Overlooked Price Trends And Some Surprising Math

Teranet-National Bank House Price Index

This house price index is the Canadian equivalent of the much-quoted Case-Shiller Index in the USA. While the Case-Shiller Index is regarded there as the benchmark of the housing market, the Teranet-National Bank Index is overshadowed by the marketing stats of our real estate industry.

For example, how many GTA residents know that housing prices actually fell for a period during 2012-2013 (down 1.8% between October 2012 and February 2013), or barely increased over an 8-month period during 2013-2014 (0.3% between August 2013 and March 2014)?

During those periods press releases would have highlighted the monthly year-over-year increases, which ranged from 3% to 6%. And there is always a national or regional price average, or a sales increase to strengthen the impression that price are constantly rising.

Buyer anxiety continues to drive prices higher. Sellers have been enjoying terrific gains, but should be mindful of two things: (1) economic risks to the real estate market; (2) overall investment strategy.

Economic Risks

Economic risks have been highlighted by the IMF and OECD. Their analysis indicates the Canadian housing market is “too pricey” and “out of whack”.

Overall investment strategy

Overall investment strategy should take into account annual price gains vs. other asset classes. For example, while house prices went up around 5% in 2013, the TSX gained almost 10%, the DOW 26%, the S&P 30%, and the NASDAQ 38%. So empty-nesters who cashed out and invested half the proceeds in index funds or some other diversified portfolio would likely have added considerably more to their net worth than keeping the house.

So far this year the TSX is up 10.9% and the 3 US markets are up between 2.2% and 6.2%. Housing in the GTA is up around 2%. Given the level of risk in the housing market, and the importance of managing risk in equity markets, a conversation with your financial advisor is recommended.

If you are your own financial advisor, you can look forward to helpful information on real-life.ca. Be sure to click consent below.

My research

For a more local view I track the prices of 2 bedroom condos sold in 3 areas and 4-bedroom houses sold in 3 areas. This focused view helps you see more clearly what is happening. Broad averages can disguise whether individual home values are actually rising or falling.

Condo prices continue to trend higher, but price volatility is noteworthy, especially in the downtown Toronto area. Signs of a nervous market?

House prices continue to trend higher, with North York showing outstanding gains. I suspect that one factor pushing City of Toronto prices into dream-land is the commuting nightmare that we won’t wake up from for many years, if ever. Shorter distances and more public transit options are worth something.

Should I buy a condo, or is renting the way to go?

Doing the math shows a surprising result.

Let’s look at a good-sized (600-699 sq ft) 1-bedroom condo in North York. Here’s one on Byng Ave, a short walk to the subway. You could say this location is in-between downtown Toronto and outside Toronto.

Mary is a first-time buyer with the good fortune of being able to gather a 20% downpayment. She qualifies for a conventional 80% mortgage. She plans to live there for 5 years, then sell and buy something else. She knows she can lock in a low rate now (and possibly up to year-end) for a 5-year term.

She could also rent a near-identical 1-bedroom in the building for $1,600 and save money. If she rents she feels she has the discipline to invest the monthly savings and earn a conservative 5%. So if she buys, the extra cash outlay for owning represents an opportunity cost on top of purchase costs.

Price: $298,000
20% downpayment: $59,600
Mortgage: $238,400
Monthly carrying cost: $1,845 (mortgage, maintenance, property taxes)
One-time purchase costs: $2,563 (land transfer tax, transaction fees, title insurance)
Cash outlay: $62,163 (downpayment + one-time costs)

We’ll assume that the condo market slows way down and Byng Ave, a short walk to the subway, ekes out a total gain over 5 years of 5%. That’s less than 1% per year.

Market value after 5 years: $312,900
Remaining mortgage: $207,173
Owner’s equity: $105,727
Minus cash outlay: $62,163
Gain in asset value/net worth: $43,564
Minus opportunity cost (1,845-1600 = $245 monthly, earning 5%): $16,614
Minus realtor’s commission of 4% + HST: $14,143
Minus legal fees + HST: $1,190
Net Gain: $11,167
% gain on cash outlay: 18.7%
Annual compound ROI: 3.48%

Surprisingly, despite the substantial costs listed in red above, Mary the owner comes out ahead after 5 years. The return on investment is not huge, but it is on top of the enjoyment and peace of mind of living in her owned home.

As for renting versus buying a house, renting remains a screaming bargain. More on that in a future issue. Or on real-life.ca, launching fall 2014. “Consent” below and you will be notified as soon as it’s open for business.

Charles Young
Real Estate Sales Representative
call or text: 416 436-5851
email: charles@charlesyoung.ca

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Charles Young

Charles Young

Sales Representative
CENTURY 21 Innovative Realty Inc., Brokerage*
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