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Fred Lum/the Globe and Mail

If houses are investments, then they’re subject to the harsh math of investing losses.

However much an asset falls in price, it has to rise by a larger percentage just to get back to the starting point.

The national average resale home price peaked at $816,720 in February and has since fallen a bit more than 21 per cent to $644,463 in October. To get back to the peak, we need the average price to rise by almost 27 per cent. Figure on it taking between four and five years to do that, if prices bounce back enough to revive the toxic idea that houses are investments.

Treating houses as investments means the death of affordability. The longer prices decline or flatline, the more opportunity there will be for home ownership to remain a viable middle-class goal.

Still, the investment mentality is a big reason why our housing market overheated. Attention must be paid.

What houses have going for them as investments is a decades-long history of price appreciation that beat inflation, and a capital gains tax exemption on the sale of a principal residence. That tax break is a key support for the idea of housing as a financial asset.

There are steep costs if you own a home, including maintenance, improvements and mortgage interest. But never mind that. Houses have clearly been seen as a can’t-miss investment in the past two years. The only way to explain the questionable buying decisions made in 2021 is that people saw houses and condos soaring in value and wanted a piece of the action.

House prices are falling in many cities, which adds some gritty authenticity to the idea of houses as an investment. Stocks are investments and everyone knows they go up and down in value.

Let’s look at how a recovery in house prices might play out. The annualized average price gain from 1980 to 2021 for resale homes was 5.8 per cent, which is an impressive three percentage points above the average inflation rate for that period.

If houses appreciate at an average annual rate of 5.8 per cent for the next 4.5 years or so, the average resale price would exceed the February peak. With a growth rate in prices of 2.9 per cent, it would take about 8.5 years to recover.

You’re in better shape if you bought in 2020 or early 2021, when mortgage rates were cheap and pandemic lockdowns drove people to find homes with more living space. If you bought at the average national resale price in January, 2021, you’re ahead by 3.7 per cent ahead, based on the average resale price for October. A purchase at the average price in October, 2020, leaves you up about 6 per cent.

There’s plenty of investment goodness left in a home bought at the average of $525,000 in October, 2019 – current prices are cumulatively almost 23 per cent higher than that, or 7.1 per cent on a compound average annual basis.

Investment success in housing comes at the expense of affordability for people trying to buy into the market. Expect to see more of this, not less.

Further increases in mortgage rates could hold back a price recovery, but there’s growing evidence that we are close to the end for the current cycle of rate hikes. A recession is possible, but the consensus so far is that it will be a) mild, and b) unlikely to cause rampant unemployment, which is deadly for housing. We still have a very tight job market in some sectors.

A clear advantage for housing is that nearly 1.45 million immigrants are expected to come to Canada in the next three years, a big number for a country with a population of not much more than 38 million. Expect housing supply to increase in the years ahead, and expect it to be soaked up to some extent by newcomers to Canada.

The historical 5.8 per cent growth rate in Canadian house prices was powered by a decades-long trend of falling interest rates. We could see falling rates by late next year. TD Economics sees the Bank of Canada’s overnight rate falling in the fourth quarter of 2023, while the Government of Canada bond yields that influence fixed mortgage rates are expected to fall through the year.

A quick rebound in house prices would end the dream of home ownership for young adults in some big cities. Prices haven’t fallen enough yet to discredit the seemingly unshakable idea of houses as an investment.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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