Blessed by the Potato

Wayfare sent me an interesting, thought-provoking article in the Toronto star “Sizzlers and Fizzlers”. I shouldn’t say article, it really doesn’t have much writing to it, no analysis or commentary. It’s an interesting factoid. The PDF with what juicy information there is is here. The headline number is that in the last 40 years, Toronto real estate was up 1250% (since 1969), compared to the TSX being up 1244%. This implies that real estate was just as good if not a better investment over the long term than the stock market (once you factor in carrying costs, stocks look like the better place to keep your money, but then you can really leverage the hell out of real estate).

That really put the tingles to my scientist senses* (like Spidey senses, but for nerds… though Peter Parker was a bit of dweeb himself), since this does not jive with just about everything else I’ve read. It makes me want to look deeper into the methods to see how these conclusions came about; it sets off my Saganist “extrodinary claims require extraordinary proof” alarm.

* – Humorous aside, we were talking today in the lab about curious results, including one study that exposed subjects to a 13-hour and 18-hour exposure period every day. Explaining where they found their 31-hour days would have made for a much more interesting paper.

Just about everything else I’ve read, which is more general and not specific to Toronto, puts the compound inflation-adjusted rate of return for housing at about 1% or so (so the nominal rate should be 3-5%). So to see the 6.9% figure in this article (the same as stocks) was a little baffling. Is Toronto really that special? Was all that other stuff about long term trends I read wrong?

Unfortunately, the article does not give anywhere near enough information to say for sure. There are some inconsistencies though. First off, their numbers for the stock market look to be about right, in terms of the nominal prices over the years, but don’t look to include the return from dividends, which should improve the stock market figures by a fair margin. I also have to wonder if the choice of starting year in 1969 could affect things, since the 70’s were a rough decade for stocks — would the picture look different starting from 1959 or 1979? (I don’t actually know, but it makes me wonder) Some areas (and Toronto’s overall average) have not, in inflation-adjusted terms, come back to their 1989 peaks yet, and my dad was saying not too long ago that the housing boom had just recently brought their house back up to that point. Naturally, some areas have been hotter than others. Surprisingly, Willowdale (C-14) was one of the very coldest areas in the study, which just doesn’t agree with the fact that it’s such a desirable neighbourhood. Was it just simply already a wealthy, desirable neighbourhood in 1968, so when the data started in 1969 there wasn’t a whole lot of up left to go? I doubt that, since it used to be, from the perspective of a kid growing up there, a “normal middle class” neighbourhood, and is now full of, well, rich people and condos. The average home price there according to the PDF, $390,520, is almost exactly the same as the overall Toronto average at $390,839 (but it was a good deal above average at the 1989 peak, hence the underperformance). However, a quick trip to MLS will show that the lowest non-condominum asking price is $420k, so how the average got to be $390k in a neighbourhood full of million dollar homes is completely beyond me. The lowest price for a condo is in the $160k range, so it’s possible that all the new condo development in the area is really bringing down the average. But what does that mean for the overall study then? North York’s condo buildup started just a little bit ahead of a lot of other areas, so is the fact that what must be a large number of these units are now being flipped and bringing the average of “resale” homes down disproportionately hurting that area? Likewise, are the people who recently sold their SFHs in the “gentrifying” areas like Leslieville to developers for gagillions of dollars bringing the average way, way up because the condos built on those sites haven’t had a chance to be flipped yet? Since they’re using average values and not medians, are a few $25 million dollar homes in a few areas really skewing the results? Do these results in any way have bearing on the reality of owning a home in Toronto over the past 40 years? Do they offer any insight for what might be in store in the future?? Disturbingly, some of these questions suggest that, for example Willowdale, might have performed even better than the factoid’s already generous rate of return. Or, that the really great returns will come from places that are presently farmland, and not areas that currently look good. Or, that it was a really good idea to own real estate in the 70’s and 80’s, and a really bad one in the 90’s, with the 00’s being a bit of a wash, so far.

The study seems to have enough holes that I’m not going to reject my earlier information that suggests that housing, in general, underperforms the stock market. It is possible that Toronto was a special exception in the last 40 years compared to the overall averages of US (and more rarely for data discussion, Canadian) real estate. After all, in the last 40 years Toronto went from being a backwater city up in, you know, Canada, to being a world-class metropolitan city. Toronto had a huge boom in building and real estate in the 70’s: that’s when almost all of the recognizable downtown was built up: First Canada Place, Royal Bank Plaza, the CN Tower, etc. Two-thirds of those impressive 40-year real estate returns were due to gains in the 70’s and 80’s (yes, it’s cherry-picking at a market peak, but in the second 20 years of this study, housing only returned 2% nominal straight-line returns per year, with negative growth when adjusting for inflation). In just the last 10 years the suburbs have expanded so much some people have started calling them the exurbs, another period of massive growth for Toronto, and also what turned out to be another real estate bubble in the States. So while the headline 40-year overall nominal return number is attention-grabbing, especially next to the very similar number for the nominal TSX return, I’m not convinced that a house is the best place to put my money.

The stock market is in the pits at the moment, and I’m seeing values everywhere. I started the year with a bit of cash on the sidelines, and bought in on the downward slide. Now I’m tapped out in terms of cash, but think it’s probably a good idea to keep buying more (not necessarily right away, just a month after my last buy-in, but through the rest of this year and next). Of course, I can’t buy without more cash… or can I? By borrowing money to invest, I can keep buying more stocks/ETFs. If the market is getting close to the bottom and ready to turn around, I could increase my returns substantially. This is known as leveraging.

