Recently, the real estate industry has dominated the headlines.
Mark Carney, Governor of the Bank of Canada, raised warning flags about the impact of higher interest rates on those Canadians who are already stretching to carry their mortgages.
There’s been coverage of the dispute between the Competition Bureau and the real estate industry over proposals that would allow greater price competition among real estate agents.
And there have been suggestions from within the industry that there needs to be increased professionalism among real estate agents.
For many Canadians, none of these is the central issue when it comes to real estate. Rather, the key question comes down to the appreciation they can expect on the investment in their home.
After all, the past decade has been a great period for homeowners. Expecting this to continue, some Canadians have stretched to buy larger houses now, before prices get away from them. Research firm Investor Economics points out that residential mortgages are at a record level, approaching $1-trillion.
|
Investor Education:
|
The lessons of history
I had a conversation with Royal LePage president Phil Soper about the kinds of returns Canadians can expect on their houses.
His central point is that, over the long term, house prices appreciate with incomes; since the early 1960s, his data show that house prices have grown by 2.4 per cent a year after inflation – what economists call the real return.
Along the way, though, there have been lots of periods of dramatic fluctuation in house prices and many instances where individual cities experienced movements up and down that were very different from the national average.
The 1980s saw a big runup in housing prices, as demand grew from baby boomers establishing families and interest rates declined from their peaks in the early part of that decade. As house prices rose, affordability went down – by 1989, Canadians were devoting an all-time record proportion of their incomes to carry their houses.
This led to a substantial correction in housing prices and to a lost decade for house prices in the 1990s. In fact, Mr. Soper pointed out that house prices went down in the 1990s after inflation was taken into account, the only decade on record where this happened.
The past 10 years
By 2000, incomes had moved ahead of house prices, laying the ground for substantial appreciation over the past 10 years.
A recent report by TD Economics pointed to annual increases in house prices over the past decade of 8 per cent, among the highest in memory.
As a result, the percentage of Canadians’ incomes devoted to carrying their houses has risen sharply to what Mr. Soper called the “affordable/expensive” level. The proportion of income dedicated to housing is not at the record levels of 1989 – but when mortgage rates rise, there is no question that some Canadians will be hard-pressed to carry their houses.
An academic’s perspective
Another point of view comes from Cynthia Holmes, professor of real estate at the Schulich School of Business at York University.
Her research shows that over the very long term, average house prices go up with inflation – but typically don’t provide much in the way of a real return at all.
She points to exceptions – for example, areas going through a transition in housing quality can experience she calls “windfall gains.” She identifies substantial benefits to owning a house – it creates forced savings and can lead to psychological satisfaction from the pride of owning versus renting, but as a whole, houses have not been particularly good investments over the long term.
