Canada's Condominium Magazine
For those homebuyers who think of a home primarily as an investment, one that brings more or less guaranteed returns that are significantly higher than can be realized in cash, bonds or equities markets, the latest forecasts by the TD Economics group may not be what they want to hear. The TD report predicts a “long-run” rate of increase for home prices in Canada of 3.5 per cent beyond 2015.
This rate is “moderately” lower than the 5.4 per cent increase that has been the historical norm (1980–2012). However, forecasting for the next decade, and taking into account a “string of lacklustre performances” over the next ten years, the bank says that the nominal return will be just 2 per cent, or the same rate as inflation. In making this projection, the bank characterizes the coming decade for real estate as “sub par.”
Those “lacklustre performances” the bank alludes to are macroeconomic factors, including lower labour force participation and mediocre productivity gains which translate into nominal income and economic growth of about 4 per cent.
As well, the bank sees population growth slowing, a fact that will impact the demand for housing. A decline in the number of new households from the present 190,000 to just 145,000–155,000 over the next two decades will cause builders and developers to adjust their pace of construction.
And the all-important role of the Bank of Canada must be considered as well. TD Economics sees the current “stimulative” interest rates being replaced by a more “neutral” rate of 3.5 per cent. This would mean that an average, 5-year fixed-rate mortgage would come with an interest rate of about 7 per cent.
Macroeconomic fundamentals drive trends in home prices over the long-run. Our analysis suggests that the rate of return for Canadian real estate will come at roughly 2% over the next decade.
TD Economics Special Report: Long-Run Rate of Return for Canadian Home Prices
Returning to the subject of residential real estate as investment, TD Economics points out that the rate of return on a principal residence is non-taxable, and, at a projected rate of return of 4.4 per cent (Ontario), is better than would be returned by cash (3.1 per cent, T Bills) and bonds (3.8 per cent, DEX Universe Bond Index) However the equities markets are projected to return 7 per cent (S&P/TSX; S&P 500).
This projection does not apply across the board, however. Certain variables, such as immigration rates in future years, the kinds of mortgage products available, and the numbers of aging Canadians who choose to sell their homes to make other living arrangements, will all impact the rate of return on real estate. Also, house price growth in the above-average group is traditionally stronger than in the average group. Supply is another mitigating factor that affects price, especially in cities like Toronto and Vancouver.
And Toronto, the TD report projects, will be one of the “out-performers,” along with Vancouver, Victoria, Calgary and Edmonton, compared to the national picture. Better than average economic performance and “healthy” immigration levels will contribute to these cities’ being out-performers.
Remember, if you buy a home because you intend to live in it for a minimum of five years, the question of return on investment is less important in the short term.