Average home prices are about 15 per cent off their peak nationally, according to data from the Canadian Real Estate Association.DARRYL DYCK/The Canadian Press
Let’s finally dispense with the idea that housing is a foolproof financial asset.
The Canadian real estate free-for-all is over. The market hasn’t collapsed, by any means. But some of the hottest pockets, including Toronto and Vancouver, are struggling. Condo sales have crashed. Nationally, average home prices are about 15 per cent off their peak, according to the Canadian Real Estate Association (CREA) data.
The housing hangover should have lots of Canadians questioning their faith in real estate as an infallible asset incapable of depreciating.
“It seems like every generation has to put their hand on the stove and get burned before they realize that wasn’t such a good idea,” said Mike Moffatt, an economist and founding director of the Missing Middle Initiative.
The last Canadian housing bust coincided with the early-1990s recession and lasted nearly a decade. But memories are short for such things.
Starting in the early 2000s, Canadian housing went on a run for the ages, with the average national price of a home rising fivefold.
It was an era that converted masses of Canadians to real estate evangelists who poured their savings into the market and began treating their homes as retirement funds.
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A speculative mindset toward housing was reinforced by the market’s incredible resilience over a two-decade streak. Unlike U.S. housing, Canada’s market didn’t go bust in the global financial crisis – an episode precipitated by U.S. subprime lending and vast mortgage securitization that we managed to mostly dodge.
Canadian housing soon took on a global profile as one of the world’s most overpriced markets. But the more the predictions of its demise didn’t come true, the more Canadians were seduced by the fortunes that could be made in real estate.
“It led people to believe that maybe this is a permanent fixture,” Mr. Moffatt said.
Beyond practicalities, there are lots of good reasons for owning a home. The security that you might not have as a renter. The forced savings of regular mortgage payments. And the upside of leverage, since you can benefit from the appreciation of the home’s whole value, not just your down payment.
But as a pure investment case, housing was never as strong as it seemed.
Consider how the housing market has performed against the stock market over the long term. Since 1980, the average Canadian house has risen at an annualized pace of 5.5 per cent, using historical data from CREA.
The S&P/TSX Composite Index over the same time generated a return of 8.9 per cent a year, after factoring in reinvested dividends.
That’s an enormous difference. In dollar terms, a $100,000 investment in the average Canadian home would have grown to $1.1-million over those 45 years. The same amount of money parked in the stock market would be worth $4.8-million today.
This is a wildly generalized example that doesn’t account for regional market differences, property type and host of other factors.
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There are also tax implications to consider. Profits earned from the sale of a primary residence in Canada are typically exempted from tax, whereas capital gains on stocks are usually taxable.
On the other hand, real estate transactions are laden with fees and commissions, while a broad stock market index fund can be owned virtually for free these days.
The point is not to make a case for stock investing in lieu of owning a home. But viewing property through an investment lens was always flawed and problematic. It encouraged people to spend more on housing than they should. To forsake other investments and overcommit to real estate. And to rely on home equity to finance their retirements.
“One of the most dangerous things in our economy is the retirement risk people are facing,” said Rob McLister, a mortgage strategist and editor for MortgageLogic.news. “If real estate performance doesn’t meet their expectations, that could be a serious problem for a lot of people.”
A house can be a wonderful thing, not just a place to hold one’s stuff. But neither is it the surefire investment it once appeared to be.