Wednesday, August 5, 2009

Go ahead, buy a house if you can handle it

Interesting question from an anonymous reader. It would preferable to have a name and maybe some followers (on the top right of the site), but I digress:

I have been following your articles which stop me from buying a house.... and now the housing prices have been going up, up and up... I cannot even afford a house now... please tell me if the housing prices will ever go down again.. please...

Please don't use my blog for direct advice on buying a house. I'll leave those decisions to you and your family. I have my views, which I am sharing, but no one is always right and you will have to live with whatever decision you make.

I still don't see how housing in Canada can be immune (the only country in the world?) to the deflationary forces out there. Anything is possible, though. I suspect that CMHC and the oligopoly (govt & banks) are responsible for keeping credit flowing. Record low rates and prevailing sentiment that Canada prices aren't going down are keeping the bubble alive.

Does it make sense to me that the same house in Canada costs 2X a house in the US (a recent study showed this)? We have more land, less people, crummy weather, no interest deductibility on our taxes, lower salaries, higher taxes. Either our prices are way, way overpriced or theirs are way, way underpriced. I suspect the former. People in Canada are all esctatic that our prices haven't gone down much while US prices have gone down 30%. That tells me that maybe our prices are overpriced. Instead, the real estate industry tells you that this is automatically a good thing.

Believe me, I have everyone I know telling me the same thing: Canadian housing prices are not going down. You were wrong.

Perhaps, but only with the fullness of time, will we know. I am currently moving from one rental to another rental. I don't want to buy now for a few reasons but one of the reasons is that I am very worried about a 30% minimum decrease in my equity. That means if I put 30% down, I get wiped out. I personally have difficulty sleeping with that type of risk. I think that we are at or near lifetime highs in real housing prices (meaning after inflation).

Even if you don't buy my views, ask yourself what happens if housing prices decline 30% over the next few years. That would only take prices to where they were earlier in the decade. If you can afford a 30%+ decline in your house equity and still live a happy, healthy life, then go ahead and buy a house. I have family members who have bought in the past few years because they could answer yes to that question.

The fact that the question is posed in such a desperate way tells me that this a bubble as people are thinking that prices are running away from them again and that they better buy soon. Historically (based on US history however), Professor Schiller has demonstrated that after-inflation, housing prices basically do nothing over decades. I wish there were a similar Canadian chart (there is no frickin' info in this country!). We are probably at a very similar place to where the US was in 2006. If you wish to pay roughly 2X the real value of a house, then be my guest. Also, realize that overvaluation or undervaluation can last for years and even decades. I suspect that we are heading for a long period of at least fair value or undervaluation.

Hope this helps clarify my views. Read my blog and other blogs that are bullish. If my reasoning resonates, it may be because you have some of my worries. If you think that I am wrong, please feel free to read all the stuff coming from bullish blogs or CREA.

Thank you for the comment


Raj said...


I have been following your blog with respect to housing crash. I did not buy a new house not because I was following your article but it made perfect sense. Economists including some over-smart ones are predicting recession is over followed by its not over in a week.
Employment (not unemployment, since in Canada unemployment = EI recipients) is lowest at all times. They are predicting a V recovery but I am sure it is a W recovery and a serious crash is not very far. I decided to lock a lower interst rate for my condo than buying a new house.
As I said before, lower interest rate has encouraged the first time home buyers to simulate the housing market. July numbers are lower than June and I don't have to mention that August and Sept would be an intersting FALL.

Anonymous said...

I too have been following your blog and insightful commentary with interest.

As a Canadian, the thing that is ultimately frustrating for me is that, as you pointed out, there is no frickin' information, stats, etc. available for Canada as a whole.

Yes, our Southern Neighbour is the driving economic force, but come on! "Official" numbers for Canada/provinces are hard to come by; never mind insightful commentary needed to "unspin" the government rubbish.

Cheers to your efforts!

Chris in Cowtown

Anonymous said...

All i know is that i have been trying to buy something for the past 3 months and i have been outbid every time i placed a bid. Somehow we are miraculously coming out of a recession and i barely even saw a real estate correction.

I hope september brings some respite. All i see for now is everything going 10-15 % over asking. Super frustrating.