House prices and rents: Reason for concern...Part 2
OCTOBER 03, 2011
Please read part 1 of this two part series for a detailed explanation of why house prices and rents tend to move in tandem over long periods of time. In that post, we examined house prices and rents in some larger centres from BC east to Manitoba. Today, Ontario and the rest. If your town is not included, it's not for lack of trying on my part. The available data only covers so many towns.
Once again, these graphs show the rise in both house prices and rents with both variables set to 100 in 1992. This does not show nominal data, but rather the change in each variable, which should, as we know, be roughly equal.
Let's let the graphs speak for themselves...
Discussion:
Once again we see that there is no 'Canadian' housing bubble. While I would say that there is a bubble in the average resale house price in Canada, it's quite clear that it is not uniformly distributed, nor will the fallout affect all communities equally. Several Western provinces and some larger Ontario cities have made an outsized contribution to the rise in the average resale house price. With increasing signs that a top in the market is forming or already past us, it seems that these same cities will provide the bulk of the downward pressure on average house price data going forward.
Interestingly, we see that house prices in most cities tracked their respective rental index until the early 2000s. I'd suggest that there are several reasons for this:
1) When the tech stock bubble imploded in the US in 2000, many investors were burned badly as they watched their savings disappear seemingly overnight. At the same time, to fend off a looming recession, the Fed in the US, and the Bank of Canada, cut interest rates. You can see this in the following graph. Notice that the overnight rate from the Bank of Canada fell from 6% down to 3% after 2001.
The stability of the housing market during this stock market turbulence, coupled with falling interest rates, ushered in a new mentality towards housing as an asset class. This shifting mass psychology can be seen in the charts from this post.
2) Just prior to this, down payment requirements in Canada were cut from 10% to 5%. This kicked off a decade-long experiment with loosening credit requirements for real estate:
- A brief foray into zero down mortgages (still technically continuing if you consider the cash-back offerings at all major banks)
- An extension of amortization rates up to 40 years, then back to 35, and now 30
- The removal, in 2003, of CMHC's regional cap on amount of mortgage they would insure
The result has been a massive expansion in mortgage credit outstanding, from 40% of GDP in 2000 to almost 65% of GDP in 2011. This does not include home equity lines of credit, which are calculated as consumer debt and have been the fastest-growing form of debt in Canada.
As I explained in part 1 of this series, rents are paid out of income, while house prices are financed with credit. Because of this, the expansion in credit that we've seen has boosted house prices but has left rents lagging well behind. Ultimately, this is not sustainable as even house prices are constrained by the incomes needed to support mortgage debt. Interestingly, we've also seen how house prices relative to incomes look in Canadian cities in this 3-part series. It's ugly.
Ultimately, we all will fall into one of two camps. We will either recognize that the metrics of house prices and rents will once again realign, likely by stagnating or falling house prices, or we embrace what famed investor Sir John Templeton called the four most dangerous words: This time it's different.
-Ben
Posted in:
26 Comments
Does anyone know the house price to rent ratio for Nanaimo or Prince George?
It is the followers who dictate the leader, not the other way around. You are correct, Jimmy: Greg definitely has a following, and that's because he speaks of things no one else will touch, no one else will look at, things the government and vested interests know about, but the public is not privy to. His comments for the most part ARE on point, but just in a more expansive, investigative way.
History is chock full of people who did speak up, were right all along, but who were labelled "conspiracy theorists" and, no, they were not all neat, tidy and polite about it. Often the greatest truths are messy because people do not want to look at them. Instead they attack the messenger.
Why is it the government is hiding so much from us? Are we, the taxpayers, not entitled to know what is going on? Do you think it's because we can't handle it, or is it because TPTB KNOW what would happen if we found out the ugly truth? Opacity is there for a reason; it's to hide something.
Jimmy, you compare Greg to your son's friend who packs up his toys? Greg has been taken to task many times here on his posts, and yet he has not backed down. He has continued to reiterate his views, backing them up with more statistics and links. He has not folded when he didn't get his own way and he has not been quick to take offence.
There was an absolutely brilliant blogger on a site I often visited. People came to hear what "Black Swan" had to say. He got frustrated with the host because the host refused to see that the people running the government, even when the evidence was CONTINUALLY put right in front of him, did knowingly look the other way, failed to prosecute, changed laws in favor of certain Wall Street banks, etc., etc. He finally left in disgust, and it was a loss to the site (whose numbers dwindled down to nothing) and to the others who visited the site. Greg was trying to turn some stones over to see what was underneath. If others don't want to listen, then that's their problem.
