Over the weekend I had an opportunity to visit with members from both sides of my family at various events and during one conversation with an uncle the conversation moved towards the housing market and a beliefe that a home was one of the best investments any young person could possibly consider versus investing in the stock market. His rationale was that stocks were far riskier than real estate and that all anyone had to do was look at the health of home prices as justification.
Of course I had a different opinion as a disciplined investor asking the question of why anyone would not want to be diversified outside of only one sector (housing), be exposed to only one asset type (real estate) or one market (Canada). A few others chirped in with opinions and I found myself attempting to justify my portfolio and the fundamentals of investing against unrealistic expectations of a single market that has had one hell of a run when you consider where its come from since 2000. At one point a date of one cousin claimed that housing was such a great investment that it was an “un-correctable market” and not exposed to as many risks as stocks in the stock market.
I left the conversation shaking my head and trying to find another beer wondering at what point simple conventional logic escaped the minds of ordinary people into thinking that real estate was the best investment since….well….subprime mortgages? I could have launched a much more in depth conversation quoting statistics I’m aware of on the housing market; but to ordinary people oblivious to the conditions in the housing market in its current state why would you believe otherwise when every other source tells you that everything is going great?
The problem with housing is that everyone that has an opinion, or finds their opinions in the national media, has a conflict of interest in seeing home prices remain high or rise further. Whether its professionals (such as banks, real estate agents or mortgage lenders), professional organizations (CREA, CMHC, etc) or members of government not many will give you the basic run down of the market in its current state.
The bottom line to the regular person, or investor, is that prices have moved so far in such a short period of time (relatively speaking) and interest rates remain so low that a combination of factors are working against home prices at this time. Since 1988 the average home price in Canada has risen from around $125,000 to $335,655 as last reported by CREA for February 2010. That’s only an annualized return of 4.67% over 22 years (up 168%), but since 2002 home prices have increased by 6.61% on an annualized basis which is far above the long-term average.
With interest rates and mortgage rates at historically low levels and on the eventual rise housing affordability will be stressed as first time home buyers with minimal equity look to get into the market and housing prices stagnate to accomodate supply. Home prices might continue to rise from current levels for any period of time but housing, like any other market, is not immune from serious corrections. What we’ve experienced the past 24 months I would not characterize as any form of correction; more a pause.
As a home owner I’m happy to see increases in the value of my home, but I am realistic in the observation that the material value of my home is not anywhere near the market value of my home. My ability to service my mortgage is not impaired by short-term moves in interest rates but not a lot of young home owners have fixed rate mortgages because of affordability issues.
It’s an interesting concept; whether housing is a market that is immune to corrections. What business does teach you though is that when you don’t expect it (or convince yourself it can’t happen) it likely will.