Should we brace for a collapse in home prices in Canada? Does housing even qualify as an “investment,” as it has been regarded almost forever?
That’s the debate taking shape in recent weeks as dire news of a worsening U.S. housing crisis seeps across our porous border, and our own market has shown signs of weakness.
The epic implosion in U.S. housing prices, now of long duration and the first of this magnitude since the Dirty Thirties, has made a hash of “safe as houses” among our language’s stoutest truisms.
The projected 10 per cent of Americans at risk of losing their homes to foreclosure has prompted a growing number of economists and urbanologists to argue against houses as an investment.
“If you find you can’t continue to make those mortgage payments, you can’t just move somewhere cheaper,” notes Felix Salmon, a top financial analyst at Reuters. “Instead, you’re liable to end up losing all your money and your credit rating.”
And the roof over your head.
There’s also a larger public-policy argument against homeownership, advanced by the likes of Richard Florida, the urban guru based at Toronto’s Rotman School of Management.
“Far too many people in economically distressed communities are trapped in homes they can’t sell, unable to move on to new centres of opportunity,” Florida says.
The new skittishness among over housing values in Canada’s much healthier market arises from an abrupt slump in the Canadian market.
Canadian house sales have dropped 25 per cent in 2010, from their peak early this year when Canada was experiencing more robust economic growth and job creation than in recent months.
The Conference Board of Canada forecasts a slightly weaker but stable outlook for Canadian home values. But the Canadian Centre for Policy Alternatives, a progressive think-tank, warns that homes now are overpriced in almost all major Canadian cities.
The centre’s warning rests on affordability. And it’s true that Canadian home prices now equal between 4.7 times and 11.3 times the average buyer’s annual income. That’s far above the traditional “comfort zone” of three to four times.
So, are Canadian shelter investments no more “safe as houses” than shares in Nortel Networks Corp. and Enron Corp. once appeared to be?
The answer is no. The doomsayers on housing ignore some relevant factors.
The current U.S. spectacle is unique. No discussion of the second-worst economic downturn in America’s modern history is relevant without accounting for the stagnation over three decades of middle-class U.S. incomes. The median U.S. male worker today earns less, adjusted for inflation, that he did 30 years ago.
To make ends meet, American homeowners sucked an incredible $2.3 trillion (U.S.) in equity from their homes between 2002 and 2007 to cope with spiraling healthcare, tuition and other basic costs of living.
America now is in a Catch-22: Until house prices recover, tens of millions of financially distressed American households will be unable to help reboot an anemic U.S. economy. But until Americans’ income levels break out of their long-term decline, there will be no one to buy the huge inventory of unsold homes built during the record housing boom of the 2000s, which is keeping prices down.
During that U.S. boom, strict Canadian lending standards kept exuberance in check.
“A lot of the fundamental differences between Canadian and U.S. markets suggest that we’re far less likely to have the kind of deep downturn that the U.S. market went through,” says Doug Porter, deputy chief economist at the Bank of Montreal.
There’s simply no comparison between housing-market conditions north and south of the border. Canadian home sales eased downward by 25 per cent over the past seven months. U.S. home sales dropped yet another 25 per cent in July alone.And while average selling prices have slipped in each of the past three months, they’re now where they were at this time last year. That’s a soft landing from the record high of May this year.
In the boom-and-bust cities of Las Vegas and Miami, there are few buyers at any price. In inner-city Detroit, that’s despite asking prices equal to that of a used car. That’s the “mobility trap” to which Florida refers that prevents workers from moving to where the jobs are.
Canadian cities have suffered their own share of buying panics and inevitable busts, from the 1970s to the early 1990s. Those painful episodes drained much of the speculative fervor from Canadian property markets, inculcating an enduring prudence – with isolated and manageable exceptions – about buyers and lenders alike.
Canadian markets have since been less volatile than selected cities in the U.S., Asia and Europe.
Toronto is something of an outlier, routinely scoring among the top five world cities in quality of life. It’s in the midst of a second population boom in four decades, and in recent years has been among the fastest-growing cities on the continent.
That’s unlikely to change. Canada has an “open door” immigration policy. And roughly half of New Canadians settle in the GTA.
Counting a home or any asset as one’s sole investment is unwise. That said, Toronto house prices have posed an average annual gain of 7.1 per cent over the past 15 years. By contrast, the average annual 10-year gain of the S&P TSX is 5.4 per cent.
Obviously that detracts from the argument of the anti-homeownership crowd that there are countless more profitable places for your investment dollar than mortgage payments. And, typically, buying is better than renting after six years. You can punch in your own cost and income figures at
www.nytimes.com/interactive/business/buy-rentcalculator.html to determine when it’s time to consider becoming a homeowner rather than feeding the landlord.
Getting caught up in manias – over property, securities or gold – is obvious folly. It’s best to buy shelter you expect to enjoy for many years, regardless of its assessment value at any given time. And it should be in a neighbourhood characterized by a high quality of living, and by gradual but steady increases in home values over 30 years or so.
As idioms go, “safe as houses” is likely to outlive “safe as churches” and “safe as banks” as a commonplace idiom. Especially as shelter-seekers become ever more judicious about the location and financing of the homes of their dreams.
Have a great day!
