Such is the recommendation of Michael Polzler, Executive Vice President, RE/MAX Ontario-Atlantic Canada in a video release that accompanies the Company’s latest research effort.
The report examines the reasons for the 100%+ gains in average Canadian home prices during the first decade of the millenium and ultimately concludes that ‘housing evolution’ has been the primary catalyst behind this extraordinary jump in prices.
To be sure, here’s the opening statement in the press release
“Billions spent in new construction, renovation, and infill over the past decade have contributed to a serious upswing in the calibre of Canada’s housing stock, propping up residential average price in the country’s major centres”
…and here’s the slick, musically scored video accompaniment…
A very uplifting and optimistic tone, wouldn’t you say?
“Forget the stock market, the place to find real value is the Canadian Housing market”In trying to explain the basis for the upswing in prices over the last decade”
Obviously innuendo and subtlety has fallen by the wayside.
Now let’s be clear. I have nothing personal against the men and women who are affiliated with RE/MAX. As most consumers know (or should) by now, “the brand” is by no means a reflection of the character and competence of the individual, one way or the other.
What I do take issue with however is the well-timed and crafted appeal to vulnerable home buyers and investors, particularly at a time like this. A time where volatility and uncertainty in global markets now has investors and institutions alike scrambling to find a safe haven for their savings and portfolios.
Here are the summarized observations advanced for the huge upswing in home prices:
- the upswing in both the value of residential building permits issued nationally between 2000 and 2010—at $340 billion—and the estimated $450 billion spent in renovation
- Higher quality housing
- Revitalization—amid an aging housing stock—and newer construction
- Infill in areas where the value of existing structures have not kept pace with escalating land values
- Renovation spending
- Strategic smart growth plans and non-residential construction, including infrastructure spending
- Marked the rise of the condominium
- Construction of rental product few and far between in many Canadian centres
- Redevelopments and Conversions
- Population growth
When you look closely, most of the reasons given reflect a “build it and they will come (and pay)” theory of price appreciation. That is to say, supply precedes demand. Let’s not kid ourselves however. Development, for the most part, does not take this type of approach. The demand (or belief that there will be) drives the prudent development. The question is what’s driving demand?
I would argue that a more plausible explanation underpinning all this “evolution” has been a historically low interest rate environment coupled with loose government insured mortgage lending (namely CMHC) both of which combine to fuel consumer confidence in the housing arena.
Consider the following exhibits:
As you can gather the ratio has spiked in the last decade from its previous average. A household now spends approximately 3.3 times its disposable income to acquire a house, compared to the average of around 2.3 times during the 1990s. Notwithstanding population growth, the only way this has been able to take place and the only way it can continue is by way of cheap and ample credit.
From above, we see that Canadian household debt is over 150% of disposable income. What’s more concerning is that that while the 2008 recession saw a US correction in this ratio, in Canada, we’re now well in excess of pre-recessionary levels.
This author does not purport to raise fears nor advance fears of worldwide financial Armageddon. Frankly when it comes to the home purchasing decision of the average Canadian, each individual and/or family situation is unique and must be given it’s own due consideration and analysis.
But given the economic uncertainties and realities which surround us, one would expect a much more transparent, subdued and conservative message to better serve Canadian home buyers and investors.