Rob Car­rick – The Globe and Mail

The most endur­ing and sim­plis­tic argu­ment for buy­ing a house is that you’re mak­ing an investment.

What an under­state­ment. Between your mort­gage, prop­erty taxes, util­ity bills, main­te­nance, fur­nish­ings, ren­o­va­tions, land­scap­ing and such, you’ll be invest­ing non-stop in your home. But what’s the return on your money?

Look­ing back a decade, houses have been an excel­lent invest­ment that rivalled the stock mar­ket. But the view ahead is not nearly so pos­i­tive. Bear this in mind if you’re con­sid­er­ing a jump into this high-priced and increas­ingly unaf­ford­able real estate mar­ket of ours.

How did the mar­ket get where it is today? Hous­ing econ­o­mist Will Dun­ning says resale hous­ing prices have grown by an aver­age annual 4.9% in Canada since March, 1988, which is the year that com­pre­hen­sive real estate indus­try data begins.

The more recent expe­ri­ence with hous­ing is even bet­ter, Mr. Dun­ning found. The 10-year aver­age annual price gain for a house is 8.3%, almost on par with the aver­age 8.9% increases logged by the S&P/TSX com­pos­ite index, includ­ing dividends.

What we have here is a hous­ing mar­ket that has been ris­ing at close to dou­ble its long-term rate in the past decade. Don’t expect this to continue.

“I’m not in the camp that says we have a big cor­rec­tion com­ing, but I think we are look­ing at a fairly long period of mod­er­ate changes in house prices – plus or minus 2%,” Mr. Dun­ning said.

Com­ment: Yes, +/- 2%, not the dras­tic 25% that some wags have pre­dicted. Like the one who made that guess last year… only to see prices in Toronto rise by around 12%. Wow, off by 37%, that is amaz­ingly bad!

In its most recent update on hous­ing afford­abil­ity, Royal Bank of Canada pre­dicted a period ahead of very mod­est price increases. “(The) rapid home-price appre­ci­a­tion of the past 10 years has likely run its course over­all in Canada,” the report said.

We’ll call that the opti­mistic view of what’s ahead for the mar­ket. For the pes­simists, the ques­tion is how far prices will fall, and for how long. Sam­ple pre­dic­tion: Toronto-based Cap­i­tal Eco­nom­ics sees a decline in prices of up to 25% in the next three years.

Com­ment: See above for the fate of the last –25% prediction.

The neg­a­tive out­looks for hous­ing are based pri­mar­ily on fac­tors such as prices, income growth and inter­est rates, all of which are a func­tion of cur­rent eco­nomic con­di­tions and thus short-term in nature. A long-term con­cern for hous­ing val­ues is Canada’s chang­ing demographics.

The fastest-growing com­po­nent of our pop­u­la­tion com­prises those who are 65 and older. In other words, peo­ple who are going to be sell­ing houses over the decades ahead and doing very lit­tle buy­ing, if any. That’s bound to affect demand for homes and the poten­tial for price appreciation.

Com­ment: Uh… nope. All the first-timers who want to move up and out of their lit­tle boxes are going to want to buy those houses.

For an actual real life exam­ple of how real estate prices can fall, let’s look at what hap­pened in Toronto between April, 1989, and Feb­ru­ary, 1996. Accord­ing to Mr. Dunning’s num­bers, the aver­age resale home price in the city fell to $192,406 from $280,121, or 31%.

Com­ment: I love pick­ing stats to sup­port a pre-conceived notion! Go back two years to 1987 and the 1996 prices are actu­ally higher! 1989 was the peak of the bizarre bub­ble we saw at the end of the 1980s where prices jumped 127% in 12 months. It is silly to include that one-off period. So tak­ing the 10 years between and includ­ing 1987 and 1996, real estate prices in Toronto rose slightly. Heck, I could say that prices have gone up about 600% from 1980 to 2010 if I wanted to cherry pick my data…

That was an extreme plunge, fuelled in part by a level of ram­pant spec­u­la­tion that we aren’t see­ing in today’s mar­ket. But prices can still fall in today’s mar­ket. Check out the Cal­gary mar­ket, which dipped 1.7% in March.

Com­ment: But Toronto is not Cal­gary. The same as Mon­treal is not Van­cou­ver. You can­not com­pare them, sim­ple as that.

“The fact remains that hous­ing can decline in value, and for pro­longed peri­ods,” Moshe Milevksy, a finance pro­fes­sor at York University’s Schulich School of Busi­ness, wrote in his 2009 book Your Money Mile­stones. “It is def­i­nitely not a risk-free investment.”

Buy­ing a house and liv­ing in it for decades can pro­tect you from tem­po­rary mar­ket dips, just as long-term invest­ing in stocks smoothes out the stock market’s ups and downs. Still, it’s worth not­ing that some­one who bought an average-priced house in Toronto around the ’89 mar­ket peak and still owned it would be look­ing at mod­est annu­al­ized gains in the 2% range.

Com­ment: And those who bought at the low­est point in 1996 would be look­ing at gains in the 250% range. Like I said, we can all pick num­bers to sup­port a cer­tain position.

His­tor­i­cal changes in hous­ing prices are just a guide­line, any­way. They don’t con­sider things like mort­gage inter­est, prop­erty taxes and main­te­nance, none of which add any value to a home.

Houses bought today have ques­tion­able invest­ment value, but there are some other fac­tors to con­sider if you’re think­ing of get­ting into the mar­ket. First, grad­u­ally pay­ing down the mort­gage on your house is a kind of forced sav­ings plan. Not a great sav­ings plan, but bet­ter than nothing.

Sec­ond, there’s the best rea­son of all to own a house. It’s free­dom: Your fam­ily, your rules, your lifestyle. That’s really what you’re invest­ing in when you buy a home today.

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Here’s how the national hous­ing mar­ket com­pares to other invest­ments over the 10 years to March 31.

Houses: 8.30%
Stocks: 8.90%
Bonds: 6.10%
T-bills: 2.60%
Gold: 19.10%

Returns are expressed on an aver­age annual basis.

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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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condo value appre­ci­a­tion toronto since 2007

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