# What home prices should be



## sags (May 15, 2010)

I found this information on one of Rob Carricks 2012 columns.

http://www.theglobeandmail.com/glob...eally-do-have-it-harder-today/article4105604/

It is interesting to note the average cost of a home in 1984......what it would be if it kept up with inflation........and 2012 prices.

Home prices have risen since 2012. Average home prices in Vancouver and Toronto are now $1,000,000.

Region..........Average Price 1984..........Price Today If Homes Had Risen by the Inflation Rate Since 1984..........Actual Average Price 2012

Canada..............$76,214.........................................$154,587.........................................................................$369,677

Vancouver.........$116,444.........................................$236,187.........................................................................$761,742

Calgary...............$94,154........................................$190,976.........................................................................$409,750

Toronto..............$96,078.........................................$194,878.........................................................................$504,117

Montreal.............$66,116.........................................$134,105.........................................................................$318,400

Halifax...............$71,950.........................................$145,939..........................................................................$272,599

In 1982, we purchased a nice 4 level split level home in a desirable neighborhood, for $78,000

A similar home in the same neighborhood, is listed today for $339,000

Our family income from 2 well paid jobs...........would not be anywhere near 5 times higher than it was in 1982.

Even with those same jobs...........we couldn't afford to buy the same home again.

Something is going to give..........and when it doesn't bend..........it breaks.


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## lightcycle (Mar 24, 2012)

Is this cherry-picking the start date a little bit? Why 1984, at the nadir of the housing bust after prices lost 30-40% of their value over the last half-decade, and interest rates were sky-high in the mid-teens? If we were to track house prices vs inflation over the next 20 years, but start the chart in 2013, houses will probably look like a bargain, won't it?


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## NotMe (Jan 10, 2011)

Running your example through excel:

amt k n FV
-78000	4.70%	32	$339,000.00 

Means an average annual return of 4.70%. While that is a decent return, it's not exactly killer or 30% a year or some other number totally indicative of a massive meltdown that's imminent to occur. Now personally I do believe that a (small) housing correction is due, but then I thought that in 2002 and so have been wrong for 12 years which is quite the losing streak.


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## HaroldCrump (Jun 10, 2009)

It is not the house prices that are out of whack...it is the official reported number for "inflation" that is hokey.
The house prices are correct, and indicative of the true inflation since the 1990s.

It is the third column titled "Price Today If Homes Had Risen by the Inflation Rate Since 1984" that is fiction.

The current house prices reflect the market (albeit manipulated by ZIRP and CMHC subsidies).
It is the CPI that does not reflect the R/E market because of the hokey way housing is baked into the CPI.

The market is right...the govt. data is bullshit.


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## Just a Guy (Mar 27, 2012)

Well, I think the truth is somewhere in the middle...in the 80's we had double digit interest rates on mortgages, and canada was in a recession (Calgary was suffering from the NEP), so I'd say it's not an easy comparison. That and inflation is no where near as low as the government claims.

Housing prices are high because interest rates are low, allowing people to pay more for houses because they can afford the payments. When interest rates rise, housing prices will come down because people can't afford the payment. 

What would be interesting to look at is the total cost of a house bought in 1984, with all the interest added in, inflation, and adjusted for 2014 dollars, compared to a house bought today with all the interest payments added in...

My bet would be the total cost of the houses would be quite similar, but still on the high side.


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## sags (May 15, 2010)

Here is a comparison that factors in wages and affordability in 1984 and 2011

_In 1984, the average minimum mortgage payment would have been roughly $628, or 18% of a married couple’s gross income, based on a:

$77,342 average house
$41,348 median couple’s income
25% down payment
12.74% five-year fixed rate
25-year amortization

In 2011, the average minimum mortgage payment is about $1,622 or 25% of a married couple’s gross income, based on a:

$372,700 average house
$77,198 median couple’s income
5% down payment
3.69% five-year fixed rate
30-year amortization
_

Interesting to note.....

The mortgage was more affordable in 1984 (18% of income) than 2011 (25% of income) despite 12.74% interest rates (vs 3.69%) and a 25 year amortization schedule (vs 30 years)

The average mortgage payment was almost 3 times higher in 2011.......despite wages growing less than 2 times higher.

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/07/harder-to-buy.html


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## Just a Guy (Mar 27, 2012)

I remember my sister hitting a 21% mortgage back in the 80's...houses weren't always that affordable. I think the time period picking is key.


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## Eder (Feb 16, 2011)

A couple with only 77k combined income have no business buying a 370k home regardless of interest rates. I think they may afford a 250k home if they rent out a room.


