June - Charting your course in an uncertain market

Sales are down

A lot. Almost 10% vs. last year for houses the first half of May, and 13% for condos. New condo sales are down 29% the 1st quarter of 2013 from the previous quarter, and 55% from the same quarter last year. There are 60,000 unsold units under construction, up 21% from a year ago.

What about prices?

If I asked you (all 300 of you at last count) whether prices have fallen during the past 12 months, I suspect 99% of you would say ‘no’. You hear about falling sales, seldom about falling prices. Meanwhile, the Terranet-National Bank House Price Index, the Canadian version of the highly-respected Case-Shiller Index in the US, shows that house prices (aggregate of detached, townhouses, and condos) declined 5 months in a row, from October to February, before the expected spring bump.

These indexes give a far truer picture of the housing market than gross averages. Here’s why. Average prices are typically biased to the upside. The reason? When jobs, the economy, the stock market, a crisis – whatever – slows down buying, these things don’t stop high net worth and high income earners from buying. A slower market translates to opportunity – to get a better deal. They buy in the higher price ranges, and that pushes up the average price of homes sold, even as individual property prices are falling. The Terranet-National Bank index is based on paired sales – the same property being bought and later sold. For the deep thinkers I’ve included a link below to their 17-page methodology.

What does ‘sold above asking’ really mean?

The impression of never-ending price increases is aided, in my opinion, by ‘bidding war’ stories. I wrote to the public editor of the Toronto Star in April to question the repeated publishing of such stories, when the ‘war’ is so easily staged by setting the asking price well below market value. Of course it’s going to sell above asking. That’s a given. Then there is the behind-the-scenes practice of some listing agents cancelling and re-listing their properties on MLS at lower prices. Then there is no price drop, and the properties sell ‘above asking’.

The constant spin on the housing market is the main reason I publish my own research on the six areas I have been tracking since January 2012 (see My ongoing research below). For brevity I use a rolling 13-month timeframe, which includes a year-over-year comparison of the most recent month to a year ago. Going forward I will also include the Terranet-National Bank index.

The other side of up

While banks and brokers are insisting on a soft landing, dramatically lower sales forebode lower prices. John Carney on CNBC.com quotes Steve Eisman – who famously made millions shorting the US housing market – that Canadian housing is going to crash. “It’s too late for a soft landing,” Eisman says.

Michael Babad in the Globe and Mail has another quote from Eisman, who noted “the exceptional run-up in prices for Canada homes, deemed by the Economist as the most overvalued in the world.” I showed The Economist comparison of world markets in an earlier newsletter.

David Parkinson writing in the Globe and Mail: “For those who have been waiting for the other shoe to fall in Canada's housing-market slowdown, I have news for you: It already has. It just hasn't hit the ground yet.”

Megan McArdle at Daily Beast says Canada didn't avoid a housing bubble and financial crisis, but it’s on "tape delay". However, he sees Canada having the benefit of knowing how the housing crisis was handled in the US and Europe.

Finance Minister Jim Flaherty and outgoing BOC Governor Mark Carney had good reason to take action, despite the misguided protestations of realtors and mortgage brokers.

Renting vs. buying

A few people – the exceptions – are taking action. There was the Vancouver realtor who sold his house last year before the Vancouver market started to fall (and is still falling). He wrote about it and incurred the wrath of fellow realtors. There is a linked article below of a homeowner who became a renter a year ago and is “still loving it”.

Preet Banerjee, a personal finance expert and host of Million Dollar Neighbourhood on The Oprah Winfrey Network, wrote in the Globe and Mail why he’s “choosing renting over buying” for his move into Toronto. He cites the example of a $550,000 condo that would cost $3,300 per month to buy or $2,200 to rent. That $1,100 to invest every month is on top of the $45,000 up front costs saved by not buying.

Every year for the past 6 years Frank Tristani at McMaster University poses this question to his finance students: which makes you wealthier over the long run, renting or owning? They do the research and the math. Every year, the result has been the same: over the 25 years it takes to pay off a conventional mortgage with 25% downpayment (being generous to the buyer), the renter wins. You could argue that the 6% return on investments is unrealistic, even though plain bank stocks alone have returned 9%. You could also dismiss the renter’s discipline to invest the cost savings. But you can’t dispute the math. There’s a lot to be said for owning; it’s just not the slam-dunk to a wealthier future that everyone assumes.