If I buy $100 worth of stock with $50 of my own money, and $50 of borrowed money, and then next week the stock is up to $110 and I sell, then I’ve effectively doubled my return: I’ve made $10, bringing me to $60 after I pay off the loan, but only needed $50 of my own money to invest. By the stock going up 10%, my return went up 20%.

It’s this magnification effect of leverage that made buying a home such a great investment over the last several years: with 20% or even 0% down, you could grab a home, and even modest increases in price would lead to you walking away with a tasty handful of cash, because you could leverage yourself to a very large degree with a mortgage.

Of course, leverage cuts the other way, too. If my stock went down to $90 instead, and I had to sell there, I’d pay off the $50 loan and find I was only left with $40 — a 10% decline in the stock lead to a 20% decline in my wealth. To lose everything, that stock would “only” have to go from $100 to $50 (a feat CIBC amongst others has managed recently). If it went bankrupt and went to $0 before I could sell, I’d end up with nothing and owe the bank $50, doubling my potential loss from the $50 I had in cash to invest in the first place.

So leveraging is a way to increase your returns, both positive and negative, at the cost of increased risk. I’ve avoided leveraging so far because it just didn’t fit with my risk appetite. Lately I’ve been thinking more and more about it, and am considering whether a 5% leverage (buying $100 of stock with $95 of my own cash and $5 of the bank’s money in the form of a loan) would work for me. In addition to potentially goosing my returns, it might also help me build up my credit rating. On the other hand, the financial markets are a mess right now, so that risk aspect is very clear.

When buying on margin like this, the risk can be magnified even more by what’s known as a margin call. You see, if you buy your leveraged positions with a margin account at your broker (as opposed to taking out a general loan or home equity line of credit), then there are rules as to how much money they can loan you — you must have skin in the game. For example, if the limit is that you must front the cash for 50% of the price of the stock, then you need to keep that much equity handy. You could, for example, put in $60 and borrow $40 to buy $100 of stock. As long as things are going up, then all is hunky dory. However, if a stock goes down to below the threshold then you will have to either provide more cash so that the value of your loan doesn’t go over the limit, or your brokerage will forcibly sell some of your stocks to cover. So if your $100 of stock goes to $80, then your $40 loan is 50% of the value of your holdings. If the stock goes lower to $79, then you are borrowing too much for the equity you have. You will have to immediately (maybe, if you’re a good customer, the brokerage will give you 3 days) provide cash or sell shares to cover the difference. That can really hurt, not only because the leverage has increased your downside risk, but also because the forced sale means you don’t even have the option of waiting out a downturn — your shares will be sold and you won’t participate in any rebound, if it occurs. These margin calls are part of what sometimes drives the stock market to overshoot and oversell a stock — if the stock starts dropping and enough investors find that they don’t meet their margin requirements, they can be forced to sell something, driving it yet further down.

My examples here are quite simplistic — you will naturally have to pay interest on that loan, whether it is from your broker or a separate loan or line of credit. This interest will reduce your bonus gains a bit, and increase the amount you have to pay on the downside. Margin accounts from a broker are generally “interest only”, which keeps the cost of maintaining the leverage low, whereas you’re generally expected to pay back at least part of the principal back with a traditional loan a bank (not sure about a HELOC, I think that is flexible so it can be interest-only if you want it to be). Borrowing to invest, as long as your investments produce income, should make the interest tax-deductible, but I am not a tax expert and in fact this means very little to me given my tax bill as a grad student.

So what are your thoughts on margin and leveraging? I thought I was fairly pessimistic, at least relative to what I was hearing in the media, about what this year had in store back in January. Then things started to get into my value ranges and I started buying. Now things are a fair bit lower than I estimated the bottom would come, so perhaps things will turn around, or at the very least we might see a dead cat bounce. Do you think I should take on the risk of leverage to try to wring some performance out of this market? For a margin account, TD presently charges 5.75% interest to buy Canadian stocks. There are a number of companies out there that are presently paying out that much in distributions or dividends, so I could buy one and have the payments cover the interest while I wait for capital appreciation. On the other hand, the market might continue to go down and down for years to come, and being leveraged would just magnify my losses. That interest rate is also variable, and could go up at any time: possibly quite soon given the fears of inflation lately, adding to the risk. What do you think? Do you have any thoughts on a margin account versus an investment loan or line of credit? To start you off, here are two posts by Canadian Capitalist, Thicken My Wallet on leverage.

The stock market is a very interesting place where shares in the ownership of a great many companies are traded and priced on a daily basis by investors. For almost any corporation you care to name, you can find someone willing to buy its shares for some price. Even people who owned shares in Bear Sterns managed to find buyers as the company was going down in a liquidity crisis and being snapped up by JP Morgan.

Often, as a small-time investor you will want to own a well-diversified collection of truly excellent companies. Ones that will have good returns for many years to come. Quality stocks.

One of the easiest ways of doing this is to buy the index, which often represents some of the largest household names out there. It’s very difficult to beat the index, especially when the market is “efficient”, when nearly everything is going up and when nearly everything is priced rationally according to accurate information about the business environment. There’s a lot of information out there about index and passive investing, including a few previous entries here. In general, I recommend it. Part of my portfolio is indexed via the TD e-series funds, and it’s the only part of my portfolio that’s growing at the moment.

