The Economist;
The latest update of The Economist’s global house-price indicators shows that prices are now falling in eight of the 16 countries in the table, compared with five in late 2010. […] To assess the risks of a further slump, we track two measures of valuation. The first is the price-to-income ratio, a gauge of affordability. The second is the price-to-rent ratio, which is a bit like the price-to-earnings ratio used to value companies. Just as the value of a share should reflect future profits that a company is expected to earn, house prices should reflect the expected benefits from home ownership: namely the rents earned by property investors (or those saved by owner-occupiers). If both of these measures are well above their long-term average, which we have calculated since 1975 for most countries, this could signal that property is overvalued.
Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble.
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More – An interactive overview of global house prices.
And possibly it is nothing in the case of Canada. Virtually all of the rapid increase in housing values is driven by Vancouver, not the rest of the country. And Vancouver’s increase is driven by purchase from overseas and not solely based on Canadian domestic income. If there is a slump in Canadian housing values it could be concentrated largely in Vancouver.
But then, this kind of pseudo-analysis based on coarse national averages is the sort of bunkum in which the Economist specializes.
Comparing ratios to historic averages catches your attention, because it indicates the growth rate of demand has been higher than the growth rate of supply. Why is demand growing faster than supply is the key question.
Regardless of those causes, limiting the % of the home’s value that can be refinanced to a very low rate should be permanent government policy.
Sobering, isn’t it? If you split Toronto, Montreal and Vancouver out of that national number the over-value on a home in those cities becomes truly amazing.
Most of the people I know who have a bunch of money made it by laddering up their home. Buy, spiff, sell. Most of the money I’ve managed to sandbag against tax and just spending it over the years has been made the same way. Buy, spiff, sell.
For me the house is really the only investment I have that’s grown over the years to an appreciable extent, and the only thing I’ve been able to add value to with my own work. That’s how the tax code is arranged, and that’s why we have a bubble.
Going to be a beeatch when it pops. The repercussions of the USA bubble bursting aren’t even -beginning- to show up yet, and already the damage is huge. There’s going to be a whole bunch of broke old people hitting the retirement system in the next 20 years, for one thing.
Phantom, I disagree to some extent. A lot of us old people bought our homes at a fraction of what they are valued at today and are still in them. The cost of maintaining these homes is still cheaper than renting. Even if the value of the home drops drastically, unless property taxes and fees go through the roof, the maintenance costs would still be similar.
The real hit will be the newer buyers that have mortgages in the hundreds of thousands with 2 cars and the myriad costs associated with their lifestyle costs as we see in the US. They can walk away from their homes without penalty while we in Canada can’t
Scary times ahead.
Dave: in van and to a lesser extent some of the other cities fOr many people the gain on their home IS their retirement. For over a decade – more like fifteen years – middle class Vancouverites have been spending an very high proportion of their take home income on their mortgage and had almost nothing to spare for other savings and investment options. They were counting on a big tax-free cash out at retirement. Thus a forty percent drop/correction would wipe out the retirement plans of millions of canadians who are now in their late forties/early fifies.
I recall visiting St. Catharines, Ontario in the early 1980s high interest period and seeing a multitude of empty homes and it seemed like a few on every street with for sale signs. It was not a pretty sight.
Housing prices have gone up in large part in places like Toronto and Vancouver because of a) excessive regulations and b)environmental policies.
I’ll touch on the later a little bit more. McGuinty brought in the Green Belt in the Greater Toronto Area on the advice of ‘American’ Richard Florida (staunch urbanist) to eliminate further urban sprawl. The Green Belt has basically eliminated huge amounts of land around the outskirts of the GTA for real estate development thus reducing the number of houses built and the increasing the value of existing/future houses thus pushing up the price and making it less affordable to live outside the city.
Just as my parents (WWII vets) benefited in the inflation of their house and property to an extent, astute Boomers have as well. Granted those who hang on to long will lose out.
