Buying a house is about life timing – not market timing
Forget market timing, buying a house is about life timing
Homes are a long-term investment
ups and downs of the housing market is near-impossible, so the best time to buy is when you can afford it.
‘You know, you’re making the biggest mistake of your life. The housing market is going to fall.”
I got this great piece of advice from another journalist at the Financial Post, who has since left the newspaper, after buying my first home. Not exactly the type of thing you want to hear after taking on huge debt and making the biggest financial decision of your life.
Lucky for me, I didn’t heed that advice about Toronto’s red-hot real estate market — in 1998. I’m not going to say I made a shrewd business decision 12 years ago, or even six years later when I bought a larger house.
For me, it wasn’t a case of not following what turned out to be bad advice from a fellow business journalist. Nor was it about trying to time the market.
I was simply following the same pattern as most Canadians: I got married and decided to stop renting and buy something. Later came the need for a bigger home when the second kid was on the way.
Which brings us to today. The supply of housing is rising fast as people try to list their homes for sale before the market “crashes.” This is happening at the same time that demand is starting to wane. Economists and even the real estate industry, are all predicting a correction — the only argument being how severe it will be.
So, the question for anyone buying is: should you wait?
Don Lawby, chief executive of Century 21 Canada, thinks the strategy of waiting for a crash is not going to work during this economic cycle. “For a market to crash, you have to have people who are desperate to sell,” says Mr. Lawby. “People will [only sell] if they can’t afford their mortgage or they don’t have a job.” He doesn’t see a decline in prices, “unless you are predicting that mortgages will renew at a hefty premium — which is not the case — or a whole bunch of people are going to lose their jobs.” Mr. Lawby believes neither will happen.
And, he adds, you are really into a risky game if you are timing the market. “A house is a home. If all you are doing is looking at it as an investment — that’s what happened the last 15 years — it’s not just that. It’s a place to live and a place to raise a family,” says Mr. Lawby. Even Benjamin Tal, a senior economist with CIBC World Markets, who, last month, said in a report that Canadian housing is 14% overvalued, has doubts about playing the market. But he suspects that’s exactly what some Canadians will do.
“Is there a sense that prices will go down and people will wait? I think it might be an issue,” says Mr. Tal. “It won’t be the main reason [people don’t buy], but it will happen at the margins. The fact that people sell at the peak and wait to buy is a normally functioning market.”
But even if you do make the right call on housing prices, it could end up backfiring on you in other ways. For example, if interest rates rise fast enough, any gains you make on price could be erased by interest charges, says Mr. Tal. Edmonton certified financial planner Al Nagy says you need to think of your house the way you think about any long-term investment. “Whether it’s an investment for use in your retirement or a house to live in, it’s a long-term thing. The timing becomes less critical than it would be if it is a speculative [investment].”
And he says making a call on the housing market is as tricky as any other investment call. “It’s very rare you catch the bottom. You can’t let the market dictate when it’s time to buy. The time to buy is when you can afford it,” says Mr. Nagy.
Housing in Canada not to collapse like the USA did
U.S.-style housing market collapse not likely in Canada, CREA says
Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes, says a report released today by the Canadian Real Estate Assocation.
Photograph by: Reuters, Reuters
CALGARY – Canadian homeowners are unlikely to experience a U.S.-style decline in the value of their homes, says a report released today by the Canadian Real Estate Assocation.
Instead, home prices will stabilize and will remain stable for some time, said the report.
“The relationship between average price and income has recently been cited as portending a U.S.-style correction in Canadian home prices,” said Gregory Klump, chief economist with CREA. “However, such warnings ignore the longer-term relationship between prices and income, and disregard typical Canadian housing market cycle dynamics.”
Just yesterday a report by CIBC World Markets Inc. said that on average Canadian home prices are now around 14 per cent over their “fair” value. The report also said that higher interest rates will likely lead to a “modest” decline in prices of between five to 10 per cent in the coming year or two.