However, I don’t think the market is “efficient” at the moment. It’s in chaos. Things are down, then they’re up, then down again. There’s a lot of fear, a lot of uncertainty about what the future holds, even some uncertainty about what the current balance sheet holds, and more than a few margin calls going on. The quality stocks are being sold off with the junk, and even the mediocre companies look to be oversold. This to me seems like the time to try to “outsmart” the market and look for values. Note that this is, essentially, gambling: I’m taking on more risk to pursue higher rewards.

I’ve already talked a fair bit about some companies that I think are really good companies in general, but possibly under-priced. GE I think “should” be at least $32 by this time next year, and YLO.UN “belongs” in the $11 range, like, now. I won’t talk too much more about those ones, especially since I’ve been wrong so many times before, and they continue to slide down no matter how much I jump up and down. Come back to this entry in a year and odds are good that I’ll be wrong again.

I mentioned earlier that every company’s shares get priced on the market. That goes for poor companies and mediocre companies as well. Generally, you want only want to own quality, but if mediocrity is cheap enough, it might be worth looking into. Virtually everything is a buy at some point, even if its just to buy up the shares and liquidate the assets. That brings me to Priszm Income Fund (QSR.UN). They run a number of KFC, Taco Bell, and a few Pizza Hut restaurants in Canada. This is not exactly a huge growth business: you’re not going to wake up in a few months and find 6 new KFC restaurants opened and bustling in your neighbourhood. In fact, they’re downsizing and selling off some of their restaurants. The future does not look particularly bright for QSR, and sales were down 4% from last year. However, the market can factor all of this into the price of a stock. It can even overcompensate, pricing a mediocre stock too low and turning it into a potential gem. Priszm is an income trust, so essentially it sells delicious-smelling chicken with 11 herbs and spices and redistributes the money to unit holders. QSR is handing out $1.20/year at the moment, and with the stock at $3.50, that’s a 34% yield. It’s crazy, I know, and that’s of course because they can’t possibly keep that kind of distribution up with the way their business is going (the payout ratio is, according to TD, about 140% at present). A distribution cut is obviously priced in right now — but has the market gone too far? A few months ago, TD’s analyst estimated that the distribution would have to be cut to 7 cents/month ($0.84/year), which is still a very attractive 24% yield at this price. Even if the distribution was cut in half to $0.60/year that would be a yield of 17%, which is pretty nice. Of course, since it looks like they might continue to lose sales for the next few years, there might be further distribution cuts after that one. Being an income trust, it’s fairly amenable to being analyzed as an annuity: how much would I pay for a distribution of 84 cents this year, and which goes down by 5 cents/year every year thereafter? What is the present value of that? Well, if my target rate of return is 15%, that kind of payout would be worth about $3.60. Not bad considering I didn’t include any mention of book value, and that there is a chance that the management of QSR will stop the bleeding before the distribution drops to zero. The high target return rate and the book value help give some downside safety to that analysis of value…

But of course things could be worse. At that rate of decline, they’d still be in business (or at least have a positive cash flow) for another 17 years. What if it dropped 15 cents per year, putting them out of business in 5-some years? (Present value: $2)

They could also go tits-up like the Colonel himself. So what are the odds of that happening? Unfortunately, I can’t really say. At this point, the market seems to be anticipating not only that Priszm will cut its distribution, but that the cut will be huge, or possibly that it will cease to have positive cash flow all together. My dad says that they’re never going to stop selling fried chicken, and he might have a point — but that won’t necessarily stop these restaurants from getting to the point where they can’t spin off cash to the investors. While KFC is a bit of an icon, consumer tastes do seem to be slowly shifting away, especially since they were slow to get away from trans fats, and even slower to get broiled/grilled/toasted chicken on the menu (this year!). So I’m a little negative on the long-term prospects of this company. I think it’s not one of the top-quality stocks that everyone always wants to have in their portfolio; it doesn’t have this insurmountable economic moat, or brilliant growth prospects (or really, any growth prospects at all — just a hopefully long, graceful decline with many years of continued profitability yet). However, at this price I can’t help but see some value there. Take that, my precious few readers, with a giant grain of salt: I’ve been seeing value in Priszm for a while, and thought it might make a good buy at $5, too. It’s quite possible I’m missing signs of more serious financial trouble at that company and am being a retard for talking this up as a value. As the saying goes, a cheap price is not necessarily a value; or, sometimes you get what you pay for.

Of course, with the market the way it is, I’m seeing values almost everywhere. My problem now is not lack of values but lack of cash. I couldn’t buy any more Priszm if I wanted to, nor could I snatch up a tasty piece of GE, YLO, TD, or CNR along with some oil, either (oops! the market found CNR today [Jul 8] – up 5.5% already!). The only place I’m having trouble seeing value right now is Potash. Don’t get me wrong, I like the Potash “story”, and think it’s probably still a good investment… but mistake though it may have been at the time, I didn’t see the “downside protection” at $100, and at $200 it seems a little too speculative to me (despite the fact that I don’t feel the same way about oil, oddly enough). Sure, I could easily see it hitting $300 by next year or the year after, and that’s awfully attractive, but I can also see the potential to drop back down to $100, so I don’t really feel the need to buy any outside the little bit that I already own in my index. One has to also consider the possibility that I am letting psychosis interfere with my financial analysis. Do I not see value in Potash because I made a mistake last year in not buying it, missing out on a huge growth story, and so continue to not see value there, justifying my earlier decision to myself? Do I think Priszm is worthwhile because I bought some at a (much) higher price, and am missing something obvious to the other investors, perhaps that management might not have much foresight if they continue paying out a distribution from cash they don’t have? Am I suffering from confirmation bias?