My bias

I have had comments from a few readers that I seem to have a rent vs. buy bias, and that I seem to be encouraging owners to sell.

Here’s my only bias – being financially smart.

  • Owners should try to sell high, especially if real estate is a big part of their net worth and their main retirement fund. If sale proceeds are not essential for financial security, then you can do as you please.

  • If you are selling to buy, you’ll do better trading up in a down market, and trading down in an up market.

  • Buyers should not overpay for anything, although some lose their cool and get into bidding wars.

  • No one should want shelter costs to suck up so much money that family, relationships, and having a real life – not just real estate – is jeopardized.

Except for investors, the most important thing about real estate is that it’s HOME. It matters less whether it’s rented or owned.

But isn’t real estate the best investment?

In case you’re thinking you can’t beat real estate – you can. One example: Garry Marr writing in the National Post compares housing with the stock market. For the 10 years to Dec 2012, including the biggest housing boom in Canadian history, the Terranet-National Bank index shows housing up 85%. The TSX composite was up 141%, despite lagging the DOW and the S&P 500. That’s works out to a 9% annual gain. “Go back 20 years and stocks still return more than 9% annually.”

That’s the overall no-brainer stock index. The Funds Filter on Globeinvestor.com shows 234 mutual funds that have an average annual return of 10% or more over 10 years. I tried to find how many individual stocks in Canada and the US that have gone up 200% or more. I’ll keep looking for a source but I bet there are thousands.

I own. The modest house I bought 28 years ago has gone up 500%. By not stretching to buy bigger I was able to pay off the mortgage in 10 years. In another 28 years, I expect it will be up 100% from today. If a couple buys my house next week, they can look forward to a 100% gain in 28 years. 100% for them, 500% for me. When you buy matters, and how much you pay matters.

I do my homework. I’ll do the math for you, too. I’m here for everyone thinking of selling or planning to buy, and wants to be well-served. When you’re ready, let’s go have a coffee.

Charles Young

Real Estate Sales Representative


call or text: 416 436-5851

email: charles@charlesyoung.ca

PS. Please do me a favour – forward a link of this blog to others. I believe most people are interested in real estate generally. In the case of adult children, cousins, friends, co-workers, and clients you will be connecting them with a concise and timely source of objective information. No sales pitches, no promotional ads, no bullshit – just intelligent discussion. I think they will appreciate it. If you or they wish to receive the full monthly newsletter version of this blog directly, please send me email addresses. There is an ‘unsubscribe’ link at the bottom of each newsletter. It only takes a couple of mouse clicks to opt out.

Recent news stories

A former homeowner, now a renter - one year later and still loving it G&M Apr 17
Why Preet Banerjee is choosing renting over buying G&M April 19
Potential first-time home buyers - Bide your time G&M Apr 24
The real cost of home ownership G&M May 1
Why is the man who bet against U.S. housing so worried about Canada G&M May 9
Is the Canadian Housing Market Falling Apart CNBC May 13
In Canada's housing market, the other shoe has already dropped G&M May 14
Would you be better off financially renting or buying a home G&M May 15
Toronto home sales sink 9.7% in early May, condos tumble 13% G&M May 16
If there was a battle between stocks and real estate, stocks win FP May 18
Terranet-National Bank House Price Index Methodology

My ongoing research and commentary

Since January 2012 I have been tracking 2 bedroom 2 bathroom condos in 3 areas, and 4 bedroom detached homes with family room and 2-car garages in 3 areas. Each month I show the rolling 13-month median selling prices and median days on the market. The 13-month timeframe provides a year-ago comparison to the most recent month.

2 bedroom 2 bath condo prices are up in downtown lakefront but generally flat around Yonge & Finch and central Highway 7 in Markham and Richmond Hill. One thing we cannot tell from the data is whether a rise in median prices is due to prices of individual properties going up, or due to more higher-priced properties being sold. Even if those higher-priced properties sold at a discount vs. a year ago, they would still push up median sale prices.

The time these condos are taking to sell is back to where it was a year ago.

Median selling prices of these larger detached homes are on an uptrend, particularly in North York. Could North York be benefitting from the widespread issue of commuting time?

The anomaly among the 3 areas is Markham, where the median time on the market in May was double any other month since I started tracking it January 2012. This would tend to put pressure on selling prices over time, but in this instance the median price was up in May.

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Charles Young

Charles Young

Sales Representative
CENTURY 21 Innovative Realty Inc., Brokerage*
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