The Wealthy Renter. Alex Avery

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      Source: Statistics Canada, Federal Reserve Board.

      It’s hard to come to any other conclusion than that housing in Canada is quite expensive.

      Perhaps the most disturbing thing about the above chart is that the interest payments Canadians now make on all of that debt don’t include the implicit rent the 70 percent of Canadians who own their own homes probably aren’t even aware they are paying.

      Look at what these five charts we’ve just seen say: 1) House prices are at record highs in terms of dollar values; 2) House prices in Canada continued to rise significantly after U.S. house prices dropped nearly 20 percent across the country;

      3) Canadian home prices are at record highs relative to income, having grown dramatically faster than incomes over the past decade and a half; 4) Canadian home prices are at record highs relative to rents, having grown dramatically faster than rents over the past decade and a half; 5) Canadians are carrying dramatically more household debt as a percentage of income than at any time in modern history. If you take an objective look at those statistics, it’s hard to come to any other conclusion than that housing in Canada is quite expensive. There are arguments on both sides of the debate of whether house prices will keep rising or whether they will fall. Whatever happens, whether house prices fall or whether they remain expensive, the prospects aren’t good if you’re thinking about buying a home (unless, of course, you wait for a really large correction before buying).

      While it might sound a little counterintuitive, further increases to house prices in expensive cities like Vancouver and Toronto aren’t very good news for potential home buyers, as prices are already very expensive compared to historical levels. First-time homebuyers today are more saddled with debt than at any time in the past twenty-five years, leaving them committing to decades of payments with lesser prospects of higher prices in the future than earlier buyers.

      Beyond all of the Canadians who might be considering buying a home, this situation isn’t good for Canada. The 70 percent of Canadians who own their homes have huge portions of their wealth tied up in expensive assets that might deliver modestly positive returns over the next several years, or they might deliver negative returns. Neither would be as good as a cheap housing market in which the majority of Canadians could spend less on housing, and expect better odds of increases in house prices to boost their net worth and provide a higher return on their largest asset.

      The run-up in house prices had been looking a little more reasonable when U.S. house prices were rising alongside Canadian house prices in the early 2000s. At least we had company … until the U.S. housing market collapsed in 2006. The magnitude of that crash, and similarities between pricing levels and indebtedness in Canada today and the United States just prior to their housing crash, have many people questioning whether the gains in Canadian house prices can persist.

      Low interest rates have played a significant part in rising house prices, allowing each dollar of interest paid to cover more and more mortgage debt. Interest rates have fallen dramatically over the past twenty and thirty years. Using the same monthly mortgage payment, today’s five-year fixed mortgage at 2.4 percent covers 72.5-percent more mortgage balance than the same payment covered as recently as the year 2000, when five-year mortgages were 8 percent. Not only that, but the total interest paid over the life of a twenty-five-year mortgage at today’s rates would be half the amount paid on an 8-percent mortgage despite the mortgage amount being 72.5 percent larger. If you think mortgage payments are scary now, ask someone who owned a home in the early 1980s how crazy mortgage payments were when interest rates were massively higher, reaching over 20 percent.

      If you assume Canadians are buying houses based on how much monthly payment they can afford, the decline in interest rates could account for 72.5-percent higher house prices since 2000, compared to the actual ~200-percent increase in the average Canadian house price since then.

      This is a point that is often used to argue for a pending Canadian housing crash. The worry is that if interest rates were to rise back up to an 8-percent five-year mortgage, house prices would have to decline to offset the increase that lower interest rates helped move higher, to maintain roughly similar mortgage payments, which in theory could result in a 42-percent decline in average house prices.

      It seems pretty far-fetched for interest rates to rise to 8 percent in the near future, but you never know. Nevertheless, interest rates don’t need to go to 8 percent to hurt demand for home ownership.

      As house prices have continued to rise, it’s not surprising that ownership rates have been rising. The positive impacts of a rising ownership rate and falling interest rates on house prices are pretty self-explanatory. It’s a positive feedback loop, with rising prices encouraging more people to “invest” in home ownership, resulting in more demand, which ultimately supports higher prices.

      It’s also pretty easy to understand that if ownership rates were to stop rising or begin to fall, and if interest rates were to stop falling and even rise, house prices might start to fall.

      What might be less easy to see is the unique physical structure of Canada’s housing markets and how that affects house prices. When it comes to the structure of Canada’s population, I find our country to be fascinating. I spend a good chunk of my time studying real estate markets, in Canada and around the world, looking at where population is concentrated, how cities are set up, and how those factors influence property prices. When I travel to other parts of the world to talk to real estate investors about Canadian real estate, one of my favourite things to do is tell investors who don’t know a lot about Canada how incredibly concentrated our population is. The responses can be priceless.

      I’ve found that people who have never been here or don’t know much about the country usually do know three things. The first is that Canada is the second-largest country in the world by area. The second is that our population of 36 million people is pretty small.

      With more than 9 million square kilometres of land, that works out to about 3.4 people per square kilometre. About 167 Canadian football fields fit into a square kilometre (CFL fields are 43-percent larger than NFL fields — just saying), which means Canadians have about forty-nine football fields of space each. That’s a lot of space for each of us to run around in.