Garth Turner - Real Estate in Canada

[cwericb]

I recently posted this in another thread but since it directly relates to this thread I will put my two cents in here.

 

This thread started with Garth Turner’s statement ...  “The big real estate bubble about to burst in Canada”. Many board members agreed and believed the collapse was imminent.

 

However, that statement and this thread originated in February of 2012 - SEVEN years ago.

 

Certainly nothing has collapsed since then. At this point, even if it does collapse, will property prices drop to pre-2012 levels? I am glad I haven’t been sitting waiting for the collapse to purchase a new home.

 

Why hasn’t the Canadian market collapsed?

 

This might have something to do with it:

 

10 Most Liveable Cities in 2018

1. Vienna, Austria

2. Melbourne, Australia

3. Osaka, Japan

4. Calgary, Canada  (average home price $431,000 CAD - $328,000 U$)

5. Sydney, Australia

6. Vancouver, Canada   (average home price $1,092,000 - $832,000 U$)

7. Tokyo, Japan

8.  Toronto, Canada   (average home price $766,000 - $584,000 U$)

9. Copenhagen, Denmark

10. Adelaide, Australia

 

The first U.S. city on the list is Honolulu. But you won’t find it until  you get to number 26 with an average home price of $800,000 U$. And in Hawaii you don’t have the expense of building for well below zero temperatures, nor do you have to battle winter conditions during construction. In other words - it ain't cheap to build in Canada.

 

As Canada is relatively welcoming to immigration, the laws of supply and demand kick in. Remember housing prices are only expensive in relation to one’s personal wealth. What may be expensive to me may well be cheap to an immigrant with a few hundred million in their back pocket.

 

I am involved in the construction industry and most people have no idea of the extent of the wealth some of these people immigrating into our country have. Most of the people I encounter are looking for real estate as a relatively safe haven for their money.

 

Had a older lady newly arrived from Iran come in recently doing some home renos. She asked if I knew of anyone who might have an apartment for sale.

“Are you thinking of selling your house and looking for an apartment?”, I asked.

“No, no I want to buy building.”

“Well, I know of an 18 unit starting shortly.”

“That’s exactly what I want. I want to buy a few of those.”

But that pales in comparison to some of the Asian money we see. And we are a relatively small place.

 

It also seems that many investors from outside Canada don’t understand that, unlike the US a decade ago, a lot of our mortgages are in effect government guaranteed through CMHC, others require a substantial down payment and in general our mortgages are not non-recourse loans. You can’t throw your keys on the banker’s desk and just walk away. So a correction in housing prices certainly would effect the economy, but not likely to the extent we saw in the U.S. meltdown of a decade ago.

 

While our economy certainly has its problems, this is still not a bad place to live - and you don’t have to look far to make a comparison.

 

We also have an upcoming election that may show an improved change in direction should a new government realize that there is more to Canada than the two central provinces.

 

Could housing prices collapse. Certainly anything can happen. But I would think twice about putting off buying a house for that reason because the bottom line is that unlike your stock portfolio, you can live in your house.

 

Just my humble opinion.

[clutch]

Very well put cwerib,

 

I live in Toronto and can share some perspective as well. I'm in the boomimg tech industry here and there are many of my friends and colleagues who have high paying jobs and are waiting to enter the housing market. So in case there is a small "collapse" I am pretty sure there will be a strong support to hold the market. Remember these people are currently paying somewhat outrageous rent prices in Toronto (there are currently bidding wars in the rental market!!) and the price wouldnt have to drop that significantly to justify buying instead of renting.

 

Also, the stats like household income to housing price can be misleading. It is a definite sign of unaffordability but not as much a sign of bubble. Most of the expensive houses in Toronto are owned by retired (or close) boomers or immigrants -- with the former group having bought their houses 20-30 years ago. Although their house prices increased significantly compared to their income, it's really not like they have stretched their budget to buy and live in their current houses. They would not be in any trouble in the collapse scenario.

 

Of course, the debt to income rario is worrisome. I do think there are also a lot of middle class people who have stretched their budget to own a home and people who are levering up to buy more and more real estate. Those two people will get hurt. But for the former group, if they are forced to sell, im sure there will be a strong support -- from many affluent professionals who are waiting to enter the market -- considering the properties that will be sold are in the low-mid ends.