Finally, I’m rethinking my stake in CanWel building materials. CanWel (CWX.UN) is a distributor of housing materials. For some reason completely unknown to me, the stock price started going really wonky a few years ago, getting stuck in the $4.25-$5 doldrums (my cost is $6.70/share). The distributions have been consistent, and it’s currently yielding almost 16% (with my yield-on-cash-invested being about 10%). They sell building materials (lumber and hardware) to stores like Rona and Home Hardware, as well as to some customers in the US, and some housing manufacturers directly. Because of the housing downturn in the states, sales are off by about 8%, and that’s what really has me worried: the housing market is nose-diving in the US, and the Canadian market does not look far behind. Moreover, this stock hasn’t been completely crushed by our current bear market (down 16% compared to HR.UN down 26%, compared to RON down 49%). That makes me wonder if I should get out while the getting out is good. True, I’d realize a loss and miss out on a pretty decent distribution. I am afraid that distribution might be cut, and I’m going to model that in just a bit, but at the same time they just had a bonus distribution a few months ago. That to me doesn’t speak of a management team that expects a distribution cut or is running short on distributable cash. My dad is still keen on CanWel, but had this bit of advice “If you’re not comfortable, just sell. The $29 commission is pretty cheap insurance.” So let’s run some numbers.

Despite falling sales, their distributable cash flow and margin have increased over the last year. This is largely due to better inventory management, so I don’t expect continued margin improvements. The payout ratio is 91%, which is a good place to be in a general sense, but in these uncertain times means that there’s no cash flow cushion to keep up distributions if sales sag. Using my ghetto spreadsheet/annuity analysis, and choosing a target rate of return of 15%, at its current distributions (and assuming they can be maintained past 2011), CanWel is worth about $4.80 — very close to the current share price, which of course is because the yield is about 16%, above my target rate (and then the buy price gets a slight boost from the book value in my reckoning). Now, sales are down 8% already just from the US housing market slowdown, but this is a Canadian company. A slowdown here could knock sales down 25-50%. Heck, maybe more, what do I really know? Running the 25% and 50% reduction scenarios, with a recovery to present levels by 2014 (arbitrarily chosen so I’m not overly negative), and I figure the worth goes to $3.90 and $4.30. At the current price of $4.40 then, some of these coming decreases might already be factored in — or I might be too optimistic in my calculations, or worse yet, completely out of my depth and doing meaningless Excel massaging. Assuming that $3.90 does represent a potential bottoming out for decreased sales/distributions, then that’s only another 11% downside. In that case holding on and collecting the cashflow is probably the best answer.

However, those calculations are cold comfort, and I can’t get over that nagging gut feeling that something nasty might be in store for CanWel, especially as the new CMHC guidelines might put a very sudden damper on the market. It is a very thinly traded stock — even my meagre holdings if liquidated would affect a typical day’s volume. So what I think I might do is put in an ask at my “fair” price of $4.80 and see what happens.

Well, FT at MDJ did a hack job on the economics of choosing a hybrid vs. a gasser, and was called to the mat for it in the comments section. He didn’t make any hugely egregious errors, like “factoring in” a “battery replacement”, or comparing a brand-new midsized hybrid to a used subcompact, but it was no better than what the clueless MSM put out month after month about payback periods, comparing a mid-size to a compact, assuming gas will never go up, ignoring government rebates (he did get the federal one, but not the provincial rebates, available in ON, QC, BC, MB, PE — or available to about 78% of Canada’s car-buying population, though FT is not himself one of that majority). I expected more from an otherwise intelligent personal finance blogger. Rather than learn from the comments though, he highlighted it in his June “best of” post, saying “The numbers don’t lie however, hybrids are simply economically more expensive.” Them’s fightin‘ words! Especially since the numbers (flawed as they were) did show that at least 2 hybrids were worth it, with payback periods of only 6.3 and 6.7 years — just about half the vehicle’s expected lifetime.

It’s only been a month, but things have already changed for that analysis. Gas is up to $1.38/L, the ecoauto federal rebate is just about gone, Toyota lowered the price of a few of its models, and in the States the Prius frenzy has gotten to the point where some people are selling their used cars for a profit. How’s that for resale value? So, I figure it’s probably worthwhile for me to walk through the numbers again and see just what the story is. Since some of you will start to glaze over with a post this long, I’ll summarize the salient points now. Depending on your assumptions:

• Prius, compared to a Camry, will save, at best, $44,593 over its lifetime; at worst, it will still save $1,697.
• The Civic hybrid, at best, saves $27,413; at worst, you save a mere $620.
• The numbers don’t lie: buying a hybrid makes good sense, with very limited downside, and a lot of potential savings if gas prices continue to increase as they have been and you keep your cars for a long time, with lots of city/stop-and-go driving. Read on for details!

