversial in the U.S.-China relations than the question of Taiwan. On October 1, 1949 after nearly two decades of civil war, Chinese Communist Party leader Mao Zedong declared victory over the U.S.-supported Nationalists (Kuomintang or KMT) led by Chiang Kai-shek. Mao proclaimed the establishment of the People's Republic of China (PRC) and instituted a new communist system modeled after the U.S.S.R. After his defeat Chiang Kai-shek fled to the Chinese island of Taiwan, then called Formosa, along with two million Nationalist refugees. Taiwan is located about 100 miles off China's coast. There he established a "provisional" Nationalist capital in Taipei and declared martial law. The Nationalists claimed to be the sole legitimate government of all of China, and set up the same political bodies on Taiwan which had ruled on the mainland. Under Chiang's authoritarian leadership, the Nationalist government established a successful land reform program during the 1950s which helped transform the country from an agricultural to a commercial and industrial economic powerhouse.

It is difficult for Westerners to understand why Chinese are so adamant about reunification with Taiwan, until an example is brought up by the Chinese. "Think of California as an island off America's West Coast and inhabited by Americans but under a different regime. Wouldn't Washington want to seek reunification ?" The analogy made by Yang Jiechi, Chinese Ambassador to the United States, makes perfect sense. Taiwan is the PRC's unfinished civil war. They fought a civil war with this Nationalist government. They essentially won. The Nationalists escaped out to an island which the Chinese consider an integral part of China. And then, because of American support and other intervening factors, they never finished their civil war. In terms of the military, the PRC is also developing very rapidly. It is acquiring a modern aircraft and modern battleships. Its naval force and air force are developing so fast that China is now at the forefront of Asia's military innovations. Ambivalence exists both in the political relations of China and the U.S. with Taiwan as well as between China and the U.S. over Taiwan. China pursues a policy of "One country - Two systems" , a policy that is working well with Hong Kong and Macau after their return to the PRC. The United States pursues a strategy aptly called "Strategic Ambiguity": it recognizes Bejing as the only legitimate government while at all times investing in and supplying weaponry to Taiwan. And Taiwan's strategy is to court the United States while increasing its trade with the PRC, now amounting to over US $40 billion per year.

It is in this complex context of political and economic balances and counter-balances that the Eagle and the Dragon are eyeballing each others. A context certainly not for the faint of heart. And yet, in the geopolitical situation of Asia the United States and China make a very good team. Both are disdainful of absolutist chieftains the like of North Korea's Kim Il Sung, both want peace and relaxation in the region, both are fervent in their plight against terrorism and both are eager to improve trade and cultural exchange with each others. The Chinese - founders of civilization are now meeting and talking to the Americans - spearheads of modern society. Two great countries, two great people.

Will the Eagle and the Dragon find a common ground for peaceful co-existence and mutual understanding?

Stay tuned.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Thursday, November 17, 2005


What makes a Realtor a Realtor.

"Now that you all passed the Pre-licencing Course, let me make one thing perfectly clear ....". Jeremy Levers had been already one of the top Realtors in British Columbia for over twenty-five years by the time I first met him in October, 1987. A sturdy man in his mid-fifties with a thick, fascinating English accent , he was there in the Auditorium of the Real Estate Board of Greater Vancouver to teach one of the twelve Post-licensing classes mandatory to complete licensing. Whereas the purpose of the Pre-licensing Course had been to give us the basics of Real Estate and Contract Law, Mortgaging, Agency and Appraisal the Post-licensing Course was designed for the practical applications of them all - life on the street, it might have been called. "There are Realtors and there are Good Realtors: a Good Realtor is the one who will always sell a house, even in a slow market. But in order for you to do this, you have to discover the power within yourselves and that I cannot teach you".

1987 was a bad year indeed for real estate: with price dropping, interest rates still in the teens and the great crash of 1982 still in the mind of many, the last thing people wanted to do was to purchase real estate. And yet in 1988, when I actually began my real estate career, I managed to sell nine houses and two apartments ... not too shabby for a rookie ! Mr. Levers, a legend in real estate circles in B.C., could not have been more on the mark. No matter the market, demand for the services of real estate agents will always be there. And the difference in performance that accounts for twenty percent of all agents controlling eighty percent of the market will always be there as well, in any market. To be sure, I have never come across a "bad market" or a "good market" , a "soft market" or a "hard market". A market is a market is a market. What I have seen are "slower markets" where demand for products typically drops, and "faster markets" where demand typically rises. And, naturally, price fluctuations go in sync with demand.

