When my old man was a high school principal he bought a house for two times his annual salary, but we still had a boarder living with us. That was okay. She was cute. Solidly middle class, we also had two cars. A new Buick and a beater VW bug. Interesting that the house was more affordable than the Buick – a mortgage could be amortized over 25 years and the purchase price was reasonable, but a car loan was short and with painful payments, and the wheels cost 30% of household income.
Today the same house costs seven times what a principal makes in the GTA; the most unaffordable point in history. Cars, in comparison, are cheap, with a minivan selling for 20% of the same salary. We still buy houses with long mortgages, but today we rent our rides.
The above should tell us a few things. Houses are artificially expensive. Cars are a bargain. School administrators (at $128,000) make too much. Elephantine debt is a way of life. And families can only get ahead if houses keep rising in value. Which won’t happen.
This raises an interesting question of why more people don’t lease houses and buy cars, if it seems clear both will be depreciating.
After all, how many more signals do we need? Austerity is now sweeping the planet, promising slower growth, less government spending and downward pressure on wages and prices. Commodities, especially copper (off 30% since August) are telling us to expect a swampy economy for some time to come. Already real estate values from poor Victoria to the withering fringe of the GTA, are retreating. It’s only human emotion and an endless appetite for debt – not a growing economy and rising wages – which keep housing aloft in places like Vancouver, Skatch and 416. But not for long.
So there is, say the research guys at Macquarie Research, more than a valid case for leasing real estate. To quote:
The cost of owning a home not only exceeds the cost of renting but is near alltime highs. With interest rates more or less at record lows this is somewhat surprising. In addition, the Bank of Canada reports that debt-to-income of Canadian households is 147%, an all-time high and above the ratio in the US—and just slightly below the ratio in the UK. Consequently, it is not too hard to imagine the Canadian housing market making a serious correction if interest rates start to rise. Moreover, we think that depressed home prices south of the border make high consumer debt levels and low affordability in Canada that much worse.
Of course, even if rates don’t jump, the amount of new debt people can absorb is not endless. And smart folks understand that when you can rent a new condo in Toronto for $2 a foot instead of spending $500 a foot to buy it, leasing could be a genius move – especially with 38,000 more units coming to market.
Is there an argument for sustained and continuous advances in the value of real estate, yielding capital gains and making all this leverage worth the risk? Hmm. Let’s take a short stroll into the west side neighbourhood of Vancouver, arguably the hottest housing market in the entire country through 2011. Over the past couple of months I’ve referenced the efforts of one blog dog to sell a fat lot with a tear-down house (the kind of property HAM loves). He started at $2.5 million (normal for the hood), then chopped that by half a mill after a few showings, but no offers. The latest news: now even the showings have stopped.
“Things have slowed to a crawl here. The last sale in the area was on Sept 6th. I plan on waiting it out and not chasing the market down further. It would be different if there was any movement near us – but there is no activity to chase. So the windfall which had appeared to be arriving on a jet plane, and then sent a telegram saying it was going to have to take the train is now apparently not even coming by bus but rather steamship….”
“No activity to chase.” In the heart of the bubble. This is why average prices – based on sales, not crickets – tell us nothing about true market conditions.
Some days ago I argued that the stats Canadians are being given by real estate boards, marketers like Re/Max and the Canadian Real Estate Association are meaningless and misleading. They record past sales which in many cases resulted from offers accepted months previously. These numbers are lagging indicators, not leading ones. They offer no map ahead. To suggest so is disingenuous.
Personally I’d rather invest in where we’re going, than where we’ve been. This week its initials are N.S.