A New York Times headline caught my eye the other week: Housing Fades as a Means to Build Wealth, Analysts Say. The article went on to report that, while most real-estate experts believe the U.S. housing market will recover from falling off the cliff, many also feel that home ownership will never again produce the rich rewards enjoyed in the second half of the 20th century.
There was something about the piece that made me think: Maybe this isn't all bad. But is it true? And does it apply to Canada?
It states the obvious to say the Canadian housing market has not been beat up in the same way it has in the United States. But, generally speaking, housing rates in both countries have plotted similar trend lines for the past 50 years or so. And the fact is, the "rich rewards" the Times article referenced have only been a reality in the past decade. That's when things truly became insane, people lost their minds, and a house became more than a home. It became an investment in a suddenly lucrative, high-yielding asset class: real estate.
From 1960 to 2000, house prices in Canada (and in the U.S., for the most part) appreciated at roughly 2.4 per cent a year when adjusted for inflation, according to Scotiabank. In other words, housing offered steady gains, but not the spectacular ones the Times suggested were being reaped by homeowners.
Things changed from 2000 to 2009, when house prices in Canada increased an average of 5.2 per cent annually. In some areas of the country, such as Vancouver and Victoria, the increase was even more dramatic. And the steep hike in real-estate values began occurring much earlier.
We bought our first house in Victoria in 1986 for $80,000. We sold it four years later for $172,000 when we moved to Vancouver. We were shocked, since we really hadn't done a thing to the house because we couldn't afford to. The earnings made no sense. We sold the next house we bought after five years and made another handsome profit of more than $100,000.
Everyone's homes were appreciating at ridiculous rates. And that allowed us to go to the banks and get bigger lines of credit on top of our mortgages, so we could take three-week trips to Italy (another reason why so many of us owe so much).
It was throughout this period that I first began to think that nothing about the real-estate market made sense and that the type of price escalation we were seeing had to stop. It had the smell of a Ponzi scheme.
And then the 21st century arrived and things got even nuttier.
Maybe as you get older, your perspective about these things changes. But I think there's something to be said for the days when you didn't buy a house to get rich and finance your retirement. You bought it to shelter your family and build a lifetime of memories. And it was often the only home you ever owned. When it came time for the kids to fly the nest, it wasn't unreasonable to expect they'd own a home, too.
Now I feel so sorry for young people trying to get into the market.
According to Scotiabank, young adults are making the leap far earlier than previous generations. My hunch is, many believe that, as ugly as their mortgage is, it's worth it because, if they wait, they may never own a home. They've been scared into taking the plunge. If it means they have little disposable income for 25 years, so be it.
But what kind of life can you lead around that reality?
Adrienne Warren, a senior economist with Scotiabank, believes the past decade in the housing market has been an anomaly, that it won't be repeated for a long time. She thinks we're heading back to something more normal, to modest appreciation rates that Ozzie and Harriet could relate to.
"Housing will still be a reasonable investment long term, but now it will be primarily a lifestyle choice," Ms. Warren told me the other day. Added Tsur Somerville, director of urban economics and real estate at the University of British Columbia: "The investment insanity model of the past decade … is over. Real estate alone cannot sustain and drive long-term economic growth."
I hope they're right.