A quick note to my readers: Posts will be a bit sparse over the next two weeks while the final bugs are worked out of the new site. Within a couple weeks, this blog will exist no more. The transition will be a bit tedious, but it should pay off. The new site is much more user friendly and has some great features. Bear with me during the transition.
I wanted to quickly highlight a great article from last week that should be mandatory reading:
Housing: Real insanity– Canadian Business
A great read overall if for no other reason than it emphasizes just how anomalous the past decade was for real estate in Canada. Was it real estate simply catching up after a decade of stagnant growth? Was it simply the realization that Canadian real estate is undervalued on a global scale as suggested by one commenter? Or is it more symbolic of a temporary, but powerful shift in mass psychology, aided and abetted by cheap interest rates and loosening credit conditions?
Some key quotes:
Financially speaking, at least, the past decade has been a great one for owning a home. Resale prices increased by an average of 7% each year, and more than 10% between 2002 and 2007. And the market is still going strong. The average resale price rose 6% between January and February.
But amid this frenzied property chase, we’ve forgotten a crucial fact: the past decade has been far from typical for real estate. Between the late 1990s and 2006, the share of homeowners jumped four percentage points, to 68.4%. Now consider that it took from 1971 to 1996 for the ownership rate to increase that much….Prices nationwide have never appreciated like this before, and credit has never been so easy to come by, nor as cheap. For an entire generation of first-time homebuyers, these conditions are the norm. Their perceptions have been warped as a result.
…Yet the country has a lot riding on keeping housing aloft. Home equity accounts for roughly a third of the average Canadian’s net worth, and one-fifth of our gross domestic product is driven by housing-related spending, from renovations to new appliances. Hundreds of thousands of jobs are tied to the sector.
This is the topic of a post coming out later this week examining the increase in GDP derived from construction (for Canada as a whole and also broken down by provinces), the change in provincial housing starts relative to populations, and the change in the percentage of the workforce employed in the construction sector. I’ve prepared about half of the charts so far, and the results are indeed interesting. Watch for that post later this week…
As for the renter’s fear of losing out financially, that too is exaggerated. Today, the average home-price-to-rent ratio is at its highest level on record, which means renting may actually be more affordable than paying a mortgage. Furthermore, a 2007 study from the UBC Centre for Urban Economics and Real Estate found that over the past three decades, renters could have beat homeowners’ financial results. The study examined the theoretical returns of buying versus renting in nine Canadian cities. In four of them, renters who invested wisely could accumulate 24% more wealth than homeowners, and match it in three others.
This is a point I often make here. As I like to say, most new ‘home owners’ are actually still renters. With so little in equity, they’ve essentially just gone from renting space to renting money. The notion that the math is tilted in favour of home owners over the long term is completely false.
Cheers for now,