Greg, I hope you would consider it your calling and start your own blog (I would, except I don't know enough yet). Your site would be deluged with people.
Anyone is welcome to post here, but some common courtesy is expected. If you post links, explain them. Try not to monopolize conversation by making many small posts when one larger post would suffice. Try to keep conversation at least remotely related to the post topic.
To this end, Greg is welcome to post here. If he took offense to me asking him to follow these courtesies and has decided not to comment any more, that's his choice. If he's taken my advice and decided to start a blog to share his views, he's most welcome to post the link here. Let's move on.
Ben, in Part I you said: "When wide swaths of the population begin to believe that house prices are an excellent investment regardless of fundamentals, or when a significant social stigma towards renting develops, deviations in the long-standing relationship can occur. Coupled with cheap and abundant credit, house prices can detach from growth in rents for a time."
The key was the cheap and abundant credit - way too cheap and abundant. Had the government let the market dictate what "risk" was, things would not have spiralled out of control. CMHC should be dismantled and banks should have to assess risk again and keep that risk on their books. Let the banks sell the mortgage-backed securities (and they shouldn't be guaranteed by CMHC). This way the investors buying these securities will actually HAVE TO TAKE A LOOK at who the banks have been loaning to, else they will suffer during a fall in prices.
"Borrowing money is supposed to be expensive in real terms. Nobody ever acts intentionally in an economy to make a loss; they all aspire to make a profit. Therefore, absent government interference, lending will always be done at an interest rate that compensates for the risk you will not pay, the time value of money, an implicit deflator on the expected rate of currency debasement (inflation), and a profit.
Central banks and governments can distort this process, and have. That has to stop."
Government has purposely removed all risk from the banks, who are savvy enough to do their own due diligence. Had interest rates not been artificially held down, had standards of who the banks loaned money to been kept higher, there is no way prices would have escalated enough for people to start to think they were getting richer. Velocity would have been taken out of the equation.
The government ,and the lobbyists from the FIRE industry who lobbied them (who knew precisely what they were doing), are 100% culpable for bringing on this impending disaster. Had the government kept out of it, the idea of a house being an "excellent investment" would never have entered people's minds because they would have been kept out of the market until they were less risky as borrowers. No velocity, no upwards momentum.
Flaherty knew exactly what he was doing, and he did it intentionally. He lowered the bar. He will pay.
I wished I owned real estate to be honest, my portfolio is taking a huge beating and dividends are not near enough to cover my losses. Wasted money renting, should have not listen to doomsayers and bought RE. Anyone else feel this way?
xaircanadaworker - I am for once do not feel that way in regards not owning versus renting. I was about to buy a very expensive RE property few months ago in Richmond after successfully sold my TH when I found Ben's web-site. Eventually I came to realization that investment in RE in Vancouver area now is a very risky undertaking with about 70-80% probability that it is already at the peak of the bubble and that I can start loosing money in owning it very soon plus that it is very risky to take a very big mortgage in addition to the money we had from the sell of the TH.
So as ridiculous as it sounded then we just deposited the money at the ridiculously low rate 2% at the bank and rented instead - after I myself counted few times again and again all the ownership versus rent associated expenses. Not only we rented the better home that we would not be able afford to buy here in Richmond but also we can now watch without any fear that RE prices started to decline here. The RE is already cheaper by about 5% than it was 2 month ago, and might be going in for a big correction, at least 20%, so I guess it is all relativity - which sector is going to loose more, the RE or the stock market...I my pessimistic opinion, there is no win-win situation for almost anyone in Canada now (except some guys high at the top) and we all are destined to loose something in order to get poorer and to correct an excessive growth we had everywhere incl. RE and stock market.
Loosing the investment is in some sense better than loosing the equity in a home that you only partially own, when the things go bad at least you do not have this huge mortgage debt that you have to pay regardless of anything.
Can't compare GIC's to owning real estate or stocks. Ben has been telling folks to buy stocks and avoid RE. I have lost money renting with no forced savings in a home and my stocks are down. If I had bought a home, I would be up at min 5%, at best 20%, so I would have had some equity in a home and be up small on my house. instead, listening to folks and buying a balanced portfolio and renting has left me with almost nothing now. The doomsayers were wrong and the real estate agents were right, I will give those scum that much. This is only looking back 1 year.