Boomers in inflated markets will be trying to downsize into retirement and could easily find no market for their homes, or a seriously reduced one. Incomes for today’s workers do not support expensive home purchase. So, yes, the Chinese in Van and affluent oil workers/executives all over western Canada continue to buy.
Another dynamic in rural western Canada is the need to relocate to larger centers where health care can be had. Rural areas( areas with pops less than 15,000 people) will see the largest movement out. This will destroy a lot of towns as their infrastructure becomes unaffordable.
So what am I staying here for?
Gold Tulk, I know so many people in that age group and you are right that they expect to cash out with the huge growth in equity on their homes. Us, in our late 60s and early 70s bought homes for $35k, my first home was $21k in central Toronto, which sold recently for $475k.
No one expects to see insanity like that for recent purchases as equity growth. The blood letting when the housing bubble bursts here as it did in the US will not be pleasant.
This confirms my anecdotal observations that house prices in the US are getting damn cheap. Time to buy?
dave said: “A lot of us old people bought our homes at a fraction of what they are valued at today and are still in them. The cost of maintaining these homes is still cheaper than renting. Even if the value of the home drops drastically, unless property taxes and fees go through the roof, the maintenance costs would still be similar.”
Yes, my parent’s generation are doing that. Thing is, that generation bought for something like $5-$7k and the house is worth on the order of $250-$500k in Ontario. In Toronto it will be up toward a million bucks. Major cash-out.
But for a lot of people, that house is the sum total of their savings thanks to 40 years of ever increasing tax on everything -except- the house. They are counting on that money to see them through their nursing-home phase. Bubble bursts, who’s paying for that? Parents are broke, kids are broke (their house has no value either, AND they haven’t paid for it yet), grandkids are still living at home with kids because no jobs, and there may even be great-grandkids in the oven thanks to the destruction of the nuclear family as a government policy.
There’s also inflation on the horizon. So you’re looking at the unholy conflagration of not declining but -plummeting- house values (sole repository of society’s savings) in a time when paper money is also losing its value rapidly. And when everything in life other than lumber is made in China. Go try to buy a hammer that wasn’t made in the PRC, just for a fun outing.
That’s a hell of a bubble.
Still, it could be worse. Chez Phantom might end up semi-worthless, but it will still have a clear view for over 500 yards in all directions.
And yes, I very much doubt I’m paranoid enough.
Woodporter said: “This confirms my anecdotal observations that house prices in the US are getting damn cheap. Time to buy?”
I did. Presently a little underwater, as prices continue to decline slowly. My purchase was a winter vacation home in AZ, purchasing as an investment I think might be a little premature.
Chez Phantom Southern Command also has good sight lines. ~:D
And when those housing prices fall, the CMHC ensures that the taxpayer’s on the hook! Deposit insurance does much the same.
“…the CMHC ensures that the taxpayer’s on the hook!”
What taxpayers? The only people working are going to be working for the government. See Greece for details.
It’s probably nothing?
Does that refer to the employment rate or the value of housing?
It refers to Flaherty’s predictive ability.
Another scenario is a possible implosion of the world financial system which is right now hanging by a thread. That would bring on a massive deflation everywhere on a scale never seen, and along with it an economic depression the depths of which we can only shudder at. Prices on everything could foreseeably drop by up to 90%.
I am being a pessimist, or a realist ?
You tell me.
A house should not cost more than 2.5x the neighborhoods median income, or 120x the monthly rent. Me, when I can buy a house for less than renting a comparable, all in (and ignoring interest deduction, as that will likely go away to fund bailouts and other welfares), I’ll consider buying.
My house is not an investment. It is somewhere to live. By modern standards and the standards of the neighbourhood it is modest (read small), but it is adequate. I will have it paid off less than ten years from the time I bought it. I could buy a bigger house, but if I did I would have less disposable income. I had an investment in a REIT, that for the time I held it paid a good dividend and provided a nice capital gain. I would rather invest in real estate that way than by flipping house. I’m too lazy to move again. The main reason I don’t buy a bigger house is property tax. I already pay an extortionate amount of money and I would get exactly the same services from the city if I bought a bigger house and paid thousands more.
