It’s no secret that Canadian house prices have been rising rapidly in recent years.  Many young people feel that they’ll never be able to afford to buy a home.  However, as fast as house prices have been rising, the stock market has risen faster. The following chart shows a decade of my cumulative investment returns compared to the rise in Canadian real estate prices.  There was nothing special about my returns over this period; the stock market was booming.  My investments were primarily in stock index ETFs, although my returns were reduced somewhat by the 20% or so I’ve had in fixed income since I retired in mid 2017. To measure real estate prices, I used Teranet-National Bank House Price Indexes for Toronto, Vancouver, and a composite index of all Canadian metropolitan areas. The chart shows that even high-flying Toronto real estate didn’t keep up with my investments.   Vancouver real estate growth is a little further behind, and Canada as a whole is eve...

If you buy a pre-construction home, both you and the builder are committing to a price in advance.  This can be a good deal for both parties in that you and the builder get some certainty in the price you’ll pay.  However, once the home is built and we see which direction housing prices moved during construction, we find out whether you or the builder came out ahead on the fixed price agreed in advance.  This creates incentives for dishonesty. If housing prices rise before construction is finished, the builder would rather cancel the deal with you and sell the home to someone else for a higher price.  In theory, the contract you have in place prevents the builder from getting out of the deal.  In practice, there are manoeuvres the builder can try to get out of the deal with you.  The more housing prices rise, the greater the builder’s incentive to break the deal. This creates a “dishonesty option.”  For a builder prepared to get out of the deal with ma...

It seems that everyone wants you to buy a house: your parents, real estate firms, mortgage brokers, and even the government. Alex Avery decided to make a case for renting in his book The Wealthy Renter: How to Choose Housing That Will Make You Rich . His reasonable and balanced analysis contrasts sharply with the usual cheerleading for owning a house. We’ve all heard people say something like “renting is just throwing money away,” or “why pay your landlord’s mortgage when you can own your own house?” This advice is based on the mistake of comparing rent to a mortgage payment. Typically, renters pay for little other than their rent – maybe a few utilities. Homeowners pay property taxes, maintenance costs, utilities, insurance, and an opportunity cost on home equity. It’s the total of all these costs that we should be comparing to rents. Avery goes through an example of an $850,000 home and concludes that the cost for an owner to occupy the home is between $4000 and $8000 a mon...

I like owning a house. I’ve become very accustomed to the freedom and autonomy that come from not having a landlord. But I can’t pretend that owning my house is the best move from a purely financial point of view any more. My current home would sell for about 2.5 times what I paid for it. Even factoring in inflation, its value has gone up over 70% in real terms. So homeownership has worked out well for me. But that’s in the past. What about the future? I don’t know what will happen to house prices, but if we look at the likely range of possibilities, the future looks very unlikely to match the past couple of decades. Interest rates are at historic lows and Canadians are deep in debt. I’d have to be delusional to think that my home is likely to increase another 70% above inflation. It’s not impossible, but hardly likely. I have little doubt that I’d be better off financially to sell my house and rent. So far my wife and I have decided to leave this money on the table and...

I’m getting to like Mark Carney more and more. He was recently quoted as saying “Real wealth is built through innovation, and it’s gained through hard work.”. He’s spot on with the real source of improvements to our lives over long periods of time. Commenting on Canadian housing prices, he continued “It’s not through some magical asset inflation.” On a macroeconomic scale, the wealth gains we’ve had over the decades have been driven by hard work and innovations that make our lives easier and better. These innovations destroy some jobs and create others. The net effect is that we collectively get more for less effort. When governments create jobs through make-work projects or financial stimulus, we are getting short-term solutions. True long-term improvements come from innovation. When it comes to promoting or thwarting innovation there are no purely good actors or bad actors, but generally speaking, the enemies of innovation are large organizations that fight to maintain th...

Despite the fact that I’m interested in the debate about whether we’re in a housing bubble and whether we’re headed for a housing crash that takes down our economy, I have no opinion myself. I care what happens, but I don’t know what will happen. Two of my favourite writers on this topic are Larry MacDonald, who likes to shoot down housing bear arguments , and Potato, who likes to shoot down MacDonald’s arguments . I won’t enter their debate except to make some observations about housing affordability metrics. Housing bears tend to focus on debt-to-income ratios. They look at how many years of income your mortgage (and other debts) represent. Of course, you can’t spend all your income on debt repayment; there’s interest to pay, and you probably need to eat. So, the actual number of years needed to pay off a debt is much higher than the debt-to-income ratio. If we focus on just the debt-to-income ratio, the situation in Canada seems dire. The average ratio in Canada keeps hit...