“Housing: Real Insanity”…..Great article in Canadian Business

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,

Ben

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12 Responses to “Housing: Real Insanity”…..Great article in Canadian Business

  1. Alex says:

    Interesting opinion (I say “interesting” because we know how rare it is to see pieces like this in the real estate industry-bascked mainstream media) on the current housing situation in tonite’s Globe and Mail. Just one dude’s opinion, but it’s a strong opinion and it’s right there in the MSM for all to see.

  2. Alex says:

    BTW, Ben, cool news about the site revamp. Congrats.

  3. Leith says:

    Thanks as always for the great links Ben. It’s a real eye opener following the Canadian housing market via your blog as it closely resembles Australia’s experience. Your new site looks great by the way.
    Cheers Leith

  4. To Quote

    Still, a line of credit against the value of their home is how Ricci, his wife and two kids fund a portion of their admittedly frugal lifestyle, particularly when paycheques become sporadic. During especially tight periods, Ricci makes interest payments on the credit line with money from the line itself.

    That is craziness!!!! I’ve been there and it doesn’t matter if your house price doubles in value eventually the payments will kill you. They also have no savings for emergencies. this will end badly.

  5. mac says:

    Heavens to Betsy: Bearish talk in the Globe & Mail.

    http://www.theglobeandmail.com/globe-investor/investment-ideas/experts-podium/signs-point-to-a-severe-housing-correction-in-canada/article1979229/comments/

    What interests me in this article isn’t so much the well-worn points any blog reader has heard over and over again, but his reference to Chinese buyers across Canada. Really? Are you guys seeing this out there in Ottawa, Toronto, Montreal, Edmonton, etc? Why aren’t you posting about it.

  6. mac says:

    I can hardly believe it but I’ve found data supporting the “mythical HAM”. And a new term too: Rapidly Globalizing Chinese Investor. RGCI. We’re all truly f-ed!

    http://realestate.bryanellis.com/4303/chinese-real-estate-investors-concentrate-overseas/

    30% of Chinese homebuyers are looking for roulette wheels elsewhere to make their 20% y-o-y gains. Amazingly huge number for this Vancouverite to contemplate and I see it every day. I bet you Ottawa types can’t even begin to understand the tsunami of cash that’s about to hit.

    10.8% of US new home sales (they love ’em new) belong to this segment of buyers. San Francisco, Boston, New York, LA, Vancouver, Toronto… look out. Or rather, don’t look out, because you’re not really invited to the party. No one’s calling you telling you where the flock will be landing next.

    What an incredible monetary phenomenon and all started by US corporations anxious to save money on their bottom line by canning jobs in the US and hiring people for pennies on the dollar overseas. Now there’s going to be a strata of unattainable housing in each and every major city while the local schmucks sit with their own properties in negative equity and jobs tapped out. Thanks, Corporate USA. Great planning!

  7. Liam from Calgary says:

    Calgary house prices headed for peak levels: analyst

    Provincial commodity boom to boost real estate

    By Mario Toneguzzi, Calgary Herald April 7, 2011

    * Story
    * Photos ( 1 )

    Real estate expert Don Campbell says Calgary house prices will rise in the next few years because of a strong Alberta economy.

    Real estate expert Don Campbell says Calgary house prices will rise in the next few years because of a strong Alberta economy.
    Photograph by: Christina Ryan, Calgary Herald

    CALGARY — Average house prices in Calgary could flirt with record levels within the next two years due to a commodity boom in the province, says a real estate industry analyst.

    Don Campbell, president of the Real Estate Investment Network, said house prices could increase five to seven per cent this year and another five to seven per cent in 2012.

    “And then after that, we’re going to be back in a bit of a frenzy,” said Campbell. “A frenzy as in a seller’s market. Now I hope it’s not as hot as it was in 2007 and 2006 but I’m telling you by looking at the job market and the population growth expectations I wouldn’t be surprised if it was in the double digits in two years.”

    Campbell said people who try to guess what the real estate market is doing by looking at housing statistics are “doing the equivalent of driving across the city staring at their rear-view mirror.”

    He said there is an increase in demand for the key four things that Alberta has: food, fuel, fertilizer and forestry.

    “Every single one of those is starting to enter into a bit of a super cycle where demand is going to start outstripping supply over the next little while,” said Campbell. “All four of those create jobs and all four of those create in-migration and in-migration is what’s going to drive the real estate market in 24 months.”

    According to the Calgary Real Estate Board, in the first quarter of this year, there have been 3,309 single-family home sales in the metro market, up 3.73 per cent from the same three-month period in 2010. The average MLS sale price this year is also up by .08 per cent to $460,315.

    In the condominium market, sales in the first quarter have dropped by 11.31 per cent to 1,349 transactions. The average sale price this year is also down by 0.88 per cent to $285,799 compared with the same period a year ago.

    The average price of a single-family home in Calgary peaked at $505,920 in July 2007 while the average price of a condo hit a record level of $332,237 in May 2007.

    When it released its latest MLS data recently, CREB said Calgary’s labour market has shown some recent improvements but it is still in the early stages of recovery as job growth remains below the five-year average.

    “Improvements in the energy sector are anticipated to show stronger job growth in the second half of the year, providing the foundation for continued recovery in the housing market,” said CREB.

    Campbell said job growth and in-migration will decrease rental vacancies initially which will eventually increase rents. Then people will start looking at purchasing residential real estate property.

    “That’s when the frenzy will be hitting in about 24 months,” he said.

    mtoneguzzi@calgaryherald.com

    Read more: http://www.calgaryherald.com/business/Calgary+house+prices+headed+peak+levels+analyst/4576355/story.html#ixzz1JFchSaYy

  8. mac says:

    “That’s when the frenzy will be hitting in about 24 months,” he said.”

    He sounds a bit desperate. I’m interested in why he says house prices could increase 5-7% this year. Are you guys something other than the fractional increases he’s reporting?

  9. Sams Mango says:

    what a joke

  10. mac says:

    I think if city council revamps that Spanish tapas restaurant’s menu, we could make a killing. Especially, if they deal drugs out of the kitchen. And do the same in our new apartment building in Toronto. City Council should really tune into Breaking Bad to get some good ideas. We could be profitable in no time.

    Mango, were you expecting another outcome?

    • Sams Mango says:

      Actually, happy to see the way the government is acting by taking over everything. It’s acting as a private lender. The sad thing is the property is of such poor quality, expensive in a great location. Once they get all the bugs sorted out, it will be in demand.

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