CIBC said at least 1.5 million houses in Canada are now overvalued and this represents just over 17 per cent of all dwellings. Of those homes, about 760,000 are overvalued by more than five per cent. The report said 17.4 per cent of Alberta homes are overpriced.
But CREA’s report said home prices tend to rise in cycles, characterized by periods of sharp growth and periods of stability. By contrast, income generally follows an orderly upward trend over time.
“For home prices to keep pace with incomes, they must rise faster during housing booms to make up for periods of little or no price growth. Canadian home prices were stagnant throughout most of the 1990s, while incomes continued rising, making housing more affordable. Over the past decade, home prices have climbed sharply as mortgage interest rates declined,” said the CREA report.
Klump said that the Canadian housing market is now widely thought to be at, or very near, the top oaf a cycle and the ratio of home prices to incomes is high, but he said the ratio will revert to its long-term average as it always does as part of a normal housing market cycle.
“History suggests, however, that it will not do so by means of a significant correction in home prices. The more likely scenario is that home prices will stabilize, giving incomes a chance to catch up again,” he said.
Klump said conservative lending practices in the mortgage industry combined with “prudent borrowing and accelerated payments among Canadian mortgage holders” will help Canada avoid a U.S.-style housing crisis.
“The correction in U.S. home prices is set against a massive oversupply of homes due to distress sales, combined with a drop in housing demand due to unemployment. The unwinding of the housing boom in Canada will be more orderly, characterized by softening sales activity and stable prices,” said the CREA report.
mtoneguzzi@theherald.canwest.com
RBC housing report
This is very interesting. Investors are still buying in Alberta as we see all the details. They seem to know that Alberta is still the place to invest in real estate.
TORONTO, May 25 /CNW/ – Alberta was the only province to experience an improvement in housing affordability in the first quarter of 2010, according to the latest housing report released today by RBC Economics Research.
The RBC Housing Affordability measures for Alberta eased between 0.1 and 0.6 of a percentage point, further extending the significant drop in the measures since the end of 2007, a trend that was only briefly halted last summer (a drop in the measure means homes are more affordable).
“In contrast to most other provinces, house prices remained relatively tame in Alberta during the past year or so and this has kept the cost of homeownership in check,” said Robert Hogue, senior economist, RBC. “In the first quarter, all RBC measures were at or below their long-term average, suggesting that affordability remains at favourable levels.”
The RBC Housing Affordability measures for Alberta, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, declined across all housing types in the first quarter of the year. The measure for the benchmark detached bungalow moved down to 33.0 per cent (a drop of 0.4 of a percentage point over the previous quarter), the standard townhouse to 25.4 per cent (down 0.1 of a percentage point), the standard condominium to 21.9 per cent (down 0.4 of a percentage point) and the standard two-story home to 36.9 per cent (down 0.6 of a percentage point).
The report found that home prices in Calgary have maintained an upward trend, although the overall pace has fallen short of the national average. In the first quarter, the increase in the costs of homeownership in Calgary was roughly equal to or slightly smaller than household income growth, leaving the RBC affordability measures hovering around the zero mark. Two-story homes were down 0.5 percentage points, while a standard townhouse was up 0.2 percentage points. Affordability continues to be attractive in the city with RBC measures close to long-term averages.
“The housing market rebound turned out to be a much more restrained in Calgary, compared to most of the other major markets in Canada,” added Hogue. “After posting strong gains in the early stages of the rebound, resale activity has slowed considerably since the fall, which likely reflects challenges in the city’s job market.”
The report also looked at mortgage carrying costs relative to incomes for a broader sampling of cities across the country, including Calgary and Edmonton. For these cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to income into account.
RBC’s Housing Affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 73.4 per cent (up 4.8 percentage points over the last quarter), Toronto 49.1 per cent (up 0.4 of a percentage point), Ottawa 40.3 per cent (up 0.3 of a percentage point), Montreal 39.7 per cent (up 0.9 of a percentage point), Calgary 36.5 per cent (down 0.3 of a percentage point) and Edmonton 32.0 (down 0.5 of a percentage point).