1. Assumptions: When doing a cost-benefit or payback analysis like this looking years into the future, what you assume can have a big impact on the final outcome. If you assume gas is 80 cents/L and will stay there until the heat death of the universe, then the benefits of a fuel efficient car are plainly not going to be as great as if you started at $1.40/L and double that every 3 years. To try to get around my set of assumptions skewing the analysis, I’ll try to run the numbers for a couple of different assumptions so you can see the spread of possible outcomes. The best solution is for you to run your own numbers if you are thinking of buying a hybrid; use the mileage and driving style that best suit you; compare it to the car you would actually buy in its stead; try a few different projections of what gas prices might do. Towards the end I’ll provide a spreadsheet to help with this process. Here are the assumptions that you have to keep in mind that can really sway this type of analysis:

1a. Assumptions about gas price: What you assume gas prices will be in the future will be a very important factor in determining how fuel efficient your next car should be. So let’s make 4 different assumptions. First, that gas will stay at $1.38/L, indefinitely. Second, that we are in some kind of oil bubble, and that gas will actually go down, settling at $1/L. Third and fourth, that gas will continue to go up about 3 and 10% per year.

1b. Assumptions about driving: Do you ever get stuck in traffic? Ever? The EPA and NRC do not include stop-and-go traffic in their fuel consumption calculations. The “city” ratings you see for cars are based on a “city cycle” that involves some slow driving and some stops, but not the ~5 km/h stop-and-go crawl that I’m sure many of us have faced. This is one of many reasons why it’s very difficult to get the rated mileage on any car. If you’re a taxi driver or someone who does the majority of their driving in a hellish commute, you should take this into account. For now, I’m sticking with the NRC figures for ease of comparison, but you should know that hybrids and gassers are affected by the conditions differently (in stop-and-go, a hybrid tends to do proportionately better due to less idling, giving the advantage to the hybrid; in nasty cold-weather driving, the hurt is proportionately worse for the hybrid, because the heat requirements mean the engine doesn’t shut off at stops as much). So let’s assume first off someone who lives say out on PEI where almost all their driving can be considered to be at the “highway” rating. Our next scenario will be someone who is a very careful driver in both the city and highway and gets the “combined” rating — driving 50% in each condition. Finally, someone who mostly just commutes around the city, and uses solely the “city” rating. As a bonus, I’ll also include my best guess “real world” mileage based on my own experience communicating with hybrid drivers on greenhybrid.com compared to my 1997 Accord’s real world mileage of 8.5 L/100 km, with most of my driving on the 401.

1c. Assumptions about lifetime: How long do you keep your car for? At almost 240,000 km, my Accord looks like it’s nearing the end of its life, but might make it to 300,000 km yet. You can take as a given that a car purchased today should last 10 years or 200,000 km, which we’ll take as our bottom lifetime mileage, with 350,000 km as the upper assumption. With the lifetime, we’ll also show the savings over the vehicle life which is, IMHO, more useful than a time to payback, which masks the significance if the premium is big: for example, if you had a full hybrid with a $4k premium and a stop-start “GM hybrid” with a premium of $1k, and if they both had a payback period of 6 years or half their lifespan, you might be fooled into thinking they were both worthwhile hybrids — but the first one would save you an additional $4k in the second half of its life, and its greater fuel efficiency would be put to even better use in a rising gas cost environment. Do you care more about how much money you save total, or how soon you get what you put out back?

1d. Resale: Most people, of course, won’t buy a new car and then keep it until it stops running at the above assumption. So resale value will play some role in the decision of which car will be the most economical to run over time. Unfortunately this issue is somewhat uncertain. At the moment, hybrid cars are holding their resale value exceptionally well. However, if and when even more advanced cars (third generation hybrids or all-electrics) hit the streets, the hybrids might take a hit to their resale value. Of course, it’s probably a fair assumption that if that happens, the gassers will also take a hit. Rather than try to look at this, I’m going to ignore the issue and simply say that resale will be equivalent — you can pass on whatever hybrid premium you paid to the next buyer, who will also be willing to pay a little bit more up front to save some money at the pump.

1e. Comparables: A comparison of a hybrid car’s value requires, of course, something to compare it to. Unfortunately it can be somewhat difficult to pick which car is most comparable to a given hybrid, the Prius in particular, since it’s not a modified version of an existing model. I propose that the Accord or Camry is the best comparable to use — the Prius is a mid-sized car with the same cargo space and slightly more rear passenger leg room (but slightly less shoulder room and less comfortable/adjustable front seats). Some people propose the Corolla/Civic or Matrix as comparables, since the Prius is just a touch smaller than the Camry, so it should be bumped all the way down to a compact. People with an axe to grind or who are retarded say that the Prius is “for economy” and will compare it to a much smaller Yaris (or overseas, a VW Polo). Even after one picks the shell to compare to, it’s difficult to pick which trim level is comparable. For sure, an automatic transmission should be used for the comparison, unless you’re really one of the <10% of Canadians who pick a manual (and then if you use the manual fuel ratings, that you shift perfectly, always with an eye to economy). If you are doing this sort of analysis for yourself because this is a decision you are facing, be sure to use whatever car you are actually considering as an alternate.

1f. Maintenance: A factor to total cost of ownership is maintenance. Unfortunately there’s just not enough information to accurately compare hybrids and gassers. You can start by throwing that 5-year battery FUD out your nearest window. Near the end of its life: possibly (the warranty covers 160,000 km!). But then near the end of its life a gasser might need any one of a number of expensive repairs (including transmission), as well as more wear parts replaced in standard maintenance (brakes, belts, pumps, etc.). For now, we call it a wash and hope that the difference isn’t too great in either direction.

