The National Addiction

December 02, 2019 | Sam Rook


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No, not hockey - housing

This will be a short post with a bunch of graphs. I don’t have any answers but I think we should all be taking a deeper look at how we view real estate now and in the future.

 

The first chart is the share of real estate owned by various birth years, sorted by decades. In the two most populous provinces, BC and Ontario, over 40% of homes are owned by people 60 or older, and over two-thirds of homes are owned by people 50 and older. That isn’t really the point here. What IS the point is what happens to their real estate when they can no longer handle it? With two-thirds of real estate potentially coming for sale in the next two decades, what does that mean for the supply and demand curve? More importantly, what does that mean for prices of the largest asset in most Canadians' lives? What happens to the value of real estate in small towns and cities that are losing young people to the larger urban centers like Toronto, Montreal or Vancouver? Will there be anyone left to purchase that post-war bungalow in St. John or Brandon?

 

              

(Source: https://www150.statcan.gc.ca/n1/daily-quotidien/190611/cg-a001-eng.htm)

 

The next two are from RBC Economics and their great Housing Trends and Affordability report from March. The aggregate cost of home ownership in Canada is near record highs. That spike into 1990 that was the previous high is worth noting for later. In a country where the average home owner is spending over 50% of their annual income just to manage the home they own, that doesn't leave a lot of room for other important things.

 

 

That aggregate is of course skewed by the two major markets, Vancouver and Toronto, which are at Mount Everest level heights.

 

 

How are we managing to survive when your home eats up over 50% of your income? Debt, lots and lots of debt. Canadians' total household debt is around 175% of disposable income. It’s the highest it has ever been and shows no signs of letting up.  This is mainly on the back of rising home prices which has allowed us to borrow against the growing value of our homes.

 

 

Since your Uncle will tell you that ”real estate is the best investment because it never goes down” this holiday season, I wanted to finish with this last graph. It’s average house prices in Canada adjusted for inflation. House prices never go down you say? Remember that I pointed out 1990 as the previous high point for housing affordability? Now you can see what caused the drop that came after that - house prices went down, and went down by a lot!

 

(Source: https://www.livabl.com/2017/01/history-of-toronto-real-estate-peaks-and-crashes.html)

 

This isn’t me calling for a housing crash. Rather, it’s me saying we need to be smarter about buying real estate going forward. There are plenty of reasons to buy a home, just understand what that means after a 25 year bull market.