Preet Banerjee – Globe and Mail
We all know someone who’s worn love goggles. They start dating someone new and their whole world starts revolving around that special someone who can do no wrong, even though everyone else seems to think otherwise. Once the honeymoon phase is over, the goggles come off, a dramatic breakup ensues and suddenly everything seems so clear. “Why didn’t you guys say anything?” the friend asks. Human psychology is a powerful thing.
Meet Ben Rabidoux. He’s a friend who has been trying to warn Canadians about the love affair we have with home ownership. Mr. Rabidoux is an analyst with M Hanson Advisers, a U.S. research firm that caters to institutional investors. His website, TheEconomicAnalyst.com, provides easy to digest graphs that essentially explain themselves, but he also weaves together a sobering new reality we may soon be facing. Already offended by the premise? He’s used to it.
Here are a few observations of hard data from his site:
In 1975, the average size of a house in Canada was 1,050 square feet. Fast forward to 2010 and new homes being built almost doubled to an average of 1,950 square feet. This increase in house size is accompanied by a decrease in the average number of people living in a household. In 1971, it was 3.5; by 2006, that number fell by a full person to 2.5.
Comment: I do agree that we are buying more house than we need. I see it every day, people always want more. They want an extra bedroom – that will be used once a year. A finished basement that they do not use. A formal living room, when they only use the family room. Etc… We need smaller, smarter, more efficient housing. That is a bigger deal than prices any day.
Whereas in 1999 the price of a home was 3.2 times income, this had ballooned to 5.9 times income in 2010. Essentially, the amount of money we are willing to pay for a house has increased much faster than our incomes. Instead of buying beer we’ve switched to champagne, but we can still only afford beer.
Comment: But he forgets that people are not buying houses based on sticker price. They buy it based on monthly payments. That is then converted to a purchase price. As I keep pointing out in this blog, monthly payments are under $2,000/month for a $600,000 mortgage at 3.5% – the same as it was 30 years ago for a $200,000 mortgage at 18%. And that was in 1981 dollars. I do not have the 1971 numbers, but my point is made. Affordability is the same, if not better now, than it was a generation ago. The key is to buy what you need and not try to keep up with everyone else. Spend wisely and you will be fine. Blow your brains out and spend the max you can afford – that is where the trouble begins.
But wait, there’s more.
Research suggests that people reach their spending peaks at age 46, then spending decreases as they start to pay off debts and save for retirement. The youngest boomers turned 46 last year. That means the pig in the python should be slowly moving from spending to saving for the next two decades.
The problem is that if Canadians approaching retirement age feel as though they haven’t saved enough for retirement, they will likely turn to their fallback plan – downsizing their homes to free up cash. TD Canada Trust recently released a survey indicating that only 43% of boomers had a financial plan. Given the growth in housing prices and the rate of home ownership, it’s very likely that this large population segment is going to have a considerable impact on supply and demand for real estate in Canada.
Comment: I have said this as well – one of the only brakes I can see for the local real estate market is when all the expensive boomer homes come up for sale. This is the first generation that cannot afford to buy their parents’ homes. I know I can’t… my dad’s place will be worth $1 million or more by the time he decides to sell. That is well above my pay grade! And if enough of them come on the market, with not enough buyers… what happens then?
Those who resist the urge to keep up with the Joneses will be better off. While there might be selling pressure for the bigger homes as retirees downsize, they are downsizing into the more modest homes, which provides some buying pressure for smaller houses.
Comment: Or condos. Downsizers do not want small houses, they want condos. They want to be able to lock the door and take off for 3-6 months at a go. But they are going to want 1,200sf condos without the $1,000 condo fees. That is going to be fun.
Add it all up, throw in the highest debt-to-income ratios in history for the average Canadian and the long-term prospect of interest rates rising and it’s pretty easy to see why Mr. Rabidoux’s website could become incredibly popular after the fact: He’s trying to point out what the love goggles may be overlooking.
Comment: But it is all over the top and scare mongering, like most. People need to stop and think and be reasonable. Buy a decent house, but do not blow your brains out on it. Relax with discretionary spending, you really do not need the 70″ TV, the iPhone + iPad + iPod. Eat at home more, buy a used car. That is what will get people through, spending a little less here and there and trying to put a few bucks away for later.
It’s possible we could be looking at a two-speed housing market over the long term. Prices for larger homes may cool off as boomers downsize and smaller homes may benefit, which means moving to a house more within your means is more important than ever – just in case the Canadian love affair with real estate turns sour.
Comment: Interesting, but unlikely.
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Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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