 

(The scenario im describing may be only specific to Toronto)

[cwericb]

Factor this in:

 

World population 1960:            3 billion

World population 2018: 7.7 billion

 

Canada population 1960: 18 million

Canada population 2018: 37 million

 

People have to live somewhere.

[Viking]

Factor this in:

 

World population 1960:            3 billion

World population 2018: 7.7 billion

 

Canada population 1960: 18 million

Canada population 2018: 37 million

 

People have to live somewhere.

 

I am pretty sure that Canada’s population grow rate has actually been slowing every decade since confederation in 1867.

 

We have had a housing boom since 2000. Something has happened in the past +18 years to drive this. Has population growth spiked? No. What then?

1.) mortgage rates: went as high as 20% in the early 80’s and have fallen steadily to about 2.5% today. Inflation is running about 2%. When you have free money it normally results in asset bubbles (financial assets and housing).

2.) China factor: wealthy Chinese looking to get part of their net worth out of China (Huawei COO owns a house in Vancouver); given current chill in relations with China and Canada this may slow for a while.

 

Bottom line, housing is not affordable for average family in Vancouver or Toronto. And, yes, there is a chance that this is the new normal (permanently higher pricing). Time will tell.

[lessthaniv]

I recently posted this in another thread but since it directly relates to this thread I will put my two cents in here.

 

This thread started with Garth Turner’s statement ...  “The big real estate bubble about to burst in Canada”. Many board members agreed and believed the collapse was imminent.

 

However, that statement and this thread originated in February of 2012 - SEVEN years ago.

 

Certainly nothing has collapsed since then. At this point, even if it does collapse, will property prices drop to pre-2012 levels? I am glad I haven’t been sitting waiting for the collapse to purchase a new home.

 

Why hasn’t the Canadian market collapsed?

 

This might have something to do with it:

 

10 Most Liveable Cities in 2018

1. Vienna, Austria

2. Melbourne, Australia

3. Osaka, Japan

4. Calgary, Canada  (average home price $431,000 CAD - $328,000 U$)

5. Sydney, Australia

6. Vancouver, Canada   (average home price $1,092,000 - $832,000 U$)

7. Tokyo, Japan

8.  Toronto, Canada   (average home price $766,000 - $584,000 U$)

9. Copenhagen, Denmark

10. Adelaide, Australia

 

The first U.S. city on the list is Honolulu. But you won’t find it until  you get to number 26 with an average home price of $800,000 U$. And in Hawaii you don’t have the expense of building for well below zero temperatures, nor do you have to battle winter conditions during construction. In other words - it ain't cheap to build in Canada.

 

As Canada is relatively welcoming to immigration, the laws of supply and demand kick in. Remember housing prices are only expensive in relation to one’s personal wealth. What may be expensive to me may well be cheap to an immigrant with a few hundred million in their back pocket.

 

I am involved in the construction industry and most people have no idea of the extent of the wealth some of these people immigrating into our country have. Most of the people I encounter are looking for real estate as a relatively safe haven for their money.

 

Had a older lady newly arrived from Iran come in recently doing some home renos. She asked if I knew of anyone who might have an apartment for sale.

“Are you thinking of selling your house and looking for an apartment?”, I asked.

“No, no I want to buy building.”

“Well, I know of an 18 unit starting shortly.”

“That’s exactly what I want. I want to buy a few of those.”

But that pales in comparison to some of the Asian money we see. And we are a relatively small place.

 

It also seems that many investors from outside Canada don’t understand that, unlike the US a decade ago, a lot of our mortgages are in effect government guaranteed through CMHC, others require a substantial down payment and in general our mortgages are not non-recourse loans. You can’t throw your keys on the banker’s desk and just walk away. So a correction in housing prices certainly would effect the economy, but not likely to the extent we saw in the U.S. meltdown of a decade ago.

 

While our economy certainly has its problems, this is still not a bad place to live - and you don’t have to look far to make a comparison.

 

We also have an upcoming election that may show an improved change in direction should a new government realize that there is more to Canada than the two central provinces.