The RBC Housing Affordability measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.
Highlights from across Canada:
– British Columbia: Homeownership become significantly more expensive,
as housing costs rose in B.C. to the highest level among all
provinces. Continued momentum in the province’s housing market has
brought affordability measures close to the all-time highs reached in
early-2008. This trend represents a risk that could weigh on the
province’s economy in the near term.
– Saskatchewan: Real estate activity picked up in the province as home
affordability measures rose significantly in the first quarter of the
year, which reflect rising house prices. This is a change from
previous quarters, which showed an improvement in affordability.
Despite this increase, affordability measures still remain below the
peak levels reached in early-2008.
– Manitoba: Manitoba’s housing market surged ahead in the first quarter
of 2010, with affordability measures moving above the long-term
average for the province. Home prices became more expensive for
condominiums, townhouses and bungalows. Additional increases in
provincial housing costs may become more difficult for Manitobans to
manage in the near-term.
– Ontario: Home prices in the province continued to rise, with property
values reaching record highs in many parts of the province. This has
led to a decline in housing affordability, after showing consistent
improvement since the middle of last year. With escalating prices,
affordability measures are now above the long-term average but below
peak levels, for most housing types. This suggests that housing costs
are becoming more difficult for Ontario residents to handle.
– Quebec: Quebec’s housing market rally continued in the first quarter
of the year, with record-levels of buying activity and rising
property values. This escalation in home prices, while more moderate
than in the previous two quarters, exceeds the long-term average in
the province.
– Atlantic Canada: Resale activity on the East Coast remained solid,
with an increase in sales balanced by an increased supply of
available homes. These stable conditions have limited the pace of
price increases in the region. Overall housing affordability in
Atlantic Canada continues to be among the most attractive in the
country, with affordability measures still below long-term averages.
The full RBC Housing Affordability report is available online, as of 8 a.m. E.D.T. today at www.rbc.com/economics/market/pdf/house.pdf.
Rates may not go up
Rate hike not guaranteed….Global financial chaos could override domestic factors
Emily Mathieu Business Reporter Toronto Star
Higher than expected rates of inflation and reports of record breaking retail sales means interest rate hikes will likely go ahead, according to a top economist with BMO Capital Markets. But domestic strength might not be enough to justify increases if the upheaval in global markets continues, said Porter.
“If the (Bank of Canada’s) decision was based solely on domestic factors, then this would be no questions asked, no debate,” said Doug Porter, deputy chief economist.
The central bank has long predicted rates would rise on June 1, but Porter said doubt over the future of global economic stability could cause them to go off course.
“It would take a very brave central bank indeed, I think, to raise interest rates in the face of the turmoil we are seeing in global financial markets right now.”
According to Statistics Canada’s Consumer Price Index, the core index advanced 1.9 per cent during the 12 months leading up to April, following a 1.7 per cent increase in March.
The boost in April was due mainly to a rise in prices for the purchase of passenger vehicles, passenger vehicle insurance premiums, property taxes, and food purchased from restaurants, the report showed.
The seasonally adjusted monthly core index rose 0.2 per cent in April, following a 0.3 per cent decline in March.
Consumer prices across the country rose 1.8 per cent in the 12 months leading up to April, following a 1.4 per cent increase in March. In Ontario, prices rose 2.2 per cent.
Porter said BMO has no plans to alter their position that rates will rise on June 1, but said that position could change if market upheaval continues into next week.
“If Canada were an island there would be no debate,” said Porter. “There is a very compelling domestic case for higher interest rates.”
Statistics Canada reported a 2.1 per cent increase in retail sales dollars in March, to $37 billion. Porter said earlier reports had predicted sales would be close to flat. “Instead we get one of the best gains on record.”
