Home ownership can sometimes be more of a financial burden than a get-rich-quick scheme, writes Rob Carrick.Nithirut14/iStockPhoto / Getty Images
In an alternate, non-Trumpian world, Canada’s housing market would be in pretty good shape.
The hard-hit Ontario and B.C. markets would have firmed up, and more affordable cities would be enjoying even better gains than they’re seeing right now. Supporting these trends would be rising consumer confidence, pent-up demand and cheaper mortgage rates.
The April numbers for housing suggested we may have seen the worst, but conditions are still a downer if you believe real estate is the magical financial asset that never fails. BMO Economics has reported that prices on a national average basis are down a bit more than 20 per cent from the peak of early 2022, which means an annualized price gain for the past 10 years of just 3.5 per cent.
Reduced levels of immigration weigh on housing, as does inflation’s impact on the ability to save a down payment, and mortgage rates that feel expensive. But the U.S.-Canada trade war is the biggest factor because it puts jobs and incomes at risk. Buyers feel reluctant to make a major financial commitment, and sellers don’t want to unload a home at current prices.
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In time, the real estate market will revive. For now, let’s acknowledge that these assumptions about real estate do not apply at the moment.
Real estate is the best investment
When was the last time you heard someone say the phrase ‘investment property?’ Been a while for me, and what a positive development that is. Treating real estate as a path to quick wealth has left us with unaffordable housing in some cities, even after recent price declines.
Also, some real estate investors are stuck with properties that have fallen in value and can’t generate sufficient investment rental income to cover their carrying costs.
The lesson of the real estate market’s ups and downs in recent years is that owning a home is enough exposure to this sector for the average person. On a long-term average annual basis, expect homes to appreciate by the inflation rate plus or minus a bit. Stocks should do markedly better on a total return basis, which means share price gains plus dividends.
Real estate investing is dead
Real estate markets in many cities across the country are functioning well right now, which means modest year-over-year price gains that aren’t enough to get investors excited. And then there are the cities in Ontario and B.C. where prices have fallen hard from their peak a few years ago and haven’t stabilized. Condos have been hit hardest.
It’s way more fun to invest in real estate when prices are surging, and there’s money to be made if you get the timing right. But let’s remember that smart investors buy assets when they’re cheap and unwanted, then wait for the rebound. Private equity firms have started buying up empty Toronto condos that have gone unsold. Get the idea? Buying low is the best way to sell high.
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Helping adult kids buy a home is a parental responsibility
Hot housing was great for boomer parents because it left them wallowing in home equity. Boomers well understood how these gains were making houses unaffordable for young buyers, and their solution was to help their adult kids get into the real estate market. Billions have been spent on the “get my kids a home” project.
The urgency felt by parents was fed in large part by a sense their kids would miss out on the best opportunity a Canadian could ever have to build wealth – owning a home. The lesson of the past few years is that home ownership can at times be more of a financial burden than a get-rich-quick scheme.
Boomer parents won’t, and shouldn’t, stop helping their adult children buy homes. But calmer market conditions mean parents can be more discerning in their decisions about how much help to provide. Check out a recent column on the cost of retirement living before you give your kids a big whack of your savings.
It’s OK to wreck your finances to buy a home
Short-term financial stress caused by a big mortgage has been seen as excusable, even advisable, in hot markets where equity gains are constant. Now that housing has cooled, we see that it’s possible to own a home with high mortgage costs and declining or barely growing equity.
We have also been reminded that sometimes, you have to renew a mortgage at notably higher rates. Buying less house than you can afford makes sense now, and forever.
Rob Carrick is a personal finance expert and former Globe and Mail staff columnist.
