Kingsmill's Investment Miscellanea: Friday, October 15th, 2021

October 15, 2021 | Joshua Kingsmill


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Ever since I moved back from the UK more than 15 years ago (where at the time real-estate prices seemed astronomical in London, compared to here in Toronto), real-estate in Canada seems to just go up and up.

 

To be sure, Canadian home prices just keep rising at an increasing rate. US Federal Reserve data shows real home prices in Canada surged in Q2 2021. Actually, that’s really underselling what happened. Residential real estate prices in Canada are growing at the fastest rates in the G7. Not just over the past year, but over the past 3 decades, nothing in the G7 even comes close to this rate of price growth.

 

Canadian residential real estate prices surged at one of the fastest rates on record. Real home prices are up 6.89% in Q2 2021 and are now 25.60% higher than the same quarter a year before. Both the quarterly and annual increases are the largest in the G7 by a wide margin. In fact, annual growth hasn’t been this high in a long time.

 

Look at this graph: While no one can predict the future, for many Canadians, they are not familiar with the “shock” in 1982: where a conflux of shock interest rate hikes, and global economy resulted in a drastic, sudden downturn in the price of homes (which for many, it took a decade to climb back from).

 

This is the inflation-adjusted indexed price of home across the G7:

 

Canada’s relative real-estate growth is truly remarkable. Here are a few points:

  • US home prices are also making headlines for rapid price growth, but it looks tame in comparison. Real home prices in the country increased 3.45% in Q2 2021, and are 7.75% higher than the same quarter a year before. Even with these lofty gains at nearly the size of peak bubble growth, they’re only a third the size of Canada.
  • Global real estate prices might be surging, but no advanced economy is seeing what Canada is. The average quarterly growth for the G7 excluding Canada was a 1.25% real increase. This is just under a fifth of the size of Canadian home price grew over the same period. The US and Germany are the next closest countries, with growth at half and a third of the rate, respectively.
  • Canadian real home price growth on an annual basis is also lofty for the G7. Average annual growth for the G7 excluding Canada was 5.48% in Q2 2021, just under a quarter the size of Canada. The UK is in a distant second with 9.22% growth, and Germany’s home prices are 8.55% higher. Annual growth is at least double the rate in Canada compared to its advanced economic peers.

I’m often asked what I think about the Canadian real-estate market: “Is it going to continue to go up?” “When is it going to crash?” In many ways, these are similar questions to investing in equities. Owning a principal residence over a long period of time has a few great advantages:

  1. The growth is tax free
  2. We generally don’t pay for it all at once, so the regular mortgage payment is kind of like “dollar-cost averaging”
  3. We tend to buy and hold our home for a long time, and therefore enjoy the compound growth of its appreciation

Just like investing, buying real-estate, whether as your primary home, or a recreational property, or for investment purposes, I always recommend the same approach:

  1. Have a long time horizon
  2. Stress-test your ability to continue to carry in the event of a downturn in the value of home, and/or your income
  3. Buy what you can afford: being “house-rich, cash poor” isn’t a long-term solution
  4. Ideally diversify: owning a lot of real-estate has been great, but also consider other more liquid investments as total net worth.

 

Switching gears, we are now just one day away from the RBC Race for the Kids. While COVID-19 has taken a toll on all of us in a number of ways, it has been especially taxing on our youth.

 

In fact, the mental health impacts of the pandemic on young people are expected to linger for years. This has been referred to as the ‘shadow pandemic’.

That is why we felt compelled to do something to help, so we're raising money for the Family Navigation Project at Sunnybrook. This is an innovative program that connects young people struggling with mental illness and addiction to the care they desperately need.

 

The Family Navigation Project is 100% funded by donations from caring people like you. Your donation through our fundraising page helps ensure that young people and their families find the mental health services they need.

 

We’d like to thank everyone who has kindly donated already, it is very much appreciated. For now, we are lacing up and getting ready to run a few kilometers.

 

Race for the Kids - Kings-miles

 

https://www.rbcraceforthekids.com/fundraisers/kingsmiles

 

 

Have a great weekend.