 

Could housing prices collapse. Certainly anything can happen. But I would think twice about putting off buying a house for that reason because the bottom line is that unlike your stock portfolio, you can live in your house.

 

Just my humble opinion.

 

The geographic footprint of the lower mainland in BC features an ocean to the West, a border to the South, and mountains in the North and East which all limit expansion. New construction features high rises these days in an effort to house more people on the same amount of land. It’s land values therefore that have become valuable.

 

And while there is lots of talk in the press about the new speculation tax there is less discussion on things like Strata legislation changes. Changes in strata legislation now means winding up a condo building no longer requires a 100 per cent vote from owners and the City of Vancouver has seen a flurry redevelopment applications.

 

High demand for the land and relatively fixed supply.

[Rod]

I recently posted this in another thread but since it directly relates to this thread I will put my two cents in here.

 

This thread started with Garth Turner’s statement ...  “The big real estate bubble about to burst in Canada”. Many board members agreed and believed the collapse was imminent.

 

However, that statement and this thread originated in February of 2012 - SEVEN years ago.

 

Certainly nothing has collapsed since then. At this point, even if it does collapse, will property prices drop to pre-2012 levels? I am glad I haven’t been sitting waiting for the collapse to purchase a new home.

 

Why hasn’t the Canadian market collapsed?

 

This might have something to do with it:

 

10 Most Liveable Cities in 2018

1. Vienna, Austria

2. Melbourne, Australia

3. Osaka, Japan

4. Calgary, Canada  (average home price $431,000 CAD - $328,000 U$)

5. Sydney, Australia

6. Vancouver, Canada   (average home price $1,092,000 - $832,000 U$)

7. Tokyo, Japan

8.  Toronto, Canada   (average home price $766,000 - $584,000 U$)

9. Copenhagen, Denmark

10. Adelaide, Australia

 

The first U.S. city on the list is Honolulu. But you won’t find it until  you get to number 26 with an average home price of $800,000 U$. And in Hawaii you don’t have the expense of building for well below zero temperatures, nor do you have to battle winter conditions during construction. In other words - it ain't cheap to build in Canada.

 

As Canada is relatively welcoming to immigration, the laws of supply and demand kick in. Remember housing prices are only expensive in relation to one’s personal wealth. What may be expensive to me may well be cheap to an immigrant with a few hundred million in their back pocket.

 

I am involved in the construction industry and most people have no idea of the extent of the wealth some of these people immigrating into our country have. Most of the people I encounter are looking for real estate as a relatively safe haven for their money.

 

Had a older lady newly arrived from Iran come in recently doing some home renos. She asked if I knew of anyone who might have an apartment for sale.

“Are you thinking of selling your house and looking for an apartment?”, I asked.

“No, no I want to buy building.”

“Well, I know of an 18 unit starting shortly.”

“That’s exactly what I want. I want to buy a few of those.”

But that pales in comparison to some of the Asian money we see. And we are a relatively small place.

 

It also seems that many investors from outside Canada don’t understand that, unlike the US a decade ago, a lot of our mortgages are in effect government guaranteed through CMHC, others require a substantial down payment and in general our mortgages are not non-recourse loans. You can’t throw your keys on the banker’s desk and just walk away. So a correction in housing prices certainly would effect the economy, but not likely to the extent we saw in the U.S. meltdown of a decade ago.

 

While our economy certainly has its problems, this is still not a bad place to live - and you don’t have to look far to make a comparison.

 

We also have an upcoming election that may show an improved change in direction should a new government realize that there is more to Canada than the two central provinces.

 

Could housing prices collapse. Certainly anything can happen. But I would think twice about putting off buying a house for that reason because the bottom line is that unlike your stock portfolio, you can live in your house.

 

Just my humble opinion.

 

The geographic footprint of the lower mainland in BC features an ocean to the West, a border to the South, and mountains in the North and East which all limit expansion. New construction features high rises these days in an effort to house more people on the same amount of land. It’s land values therefore that have become valuable.

 

And while there is lots of talk in the press about the new speculation tax there is less discussion on things like Strata legislation changes. Changes in strata legislation now means winding up a condo building no longer requires a 100 per cent vote from owners and the City of Vancouver has seen a flurry redevelopment applications.

 

High demand for the land and relatively fixed supply.

