The housing market is a system that transfers wealth from young people buying first homes to long-time owners who sell.
It has always been so, but in recent years things have gone a little crazy. That's why the latest developments in the housing market are so notable for two groups – young adults despairing over their ability to afford a home and the people whose financial plan in retirement puts a lot of importance on cashing out of the family home.
There's a hint of change in the air as the all-important spring season for housing arrives. Some markets across the country are showing signs of a price correction – not the juicy price declines that first-time buyers have been hoping for, but still something. Combine this with the mediocre short-term economic outlook and you get market conditions that could finally start to shift some advantage away from people who have owned their homes for ages to young buyers.
Buried in overall national real estate numbers that still look fine are multimonth price declines in cities such as Calgary, Winnipeg, Montreal, Ottawa, Quebec City and Halifax.
According to the Teranet-National Bank house price index, the declines have in recent months ranged from 2.3 per cent in Calgary on a cumulative basis to about 5 per cent in Ottawa and Montreal. In February, the price index showed just three of 11 cites with a month-to-month price gain – Vancouver, Victoria and Hamilton.
Falling prices will help first-time buyers, but only if mortgage rates stay low. For the near term, that's not a problem. In fact, the most notable mortgage trend for 2015 has been lower borrowing costs for home buyers. A well-discounted five-year fixed mortgage can be had for just 2.59 per cent these days, and my colleague Luke Kawa has done some analysis showing there's room for still lower rates.
Low mortgage rates are the main reason why housing prices have surged in the past six years. So you might wonder how it is that rates are moving lower and prices are doing likewise in some cities. It's the economy. With oil prices falling, growth is weak. That's why the Bank of Canada made that surprise interest rate cut in January.
The high level of household debt also weighs on housing, and so does weak income growth. Economic numbers issued earlier in March showed that disposable income rose just 0.5 per cent in the final three months of last year, the slowest pace in the past six quarters. Weak income growth isn't a new thing, by the way. In an analysis done for the Broadbent Institute, economist Andrew Jackson found that employment income rose just 3.5 per cent on an inflation-adjusted, cumulative basis from 2006 to 2012, the most recent year for which there's comprehensive data.
House prices on average went up 17 per cent on a cumulative after-inflation basis from 2006 to 2012, according to data supplied by the Canadian Real Estate Association and adjusted for cost of living increases using the Bank of Canada's inflation calculator. Only falling mortgage rates allowed houses to remain affordable with house prices rising so much more than incomes.
Declining house prices in some cities in recent months suggests low mortgage rates have done all they can do to prop up prices. That's why it's time to strategize if you're a long-time home owner sitting on a mountain of equity. If you plan to live in your home indefinitely because you love it, then do nothing. Staying in your home for 10 or more years should bridge you across any corrections that may occur in the housing market.
If your home equity is a big part of your retirement, then it's time to start thinking about how theoretical price declines of 5, 10 and even 20 per cent would affect your financial plan. Use our housing price calculator to help in your analysis. What you want to avoid as a baby boomer is trying to sell amid a market downturn in your city. That would encourage more boomers to try and cash out of their homes, thereby depressing the market even further.
First-time buyers, let the market come to you. Either prices fall enough to make a purchase affordable, or you just keep saving to build your down payment. Sooner or later, the balance of power in real estate will shift at least a bit to young from old. It may already be happening.
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