Looking at what you did Olga, you actually rode the real estate wave and bought a TH. So I don't think you are actually a person against owning, you have cashed out and are renting. Nothing wrong with that, but you actually made money from real estate is the point, not stocks or other things that have been shown on this site and others.
"buying a balanced portfolio and renting has left me with almost nothing now"
Not sure what your 'balanced' portfolio looks like, but mine is still up on the year. You do understand that a balanced portfolio has more than just stocks in it? And if you had followed my advice and saved for a house using short-term bonds, you'd be laughing right now...
http://www.theeconomicanalyst.com/content/building-winning-portfolio-part-2
But if you're really distraught, it's not too late to sell everything and take the plunge into real estate before you're priced out forever.
Ben, you are up on the year ?- your link has nothing showing anything worthwhile or specific. I am sure you are down and trying to pretend. It's time to be honest. Real Estate did much better over the last year since you started your doom and gloom. Stop kidding yourself and others.
"I am sure you are down and trying to pretend."
Big words there, partner. I've suggested a balanced portfolio with lots of detail here:
http://www.theeconomicanalyst.com/content/building-winning-investment-po...
Believe it or not, I follow my own advice. So while my retirement portfolio is essentially flat on the year, the portion set aside to purchase a home is quite nicely up on the year. Here, once again, is that link on how to build a vulture fund:
http://www.theeconomicanalyst.com/content/building-winning-portfolio-part-2
Sorry Appraiser....er...xaircanadaworker, but the only one trying to kid people here is you.
Also, remember readers the advice Ben is giving me now - sell stocks (lows) and buy RE (highs).
"But if you're really distraught, it's not too late to sell everything and take the plunge into real estate before you're priced out forever."
This is hardly expert advice buy "high" and sell "low"
Ben, you should start to be honest with yourself and come to grips with your analysis is wrong.
"Also, remember readers the advice Ben is giving me now"
Here in the real world, we tend to call that 'sarcasm'. Look it up.
Ben, how do you sleep at night?
Hey xaircanadaworker - you are looking back a year? what are you crazy? If you had bothered to even look at Ben's graphs - it shouldn't be too difficult for you since they are pretty pictures and you don't even have to read anything - they go back WAY more than 12 months - THIS IS A MULTI-YEAR PROCESS - don't blame Ben if you are illiterate - this debt bubble has played out over multiple years and it will take MANY years for the debt to go away and for consumer balance sheets to recover - I also put my $$ into bonds - I am 80% bonds since 2009 - while I haven't made a ton, I also haven't lost 20-30% like someone who was still in equities - you need to READ AND ASSIMILATE AND UNDERSTAND Ben's other blogs, esp the one about mass psychology and investing.
Occupy Toronto. October 15th.
Expect us.
I really don't get this "occupy" shit. Is the complaint that people in finance make too much money? You want a redistribution of wealth so plumbers/teachers are making more? Is that it?
Ill explain real quick the basics of supply and demand when it comes to wages. There are lots of plumbers/teachers therefore they do not get paid lots. It may "seem" unfair that certain groups get paid more - my examples being athletes and people in finance. Athletes get paid lots because the world needs entertainment and we like our sports. There are leagues with the best talent that we all enjoy to watch. Ill use the NFL as an example. Because we all enjoy watching football the NFL will accumulate lots of money. What in the world do you want them to do with it? Well they build new stadiums (jobs), upgrade facilities, pay players and pay themselves. Because there is a lot of demand for the NFL and not a lot of supply everyone involved who cannot be easily replaced (the owners/players) make lots of money.
People in finance make lots of money because there is lots of money in the world and someone has to manage it. If people did not need help doing their investments there would be no investment industry. If there were more qualified people in finance or less money the people in the industry would make less.
I know its sad that nurses and firefighters don't get paid millions but that's just the way it is. If they did more people would want to be nurses leading to a oversupply of nurses leading to a salary decrease.
There is no evil consipracy to protest. Just capitalism. If you can find a better damn system please feel free to make a educated report and hopefully people will read it. But to smoke pot in downtown Toronto with no real goal in mind is fucken useless.
The important point is that people in Finance are paid in stock, which has been destroyed 50%+. So to occupy Bay Street and make a point to people who have lost over 50% of net worth in 6 months is not making any sense. better to get re-trained and start driving a cab to pay your student loans, otherwise bay street workers will do it.
