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The condovirus

Condos are the entry door to home ownership for thousands. Hundreds of thousands. Most think they’re investing in real estate, but no dirt’s involved. No property. Owners own from the paint in. The rest of the building is their shared liability. That’s what condo or strata fees are for – to help pay for the cost of maintaining a structure worth millions. Plus insuring it.

If more condo buyers knew what they are buying into, many would freak. They’d bolt. And so they should. A liability disaster may be unfolding.

At first the crisis seemed remote and unique. Condo owners in Fort Mac facing disaster when premiums soared in a community that was attacked by wild fire. Property values plunging to near zero. Owners under water. Mortgages being cancelled.

Then it spread.

Premiums for condo corps in some Alberta centres spiked by 700% or more. Monthly fees escalated wildly as a result. Then last month every condo owner in the province became personally liable for up to $50,000 in potential payments. Condominium corps can seek recovery of the deductible portion of an insurance claim to that level from any condo owner for damage originating in their unit – whether they caused it or not. (Many condo associations in Canada have deductibles ranging up to hundreds of thousands, and owners whose units cause damage can be on the hook for the full amount.)

As one lawyer interprets it: “That means that if something happens in the unit and it’s not your fault — the toilet explodes, there’s water loss, water damage goes through to the floors below — and there’s a $50,000 deductible or a $25,000 deductible, the owners are now responsible for the deductible.”

But it gets worse. What if your condo building couldn’t get insurance at all? Then you couldn’t sell your unit. No buyer could get financing. Property values would collapse. Your own financing likely would not be renewed.

Which, as it turns, out, is exactly what’s happening in BC.

Catastrophic loss events like the 2016 Fort Mac fire, the blazes in central and northern BC or the 2013 Calgary flooding combined with climate change projections, changing weather patterns, escalating building and replacement costs and inflated real estate values (thanks to demographic demand and the mortgage stress test) have seriously goosed condo values, and lie at the heart of a liability crisis. Insurers are backing off. Risk has exploded. Most have no idea what may be coming.

In Burnaby, for example, one condo corp has seen the insurance premium escalate from $200,000 a year to over $800,000, resulting in a massive hike in monthly fees. Other developments have been unable to renew their policies at any price, cancelling sales of individual units since buyers can’t get a mortgage in an uninsured structure.

Says Tony Gioventu, executive director of the Condominium and Homeowners Association of B.C., “This will collapse our real estate industry because no one will be able to get mortgages and there will be no buyers and no sellers.” The buildings hardest hit are those where the most expensive units are located, plus any that have had recent insurance claims or where condo boards have neglected to keep up with big maintenance projects, fearing the impact of special assessments on condo owners.

In BC, the provincial government is being pressed to step in and legislate some kind of solution. Nationally the Insurance Bureau of Canada has engaged a risk manager to work with condo boards in finding ways of reducing their exposure. Nowhere in Canada is there any governmental cap on condo premiums, nor are insurers required to get approval for increases.

In Ontario the insurance issue is being called “a crisis’ by the Canadian Condominium Institute as a growing number of boards cannot find insurance, at any cost. The burden which could be imposed on individual condo owners is large as insurers reprice risk in a changed world. Already many of them, as first-time buyers, struggle with financing payments, property taxes, utilities and personal condo insurance as well as monthly corporation fees. The last thing they need is hundreds more a month in charges – or the potential of a huge deductible – as policies jump in cost.

What to do?

In Alberta every condo owner needs enough personal insurance to handle the cost of the potential $50,000 deductible now on their shoulders. Everywhere people with units must prepare for the certainty of rising monthly condo or strata fees, and perhaps a special annual assessment, as boards are hit with premiums they must pass on. It goes without saying as the cost of condo ownership escalates, property values will be impacted. Mortgage lenders know, and are already adjusting their own risk management.

Mostly, if you’re thinking about a condo purchase, think again. Be prepared to accept greater liability and have the capacity to absorb higher fees. Never, ever buy without requesting a status report from the condo board and having your lawyer parse it. That will show the state of insurance and should highlight developing issues. If you already own, ask the condo board for a copy of the current certificate of insurance – it will outline deductible costs. Insure against them.

Sorry, kids. Mom might have been wrong. You should have rented.

 

Bat-sh*t crazy

DOUG? By Guest Blogger Doug Rowat

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It turns out that bats are the source of all the world’s major virus problems. According to Business Insider:

In the past 45 years, at least three other pandemics (besides SARS) have been traced back to bats. The creatures were the original source of Ebola, which has killed 13,500 people in multiple outbreaks since 1976; Middle Eastern respiratory syndrome, better known as MERS, which can be found in 28 countries; and the Nipah virus, which has a 78% fatality rate.

And the coronavirus is apparently no exception: bats are the most likely cause. And with 10 billion or so bats in the world, future pandemics are a certainty.

At last count, the number of global coronavirus infections sits at about 26,000. However, it’s spreading so fast that by the time you’re reading this that number has likely jumped significantly.

With all the drug companies now involved in vaccine research, you’re probably thinking that the health care sector must have been a pretty good investment over the past month. But, alas, the S&P 500 Health Care Index has actually underperformed the broader market over this span.

This is probably because investors recognize that the coronavirus will have limited-to-zero impact on the bottom lines for drug companies. The approval period for most vaccines is about 10 years, and even if it’s fast-tracked, an approved vaccine could still be 2–3 years away. So, looking to the drug developers to save us from the coronavirus is a misplaced trust. The solution, as it was with SARS and Ebola, is likely to be simple containment. But, of course, if the virus is contained then the revenue opportunity for a vaccine is, needless to say, significantly diminished.

The health care sector actually does best not when the world’s health problems require quick action, but rather when its health problems are lingering and not completely solvable: high cholesterol, arthritis, heart disease, cancer, long-term care, etc.

So, buying the health care sector to ‘play’ the coronavirus is certainly the wrong reason to own the sector; however, allow me to explain a few of the right reasons.

Most importantly, the world’s population is rapidly aging, which results in more demand for health care services. In particular, the wealthy regions of Europe and North America have rapidly aged over the past 15 years (2000–2015). The below chart shows the relationship between the shift in demographics and the massive outperformance of the S&P 500 Health Care Index:

United Nations: percentage population 60 and over

Source: United Nations, Bloomberg, Turner Investments; market returns are cumulative total return from 2000 to 2015

The dotted lines show the forecasts—the accelerating trend clearly won’t be moderating in the coming decades. Obviously, the future performance of the health care sector can’t be predicted precisely, but the favourable demographics will, undoubtedly, be strongly supportive of the sector.

Having health care exposure also provides another built-in benefit for your portfolio: defensiveness. This is illustrated in the performance of the sector over the previous three US recessions dating to the 1990s. In each instance, the health care sector outperformed, often strongly. So, if you’re looking for added volatility control and downside protection, look no further than health care.

US recessions are the S&P 500 Health Care Index (%): health care shines defensively

Source: Bloomberg; NBER; Turner Investments; market returns are the cumulative total return during each recession

So, the health care sector won’t save us from the next pandemic, but if you’re a long-term investor, it just might help save your portfolio.

We’ll let Ozzy Osbourne save us from the bats.

Doug Rowat, FCSI? is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

 

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