1g. Years vs km: Many of these comparisons look for “years to payback” and then assume some typical yearly mileage. Of course, if you then drive way more per year than the average person (for instance, as a taxi driver) then the comparison means little. Heavy drivers usually find hybrids a very appealing choice. I won’t even bother looking at it like that, and will stick with using distances and lifetime costs rather than time — you can figure out years if you want them from how much you drive per year (me, I drive about 20,000 km/year, or at least I did before I got my bike). One caveat to that is that I will be using time to figure the changes in the price of gas, and splitting the lifetime mileage over 12 years.

1h. Price – MSRP: One last assumption is that all these comparisons are done at the MSRP. It is very likely that you will negotiate down from MSRP if you are buying a new car, whether by negotiating on your own or with the help of something like the APA. It is possible that due to demand and other factors, you might be able to get more of a discount on a gasser (negotiate closer to invoice) than on a hybrid. However, from getting quotes from the APA I did not see much difference in 2006, so I’m ignoring this factor anyway. At most, it might sway the results by $1000 or so. Update, 2010: I have confirmed that it is possible to negotiate the price of a hybrid to within a few hundred dollars of invoice, exactly like a gasser. That’s always subject to change, especially with a gas price shock, but there you have it.

1i. Cost of Money: Ok, seriously, I know that you may have to finance the hybrid premium, and the interest paid may make that premium a little more painful, but come on. I’m ignoring this factor — you can do the math yourself if you find the numbers come out close enough that it might matter.

1j. Insurance Costs: I can’t say definitively what the difference in insurance costs will be for your hybrid vs regular car. Definitely shop around if you’re buying a hybrid. Some companies (in the US at least) offer discounts to hybrid drivers, both to project a green image for the insurance company, and also due to the belief that drivers who choose hybrids drive for efficiency: slower, leaving more following space. Contrarily, some insurance companies charge more to insure a hybrid due to the “unknown” factor as well as the fact that the resale values hold up so well that if there is an accident, it ends up costing them more to make the drivers whole. This factor is also ignored. Update, 2010: I have confirmed that TD Meloche Monnex at least charges the same for a Prius or Matrix, so there’s no insurance difference.

2a. Comparison – Prius: I’ve talked a lot about the Prius on here in the past. It’s the most famous, most recognizable hybrid, and the one I plan on buying myself… one day. So let’s start with its comparison!

The Prius is, at last count, the most fuel efficient car available to Canadians. That says a lot about hybrid technology considering the Prius is a comfortable, reasonably speedy mid-sized. Yes, it’s even more fuel efficient than the tiny 2-seater Smart ForTwo (though that’s a really close race). The Prius, as of just this week, starts at $27,600 and has a $2000 Ontario rebate on the PST (as well as $2k in BC, MB, and QC; PEI has a rebate as well, but I’m not 100% sure what that rebate is). If you act quick, you might get the last of the federal EcoAuto rebate money, but I won’t include that in this analysis.

The Camry, Toyota’s other mid-sized car compares very favourably to the Prius. It starts at $23,400, putting the hybrid premium at $2,746. The Prius has a fraction of an inch more legroom, 25 L more cargo space, but 2.5 inches less shoulder room. You see immediately why it’s not really proper to compare it with a Corolla! The Camry gets 9.5 and 6.2 L/100 km in the city and highway, compared to the Prius at 4.0 and 4.2. So, assuming a 200 Mm lifetime, we find that under our constant ($1.38/L) gas price assumption, the Prius saves $7,604 in combined driving. Our worst-case assumptions, that gas goes back down to $1/L and only hwy driving is used, and the Prius still comes out saving $1,697 over its lifetime. In the best-case (for the Prius), where gas goes up by 10% per year and all driving is at the city rate, the savings are an astonishing $24,305! Use a 350,000 km lifetime for both cars and that best-case savings comes to $44,593 (enough to not only repay the cost of the hybrid premium, but enough gas savings to pay for the entire car outright!). Of course, that’s a lot of really shitty city driving under some downright oppressive gas prices (ending up at about $4/L in year 12 — though that might be coming for us). The savings from the real world mileage comparison, at constant gas prices, over a 350,000 km lifetime are $14,159. When compared to the Camry, there is no set of realistic assumptions that lead to buying the Prius being a bad financial decision, at least as long as we’re ignoring maintenance and cost of money.

So, as MDJ and some other uninformed journalists have done, let’s look at the Corolla as the comparison car. The Corolla is smaller than the Prius, with a bit less shoulder room up front, and a bit more in the back. It’s got less legroom in both, losing out on more than 2″ in the back (which makes a difference for putting adults in back), and the cargo area at 350 L is more than 100 L smaller than the Prius’ rating, and the Corolla doesn’t have the utility of the hatch (though for normal luggage, the longer, lower trunk is more usefully shaped). The lowest package with an automatic transmission, air conditioning, and cruise control is $18,295, putting the hybrid premium at $8,514.65 (though if you want keyless entry and 16″ wheels, you’re looking at $19,900). The Corolla gets 7.4 and 5.6 L/100 km in the city and highway cycles, resp. The best-case for the Corolla, gas prices go down to $1/L and the cars only last 200,000 km, and all driving is done on the highway, the Prius ends up costing $5,404 more over its life. Even at that lifespan, the Prius will save $869 if gas prices stay the same and all driving is in the city; $8,208 if all driving is in the city and gas goes up. With a 350,000 lifetime, the only way the Corolla makes more sense is if all driving is done on the highway. Here it really depends on which assumptions you have going in, but Wayfare has already vetoed the Corolla as not having enough space — the Prius or a Camry/Accord is really the only choice for us. It’s quite possible that a Corolla might be one’s comparison car of choice, in which case deciding what you think might happen to the cost of gas in the years to come and how long the cars will last will sway your results.