Real estate sales to me is more a field of discipline than a profession. It is, furthermore, far less overcrowded than many people believe it to be. Take for example the Greater Vancouver Metropolitan Area, home to approximately two million people. If the Urban Studies Institute is correct (and they normally are), the average household is made up of four people. That makes 500,000 residential units to house all these many people. If the Instute, moreover, tells the truth (and they normally do) thirty percent of the people are tenants and seventy percent are property owners of all sorts of products - single family detached housing, apartments and row townhouses. This translates into 350,000 units that can be bought and sold at any given time. As, still according to the Institute, the average Canadian household changes residence every five years, the result is that there are 70,000 residences that can potentially be bought and sold every year. The population of the membership of the Real Estate Board of Greater Vancouver is about 6,000 realtors in any given year. 6,000 realtors handling 70,000 homes ..... and you think the field is overcrowded ?

I hear at times folks, who otherwise ought to know better, rendering opinions the likes of "real estate has bleak future growth prospects" or that the industry is being "replaced by technology". Quite aside from the fact that realtors - at least in Canada - and Real Estate Boards throughout the country are at the vanguard of technological innovations with the average agent owning both a laptop and a desktop in addition, of course to a Blackberry or Treo, as well as sporting at least one website of his own in addition, of course to the office website, real estate may have "bleak future growth prospects" in the Sahara Desert perhaps, but certainly not in Greater Vancouver where the average is 92 real estate transactions handled by real estate professionals every day !

I read blogs authored by people, who are supposedly educated and knowledgeable in the field of statistics and economics, complaining about the fact that Realtors do not contribute value to our society when, in fact, the average real estate transaction in Canada, according to a study conducted Clayton Research Associates, finds that the purchase and sale of homes through the MLS system generates an average of CAD $19,800 per transaction in additional consumer spending for fees paid to professionals such as lawyers, appraisers and surveyors, taxes and registration fees paid to governments at all levels as well as purchase of new appliances, furnishings and for renovations. Since there are about 381,000 resale transactions in Canada handled through the MLS system annually, as a result the resale market generates CAD $7.5 billion per year in additional consumer spending and helps create more than 101,600 jobs attributable to moving. That's quite a feat for an industry that contributes "nothing" to society.

And the commissions ... ah, the commissions ! Even taking the standard six percent across the board charged in the United States - which is more than what it is charged typically in Greater Vancouver - that is one of the lowest compensation paid for services in the economic basket of goods. Plaintiffs'lawyers in the United States, for example, charge a fee amounting to 33.3 percent of recoveries before cases are set for trial, and a whopping 40 percent when a trial date is scheduled. And that does not take into account appeals, for which fees are renegotiated. The typical stockbroker charges ten percent per transaction on the buy-sell of stocks, just like the average food broker. Architects charge a mix of fees and commissions depending on the project, with the latter averaging from six to ten percent. Ah, but you say, realtors commissions are six percent on $300,000 ! Here is my professional advice: cut your price in half, so you will pay half the commission ...

Real estate sales is a wonderful, wonderful discipline which brings you closer to people and makes you a better person mainly because it makes you understand your fellow human being and, consequently, yourself to a higher degree. It is a discipline I would encourage anyone to get involved into. The practice of real estate leads to the discovery of how other people live, think and feel and how they go about their lives. It exposes their emotions - joy, anger, frustration and exhilaration, it maximizes interaction among people and with fellow human beings on a spiritual level. It has been said that others are the mirror in which one's life is reflected. When we look into this mirror we get a clearer image of ourselves, a more focused reverberation of the ineherent possibilities of human consciousness. And by doing so, by deepening our insights and understanding of the journey of others we end up discovering our own inner self. The "power within yourself" as Jeremy Levers told us eighteen years ago.

Boy, was he right !

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Saturday, November 12, 2005


The Funniest Real Estate Blunders.