Evan - Your point about ‘not getting’ this occupy ‘shit’ has been made clear by your reply. My
first suggestion would be to get informed. There has been a lot of misinformation in regards to
the protests. The decision to occupy Bay Street is a way of showing solidarity with the larger
Occupy Wall Street movement. If you do not understand how our systems have been
compromised through deregulation leading to the tech bubble in 2001, the Sub-Prime Mortgage
crises, etc., and how dangerous it is to have Wall Street in bed with politicians, then I would
suggest you start by watching the documentary ‘Inside Job’. If you think this has no relation to
Canada (because we are an island you know), consider how the active involvement and
manipulation of interest rates by our politicians and the current lending practices of our banks. If
the ‘system’ was working properly (ie. hands-off capitalism), why are we experiencing one of the
largest housing bubbles of all time? People are starting to get mad. And they should be.
Xaircanadaworker – Sorry are you saying all people working in finance are paid in stock? What?
And that all stocks are down 50%? What? First of all, if they know anything about finance they
would have their portfolios a bit more balanced than that. Anyways, I am a member of
Generation Y. I paid off my graduate-level student loans in two years by making some pretty big
sacrifices. I have a diversified net worth of several hundred thousand dollars. Please do not make
assumptions about the people who are supporting this movement. Seeing us all as mindless
hippies or anarchists is exactly what those against this movement are hoping you will believe. To
be honest, I will be fine, but most of my generation will not. The housing bubble, the lack of
accountability on Wall Street, and the unhealthy relationship between corporations and
governments is something we should all be concerned about.
What a crock!
One of the points the "occupy" protesters have that resonates with me is rescinding the legal concept that corporations are people. Sure it may have started out to ease a lot of red tape and bureaucracy, but the giant corporations have shown they're exploiting it, and it was never true to begin with. If a corporation like Sony is a person show me its body so I can punch it in the face.
It's interesting that you'd pick sports teams to compare to the finance industry in that both seem to require enormous sums of taxpayer money. (heavily-subsidized stadiums vs. bailouts)
Interesting. I find the comment illuminating the point that rent is income and mortgage is credit particularly on point... it's not something I'd considered before.
Thanks!
How about this scenario: My husband and I moved to a thriving GTA suburb (good location - between Yonge and Bathurst, close to highways and new shopping) in summer 2007, buying a house just after peak and avoiding multiple bids. We put down a lot and now have no mortgage. One child with a few more years of HS to go. We are contemplating selling and going to a rental sooner rather than later, to free up our equity for something else AND make life easier. So: it's not a buy vs. rent decision for us, because we're already in and paid up. Our primary expenses are taxes and insurance (mostly predictable) AND maintenance, upgrades and repairs (mostly unpredictable, though a lot is behind us at this point). No risk of going underwater, because it's paid up - just the risk of reduced capital, and inflexible capital at that. But secure long-term rentals don't appear to be abundant and we're not going to flit from thing to thing, not at our age and not with a child. What's the necessary analysis here? Equity is about 1/3 of our investable assets. By the way, we're dismayed at all the "It can't happen here" thinking. It can, it does, and it will. Thanks.
Thanks for the comment. You are in much better shape than most. My advice for you, since you have no debt and don't sound like you are looking to move cities, is to stay put, find a way to be 'okay' with the value of your home going up, down, or sideways, and don't plan on using your home equity to fund your retirement. If you have no need for the equity, you'd might as well stay put. Transaction costs are steep. So too is the disruption caused by a move.
That advice would not apply to:
1) Young home owners with little equity and a good chance of having to relocate within 5 years
2) Near-retirees counting on home equity to at least partially fund their retirement.
Hope that helps.
Thanks Ben. It makes sense ... though we're still concerned about a) ownership premium (future repair costs & time/energy to undertake them) and, on a less objective basis, neighbours whose disruptive behaviour has prompted many to say, "Move." Currently equity is about 1/3 of our net worth (the majority of which assets are in tax-deferred retirement accounts). We're in our mid 50s so it really puts us on the fence, especially as we would use the freed equity for long-term index investing, mostly outside tax-deferred accounts, to finish reaching our long-term goal. Well, grateful to have a "good" problem that's within our control. Sometimes the decisions whose outcomes are actually closer and less obvious make us the most crazy!
Going to add one last comment in light of the earlier discussion. For these decisions, time horizon is an essential determinant. I forgot to add to our scenario that we had planned on selling our house in about 3-5 years from now as it was. So, then it's "which way do we come out better in the coming 3-5 year period?" (Disruption and transaction costs either way - take the pain now, or take it later). That helps bring things into focus.