Ronald Hir­sh­horn – The Globe and Mail

As we brace for a hous­ing slow­down, it is a fit­ting time to ask how the pro­longed upward surge in hous­ing prices has affected Cana­dian home­own­ers. The answer is, for the most part, not much.

Com­ment: “Brace” for it? Sounds like a bad Game of Thrones meme… The slow­down has begun, it started in the sum­mer, the day after the new mort­gage rules took effect.

The gen­eral view is that those for­tu­nate enough to have rid­den the uptrend in the hous­ing mar­ket have reaped a huge wind­fall. My friends, Vic and Amy, for exam­ple, are the proud own­ers of a charm­ing two-storey, three-bedroom house they pur­chased in mid­town Toronto about 10 years ago. They are happy to guide guests through the liv­ing room with its large wood-burning fire­place, up to their impres­sive mas­ter bed­room and out onto the deck over­look­ing their care­fully tended gar­den. But what excites them more than show­ing off their home is cal­cu­lat­ing the wealth they have accu­mu­lated as a result of the approx­i­mate dou­bling in the value of their prop­erty. They are not unique. Across Canada, house prices increased 109% from 2000 to 2011, accord­ing to the Teranet-National Bank com­pos­ite index of 11 main cities. A sur­vey by Envi­ron­ics Ana­lyt­ics found that between 2006 and 2011 the net worth of Cana­dian house­holds rose from $330,000 to $363,000, with almost all of this accounted for by the increase in hous­ing equity.

The prob­lem is that these fig­ures only tell part of the story. What is left out is the impact of ris­ing house prices on the costs Cana­di­ans must pay for shel­ter ser­vices. This cost, which for own­ers who occupy their homes is essen­tially the rent they forego by liv­ing in their dwelling rather than rent­ing it out, increases as hous­ing prices rise. In tan­dem with the increase in house prices, house­holds expe­ri­ence a rise in the cost they incur over time for hous­ing services.

Com­ment: That is faulty math. Your friends who bought in 2000, their mort­gage pay­ments did not go up as their home value rose, those pay­ments are based on what they paid for it. Their util­ity bills are not tied to house value, so there is no change there. Their prop­erty taxes would have risen, but by ver­i­ta­ble pen­nies annu­ally, so lit­tle as to be moot. Maybe $30/month over the decade. And their insur­ance may have risen, maybe another $10–20/year.

Fam­i­lies that are set­tled in their own home are pro­tected from this grow­ing lia­bil­ity; with the gains that come from the appre­ci­a­tion of their res­i­dence, they will be com­pen­sated for the increase in shel­ter costs they must incur now and in the future as a con­se­quence of the rise in hous­ing prices.

Com­ment: And yes, prices have risen, but rates have fallen, keep­ing things pretty much in line. In 2000 the aver­age Toronto home price was $243,255 with mort­gage rates at around 8.25% (what I paid for my first house). Thus, with 20% down, the monthly mort­gage pay­ment would have been $1,531.57. Adjust this upwards for infla­tion and that same pay­ment would have been $1,916.84 in 2011. Now, in 2011 the aver­age house price was $465,412 and mort­gage rates were around 4.5% – mak­ing for a mort­gage pay­ment of $2,081.35 – a $164.51 dif­fer­ence in monthly costs, as opposed to the near dou­bling of hous­ing prices. So be sure to ana­lyze the num­bers prop­erly, just because the prices shot up does not mean the monthly costs have shot up. This is why the mar­ket keeps plug­ging along. Prices broke $500k in 2012, but mort­gage rates have dropped below 3%, keep­ing the monthly costs afford­able. Aver­age incomes have risen almost 6% since 2006 alone, while monthly mort­gage costs rose 8.6% in 11 years. Safe to say they have kept pace, incomes pos­si­bly exceed­ing mort­gage cost increases. So, tech­ni­cally, houses are cheaper to pay for today than they were in 2000.

Home­own­ers who have all the hous­ing they require are there­fore no worse off. But, con­trary to gen­eral per­cep­tions, nei­ther are they bet­ter off. Unlike gains made in the stock mar­ket, the gains that Vic and Amy and other long-time home­own­ers have made from excep­tion­ally strong real estate mar­kets are not a wind­fall that can be used to sup­port a more lav­ish lifestyle.

