- the source for market opinions


August 6, 2019 | Apples & Apples

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Enough Trump, China and pantywaist investors. Let’s get back to bricks for a while, where men are men and nobody ever loses money. Err… Wait a minute.

The news Tuesday was that sales last month ‘soared’ in the nation’s biggest real estate market. Say the Realtor® gods®: “With annual growth in sales far outstripping annual growth in new listings, market conditions clearly tightened compared to last year.” So, more buyers chasing scant listings resulted in higher prices.

As market conditions continued to tighten in July, the average selling price increased by 3.2 per cent on a year-over-year basis to $806,755. The MLS® Home Price Index Composite benchmark was up by 4.4 per cent.

Well, that’s definitive. And fake. Let’s have a closer look at what’s going on in a region inhabited by almost one-fifth of the entire Canadian population. Last month the average single-family home in 416 was trading for $1,227,400. That compares with $1,350,700 for the same place a year ago. This is a drop of $123,400, or $10,300 per month. On a yearly basis, the decline is 9.1%.

Now, since everyone on this pathetic blog loves to make year/year comparisons with financial assets, let’s apply the same logic.

A detached 416 house purchased a year ago would cost $1,397,700 with land transfer tax. If the same house were sold today (at the average market price) it would fetch $1,227,400, less 5% sales commission, for a net of $1,166,030. The loss: $231,670, or 17%.

But, I hear the house-humpers cry, Garth’s a moron because (a) there was a benefit from living in the house and (b) nobody buys to sell 12 months later.

So let’s factor in imputed rent of $3,500 a month, or $42,000 for the year. That reduces the loss to only $189,670, of $16,000 a month. Yippee. Of course, to be fair, an investment portfolio – even one that loses capital value in a year – also produces income in the form of dividends, interest and distributions. Apples and apples.

And the argument that houses are not bought/sold annually? Perfectly true. Most people acquire real estate, don’t sweat the value, don’t routinely have it appraised, and really don’t care what it’s worth until they come to sell. But wait. Isn’t that exactly the same with, say, money in an RRSP or a TFSA or a non-registered investment account that won’t be needed until you retire or your kids go to med school?

So why do we apply an entirely different measure to one asset class than another? If  residential properties were valued hourly, as ETFs are, we might have a different view of the ‘stability’ of real estate. And, by the way, 416 single-family home prices are back to where they were in the summer of 2016.

So much for “clearly tightened market conditions.”

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So what do new homebuyers regret the most? Surveys in both Canada the US have come to the same conclusion. Most people wish, wish, wish they’d had a bigger downpayment.

New American data found almost 70% of recent buyers lamented the paucity of their down. Over half (52%) said mortgage payments were too high and a third believed owning a house was stressful. In Canada, it’s worse. Most new buyers are in condos now, with the average price of a concrete box in the GTA (for example) at a punishing $628,000. In Vancouver it’s $653,000. Government policy (the stress test) has depressed expensive homes and goosed competition for cheap ones – a direct burden on first-time buyers. Meanwhile condo owners are subject to continuous escalation in costs that they cannot control as buildings age and strata fees jump.

The inevitable conclusion: move to Regina and buy an actual house. Average cost: $269,400. That’s 4% less than last year. And it’s not even snowing yet.

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Finally, for more evidence of what a housing bubble does to people’s brains, here’s Lillian. Yes, this is an actual letter.

I sold my condo in Brampton for $359 000 purchase price $190 000. I would like to purchase another property for investing but properties are crazy in Brampton. I might have a down payment of about $200 000 but not able to qualify for a mortgage more than an additional $180 000 because my income is $43 000 with part-time job. I am thinking to move to Alberta and buy a property cash. I am 50 years old with no savings but debt free except mortgage. Should I try to buy another house in Brampton?

A woman who rode the property wave, made some serious money, now has liquidity (for the first time, it seems), is steaming towards retirement age and wants to shovel all her money into one thing, while taking on leverage. The question is not Brampton or Alberta , but what this poor creature thinks she’ll live on in twenty years.

Canadians are choking on debt and massively over-invested in a single asset which is still so inflated in most markets that average people cannot afford average homes. And Lillian shows us why it’s happened.

Real estate always goes up. Everybody knows that.

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August 6th, 2019

Posted In: The Greater Fool

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