 

But the supply is not so fixed if you consider that people have options--they can move to much cheaper Canadian cities.

[alpha]

 

This might have something to do with it:

 

10 Most Liveable Cities in 2018

1. Vienna, Austria

2. Melbourne, Australia

3. Osaka, Japan

4. Calgary, Canada  (average home price $431,000 CAD - $328,000 U$)

5. Sydney, Australia

6. Vancouver, Canada   (average home price $1,092,000 - $832,000 U$)

7. Tokyo, Japan

8.  Toronto, Canada   (average home price $766,000 - $584,000 U$)

9. Copenhagen, Denmark

10. Adelaide, Australia

 

 

From what I have read #2,#4,#5,#10 on that list are all currently experiencing housing corrections/crashes.

 

However, that statement and this thread originated in February of 2012 - SEVEN years ago.

 

Interest rates have been abnormally low for over a decade. These predictions were based on the idea that rates have to normalize. It remains to be seen what will happen in a higher rate environment.

 

 

 

I am involved in the construction industry and most people have no idea of the extent of the wealth some of these people immigrating into our country have. Most of the people I encounter are looking for real estate as a relatively safe haven for their money.

 

Had a older lady newly arrived from Iran come in recently doing some home renos. She asked if I knew of anyone who might have an apartment for sale.

“Are you thinking of selling your house and looking for an apartment?”, I asked.

“No, no I want to buy building.”

“Well, I know of an 18 unit starting shortly.”

“That’s exactly what I want. I want to buy a few of those.”

But that pales in comparison to some of the Asian money we see. And we are a relatively small place.

 

 

The only thing drawing this wealth to Canada is the lack of money laundering laws and regulation, if that ever changes the wealth could disappear as quickly as it arrived.

 

 

[bizaro86]

Your list of crashes depends how far backward you are looking. Calgary is down big earlier than the rest of Canada because of oil prices, but things seem to have startes to stabilize here, and valuations on basically every metric are way more reasonable. Vancouver/TO are much earlier in the bubble deflating process.

 

 

[Liberty]

If you look at the Canadian housing market in USD, it had a pretty big correction since 2014.

 

But the idea remains that Canadians haven't seen their incomes increase at anywhere near the rate that housing has increased, that the difference is made up of debt, and that the only way this debt can be serviced is because of very low interest rates. Something that can't go on will stop at some point.

 

I've always said that I have no idea when it'll happen, and I'm quite happy not to have bought since I've both done better in the market than Canadian housing since, and since my assets have been in USD instead of CAD, so I've had a double dip. I've also learned a lot about what I want in a house (having two kids does change a few priorities) and what neighborhood is best, so if I had bought back then, I probably wouldn't be happy with it now anyway and selling and buying has huge friction and headaches that I'm glad to have avoided.

[clutch]

I've always said that I have no idea when it'll happen, and I'm quite happy not to have bought since I've both done better in the market than Canadian housing since, and since my assets have been in USD instead of CAD, so I've had a double dip.

 

Not sure which region you are in, but this is hard to believe considering that the housing investment would have been most likely leveraged...plus the tax exemption you'd get for the principal residence.

[Liberty]

I've always said that I have no idea when it'll happen, and I'm quite happy not to have bought since I've both done better in the market than Canadian housing since, and since my assets have been in USD instead of CAD, so I've had a double dip.

 

Not sure which region you are in, but this is hard to believe considering that the housing investment would have been most likely leveraged...plus the tax exemption you'd get for the principal residence.

 

I'm near Ottawa. We'd have paid for most of the house with cash, so not much leverage involved.

[Cigarbutt]

I've always said that I have no idea when it'll happen, and I'm quite happy not to have bought since I've both done better in the market than Canadian housing since, and since my assets have been in USD instead of CAD, so I've had a double dip.

Not sure which region you are in, but this is hard to believe considering that the housing investment would have been most likely leveraged...plus the tax exemption you'd get for the principal residence.

I'm near Ottawa. We'd have paid for most of the house with cash, so not much leverage involved.

I think the topic raises an interesting question.

