Warnings on the Canadian Housing Market!

By: GenXinvestor
Image courtesy of hywards / FreeDigitalPhotos.net

Image courtesy of hywards / FreeDigitalPhotos.net

Deutsche Bank is the latest institution to join in on the growing number of voices warning about the Canadian housing market. According to a recent report, the Canadian housing market is overvalued by 63%. What struck me about this report what that this is the highest estimate of overvaluation that I’ve seen so far.

Hilliard MacBeth argued back in October of 2014 that the Canadian housing market is overvalued by up to 50% and that we will at some point experience the dreaded hard landing.

In December, the Bank of Canada stated that the housing market was overvalued by 10%-30%.

So it seems clear that the Canadian housing market is overvalued to some degree. But that is nothing new. For years we’ve been hearing warnings about the housing market and the fact that Canadians are piling on a record amount of debt.

It is against this backdrop that I upgraded from a small townhouse to a detached home. I did so for a number of reasons.

1.  I simply couldn’t wait any longer. My growing family outgrew our home. We needed more space – it was as simple as that.

2.  I am not a first time home buyer so it’s not like I would find myself in a position of negative equity in my home were the housing market to have a severe correction.

3.  My wife and I are settled in our community and we expect to live in our new home for decades. So as long as we buy and hold over the long term we should do just fine.

4.  We bought a quality home in a highly desirable area. Just as when you buy stocks you look for quality, so too when you buy a home. As we all know, when it comes to real estate location is very important. While I don’t think that our location will be immune from any kind of a downturn in housing, I do think that it should weather it reasonably well and that over the long term it will prove to be a solid purchase.

I must admit that I seriously considered cashing out and renting until the market corrected but there were a few problems with that approach.

1.  It’s very difficult to successfully time the market. Just as it is nearly impossible to time the stock market, so too is it to time the housing market. I first became a bit concerned about the housing market in 2011. Had I sold and rented back then, I can only imagine where I’d be today. After all, when do you get back into the housing market?

2.  There is a cost to living. We need to live somewhere. While owning a home can be a bit more costly than simply renting one, I still believe it is better to own your own home. When you pay a mortgage you are building equity in an asset, when you pay rent you are providing your landlord with income and are building his or her equity in an asset. There are some who say you need to look at the opportunity cost of having your down-payment tied up in a house versus investing the money, but most people are not disciplined savers so I’m still not sure that those arguments make sense. The amount of debt that Canadians have racked up would suggest that, by and large, most people find it easier to pay something off rather than to save and invest their money up front.

3.  Real estate is an asset class on its own and therefore adds a level of diversification to a person’s asset base. In the midst of the 2008-2009 financial crisis, when investment portfolios lost 20%-40%, my home didn’t lose anything. In fact it has continued to go higher ever since.

I think the problem that most financial analysts have with housing is that they fear too many people have all of their net worth tied up in their home. That is a valid concern. Most people do not have adequate diversification.

Another big reason that analysts say buying a house is riskier than buying stocks or bonds or even gold for that matter is that most do it with borrowed money which amplifies the risk.

I think that, these days you’d be hard pressed to find an asset class that is not at risk of some kind of correction. As I mentioned elsewhere, bond prices are at or near record highs and their yields at record lows. Most stock markets have doubled and some, like the S&P 500, have even tripled since the crash of ’08-’09. These markets have been on a steady upward trend since the Fall of 2012 and are most certainly due for some type of correction. Even with the collapse in gold prices, at current levels ($1220) it has still increased three-fold from where it was a decade ago.

In my opinion the housing question really has to do with what stage of life you’re at. If you’re just starting out, renting is probably a safer option. If you’re nearing retirement and you’re depending on the equity in your home for a comfortable retirement, now might be a good time to sell. But if you’re like the vast majority of people out there and are an existing home owner carry on as before as time is on your side. After all, houses aren’t like stocks – it’s not that easy to just press a button and sell the thing.

So what do you think? Is the Canadian housing market doomed? Do people have too much of their net worth tied up in their home?

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