Let’s finish up our work with the Prius by looking at the Matrix. The Matrix is based on the Corolla platform (or so I’m told), so it has the same leg room issues. Surprisingly, the trunk in the Matrix hatchback is bigger than the Prius by 100 L — after having rented one I would have eyeballed it as about the same, so I think that size comes from height (the Prius hatch slopes down whereas the Matrix keeps a flatter roof further towards the back). The Matrix XR is $20,735 and gets 9.7 L/100 km in the city, 6.9 L/100 km on the highway — bizarrely, worse than the Camry. Knowing that, it’s pretty easy to see that the payback is pretty decent, even with the higher premium of $5,757. The Matrix would save a bit relative to the Prius if gas prices went down and the combined ($425) or highway only driving ($2647) was used with a 200,000 km lifetime. If gas prices go up, or lower-mileage conditions are considered, the Prius makes more financial sense. With a 350,000 km lifetime, the Matrix can still save a bit with highway only driving (down to $314) if gas goes down to $1/L, but if gas goes up 10% per year and the combined cycle is used, the Prius will save $14,900 over that time. At stable gas prices and the combined driving cycle, the Prius would save $866 over 200,000 km and $5,834 over 350,000 km lifetime.

2b. Comparison – Civic Hybrid: The Civic hybrid is really only compared to the Civic, for obvious reasons. The hybrid is a bit of an “upscale” trim, falling somewhere between the LX and EX in its feature list. To be conservative, we’ll pick the LX. The Hybird is $26,350 compared to the LX’s $22,180, which with the $2000 from the Ontario (or other provincial) government puts the hybrid premium at $2712. The gasser gets 8.2/5.7 L/100 km vs the hybrid at 4.7/4.2 L/100 km. At constant gas prices, a 250,000 km lifetime, and mixed cycle driving, you’d save $5,913 over the lifetime of the hybrid. There is no scenario where you save money with the gasser — though a short 200,000 km lifetime with all driving at the highway rating and gas prices that go down to $1/L would make it a close call, with the hybrid saving a mere $620. A 350,000 km lifetime in our city-driving Armageddon gas price universe (gas goes up 10%/year to almost $4/L in 12 years) and you could save as much as $27,413.

The Civic vs. Hybrid Civic is not an economic debate at all: the hybrid just makes so much financial sense, it has so little downside that if that were the issue, you just buy it and don’t worry. The real decision is between spending more (over its lifetime) for the gasser to get the bigger trunk, or save money (by spending a bit more up front) to get the hybrid, and then live with the small trunk — maybe having to get a roof rack for that twice a year trip to grandma’s. The day they make a hybrid Civic wagon, or find a way to hide those batteries without using up interior space, Honda could just shut down the rest of the Civic line.

2c. Comparison – Saturn Aura Hybrid: Here the MSRP discount thing is really not an issue, since Saturn has “no-haggle” pricing. The Aura “hybrid” is, well, kinda shitty. Many people actually wonder if GM put it out to make people mad on purpose, to question the fuel savings of a “hybrid”, to sully the name of hybrids everywhere so people would stop going to Toyota and Honda and come back to good old GM gassers. It gets 8.5/6.2 L/100 km compared to the gasser 4 cylinder’s 9.6/6.5 L/100 km (city/hwy). Most of the savings come from the stops in the driving cycle where the stop/start system can, well, turn the engine off to avoid idling. Its electric motor is not really powerful enough to provide any real electric boost, so regenerative braking also doesn’t really factor in. Nor does it feature a switch to an Atkinson-ish cycle. In all honesty, this start/stop system should be on all cars, and should have been years ago; it shouldn’t be referred to as a hybridization. However, the Aura is cheap: $27,575 for the hybrid to $24,240 for the XE. With the $2000 PST rebate (but no EcoAuto rebate, even if you get an ’08), that puts the premium at a smooth $1,768. Under the very best scenario, 350,000 km lifetime and increasing gas prices at 10%, with all city driving, the Aura save $7,699 over its life (compare that to the tens of thousands saved by the Prius and Civic in this best-case for hybrids scenario). Drop the lifetime mileage to 200,000 km, and the savings are $3,642 for the 10% increasing gas prices and city driving; $163 for the combined cycle and stable gas prices. Of course, at worst, if gas prices go down and all your driving is on the highway over a 200,000 km lifetime, the Aura will only cost you $1102 more than the gas equivalent. Sure, it’s the “cheapest” hybrid, but it will save you the least over its lifetime because the efficiency gains aren’t really there.

