Recently there have been many press releases coming from big name CEOs at the Canadian banks and the Bank of Canada stating that housing prices in the two hottest cities, Vancouver and Toronto, have become unsustainable. But are their words actually true? If they were too expensive then why are people still able to buy them?
I don’t quite buy the foreign ownership argument that everyone gives because I think it’s just a racist marketing scheme crafted by realtors to push people into home buying. They’ve done it before in 2013 with fake Chinese helicopter buyers in Vancouver, so why wouldn’t they keep doing it? I can fully understand Vancouver and Toronto being extremely popular destinations for investors, but Hamilton, Aurora and Oshawa? C’mon give me a break. Why would I, as an investor, want to buy a house in Newmarket, ON for near $1M when I could probably get a condo in New York for that price. Plus, as an investor, I have a more compelling reason to believe that there is a lot less land left on the island of Manhattan than there is 1 hour north of Toronto in farm country.
Bank of Canada Warning
The biggest fear that grips the Bank of Canada is that housing prices have far outstripped the fundamentals of our economy. Bank Governer Stephen Poloz went to the extreme to even state that “…prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction…”
Media outlets jumped on these bold statements by the head banker an deemed it as a warning to ordinary Canadians to not speculate on the growth of housing. This prompted long running MacCleans magazine to write a piece on the dreaded “B” world. Bubble. This, however, is a story that has played for the last decade. Time after time, people have been saying housing is too expensive, yet it continues to go up. So what gives?
The drastic increase in housing prices across all of metropolitan Vancouver hasn’t gone unnoticed by young Millennials trying to enter the market. We all know of the viral Twitter feed and rallies around not having a million dollars to spend on a house. Despite this disdain, housing prices have actually continued to climb even faster. Does this mean that people are just more well off?
Certainly if the fundamentals of the economy support these rising home prices, then everyone’s wages must be going higher. Perhaps that’s true because if you look around Vancouver and Toronto you will definitely see many more people driving around luxury cars, shopping at higher end clothing stores and a greater affinity to fine dining. To further that point, even in retail, only the low end stores are going bankrupt like Aerospotale, but higher end sales at new Saks Fifth Avenue stores are actually higher.
Perhaps the dissenters are wrong. We are better off, but those that are less affluent are feeling left behind and are voicing a greater displeasure. Can this be sustainable? If anything is true, it’s probably that income equality has grown so out of hand in Canada that there are only the few wealthy that can really afford a home.
The real estate board disagrees with the claims that you actually need a million dollars to buy a home. In some senses this is true. Our own personal expectations have risen so high that we all want a big wide property lot, two door garages and a backyard large enough to host a rock concert.
The #dontneedamillion was crafted out of the same viral hashtag that took over Vancouver last year. Prices for condos even in the large cities of Toronto, Vancouver and Calgary still remain within the reaches of first time home buyers. A quick search through realtor.ca will find plenty of listings in the mid $300K.
In other world class cities like New York, Hong Kong and Singapore it’s not uncommon for families to raise children in tall high rise buildings. Yet in Canada, somehow the kids need a bigger room to run around in than in the aforementioned cities.
With greater population growth perhaps that detached house is somewhat of a luxury item rather than the norm. In this argument, one would have to say that housing is still somewhat affordable for families even though condo prices have been creeping up past the $500K mark for larger units.
The Millennial Revolution
On the other end of the spectrum are those that are completely fed up with the notion of the “American Dream”. Since houses have become so expensive why bother chasing after them?
The Millennial Revolution follows the story of two Canadians who decided to forego home ownership, reach financial independence and live their dream without home ownership. What’s amazing about their story is that the two retired at the age of only 31. Yes 31!
Many will say that it’s impossible, yet they chose decent paying careers. Saved like bandits and invested properly to make their goal. All this with incomes that probably didn’t even reach 6 figures. On top of that, they hated their jobs, but their short term sacrifices of only a few years of working were rewarded with early retirement where they can now enjoy their lives happily.
So does owning a home actually equate to happiness? Many would think so, but they do not. With the cost of ownership reaching epic highs in some of the popular cities in Canada, many may decide to forego owning entirely. Perhaps happiness can be achieved through other means.
It doesn’t take a genius to understand that home prices cannot continue at an exponential growth rate that the above curve shows. It’s just common sense. When any economist sees a chart where the line goes straight up, it’s usually bad news.
The only thing that can help sustain housing price growth is wage growth. At the end of the day, the citizens still have to be able to pay to live in the houses. There will always be investors who will want to own homes like commodities, but the greater market usually follows the trends of the people that actually live in the city.
Just remember that if you do decide to go into the route of home ownership, make the responsible choice and ensure that you can actually afford the house rather than trying to over leverage and speculate.