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What’s Happening To The Family Home
By Adrian Spitters and Win Wachsmann. Will your home be a good source of retirement income? Real estate.
Editor’s note: This is the second in a series on the real estate market by Adrian Spitters and Win Wachsmann.
A rebuttal from Greg Cross – The Other Side Of The Real Estate Story
Follow Abbotsford Economic Indicators
The family home – Many people believe it is the Holy Grail.
You’ve heard the propositions:
- Everyone needs to own real estate. The more the better.
- Get in now before its too late!
- Dont listen to the skeptics!
- Theyre not making any more land
- Land values will only go up
- Its a good way to save for retirement
- The arguments go on and on.
Are the underlying assumptions still valid?
The Baby Boomers have driven much of the housing market for the last 30 years. First a small starter home, then a larger home for the growing family, and more recently the dream home. There have been 30 years of strong growth in prices an average of 5.4% annually. Locally, strong Asian immigration and investment helped increase that rate to 7% per year over the last 10 years.
In the 80 s an average house in Vancouver was just over $130,000, or about 3 times the annual salary of $41,000 ( Statscan). In 2012 an average Vancouver house cost $684,000while the average salary was $67,000 ( Statscan); a house in Vancouver now cost more than 10 times the annual salary! Since the 80 s, house prices in Vancouver (and Toronto) went up 5 times while salaries only went up 0.6 times (unless you worked for one of the three levels of government). If you live outside these major centres the house prices may not be as high, but the ratios will probably hold since the average salaries will also be less.
Will house prices continue to climb at the 7% per annum rate they have in the past 10 years? Most likely not! The Toronto Dominion Bank forecasts a downward adjustment for Canadian house prices over the next three years. They also predict that the annual rate of return for real estate in nominal terms will be roughly 2% over the next decade. Forecasting is by definition based on a wide range of assumptions and forecasting house prices is particularly difficult, so these figures may be optimistic. Regardless, we will not see the growth we have seen in the past 30 years anytime in the near future.
What are some factors for this turnaround?
International financial stability (or lack thereof), national financial stability (or lack thereof), economic growth (or lack thereof).
Demand for housing
Demand for housing is decreasing because the absolute numbers of entry level home buyers has decreased significantly.
The Canadian government kept mortgage interest rates artificially low over the last ten years in order to avoid a recession. As a result, real estate prospered and Boomers and their children saw it as the ticket to financial freedom. Many kept buying larger and/or more expensive homes at the instead of saving for retirement. The idea was that the increased value of their real estate would pay for their retirement.
And now reality is setting in:
- Global economic growth has slowed.
- Various countries around the globe have seen their debts and deficits skyrocket.
- Central banks are printing money to ease the pain.
- Central banks are keeping interest rates artificially low.
- The number of young people in the home buying demographic is down.
- Good paying jobs for young people are almost non-existent even for those with university degrees.
- Young people able to afford a home without substantial help from their parents are few and far between.
- Many Boomers have been borrowing against their equity in their homes and are unable to help their children buy homes.
Canadians are carrying historically high levels of debt.
Almost 50% of Boomers are headed into retirement with more than 40% still owing on their mortgage. 25% of all Boomers owe more than 75% on their mortgage. Of concern are those endebted Baby Boomers heading into retirement at a time when our economy is showing signs of slowing down. If the interest rates move up, many homeowners who took on large mortgages at 3% or so will have trouble making payments. We may see another massive round of foreclosures and losses. Without adequate money saved for retirement and no income to support a mortgage when they retire, how will these Boomers support themselves?
All these factors will drive housing prices down or keep them flat. The result the era of real estate as an investment opportunity for growth is over.
If you are a Boomer on the way to retirement with 40%-75% owing on your mortgage, an unbelievably low interest rate, a pittance saved for retirement, no company pension, and you plan to take the long term approach to investing in real estate, you are dreaming. All investment types go in cycles, and now is not the time for real estate.
Adrian Spitters, FSCI, CFP, FMA
As a Certified Financial Planner (CFP), Adrian Spitters offers financial advice that focuses on investments, retirement, business succession, estate and tax planning in cooperation with his clients own legal and accounting professionals.
He can be found at www.theretiringboomer.ca
Win Wachsmann is an author, journalist, syndicated columnist, filmmaker and businessman who makes his home in the Fraser Valley of British Columbia. His articles and columns can be found in some of the finest offline and online magazines, journals and media properties.
He can be reached at firstname.lastname@example.org.