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## Just a Guy (Mar 27, 2012)

The old standard was 2.5x your income max.

Easy credit and huge profits put an end to that of course.


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## cashinstinct (Apr 4, 2009)

Just a Guy said:


> The old standard was 2.5x your income max.
> 
> Easy credit and huge profits put an end to that of course.


I bought at less than 2.5X in 2012... viva Montreal area


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## amitdi (May 31, 2012)

Just a question -
Shouldnt we be adding property tax as annual payments if we want to compare apples to apples.

Of course, theres capital gains tax for the invested money which wont be there for primary residence. My intuition says with these 2 factors, real estate gains wont be that attractive.


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## Just a Guy (Mar 27, 2012)

With investment properties, you get credit for the property tax on your taxes. Also, investment properties are leveraged so they should get paid down with other people's money not your own.

A personal home is rarely a good investment when all costs are factored in, it's better thought of as a forced savings plan. When I can buy a property with none of my own money and get a cash flow from day one and a fully paid off property in 20 years, it may not compare to a 5000% return you could have gotten from buying apple in 1996, but I'd probably still take it over trying to pick stocks if I had to choose... Then again, finding such a property isn't very common these days either.

Buying property is not the same as investing. The same as holding a stock is not the same as investing, or working for a paycheque is not the same as owning a company.

One could also say being a good stock investor won't make you a good real estate investor or business owner...they are all different and take different skills and expertise.


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## NotMe (Jan 10, 2011)

amitdi said:


> Just a question -
> Shouldnt we be adding property tax as annual payments if we want to compare apples to apples.
> 
> Of course, theres capital gains tax for the invested money which wont be there for primary residence. My intuition says with these 2 factors, real estate gains wont be that attractive.


Since I love an academic exercise, one thing I've never fully understood about the investing to real estate comparison is the sources of capital question. If I'm 55, maybe I have $500,000 I can spend on a house or investments, in cash. But if I'm 25 and have income but no assets other than a $15000 downpayment, I know I can borrow say $250,000 for a house. But I likely can't borrow $250,000 to invest, can I? Maybe $20,000 on a line of credit, for a total of $35,000 no? so you have to compare the return on the house versus the return on the invested assets of $35,000, no?


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## Karlhungus (Oct 4, 2013)

No capital gains tax makes it a very good investment.


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## wert (Jan 26, 2014)

Vancouver loses thousands of SFH addresses a year as they are converted to condos. Population increases yearly as well. Why wouldn't prices increase over inflation as supply drops and demand grows?


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## Just a Guy (Mar 27, 2012)

Vancouver is a special market and shouldn't be compared to the general market. The land space is limited with mountains on three sides and an ocean on the other. Can't be compared to areas where there is more room to expand. Even Port Coquitlam is significantly cheaper than Vancouver. 

It's the same with being closer to the core in large cities like Toronto. As long as the core is desirable, it will be more expensive...but, in Saskatoon, you don't have either issue, so you can't compare markets.


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## My Own Advisor (Sep 24, 2012)

I wouldn't mortgage more than 3x my own income, let alone what my wife makes. 

Borrowing too much money is a recipe for disaster in my books. Without debt, there is SO MUCH financial freedom me thinks....

I wouldn't know yet, still killing the mortgage beast!!! :frown:


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## nobleea (Oct 11, 2013)

lightcycle said:


> Is this cherry-picking the start date a little bit? Why 1984, at the nadir of the housing bust after prices lost 30-40% of their value over the last half-decade, and interest rates were sky-high in the mid-teens? If we were to track house prices vs inflation over the next 20 years, but start the chart in 2013, houses will probably look like a bargain, won't it?


Some people believe that home prices can only be overvalued. They can never be undervalued.

I think that both can happen, so I agree. Picking a low point in pricing isn't a good example.


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## sags (May 15, 2010)

You can't consider home prices too high or too low..........without comparing them to average incomes.

There are other considerations........nice weather, pretty scenery........but they exist in areas with high home prices and low home prices.

But the bottom line always comes down to 2 key metrics.....affordability and employment.


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## nobleea (Oct 11, 2013)

sags said:


> You can't consider home prices too high or too low..........without comparing them to average incomes.
> 
> There are other considerations........nice weather, pretty scenery........but they exist in areas with high home prices and low home prices.
> 
> But the bottom line always comes down to 2 key metrics.....affordability and employment.


Ok. So if home prices today are high relative to income (I'm not arguing this), when were they low?


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## Just a Guy (Mar 27, 2012)

Well, if we go to the USA, right after the mortgage collapse of 2008, you could say the market fell too low. Many Canadians picked up properties at the bottom and have done quite well, even though the prices today are nowhere near what they were in 2008.