Com­ment: They can if they sell and cash out, or re-finance to pull asset money out of the house. Not that I advise either of those options. Same with stock mar­ket gains, or any paper gains, you have to sell to actu­ally get the money. My Wayne Gret­zky rookie card is worth $xxx accord­ing to eBay, but it is worth­less until some­one actu­ally puts the cash in my hand.

While those that have sat­is­fied their hous­ing needs are lit­tle affected, ris­ing hous­ing prices do cre­ate win­ners and losers. The win­ners include real estate investors and spec­u­la­tors, and elderly house­holds that require more mod­est shel­ter accom­mo­da­tions than in the past and can par­tially cash in their gains. The losers con­sist of young fam­i­lies that have bought a house recently or have not yet pur­chased a res­i­dence, along with those who are in a starter home and hope to acquire a larger res­i­dence that bet­ter meets their fam­ily needs. The increased costs of home own­er­ship for young Cana­di­ans who are already fac­ing sig­nif­i­cant chal­lenges because of a dif­fi­cult job mar­ket and earn­ings prospects that are dim­mer than those of their par­ents’ gen­er­a­tion is one of the more unfor­tu­nate con­se­quences of the run-up in hous­ing prices.

Com­ment: That much is true. I would cer­tainly not want to be 25 right now, try­ing to make a decent liv­ing, maybe want­ing to buy some­thing. Unsure of where I might be in 5 years – job-wise, love-wise, etc. But that is what I am here for, to help peo­ple like that fig­ure out the right course of action.

Although the eco­nomic cir­cum­stances of most house­holds have not changed, a strong hous­ing mar­ket has encour­aged Cana­di­ans to spend more. The evi­dence is mixed on whether this is partly due to home­own­ers’ mis­taken belief that, as a result of increas­ing hous­ing wealth, they are bet­ter off finan­cially or whether it is sim­ply because increases in home equity have made it eas­ier for house­holds to bor­row the money needed to finance their pur­chases. It is clear, how­ever, that, along with low inter­est rates, ris­ing home prices have been a fac­tor under­ly­ing the growth in spend­ing and the unset­tling rise in Cana­dian house­hold indebtedness.

Com­ment: Cana­di­ans are bet­ter off, in gen­eral, than they were before. And bet­ter off than the press would have you believe. But we MUST cur­tail our stu­pid spend­ing. Get­ting loans for TVs and vaca­tions and non-tangible things is going to come around and bite us in the ass. Spend less on Christ­mas gifts, delay non-essential pur­chases. Treat your credit card like you are bor­row­ing from a large man with a base­ball bat.

What does all this mean for the com­ing period of expected falling house prices? A slow­ing in hous­ing activ­ity and a reduc­tion in spend­ing by house­holds that need to adjust to a decline in hous­ing wealth are not wel­come devel­op­ments for a coun­try try­ing to re-ignite its econ­omy. These effects will impact, directly or indi­rectly, on all Cana­di­ans. But, in them­selves, lower prices are clearly good news for prospec­tive buy­ers and those look­ing to increase their hous­ing. At the same time, the vast major­ity of home­own­ers who are not lever­aged to the point where a drop in hous­ing prices could lead to a risk of default can draw encour­age­ment from past expe­ri­ence. Just as ris­ing home prices do not lead to an improve­ment in liv­ing stan­dards, falling prices do not trans­late into a loss of eco­nomic well-being. So, if you are an owner that’s set­tled in your home and not need­ing to cash out, hold on, sit back and relax as the Cana­dian hous­ing roller coaster rounds its peak.

Com­ment: Only those who can­not see all of the fac­tors at play think we are going to see prices drop. Spend 5 min­utes on this site and you can find all of my var­i­ous essays on why that won’t hap­pen. I agree that lower prices are a good thing, as it allows more buy­ers into the mar­ket. Those who are sell­ing, they may not like it. But if they bought 10 years ago, then they are com­plaing about get­ting 96% more than they paid as opposed to 103% more. But, as soon as we get tons more buy­ers into the sys­tem because of lower prices, they will start to bid against each other and push prices right back up again. We saw in in 2008–2009, what makes you think it will any dif­fer­ent this time? With lower mort­gage rates and stronger incomes, there is no going down. My age-old favourite stat is sim­ply that 43 of the past 47 years have seen Toronto real estate prices rise. There is no impe­tus in the mar­ket right now to change that in any major way.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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