Leaving aside the intangible value that a "home" can have, choosing which opportunity to invest in and the leverage aspect can be handled as a two-level decision but taking the two decisions together, one could argue that it was (in 2010-2) relatively easy and cheap (leverage aspect) to buy a house using a significant amount of leverage (ie 3:1 or 4:1 debt to equity).

 

Looking back (to the 2010-2 period) and, assuming one would sell today in Toronto, the return on the equity of the purchased home would have been quite rewarding, even taking into account the recent price decline and the return would have been tax-free assuming the principal residence exemption. CAGR of avg MLS transaction price=7-8%

 

The interesting question is what would one do today in Toronto with a sum of money to "invest".

[clutch]

I've always said that I have no idea when it'll happen, and I'm quite happy not to have bought since I've both done better in the market than Canadian housing since, and since my assets have been in USD instead of CAD, so I've had a double dip.

Not sure which region you are in, but this is hard to believe considering that the housing investment would have been most likely leveraged...plus the tax exemption you'd get for the principal residence.

I'm near Ottawa. We'd have paid for most of the house with cash, so not much leverage involved.

I think the topic raises an interesting question.

Leaving aside the intangible value that a "home" can have, choosing which opportunity to invest in and the leverage aspect can be handled as a two-level decision but taking the two decisions together, one could argue that it was (in 2010-2) relatively easy and cheap (leverage aspect) to buy a house using a significant amount of leverage (ie 3:1 or 4:1 debt to equity).

 

Looking back (to the 2010-2 period) and, assuming one would sell today in Toronto, the return on the equity of the purchased home would have been quite rewarding, even taking into account the recent price decline and the return would have been tax-free assuming the principal residence exemption. CAGR of avg MLS transaction price=7-8%

 

The interesting question is what would one do today in Toronto with a sum of money to "invest".

 

I think a fair comparison would be to assume that you would have made enough downpayment such that your monthly mortgage + tax + upkeep etc. equals the monthly rent for a similar house. Then you can compare the return on that downpayment. Based on my rough calculation, in Toronto, you'd have made like 10x the original downpayment if you bought 10 years ago and sold now. Comparing that vs. investing the original downpayment in S&P, despite its good returns, it's not even close. And if it was your principal residence and you could have invested in S&P only via non-tax sheltered account...well that's another 2x in favor of buying the house.

 

In Ottawa, it looks to be about 4x return on the original downpayment based on the same assumption...

 

If you assume you would have bought the house entirely with cash, you should assume that the money you'd have saved from monthly rent would be invested in the stock market and aggregate that return with the return on the house. Not sure which option would have been better in that case -- but it seems extremely silly to not have taken the mortgage with the low-interest rates for past 10 years.

 

Of course, this is all in hindsight. Going forward, investing in any real estate in Toronto does seem crazy right now. However, if it's your principal residence, I'd say just buy it with the mortgage if your total monthly expense on the home does not exceed 30-35% of your after-tax income (and it's not like rent is cheap in Toronto either). I really think nobody can predict what's going to happen to the market in the short term and over the long term you will do fine considering the relatively cheap leverage and tax exemption.

[Liberty]

Comparing highly leveraged investments in an illiquid single asset that you can't easily sell is a fair comparison with an unlevered investment in the 500 biggest companies in the US (and mostly the world, since they have global sales) across multiple industries  ???

 

Leverage cuts both ways. you can lose more than your whole equity if you lever up 4X...

 

Lots of hindsight bias here. If the Canadian market had crashed during that period, there would be a lot less celebrating, especially because when you're this elevated, nothing says you'll bounce back anywhere close any time soon (took around 21 years after the last toronto RE crash).

 

 

I mean, I know this time is different and it can't possibly happen again, but what if?

[SharperDingaan]

Financially, a house is valued the same way that we value a bond; PV of future benefits.

When interest rates are high the PV of those future benefits is small (house is cheap); when interest rates are low the PV of those future benefits is large (house is expensive). Change usage, and you change the benefits, further altering the calculation. Leverage the asset (mortgage) and you magnify the PV change in benefit.

