'What bubble?' is wisdom ? as real estate soars
GARY NORRIS
CANADIAN PRESS
Jul. 17, 2005. 08:38 AM
If your house is making more money than you are, should you be elated or worried?
Homeowners in various Canadian neighbourhoods have watched 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 (U.S.), not including the land it sits on, as reported by USA Today.
And 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, Rogers said.
That may already be happening: the national average price of a two-storey house rose 6 per cent year-over-year in the April-June quarter to $318,390 (Canadian), slowing from an 8.5 per cent appreciation in the previous year, according to Royal LePage.
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 "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, Tal 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.
`If you talk to people, they think it's their
safest investment'
Jim Rogers, Rogers Group Financial Advisors
"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 homes, 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.
He concedes that "not many" Canadians have that kind of balance.
And don't expect other investments to provide shelter against a decline in home prices.
The same rise in interest rates that would undermine house values would also hit stocks and bonds.
"Unfortunately, they do move in similar directions," Rogers says.
Caldwell agrees. "I don't think there's anything that's a direct hedge," he says, although he notes that "an awful lot of money that would have gone into the stock market has gone into real estate."
Still, CIBC's Tal says that in a general economic slowdown, "the best place to be . . . is in defensive mode ? namely in bonds, in interest-sensitive investment vehicles" such as utility and bank stocks.
As for the fear of buying a house at the peak of the market, Caldwell notes, "At least with one's own house, one can live in it, and if it turns out you paid too much for it, well, you're still going to live in it, and given world enough and time, it'll work itself out ? it may take 10 years, but it'll work out."
However, Rogers stresses: "Make sure that if the debt-service charges double or even triple ? something that's very possible in this low-interest environment ? you can still make the principal plus interest payments, and ideally taxes as well, with less than 30 per cent of your gross income."
In assessing a home, "its future value will be highly dependent upon how careful you were in selecting the right location," Rogers observes.
And for homeowners who have been enjoying low floating mortgage rates, he advises locking in now for three to five years.
"Quit trying to find the bottom," he advises.
"It's the old saying: If you try to get the last drop out of a beer stein, the lid'll fall on your nose." |
