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The good news about housing prices - thought

Here are my 2 cents

People... if you haven't read the article, do yourself a favour and go out and buy this magazine and read it. Personally, I think it's the first non biased article on Canadian housing that I've seen in a really long time.

The futures market are a large group of investors who basically put their money where their mouths are. Who would you trust? A large group of investors who are fronting their own money because they see a future downward trend in a market, or would you trust one or two economists who work in the real estate market and have a vested interest in keeping a market artificially inflated?

The moral of the story is - you really can't trust any report that comes out of the real estate industry. Think about it. Anyone who has a vested interest in keeping the market up, will always sway you to think there's nothing wrong. CMHC fund their insurance business by volumes of housing transactions. ReMax, Royal Lepage etc... all make their money on transactions. The more transactions there are, the higher the average price is, the more money they make. Of course they want people to keep thinking nothing bad is going to happen. Think about how many real estate agents would lose their jobs if a) # of sales drops dramatically, and b) the average price of homes drop. An economist in the real estate industry who releases a negative, but realistic report on Canadian housing would have their heads on a chopping block because they would be messing with the livelihoods of a lot of people. But what those people don't realize is, that by prolonging the inevitable, they fall will be much harder... and longer.

There are a few things to consider when looking at housing prices.

1) Affordability index (% of household income taken up by ownership costs)
2) Interest rates
3) Demand
4) Consumer confidence

Here's a good link that shows the affordability index for various regions across Canada:

NOW, keep in mind the above report is from a BANK, who also makes money off people buying mortgages, so while the #'s "could" be accurate in the graphs, any positive statements about the future housing market rebounds in the short term could be misleading. This was also published in Dec 08, a month before the worst month job loss in Canadian history, so take it with a grain of salt. Keep in mind that a lot of people theorize that a stable housing market is when the affordability index is between 30-40%...

So, let's think about this outside the box. 1) Canadian housing prices, adjusted for inflation, are at or close to their highest point in history. 2) We're currently going through one of the worst global economic catastrophes since the depression 3) Canadians are losing their jobs left right and centre, so median incomes are going to be dropping like a prom dress on prom night, therefore disposable incomes will be dropping as well 4) Consumer confidence is at it's lowest point since the 70's 5) Property taxes are going up (e.g. 4% in the GTA), and other taxes, all which lower disposable incomes.

Now, the one good thing that "I" can see, is interest rates. They are at historical lows which should help. However, if you take a look at all the above facts, it still doesn't bode well for housing prices in Canada.

Do I think housing will see drops of 40-50% like in some areas in the US and around the world? I highly doubt it. Is it conceivable that we in Canada could see a drop of 20%+? Absolutely. Yes, some areas will be affected more than others (like Vancouver for instance). But what makes anyone think that Canada will be exempt from what's going on globally? Granted, Canada doesn't have the sub prime issues that the US has, and our banks "are" more fiscally responsible than many other industrialized nations, but to think we're going to fall into this global economic crisis and come out smelling like roses is just plain idiotic.

Anyone who believes the real estate/CMHC reports that Canada will only see a mild correction, with a rebound at the end of the 2009, is simply looking at the world through rose coloured glasses...

So, what colour in the sky in your world?

That's my 2 cents


P.S. I also predict that the rental market will rebound as housing starts decline to all time lows. Certain areas, like the GTA where vacancy rates were at 40 and 50 year highs will be back down to more acceptable levels. Right now, there is such a large gap between cost of owning and renting. As rental demands increase, so will the cost to rent. Couple that with a lower cost of owning over the next few years, we'll see the gap between owning and renting close significantly, giving first time buyers opportunities to get into the market. Remember the mid 90's anyone? 2009-2012 will be the mid 90's all over again. Anyone with cash in the bank ready to get into the market will be positioned better than ever (well, since the mid 90's).

Oh, and as for Real Estate investing. I have a good friend who is a real estate investor, and a great rule of thumb when trying to maximize your investment on a rental property, not only should you be cash flow positive, but you should generate a minimum of 10% of the purchase price of the property. For example: If you buy a rental place for $300,000, then you should generate $30,000 per year in rental income. This should cover all your costs such as mortgage, expenses, repairs, insurance etc... with cash left over for a rainy day (i.e. new roof, new furnace etc... the "unforeseen" expenses). Now, 10% isn't carved in stone, but it's a good rule to follow. Anyone who is interested in real estate investing should check out Don Campbell's books on Canadian Real Estate:

Anyway, thanks for reading... I would love to hear your opinions as well!