Real estate is not one market. it can be undervalued in one part of the country and overvalued in another...heck, I've seen that in two parts of one city. You can't think of real estate the same way you think of stocks, there is no general market, each house is a separate entity. That's how I can buy underpriced properties in a hot market...you can't do that with stocks.

So, it may be tough to find a specific time period...some may say there were local times when real estate was undervalued in general, but you may always find an undervalued property...foreclosures, forced moves, inheritance...these are only a few of the things that could trigger something.


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## andrewf (Mar 1, 2010)

For Canada since 1990, house price to incomes were lowest in about 2001. Prices have risen ~ 50% since then vs incomes.

http://www.cansofunds.com/wp-conten...nadian-Housing-Market-July-2013-Revised-2.pdf
(chart on p 3)


In terms of rents, houses were at their cheapest in ~1997, and have roughly doubled in value since then.

Unfortunately, data like this is relatively poor when compared to the US. Not much good data prior to 1990 or maybe the mid '80s. Ben Rabidoux used to have a site with lots of interesting data, but has since let it lapse as he has gone into consulting for private investors.


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## amitdi (May 31, 2012)

NotMe said:


> Since I love an academic exercise, one thing I've never fully understood about the investing to real estate comparison is the sources of capital question. If I'm 55, maybe I have $500,000 I can spend on a house or investments, in cash. But if I'm 25 and have income but no assets other than a $15000 downpayment, I know I can borrow say $250,000 for a house. But I likely can't borrow $250,000 to invest, can I? Maybe $20,000 on a line of credit, for a total of $35,000 no? so you have to compare the return on the house versus the return on the invested assets of $35,000, no?


NotMe, Good point. However, the return can be considered on $15K only if you dont put in additional capital. $15K initial capital + treat mortgage and other costs (property taxes minus credit, maintainence, etc) as additional payments to calcualte IRR.

My point is that the glorified real estate returns are not so glorified with all these *real* factors in play. People should not buy primary residence for investment. I have seen people going for a house when they are not ready for it thinking that they are missing out and wasting the rent.


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## sags (May 15, 2010)

Just a Guy said:


> So, it may be tough to find a specific time period...some may say there were local times when real estate was undervalued in general, but you may always find an undervalued property...foreclosures, forced moves, inheritance...these are only a few of the things that could trigger something.


I think you struck on something very wise here for future home buyers.

Don't get too set on one type of particular house. Gather your resources and wait for a deal to come along..........and don't be overly picky.

A well made home in a nice area.................is a good start...........even if it isn't everything you ever dreamed about in a home.

If you plan to live in a home for a long time......the only time a person should buy one really, there is lots of time to make changes.

Few people live in homes that look like the ones in magazines or advertisements.

Most of us have kids, pets, and ordinary furniture. We have some clutter and some dings and dents in the walls.

Like the old saying goes...........a home should be clean enough to be healthy..........and messy enough to be happy.

Lots of time during my life...........some kind of deal appeared out of the blue.

As you said a family inherited a home they want to sell. Maybe it is outdated inside.........and they don't want the bother of redecorating and will accept a lot less money to sell it as it sits.

I think a lot of homes, owned by baby boomers and looking like they are right from the 1970s, will be coming up on the markets.

They will need paint, rip out the old carpet, tear down the wallpaper, replace the old wood paneling in the basement......etc.

Wait.........watch.......and when something good comes up.........pounce.

That would be my advice to someone looking to buy.............


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## nobleea (Oct 11, 2013)

sags said:


> I think a lot of homes, owned by baby boomers and looking like they are right from the 1970s, will be coming up on the markets.
> 
> They will need paint, rip out the old carpet, tear down the wallpaper, replace the old wood paneling in the basement......etc.
> 
> ...


Anectodal evidence for sure, but it's been my experience that the boomers are the ones with the nicest homes. The ones that don't need to be renovated. It's their parents (those that are still in their homes) that are the ones with homes that haven't been touched since the 70's in terms of decor.


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## OhGreatGuru (May 24, 2009)

I agree CPI (if that is what Carrick used as "inflation rate") is not relevant to house prices. It is perhaps relevant to the rate at which most peoples' incomes have been moving.

He could have used the "shelter" CPI, which is higher than CPI for all commodities. But it would still be a flawed methodology.

He could have used Construction Price Index, but housing cost has more to with land costs than construction.

A more useful comparison might have been to compare housing prices to average incomes in those cities. But that is a distorted picture as well. Because the data points become self-selecting. Only those people who can afford to buy a house in Vancouver do so, so the average income goes up.


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