 

Per the below reference. The average mortgage rate in Canada is 6.9%

In the 1980’s it ranged from 12-14%, spiking at 21.94%; from 2008 it has fallen from 5% to the current 3.84%.  The usual mortgage amortization term is 25 yrs.  For illustrative purposes, make up a monthly payment; and discount it for 25 years at each of the above mortgage rates. The 1980’s house price is very low, the 2018 house price very high, and the average house price is ‘in between’. Divide by the average house price to get a sense of the impact neccessary to return to 'average'.

https://www.theglobeandmail.com/real-estate/the-market/remember-when-what-have-we-learned-from-80s-interest-rates/article24398735/

 

Of course, todays housing market should fall as interest rates go back to 6.9%. But we have no idea how long it will take for rates to rise another 310bp, and we know that the price for an individual property will be determined by supply/demand at the time of sale. If nobody wants your place, you’re not getting the price you want.

 

Look around you.

At current debt levels, how many people around you would still be able to pay their floating rate mortgage if rates were 300bp higher? They need to sell before that occurs, and move to something smaller with a smaller mortgage. The price of the $1M McMansion falls as everyone sells, and the price of the 500K townhouse rises as everyone buys one. The houses remain, with different people living in them, but the process takes a very long time. No crashes.

 

Boomers owe their wealth to their ability to have bought a house in the mid 80’s, and finance it with a mortgage. 25 years later that house was worth many times what was paid for it, the mortgage was paid off, and the gain on sale was tax free. And every year of those 25 years, interest rates fell, continuously spurring the economy, and ensuring that you remain employed. And if you were a ‘bank’ employee you did even better, with ‘below market’ mortgages as a perk.

 

If you’re < your mid-40’s today, this isn’t your life.

 

SD

 

[clutch]

Comparing highly leveraged investments in an illiquid single asset that you can't easily sell is a fair comparison with an unlevered investment in the 500 biggest companies in the US (and mostly the world, since they have global sales) across multiple industries  ???

 

Leverage cuts both ways. you can lose more than your whole equity if you lever up 4X...

 

Lots of hindsight bias here. If the Canadian market had crashed during that period, there would be a lot less celebrating, especially because when you're this elevated, nothing says you'll bounce back anywhere close any time soon (took around 21 years after the last toronto RE crash).

 

 

I mean, I know this time is different and it can't possibly happen again, but what if?

 

Why is hindsight bias relevant here? I'm just giving you analysis, not a prediction.

 

I'm not predicting what's going to happen in the future, but pointing out what actually happened in in the last 10 years because I didn't buy your argument that you were better off (only the financial aspect) renting during that time. Remember, you were stating that you were better off based on what actually happened, not based on what you expected to happen. And I'm basically refuting your statement that it's likely to be factually incorrect (never said your decision was right or wrong, which is a different argument).

 

And I push back on the fair comparison question -- because we were talking about buying a home vs. renting. I was comparing two scenarios what a sensible person would do if the person had some cash and was renting. Should they use that cash to make a downpayment to buy a home or just keep renting? Or keep renting and invest that money on the stock market? It's the typical buy vs. rent analysis. And I'm saying that buying would have resulted in a better financial outcome in most cases. Again, that's a fact, not a prediction.

[Liberty]

Why is hindsight bias relevant here? I'm just giving you analysis, not a prediction.

 

I'm not predicting what's going to happen in the future, but pointing out what actually happened in in the last 10 years because I didn't buy your argument that you were better off (only the financial aspect) renting during that time. Remember, you were stating that you were better off based on what actually happened, not based on what you expected to happen. And I'm basically refuting your statement that it's likely to be factually incorrect (never said your decision was right or wrong, which is a different argument).

 

And I push back on the fair comparison question -- because we were talking about buying a home vs. renting. I was comparing two scenarios what a sensible person would do if the person had some cash and was renting. Should they use that cash to make a downpayment to buy a home or just keep renting? Or keep renting and invest that money on the stock market? It's the typical buy vs. rent analysis. And I'm saying that buying would have resulted in a better financial outcome in most cases. Again, that's a fact, not a prediction.

 

That's fair.

 

What did happen, though, is that I did better than I would've otherwise done. Someone else might not have, though, but modifying what I actually did to change it to what you think someone else should've done does make it something other than "what actually happened".

[Cigarbutt]

...