In real estate it pays to steer clear of blunders. Every Agent will tell you so, adding also with a very serious, monochrome facial expression the like normally reserved for weddings or funerals that blunders in real estate are very costly. What not every Agent will tell you, however, is that sometimes we - the Agents - are the ones making the blunders. I was reviewing the other day a collection of very funny newspaper ads I have gathered throughout my eighteen years of real estate practice. Today it is very easy to correct an error on the Internet with just a couple of clicks of the mouse. But only a few short years ago we did not have the benefit of computers with all the whistles and bells like websites, blogs, electronic newsletters and ads. The electronic era was in its infancy and the World of Real Estate was primarily a printed world. Which meant that a blundered newspaper ad, for example, was going to be delivered into each and every household in town before it could be corrected, much to the detriment of the author. And in the impetus and stress of real estate sales and sometimes merely for an abundance of zeal, some of those ads did not reach the intended results. You be the judge ...

"Location .. Location .. This property is conveniently located with Revenue Canada only two short blocks to the south, the hospital only one short block to the north and the cemetery right across the street."

"This apartment complex is located in the center of town, surrounded by all modern amenities and with Safeway only a short two-hour drive away".

"Furthermore this very fine house comes with all the whistles and bells you can possibly imagine, including the front door".

"From the luscious living area step outside the large, stone-covered, wrap-around balcony where you can enjoy the most amazing, breathtaking, 360-degree view of Canada".

"Additionally this open layout apartment comes with the exclusive use of one underground parking where you can securely park your car with your inlaws".

"The living room is bordered by the open wall which coupled by the crystal floor-to-ceiling divisory partition enhances the spaciousness and luminosity of the area so that practically anyone can be laid down".

"Enjoy the sunsets from the acreage of this wonderful, pristine island estate, with the ferries passing on the horizon once a week".

"This spectacular house was built by the famous Sahota Brothers, Amrit and Jill, in less than a month".

"The kitchen communicates with an approximately 8' by 7' room that can be used as pantry or can easily be adhibited as living quarters for the maid".

"Grandma will no doubt enjoy the ceiling-mounted wall socket, perfect for plugging in the iron while watching TV".

"This fine property is still on the drawing board, construction will begin in mid-June and it's never been used before".

"The detached garage is fully functional and self-sufficient and can be used to park your cars or as a guest suite for the inlaws".

"The manicured backyard which is second to none borders with the United States and is, therefore, a smuggler's paradise".

"Don't be fooled by the square footage. This studio will easily fit yourself, the wife, the children and your pets all in the same room".

"There is a master bedroom on the main floor, a master bedroom on the upper floor and a master bedroom downstairs. They will make a Frenchman pale".

And here are some very good reasons for hiring them:

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Wednesday, November 09, 2005


Fundamentals of Agency Law.

"Hello there, my name is James ... James Bond, and I am ... well ... a Realtor". In the Greater Vancouver area there have been an abundance of famous real estate Agents at any given time, at least famous by name that is. In addition to James Bond and, of course, my own last name (' Frascati' is a very famous wine in Italy and one of the seven hills of Rome ), we have had Agents the caliber of Omar Sharif, Vera Cruz, Charlie F. Brown and Giuseppe Mussolini ( you can spot him on the street because he wears a black shirt and has that certain martial ... how should I say ... goose step ...). Not to mention Yuri Gagarin ( no relation to the astronaut ), Carl Marx, Richard (Dick) Nixon and - yes - Douglas MacArthur ( tough guy to deal with ... ) with his newly-found pal John Yamamoto, to name some more. And, faithful to the oriental tradition that characterizes this neck of the woods, we have been sporting at various times a Ding Dong, a King Woo Kong as well as a Sing T. Sing, a Wu Win-chi Wu ( who uses the initials WWW ) and two Ho Chi Minh's. The longest name I have ever come across is Guillermo Oreporemotichovea ( but his friends call him 'Cy' ... no wonder ) and the most memorable slogan ever adopted, to my knowledge, by a Realtor belongs to an Agent by the name of Bob Bye ( now defunct, possibly of starvation ... ) who used to post ads on the paper the likes of " List with Bob Bye - The Guy with the Tie ". Yet, despite the variety of names and walks of life, all Agents - especially in real estate - must abide to the axioms of the Law of Agency when it comes to fulfilling their professional mandates.

