Hard Facts on House Prices

Tuesday, October 19th, 2010

Not many top­ics are more emo­tion­ally charged than house prices. Part of the rea­son is the amount of myth, anec­do­tal con­ver­sa­tion and pure mis­in­for­ma­tion on this topic.

In many cases, that cre­ates a big oppor­tu­nity for advi­sors to add value by intro­duc­ing facts and objec­tive information.

That’s been the sub­ject of my last two Globe columns — last week’s looked back at the his­tor­i­cal returns on home own­er­ship, today’s  exam­ines what cur­rent house val­u­a­tions look like by his­tor­i­cal standards.

Links to both columns can be found at the bot­tom of today’s email, should you want to email them to clients.

Houses as an invest­ment — the ver­dict of history

The last ten years have seen annual increases of 8% in house prices — the best decade on record.

Some Cana­di­ans expect those kinds of gains to con­tinue — and are almost sure to be disappointed.

So last week’s Globe col­umn tack­led the ques­tion:  What are the facts on his­tor­i­cal returns on houses?

Depend­ing on your source, the answer is that after infla­tion, returns on houses have been either slim or nonexistent.

Phil Soper of Royal Lep­age said that since the early 1960s, Cana­dian house prices have seen an aver­age annual gain after infla­tion of 2.4% — this com­pares to a long term real return on stocks of over 6%.

Another per­spec­tive came from Cyn­thia Holmes, who teaches real estate at the Schulich School of Man­age­ment at York. She sug­gested that over the longer term, on aver­age house prices only increase with infla­tion and there are no real returns at all — this is sup­ported by a study of houses in cen­tral Ams­ter­dam going back 350 years.

Con­firm­ing her view, in this weekend’s National Post Robert Shiller of Yale was quoted that from 1880 to 1990, US hous­ing prices yielded a zero rate of return.

Today’s email con­tains an inter­view with Cyn­thia on this — you can also watch it here:

http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​c​y​n​t​h​i​a​-​h​o​l​m​e​s​-​a​-​l​o​n​g​-​t​e​r​m​-​v​i​e​w​-​o​n​-​r​e​a​l​-​e​s​t​a​t​e​-​r​e​t​u​r​n​s​/​t​y​p​e​:​i​n​v​e​s​tor

Hous­ing prices today — fairly val­ued or a bubble?

Today’s Globe col­umn shifts from the past to the present, exam­in­ing the sub­stance behind recent sug­ges­tions that hous­ing prices are at bub­ble levels.

In March, the New York Times devoted a rare arti­cle on Canada to this topic.

And a cou­ple of weeks back, David Rosen­berg of Gluskin Sheff released a report sug­gest­ing house prices could fall by 20%.

Here’s the Rosen­berg report:                                                https://​ems​.gluskin​sh​eff​.net/​A​r​t​i​c​l​e​s​/​C​o​f​f​e​e​_​w​i​t​h​_​D​a​v​e​_​0​4​2​3​1​0​.​pdf

Here’s how it was cov­ered in the Toronto Star: http://www.yourhome.ca/homes/realestate/article/799961–canadian-housing-market-correction-in-the-cards-says-economist

And here’s the New York Times story: http://​www​.nytimes​.com/​2​0​1​0​/​0​3​/​2​0​/​b​u​s​i​n​e​s​s​/​g​l​o​b​a​l​/​2​0​r​e​a​l​.​h​tml

Hous­ing prices through the lens of affordability

Phil Soper of Royal Lep­age points out that over time hous­ing prices and incomes move together — although there are lots of peri­ods along the way where incomes get ahead of prices or prices get ahead of incomes.

Since 1985, RBC eco­nom­ics has tracked afford­abil­ity of houses in 100 neigh­bour­hoods across Canada, look­ing at the per­cent­age of the median household’s income it would take to carry a 1200 square foot bun­ga­low, assum­ing a 25% down pay­ment and includ­ing util­i­ties and prop­erty taxes. The higher a per­cent­age of a household’s income it takes, the less afford­able houses are.

Today’s Globe col­umn con­tains a chart of his­tor­i­cal and cur­rent afford­abil­ity in Cal­gary, Mon­treal, Toronto and Van­cou­ver — this chart is found at the bot­tom of this article.

Since 1985, the aver­age pro­por­tion of income to carry a bun­ga­low across Canada has been 39% — Mon­treal ‘s been 37%, Cal­gary 40%, Toronto 49% and Van­cou­ver 57%.

There have been big vari­a­tions along the way of course — as house prices ran up in the 1980s, afford­abil­ity declined to the point that by 1990 it took an aver­age of 53% of income to carry a bun­ga­low, with Toronto hit­ting 73%. The high prices and the poor afford­abil­ity that resulted led to the lost decade for house val­ues in the 1990s, when prices actu­ally declined in real terms.

At the end of Decem­ber, afford­abil­ity in most mar­kets was close to his­tor­i­cal lev­els, although RBC points out this was partly a func­tion of mort­gage rates well below what would nor­mally be expected. When they did the cal­cu­la­tion assum­ing nor­mal mort­gage rates, afford­abil­ity dropped below the long term aver­age — the good news was that afford­abil­ity was still well above the all time highs.

The only mar­ket where alarm bells went off was Van­cou­ver — assum­ing nor­mal mort­gage rates, at the end of Decem­ber it would have taken 81% of a median household’s income to carry a bun­ga­low, just below the all time high set in early 2008.

Based on this analy­sis, today’s col­umn draws two conclusions.

First, with the excep­tion of Van­cou­ver, houses do appear expen­sive but are not at bub­ble levels.

And sec­ond, there’s no rush to buy — while house prices could con­tinue to increase, if they do it’s likely they’ll cor­rect back down.

Here’s a link to the RBC report on afford­abil­ity, which con­tains his­tor­i­cal data on twenty cities across Canada: http://​www​.rbc​.com/​e​c​o​n​o​m​i​c​s​/​m​a​r​k​e​t​/​p​d​f​/​h​o​u​s​e​.​pdf

And here’s the sum­mary of long term afford­abil­ity that’s in today’s Globe:

% of typ­i­cal household’s income required to carry an aver­age bungalow

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Tags: 1960s, Canadians, Central Amsterdam, Email, Globe, Historical Returns, Home Ownership, House Prices, House Valuations, Inflation, Last Ten Years, Misinformation, Myth, Phil Soper, Rate Of Return, Robert Shiller, Royal Lepage, School Of Management, Schulich School, Zero Rate
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