Of course, this is all in hindsight. Going forward, investing in any real estate in Toronto does seem crazy right now. However, if it's your principal residence, I'd say just buy it with the mortgage if your total monthly expense on the home does not exceed 30-35% of your after-tax income (and it's not like rent is cheap in Toronto either). I really think nobody can predict what's going to happen to the market in the short term and over the long term you will do fine considering the relatively cheap leverage and tax exemption.

Some works have convincingly shown that buying the Nifty-Fifty stocks at the top would have resulted in an overall good result on a relative basis if held over the long term (assuming the investor had the mental and financial fortitude to get through some difficult years). So, the long term argument makes sense and one (or a household) has to live somewhere.

 

If I would consider moving to Toronto today, the real estate factor (does seem crazy or is crazy) would play a significant and negative role. This is not about timing but about pricing. Taking the numbers and assumptions listed above and noting that the principles are similar to what the Bank of Canada is trying to do with their new stress tests, it seems that only 10 to 20% of households in the Toronto area would qualify for the typical average transaction. Who is buying? There has been a lot of talk about the "marginal" price-insensitive buyers who tend to push prices up but it seems that this "marginal" population would be responsible for, at the most, one month's worth of transactions. The above could be mitigated by the fact that the homeownership rate is about 2/3 (so one has to adjust the 10 to 20% up) but the above assumes that the typical home buyer carries a low level of non-housing-related credit which is probably too conservative. All that means is that the typical buyer is probably not following the "prudent" rules mentioned above and are stretching their budgets, an assessment that is confirmed by different surveys and perhaps an explanation for the negative pricing trends in 2018.

 

So, where is the margin of safety when a small and unexpected bill could put sand in the gear?

[mcliu]

Has anyone done an analysis on the break-even point between rent vs buying?

 

How high do prices have to get for an average family before it makes sense to rent instead of buy?

[Cigarbutt]

Has anyone done an analysis on the break-even point between rent vs buying?

 

How high do prices have to get for an average family before it makes sense to rent instead of buy?

There are various rent vs buy calculators available but one has to plug in the inputs. The biggest assumptions concern the after-tax return expected on investments (capital not used for a down payment and differential saved per month after) if you rent vs the expected home price appreciation over time if you buy.

 

In Toronto, there are probably pockets of relative undervaluation for either rents or home purchases but it seems that both markets are overall expensive.

 

An interesting feature is that homeownership rates have increased (in Toronto and Canada) but it seems that a peak has been reached. Also, millenials tend to stay home longer.

https://www150.statcan.gc.ca/n1/en/daily-quotidien/171025/dq171025c-eng.pdf?st=P8xOuLu9

[gary17]

pretty hard to beat tax free leveraged return if you buy a home

[rb]

pretty hard to beat tax free leveraged return if you buy a home

How do you harvest that return?

[Viking]

Holding period is a key. If you are planning on living in the same area for the next 10 or more years then buying at historically high prices might make sense. However, if you might want to move then buying today does carry risks.

 

If you buy in Vancouver or Toronto today and prices fall 10 or 15% over the next couple of years (certainly possible) and then you are offered a promotion at work but have to change cities then you will need to sell your place and realize your loss. This happened to some people in the late 80’s.

[Liberty]

pretty hard to beat tax free leveraged return if you buy a home

 

Historically, on average, real estate appreciation has pretty much followed inflation with a little extra, no? And there are all kinds of maintenance costs that people often forget to factor in when they cite how much they've made. Most of the return seems to come from leverage, which is fine, but we shouldn't forget that carrying a lot of debt can be a problem (price can fall, hells angels can move next door, houses can have expensive problems, etc).

 

Tax free is nice, but a lot of people invest in tax-advantaged accounts too, and the friction to buying and selling tends to be relatively high, if you're not someone who knows real estate well and can bypass a lot of the fee-takers.

 

To me, buying a house has a lot of non-financial considerations too, so looking at IRRs vs renting is only part of the story. Some people want to be real estate investors and don't mind flipping houses and moving every few years. Personally, I have no interest in that.

[Cigarbutt]

^the above takes for granted that house values will keep increasing faster than inflation.

 

A long term retrospective look indicates that this is not guaranteed.

https://www.livabl.com/2017/03/canadian-house-prices-since-1921.html

 

If interested, the full study referenced in the article is long but fascinating and includes a horrible chart, made in Japan.