My wife and I sold our 1000 square ft townhouse in Calgary in 2004 for just over $100,000 and purchased an 1,800 sq ft detached home for around $225,000. In 2010 we sold it for $440,000 (with multiple offers over asking price). That old townhouse we had was also back on the market for $225,000.
The people who bought our house are crazy but I gladly took thier money. That house was worth $300,000 max. My only regret was not keeping the townhouse and renting it for a few years. In hindsight we could have easily managed the the two mortages.
We then moved to the Estevan area and bought a bungalow for $280,000 and it is currently back on the market for $350,000 less than 2 years later. We did add a garage but the inflation is crazy.
We are back in Calgary now and are renting. There is no way I would buy in this market with the pending global economic collapse coming. Our rental was on the market for $450,000 which if you had a mortgage would cost roughly $2,500 / month with property taxes. We are paying $1,900 / month which is a 25% discount on the price to rent ratio. The profits we have from both sales and the market shorts I have invested in my TFSA etc. will allow me to buy a house outright with cash once the dust settles.
The bubble is everywhere not just Vancouver, Toronto etc. Regina and Saskatoon are the same and the rest of Canada is in the same boat.
Well, my home on a rural acreage is paid for, no mortgage outstanding. It has probably dropped in value from its peak of a couple years ago, but I don’t particularly care, because I live there, and have no plans to cash out.
If TSHTF, as far as the world-wide economy goes, I have enough land to grow my food, plus a shop that I could use to take in work to earn a little of whatever passes for a medium of exchange.
I’m with Gordinkneehill, my house will be paid off when I’m 52, though I am considering paying it off in the spring with a forthcoming backpay cheque. I have an acre in a rural hamlet and I plan to stay here until they carry me out feet first.
I never bought into this idea that a young couple must buy a starter home first, then buy a bigger home when you have children then buy a retirement home that is the same size as the starter home. I think this scheme benefits the real estate agents, the lawyers and the province which collects land transfer taxes. Also the houses they make today are much too big.
We recently moved from WA to MD (for work). In both places, monthly rents are higher than typical mortgage payments on comparable properties. So we are renting out the house we own back in WA, and will most likely buy a house in MD once we have the down payment together and are more familiar with the communities out here. The only worrisome thing I see is that in some communities the property taxes are astounding, e.g. an annual $10,000/yr tax on a $400K house. In other areas, the property tax rate was roughly doubled just a few years ago. Folks on fixed income can’t cope with that even if they already own their homes outright.
I love renting!
If I had any money I would want it making money in the market, not moldering in property taxes, maintenance, surprise drainage attacks and an illiquid asset in a declining market.
Right now I want a certain sort of house for my young family: ten years from now, a different sort of house for the teens/university guys.
Meanwhile, the housing prices in Victoria have dropped about 15% in the year we’ve been renting our current house. On 800k (the price of a nice house in Victoria) that is 120K in a year, 10K a month…we don’t pay 10K in rent.
Being a trailing edge boomer I know that there will be lots of lovely houses on the rental market for years. There is a melt on everywhere but Vancouver and the core of the GTA.
Once a month the rent cheque clears (pray God) and we have the pleasures of our house with none of the downside exposure. Works for me.
Jay, you are not alone. The renting market was completely dead in Phoenix when I lived there in the 1990s, because you could make payments on a house cheaper than renting. Like, a couple hundred bucks a month cheaper. It was shocking to me how cheap it was, actually. I remember staring at the real estate lady with my mouth open when she did the numbers for me.
Now, its completely reversed. Nobody wants to buy, everybody wants to rent. Bottom is not yet in sight.
Canada’s future? Almost for sure.
I haven’t read all the comments, so maybe someone has already noticed this, but doesn’t that line graph look an awful lot like Mike Mann’s hockey stick? If the Economist is using the same algorithm as Mann et. al., I don’t think there’s much to be worried about.