An Agent is a person who is authorized to act on another person's behalf. The person for whom he acts is called his Principal. Because the Agent has authority given to him by the Principal, he can create a legal relationship between the Principal and a third party. For example, a purchasing agent can order goods from a third party on behalf of his principal, so long as the purchase is made within the scope of the agent's authority. In such instance, the principal must pay for the goods because he is effectively bound by the agent in a contract with the third party. The agent, on the other hand, is not a party to the contract.

The relationship between an agent and his principal is created by contract. Under the Agency Contract the agent is given authority to do certain things in his principal's place. In exchange for the service provided by the agent to act on his principal's behalf, the principal pays the agent a fee or commission. Agents are not employees. The distinction between an agent and an employee is the degree of control and method of remuneration. A principal tells the agent what he wants and leaves it to the agent how to bring about the result. An employer, on the other hand, tells the employee what to do and how to do it. Furthermore, the agent is usually paid by way of a commission that becomes payable only when he brings in the result. An employee, instead, expects to be remunerated for the number of hours he works regardless of whether or not the result is accomplished. Real Estate Agents are a particular kind of agents. A real estate agent acts on behalf of his principal, almost always the Seller, but can also act on behalf of a Buyer and can, in fact, act on behalf of both Seller and Buyer at the same time subject to certain restrictions. The contract that spells out the terms and conditions of the authority confered by a Seller to the real estate agent is called the Listing Agreement. With the Buyer, the name changes to Buyer's Agency Agreement.

Based upon the wording of the contractual agreement between the principal and the agent, the authority to act confered upon the agent falls into one or more than one of the following categories. The agent's authority to act can be express, implied, by ratification, usual and apparent.

Express Authority

Express authority is the authority given by to the agent by the contract. The contract can be in writing or verbal. Real estate agents are given usually express authority under a Listing Agreement and here in British Columbia all listing agreements involving land or an interest in land ( such as a lease ) must be in writing in order to be enforceable, pursuant to the Real Estate Services Act . It must be understood that a listing agreement is not a contract to sell or otherwise convey an interest in land but, rather, an agreement by and through which one party ( the Agent ) agrees to market an interest in land and the other party ( the Principal ) agrees to pay a commission on completion.

Implied Authority

Even when precise words are used in the express authority, an agent may find himself in circumstances where the acts he wants to do are not covered by those words. It is sometimes possible to imply authority from the precise words. More specifically, an agent would have implied authority to carry out an act if the agent has no choice but to do it in order to fulfill his express authority. For example, a real estate agent's authority may be only to sell a certain parcel of land or a certain house for his principal. The agent may wish to show the property to prospective purchasers during the owner's absence. If the agent had no authority to do so both he and the prospective purchasers would be trespassers and, therefore, liable to the owner in damages. Because showing a property is necessary and incidental to effecting a sale, the agent can imply the authority proximately from his express authority, provided nothing in the contract states otherwise.

Authority by Ratification

Sometimes an authority can be created retroactively. For example, where an agent enters into a contract on behalf of his principal but the contract is beyond the agent's express authority, he can be given authority in the past. This is done by ratification. If the principal consents after the fact to be bound by the unauthorized acts of his agent, he has ratified the contract. The end result is, therefore, that the principal is bound by the contract just as if the agent had been so authorized in the first place.

Usual Authority

Usual authority arises when an agent is engaged by the principal to act in a particular transaction and such transaction is governed by 'customs of the trade' . In such case the principal is considered to have consented to the agent acting in accordance with such customs, as long as they are lawful and reasonable and the principal has not indicated otherwise.

Apparent Authority

Under certain circumstances, furthermore, an agent can bind his principal to a third party even though the agent was not authorized to do so. This arises where a principal has acted in such a way that he leads third parties to believe his agent has authority to perform certain acts on his behalf. If the third party deals with the agent in the bona fide belief that the agent has the authority represented, it is called apparent authority.

In general, any person of sound mind can act as an agent, since the agent does not need to have the capacity to contract out that the principal must have ( refer to my Article entitled 'Fundamentals of Contract Law' for further information ). As a result, an infant agent ( i.e. an agent under the age of majority ) can negotiate a binding contract between the principal and a third party. The infant agent is, however, a party to the agency contract and could therefore use his own incapacity to contract out to repudiate the agency contract with his own principal.

Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

Saturday, November 05, 2005


The North American Consumer: an endangered Species ?

Is the North American consumer on his way to extinction? You can all imagine the scene some 50,000 years into the future, when a group of renown paleo-anthropologists will begin excavation in a geographical area of the Eastern Seaboard known as ... The Great Wall Street Depression. They are looking for the fossilized remains of a sub-species of Homo Sapiens thought to have existed at any time between the mid-Twentieth Century and the beginning of the Twenty-First. After several days of unsuccessful research, luck strikes: they uncover the fossilized skeleton of a hominid with telltale characteristics. The large skull implies that this Homo was intelligent, the long femur is proof that he was well-fed and the gold teeth testify that he took care of himself. But what really captures the attention of the paleo-anthropologists is the fact that this specimen is still clutching a VISA with the right hand and a Mastercard with the left hand. They have unearthed the first fossilized remains of the North American Consumer !

Now that the Federal Reserve is openly on the path of war with increased interest rates and that the Bank of Canada is poised to follow suit, an important economic matter is the evaluation of the existing huge consumer debt. How much weight does consumer debt have on the economy as a whole and is the economy of the North American continent threatened by it? There is a fear these days that if Central Banks continue to increase interest rates, indebted consumers will be thrown into a tizzy and the overall result will be a sharp slowdown in the economies of both the United States and Canada. Those who believe this expect interest rates to remain at historic low levels for a very long time. At the heart of this issue is the high and ever-rising consumer indebtedness. In Canada the ratio of debt to personal income now exceeds 100 percent and in the United States it is more than 90 percent. By any standard of comparison, this is a lot of money. For instance, on the other side of the spectrum in the European Union the average ratio of debt to income is 65 percent, while New Zealand, Australia and Japan are anywhere in between on a growing scale (figures for Hong Kong, now under Chinese jurisdiction, are unavailable). It used to be that Americans were the big spenders, but they have now been outclassed by Canadians. And, furthermore, with debt growing at a rate of nine to ten percent in Canada and seven to eight percent in the United States and income growing at the rate of only two and three percent respectively, these debt to income ratios are bound to rise even further. The question, then, of course becomes: how much is too much ?
Economists have been always leery of consumer indebtedness over the past fifty years, yet disaster has eluded us so far. Canada's ratio of debt to personal income was 98 percent in 2000, which is not very much different from today. And even though interest rates were on the rise in 2000, the economy remained strong. In fact the main reason as to why consumer debt has been constantly on the rise the past fifty years is simply because credit has become more and more available. Not only did lenders in Canada - and to a certain extent in the United States - lower their qualification standards - they have also been offering a variety of loan products, thus making even easier for consumers to meet minimum monthly payments without ever substantially decreasing their debts. Lenders have even made refinancing a snap and in Canada there are reported cases of minors going around (and shopping) with credit cards boasting limits in the tens of thousands. Consumers have more financial flexibility today than ever before, and for good or bad they take full advantage of it. And this flexibility allows them to choose to carry debt when in the past they may not have had this option. Additionally, it is certainly true that low interest rates have encouraged more borrowing which, in turn, has spurred more spending. Real estate is proof of this. All the BMW's, Mercedes, SUV's we see on the streets are another proof.
But has all this extra borrowing really increased the vulnerability of consumers to higher interest rates, as it is being suggested ? Consider the extraordinary automobile deals offered by the Big Three: GM, Ford and Chrysler are offering promotions on certain models with zero percent financing for up to 60 months. As interest rates creep up, those buyers will be left unscathed for the next four to five years. The same is true for mortgages, where many homebuyers have been locking in for the next several years. This ultimately means that the return of interest rates to more normal levels will have no serious - if at all - impact on these consumers with existing debts. And save an except for tragic occurrences the likes of another 9/11 or another war, it doesn't seem that consumer spending will be abated vis-a-vis a gradual increase in interest rates. Much to the good fortune of all of us North American consumers, which do not seem to be on the way to extinction at any time soon.
Luigi Frascati

As Featured On Ezine Articles Platinum Author

Real Estate Chronicle

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