Canada's Condominium Magazine

Looking for the Goldilocks housing market

Many observers have commented on the contradiction between the housing market, where rising prices are seen, by and large, as a positive sign that the economy is improving, and other consumer sectors, where inflationary prices are treated with fear and loathing. If you own a home and its value appreciates by 10 per cent over twelve months, you are happy. If you go to the supermarket and find that you have to pay 10 per cent more for a loaf of bread than you did last year, you are outraged.

The reason for the different reaction is obvious: in one case, you make money, in the other, you lose. Many people see their home as an investment, and to some extent we are encouraged to think that way. An annual return of 10 per cent on an investment is a pretty good deal, hard to beat in the stock market. Buying a home is so foundational to the health of our economy that it is almost unpatriotic not to do so. Many people build their retirement plans around owning a home.

Most Canadians believe that home prices will rise to new heights in 2014. A survey by Point2Homes, an online real estate portal, found that just over half of Canadians see prices rising about 8 per cent in local markets. Whether as a result of optimism or perhaps inside knowledge, real estate agents are even more sanguine about housing prices: two-thirds of them believe that the market is gaining momentum, and that prices will go up.

While homeowners may take satisfaction in the knowledge that their home’s value is steadily increasing, those who are still outside the real estate circle may see rising prices as a barrier.

Central bankers, meanwhile, have to take care that prices don’t rise too fast and form a bubble. We saw how devastating that can be in the US in 2007. Mark Carney, who has now been in charge of the Bank of England for exactly one year, and has been grappling with that country’s housing market, just announced a couple of measures to moderate the market, but nothing severe. He said that a 20 per cent rise in prices over the next three years would be considered the tipping point. Only then would he impose “draconian” measures to cool the market. London is a different story of course: housing prices there rose 18.5 per cent in the last year, three times the national rate.

Carney warned that UK households were “vulnerable” with an average debt-to-income ratio of 140 per cent, which he called “the limits of our tolerance.” In Canada, we’re well beyond that, at 163 per cent. He also underscored the lack of housing supply in Britain. Considering that it has twice the population of Canada, it is surprising that it built just 110,000 new homes in 2013; in Canada the number was over 180,000.

In the US, home prices have been rising more slowly in recent months. Last year’s 13.7 per cent gain is down to a more reasonable 10.3 per cent so far this year, according to the New York Times, referring to a S&P/Case-Shiller home price index.

The healthiest state for a housing market? The Goldilocks market, one in which prices rise enough that owners build equity and builders have an incentive to build, but not so much that they outpace wage growth and make housing unaffordable. Not too hot, not too cold. Just right.

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