Pierre and Alison have a problem. He works for the feds, and they bought a nice little house across the river from Ottawa. Being Quebec, of course, real estate is half price. Some day I’ll explain why.
Alison pines for her home town of Toronto, wants her kids regularly shucked under the chin by grandparents, and Pierre’s willing to relocate. After all, happy wife, happy life.
But afford a house in the Big Smoke after selling one in Gatineau? Fuhgeddabodit, he says. Way too expensive, even if the bank thinks they can carry a half-million-dollar mortgage. So Pierre has written for comments on three options he’s arrived at. Here they are:
1) Live in Hamilton. I know that Hamilton has an unfairly bad reputation and I believe it to be one of the most interesting cities in Canada. I have also researched the current political climate within the city with a view to diversifying its economy and restoring some of the downtown districts. My wife and I both love the idea of living in an older home within the city and aren’t scared of putting in some elbow grease if necessary. The equity we have in our current house would allow us to have little or no mortgage there, or have a small mortgage and highly diversified investments.
2) Rent in Toronto in the short-term. My wife has a psychological issue with renting, but it’s not insurmountable as some cases, in that she’s open to looking at the calculations and going with it if it makes sense (which, of course, it does). However, even a small SFH in a less-than-great neighbourhood would cost more to rent than I pay in total mortgage/taxes/repairs here. Not much more, but the house wouldn’t be as nice either. I’d pay less income tax but higher car insurance, so it’s basically a wash otherwise.
3) Keep waiting for the bubble to burst. I’m not under the impression that the Ottawa/Gatineau will come out of the housing bubble unscathed. A lot of federal employees have started second jobs climbing the housing ladder and I don’t think it will end well, especially with the looming danger of budget cuts. But even then, I think it will likely come out ahead of Toronto. So with a few more years of paying mortgage and building up our investments, if decreases in Toronto outpace Gatineau decreases, we might be able to move into Toronto proper without overly compromising our finances. Advice?
Actually, Pierre, today I’m on strike. I intend to hold out until my non-negotiable demands have been met by the cheap overloads who frequent this pathetic site, or until Parliament passes back-to-blogging legislation. So I’m going to slip this one out to the pack, letting the blog dogs chew on the Hamilton-rent-wait conundrum, and respond.
But, let’s all be aware of how fast the rules of the game are changing.
The heretic, antisocial and vaguely sexual financial views espoused here seem to be going mainstream, which I must admit scares the hell outta me. This week CIBC economist Benny Tal penned a report, for example, which makes the case for real estate being a lousy investment over the coming years. Given current trends, he says, your house is probably going to lag behind other kids of assets in terms of appreciation. He’s right, of course, but the fact a mortgage-spewing bank is saying stuff like this is remarkable all on its own. It would not have happened a year ago.
What’s changed is the amount of new debt Canadians have chowed down in a year (most of it to sate house lust), coupled with an economy which is once again running out of gas. Household balance sheets suck, the savings rate is non-existent and home ownership is at saturation levels. I mean, why would houses rise in value unless enough people are horny and delusional?
But Tal also says this: “Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable. Tempting, but probably wrong.”
And just when he was doing so well…
Benny says for a crash, we need a drastic rise in rates, similar to what happened in 1991 (mortgages topped out at 14% a year or two later). He also says there are not enough equityless young homeowners, who would be wiped out in a shock-rate scenario, to tip the market. So, he concludes, real estate will gradually decline as rates gently rise.
Crap, says Capital Economics. Canada has a housing bubble because real estate is out of touch with economic fundamentals, and house prices will careen lower by 25% over the next three years, it claims. The big reason: consumers are debted out.
“Relative to disposable income per capita, our calculations suggest that housing is around 25 per cent overvalued, which is approaching the level of excess that the U.S. market reached at its peak in 2006.”
And here’s economics professor Stephen Gordon dissing central banker Mark Carney this week. The prof’s argument is that house prices have done a Kirstie Alley simply because a small drop in mortgage rates of a couple of points had a massive impact on borrowers’ ability to leverage. So, on the trip back down, small increases can cause equally dramatic results.
“Probably the biggest reason why Mr. Carney did not mention the possibility of a bubble (in his recent speech) is that its presence isn’t a necessary condition for warning Canadians about the importance of preparing themselves for a significant decline in housing prices in the medium term. If small decreases in interest rates can produce large increases, then small increases in interest rates — and such increases are inevitable — can also generate large reductions in house prices.”
Oh yeah, and the Globe’s personal finance columnist wrote a piece a few days ago on why renting is a better choice than owning for those hideous wrinky people we call Boomers.
So, there you go. Pierre wants words. Give him a few.
I’d have written something today but, like Greece, I’m revolting.