Province
In Vancouver, many homes appreciate more in a year than their owners take home in pay. — PROVINCE FILE PHOTO
If your house is making more money than you are, should you be elated or worried?
Homeowners in Vancouver are already well aware of the climb in residential real-estate values. But relatively few new homeowners remember that what goes up can come down.
Not that any tumble in the Vancouver market is in the offing, but there have been market collapses in the past and it is always advisable to keep that simple bit of history in the back of your mind.
Various other Canadian neighbourhoods are in the same boat, with owners watching in fascination as the annual rise in the market value of their property during recent years has approached or even exceeded their take-home pay.
Take the recent case of an old, semi-detached house in the gentrifying but still gritty Toronto district of Parkdale. Renovated but with an unfinished basement and no place to park a car, it was listed at $359,000 and sold within a week for $421,500.
That was a gain of $118,500, or 39 per cent, over its previous selling price in 2002.
Admittedly, this can’t compare with a mobile home in Malibu, Calif., listed for $2.7 million, not including the land it sits on, as reported by USA Today.
The received wisdom among bank and government economists is that there is no housing-price bubble in Canada and any steep decline in values is highly unlikely.
However, Jim Rogers, a certified financial planner at Rogers Group Financial Advisors Ltd. in Vancouver, uneasily recalls that average Vancouver real-estate prices tumbled 30 per cent between 1981 and 1982 and didn’t revive to 1981 prices until 1986.
“If you talk to people, they think it’s their safest investment,” Rogers says. “These same people say they would never borrow to invest in the [stock] market, for example, and they’re afraid of leverage.
“And yet, by way of having a mortgage on your principal residence, you are using leverage in the classical sense.”
House prices may not go down, but they’ll certainly flatten, he said.
That may already be happening: The national average price of a two-storey house rose six per cent year-over-year in the April-June quarter to $318,390, slowing from an 8.5-per-cent appreciation in the previous year, according to Royal LePage realtors.
And Statistics Canada says the annual rate of increase in the price of newly built homes eased in May to 4.6 per cent.
Benjamin Tal of CIBC World Markets said he, like many prominent Canadian economists, doesn’t expect any serious slump in the housing market — but cautions that “even a soft landing, a levelling off of real estate prices, will have a significant impact on the economy because the housing market has been a major driver.”
Just the wealth effect of homeowners consuming more because they feel richer has added $50 billion to the economy over the past three years, Tal says.
Meantime, he notes, the savings rate has dwindled and actually turned negative — meaning people on average are spending more than they earn — while the Bank of Canada is signalling with increasing force that interest rates will soon rise.
“Banks can’t lend you enough at the top [of the economic cycle] — and they won’t lend you anything at the bottom,” cautions Brendan Caldwell, president of Caldwell Securities Ltd.
“It’s not a question of a bubble that bursts, necessarily, and people are moving out of their houses in the middle of the night as they were in the ’80s,” Caldwell says.
“The people that are at risk in a rising-interest market … are in the areas where real estate, in the minds of some, has been overbuilt, and I think of the condo market,” Rogers says.
“If you’re saying, ‘Where’s the bubble?’ I’m guessing it might be in the condo market.”
Big-city condominium construction is still booming, propelling overall housing starts last month to an annualized rate of 237,200, up 14 per cent from June 2004.
Rogers counsels that real estate, including cottages and investment properties, “should never constitute more than one-third of your total net worth,” with another third in equities and one-third in fixed-income investments.
© The Vancouver Province 2005