National energy prices rose 9.8 per cent between April and the same time the previous year, following a 5.8 per cent increase during the 12 months between March 2010 and the same time the previous year. Excluding the increase in energy the index rose 1.1 per cent, compared with a 1 per cent increase in March.
For the sixth month in a row, gas prices exerted the strongest upward pressure on the index. In April, Canadians paid 16.3 per cent more at the pump than they did the same time the previous year. That change follows a 17.2 per cent increase between March of this year and the same time in 2009.
Natural gas prices were up 3.3 per cent in April than the same time the previous year. Between March 2010 and the same time the previous year prices had dropped 22.4 per cent.
The cost of transportation was up 6.2 per cent in the 12 months to April and consumers paid a 5.6 per cent more for insurance premiums in April compared to the previous year.
Housing costs were up 0.8 per cent, after declining 0.7 per cent in March, with household utilities exerting the most upward pressure. The mortgage cost index fell 6.1 per cent, the report showed.
Food prices were up 1 per cent, following a 1.3 per cent increase in March. The 1 per cent rise, largely related to prices for food purchased in restaurants, was the smallest since March 2008.
Health care prices rose 3.3 per cent, the report showed. http://www.thestar.com/business/article/812567–rate-hike-not-guaranteed
Home ownership costs increase across Canada except Alberta says RBC report
By The Canadian Press TORONTO – Owning a home in Canada has become even more expensive _ unless you live in Alberta, according to the latest housing report by RBC Economics Research.
The report, released Tuesday, says homeownership costs in Canada rose for the third straight quarter across all housing segments in the first quarter of 2010. A strong real estate market and jacked up housing prices are getting the blame for putting a strain on Canadians’ bank accounts.
“Although home ownership became more costly in the first quarter of 2010, affordability measures are still moderately above the long-term average and below peak levels,” said RBC senior economist Robert Hogue.
“We expect affordability to deteriorate throughout 2010 and 2011, but this should be limited as more balanced supply and demand conditions will take much of the steam out of the housing market,” he said.
The RBC Housing Affordability report projects that the cost of owning a home will continue to rise.
The main contributing factor is an expected rise in interest rates, as the Bank of Canada moves towards raising the current exceptionally low rates to more normal levels through the second half of this year and in 2011.
According to the report, housing affordability measures in Canada are unlikely to exceed the peak levels reached in early 2008.
With the exception of Alberta, home affordability measures deteriorated across all provinces with a significant decline in affordability in B.C., Saskatchewan and Manitoba.
Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada. Alberta is the only province to show a drop in the costs of owning a home. http://ca.news.finance.yahoo.com/s/25052010/2/biz-finance-home-ownership-costs-increase-across-canada-except-alberta.html
locking in …
Is It Time to Lock In?
With people banking on the main interest rate going up in June, it seems like a good time to for homeowners to lock in their fixed-rate mortgages.
About 12 percent of mortgage holders with fixed-rate mortgages “locked in,” or switched from variable rate mortgages, in the past year, , according to a report this month by Will Dunning, chief economist at the CAAMP , and another 10 percent had already switched from variable more than a year ago.
The rate for conventional five-year mortgages was at 6.25 per cent at the end of April, nearing the 5.25 per cent rate at the end of May last year – the lowest since 1973 when the Bank of Canada data began.
“As interest rates rise, expect home buyers to increasingly opt for fixed-rate loans, in turn leaving banks with more fixed-rate assets to hedge in the swap market” said Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto.
My View:
What is all the panic to lock mortgages into fixed rates? Sure interest rates will start rising, they have no where else to go, but I have not heard anyone saying that these rate hikes will be aggresive and fast. Being in a variable of 1.70% today is way better than being locked into a 5 year fixed of 4.4%. That’s a difference of 2.7%!!! It will take 10 rate increases or so for the variable to just reach the same level. The question is how many years will it take for rates to increase 10 times?