Home ownership a passion for Canadians
Canadians have a love affair with their homes, stretching their finances to buy them, sacrificing other things to have a house or condo and remaining deeply in debt even when the numbers suggest they would be better off renting.
North American stock markets continue to reach new highs every day but don’t tell anybody in organized real estate about it.
It’s not something the industry wants to hear.
But here you go: By the end of last year real estate prices had climbed about 85% over the previous decade, according to the Teranet/National Composite Bank House Price Index.
It is a passion for ownership that has put Canada in the elite company of countries with estimates that more than 70% of households now own their own home. Even young people have caught the housing bug. Statistics Canada says much of the increase in home ownership — the number was 68.4% in 2006 — has been from young people buying condos.
In the dozen years since the beginning of the millennium, home prices rose 225%. Those prices were largely financed by household debt which rose to 160% of family income in 2012 from 100% in 2000, says Benjamin Tal, deputy chief economist for CIBC in Toronto. “House prices in Canada continue to defy gravity.”
There is good reason for that.
“Everybody needs a place to live, of course, and people can be house proud. They tend to see houses not just in financial terms, but as expressions of themselves in which they like to invest,” says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C.
“Moreover, there is an expectation that we will own homes. Ownership is seen as a God-given right. And you can sell the house with no capital gains tax if it is a principal residence.”
In Winnipeg, Vic Kuzyk, a retired school principal, has owned his own house for 40 years and has added two houses nearby that he rents out.
“The house rents return 5% a year on my equity and they have more than tripled in value,” he says. “They are terrific investments.”
And he says they have given him fewer headaches than “worrying about my stocks and mutual funds.”
The property play has also produced an unmeasured but substantial effect on the value of his own house. “I bought the first rental house next to my own because it was run down. It could have reduced my own property value. I repaired it so it now can add to my own value. That’s not anything one could do with stocks or bonds.
Why homes seem like good investments
The idea that a house or condo is a superior investment is based partly on recent history. Home prices rose strongly in the first decade of the century, driven by falling interest rates which reduced the cost of mortgage financing. In Canada, homes also escaped the worst of the collapse of U.S. home prices driven by the vast American subprime mortgage debacle.
Apart from macroeconomic forces, home prices are harder to measure and do not seem to fluctuate moment by moment, as prices of stocks, exchange traded funds and actively traded bonds do, Mr. Moran adds. “The idea of stability becomes a driver of the passion to own a home.”
There are other ways to invest but anyone who satisfies lending criteria can get a conventional mortgage with the usual 25% down or a high ratio mortgage with CMHC or other insurance. Few lenders will match those terms on other assets save for certain government bonds. Regardless of the merits of bonds, they can’t provide a place to lie down at night.
Mortgage lending has extended the affordability of homes. Once in a home, people tend to stay to avoid moving costs and sales commissions. These costs, usually paid by the owner who is selling, make rapid flips costly and unattractive for many. So most housing is not on the market at any one time, unlike stocks that are for sale at least at some price almost all the time. That makes home prices seem stable and solid. Price stability becomes a self-fulfilling prophecy.
There are price trends in housing. Though the fraction of all owner-occupied housing for sale is a small part of the total in existence, the pricing and affordability of what there is to buy is based substantially on interest rates and demographics, explains Brendon Abrams, an analyst specializing in real estate investment trusts with investment dealer M Partners Inc. in Toronto.
When rates rise, people will get less space or other measure of home for each dollar of mortgage payment. When rates fall, as they have done and remain at near record lows, they can afford to buy more house or condo or, for any amount of space, they can pay less. Thus low interest rates have spurred and supported the high level of home prices. Those prices have been held up by pressure from new arrivals coming to Canada who need a place to live, migration to high economic growth areas such as Alberta, and sheer lack of space in markets like Vancouver.
The financial attractiveness of home ownership also builds on information bias. It is not hard to find people who have owned their homes for decades and have seen their homes’ prices rise two, three, four or more times in those periods. It is harder to find people who have held a single stock for twenty or thirty years. The typical period of stock ownership is months for ordinary shareholders and even less for professional portfolio managers. In these shorter periods, a stock’s price is likely to rise very little. Short term trading can also generate losses.
Home prices have soared for the last decade. But stock prices, having gone through the Twin Towers tragedy of Sept. 11, 2001, the dot com meltdown from 2000 to 2002, and the subprime mortgage banking collapse that drove down world stock markets in 2008, have stagnated. Now, however, the tide may be turning, Mr. Tal says.
Your home is like a huge tax-free savings account with no contribution limits
Stocks are recovering while house prices, which got ahead of the underlying long-term average annual compound rise of 2%, are likely to be soft. “The real estate market is now at the end of its game while the equity markets are coming back.”
That is not a reason to dump your home. Even if house and condo prices soften, owner-occupied housing has a terrific tax benefit. In the U.S., mortgage interest is tax-deductible, subject to some limits, while in Canada, all capital gains on one’s primary residence are free of capital gains tax.
“Your home is like a huge tax-free savings account with no contribution limits,” says Nathan Janzen, an economist with the Royal Bank of Canada in Toronto. That means that homes have both the value of a place to live and terrific investment characteristics. Even when there are temporary price declines, the long-term owner should do fine on price and very well after tax. In that sense, you can’t beat a home of your own.”