3. The Notion of Payback: And finally, a quick note on the notion of payback. Here I’ve shown that, with a few sets of assumptions, that you will save money by buying a hybrid over a comparable gasser. Choosing a hybrid powertrain is the only option that will ever pay for itself. Reflect on that magical fact for a moment. Buying a moonroof, a V6, an automatic over a manual, or a larger car/SUV will never make economic sense. A hybrid does, in many scenarios, and also provides all those other wonderful environmental benefits and the coolness factor.

4. Conclusions: As you may have noticed, I have way, way too many potential parameters to even lay them all out in a chart. I’ll provide the excel sheet I created so you can run through any calculations you want to, now that you know what to take into consideration. It’s just taking too long to type this out. Nonetheless MDJ and the MSM journalists have been served. If you use a comparison that at all includes an increase in the price of gas or compare a car that stacks up well to the hybrid model such as the Prius vs Camry, and include the provincial rebates, then you find that in many potential outcomes, the hybrid makes economic sense. In some, such as an extended continuation of our current gas shock, you find that the hybrid becomes the only really intelligent option. So much upside, so little downside — and that’s not even taking into consideration the reduction in pollution. After all, at worst you’re out the “hybrid premium”, which is not that much more than the cost of a built-in navigation system. At best, you save tens of thousands of dollars if gas prices and the traffic on your commute go to hell.

There are some limits to this: if you can wait another 5-10 years, you may be able to get an all-electric or at least plug-in hybrid car, which will be very attractive for city commuting. If you buy used, your total cost will almost certainly be lower than getting a new hybrid (the exception being taxi drivers, who have such poor fuel economy with their city-only, heavy idling driving, and they pack on so many miles that at current gas prices a hybrid saves them money even if the alternative car is free). It almost always makes more sense to hang on to an already-paid for vehicle that’s running well than to trade in for a hybrid. The slam-dunk for hybrids vs comparable new cars does in part depend on the tax rebates. Also because the resale value on hybrids is so good, it’s difficult to make the same kind of financial sense vs a comparable used, non-hybrid car if you look at used-to-used.

4a. Diesel vs gasser: Over in the comments, some people also clamoured for a diesel vs gasser comparison, to see if the greater fuel economy of diesels made that purchase make financial sense, since diesels also have an up-front price premium. I’m not even going to touch that, because first of all, the diesels are not as efficient as people remember them being in the bold new low-sulphur diesel world, and secondly because the price of diesel keeps going up even faster than gas. But most of all, because diesels are dirty. With hybrids, one wants to check if it makes financial sense for selfish reasons, and if it does, then go for it because it has these great environmental benefits. For diesel, the opposite is the case: they emit more smog, asthma, and cancer-causing emissions, as well as carbon dioxide (for the same number of liters burned) so the fuel savings would have to be huge to justify that kind of social cost. And they’re not.

4b. Not A Panacea: Oil is getting more expensive. We’re running out of the easy-to-get-stuff. Global warming is an issue. Hybrids are not a panacea. Even if everyone drove a Prius, we’d only delay the inevitable by a few years, though we would handily take care of those air-quality-alert days. However, it’s the best available option short of giving up driving all together. It’s also a valuable stepping stone towards pure-electric or PHEV cars.

Link to the comparison excel sheet.
Permalink.

I’m a little bit of a sucker for using reward points and cards, but I hardly ever redeem my points. From Air Miles I regularly get Cineplex Night Out passes, both as a nice use of the reward points, and also as a way to go out to the movies (something Wayfare loves) without having to see just how much it costs these days (something I loathe). But my RBC card has been racking up points for years now that I’ve never redeemed, as has my PC account (both debit and my recent mastercard). I’m up to nearly $400 worth of points on the RBC card and over $40 on my PC points.

These last few months have been pretty tough on the budget: I had some car trouble, tire trouble, a conference or three, we went on vacation, and I bought a bike. Some of that isn’t too bad: I’m getting good use out of the bike, and it can even help me offset some of my car usage (…as soon as I build up the stamina to start biking to Toronto). The car costs were fairly outrageous, but hopefully that’ll be the end of that until October at the very least (when I’ve got to get my emissions checked and renew my license, and where for the first time ever I’m afraid the old beast might not pass). Work does pay for the essentials of sending me to a conference: the flight, the hotel, the taxi from the airport to the hotel, registration, and the majority portion of my food (I haven’t quite found which category I can expense whatchamicallit bars under, so it looks like I have to eat that cost). However, they do encourage non-budgeted spending in a pretty nasty way: as long as I was out in Victoria, I went to visit the Cathedral Grove. Whilst in San Diego, why not try surfing and visit the zoo? Plus the hotel has restaurants on-site, so if we decided to take a cab downtown for a little variety in our meals, work would pay for the meal, but not the cab fare. It adds up.

So to try to get back on-budget, I’m going to start tapping some of those reward points. A few hundred dollars in gas from RBC, and a week’s worth of groceries from PC should help get us back on track for the summer months.

One thing I find interesting is how your rewards points have different values depending on how you spend them. RBC has a number of gift cards available, including the gas cards for Esso, and that gives you an idea of the cash value of the points: a $50 gas card costs 6000 points. A Cineplex Night Out pass is 3500 points, so it costs about $29. Air Miles gets very peculiar, because you can get different values for the cash/gift cards depending on which store it’s for! The A&P $20 gift card is 140 points, but some others like the Shell $20 card can go for as much as 175 points! To get the same Night Out pass from Air Miles costs the equivalent of $25, so I’ll continue to use that as the source of my movie entertainment, and get my gas from RBC :)