Sunday, 6 April 2014

Housing Delusion - Weekly Links

Houses: the greatest investment delusion known to man
The housing market is the greatest source of investment delusion known to man. As I said a few years ago, people are encouraged to believe in “money for nothing”. As house prices go up, they are led to believe that as a society we are richer and yet if no new assets are produced, clearly we are no richer at all. On the contrary, we would be richer if a prolonged and pronounced building boom caused house prices to fall.
For this you cannot blame Mr and Mrs Average, whether driven by greed or fear. This is the result of a massive failure of public policy: tight control of building land and massive subsidies to home-ownership, combined with a lax immigration policy. I am not saying that each of these is necessarily wrong but the combination of the three has been catastrophic – wasting resources, distorting the economy, leading to misery and frustration for millions of people and diverting their energies into the zero-sum game of climbing the housing ladder.
Indeed it is a failure of public policy. Current housing policy rewards those who borrow the most. The lower your down payment (sub 20%), the lower your mortgage rate. As Luke Kawa pointed out in his article, the Canadian housing policy is quite puzzling at the very least and irresponsible at worst.

Canada's Getting Richer. Most Canadians Aren't 

Some interesting charts in the above article. Below are a select few:

Note that the above graphs by Bloomberg show an incomplete picture. The reality is much worse as incomes in Canada have stagnated for decades. See long term graphs for Canada's median household income here.

Canada has switched places with the US as the figures moved in the opposite direction.

Rob Carrick is Wrong by Brad Lamb

Mr. Carrick and his moronic bunch that sing the praises of renting over buying got dropped on their heads as babies.  From 1980 to 2010, virtually every large Canadian city saw its average real estate prices rise by 5 ½ – 6% a year compounded.  A Toronto home buyer that bought a home in 1980 for $100,000, with $5000 down, in 2014 now has a home worth $500,000.  His $5000 down payment has now risen to a $500,000 windfall.  For those of you bad at math, that is 100 times more that the down payment, or a 10,000% return on invested money.  Rob Carrick regularly talks about his recommended method of achieving 5-6% per year in annual return on invested money through mutual funds or other stock market investments.  It would take over 79 years investing Rob’s way to do the same as that house buyer.  Remember a potential home buyer’s alternative is to rent.  The cost of owning that home in 1980 was approximately $1200/month (with 5% down) about the same as the cost to rent.

Rob Carrick replied the following here. "My take is that Lamb's a salesman who, as they say in the investing biz, is "talking his book." All in good fun. To reiterate my position: Don't buy a house if you can't properly afford it. That's it. Over and out."

Housing Now March 2014 by CMHC

In the above report, CMHC bashed indicators such as price-to-rent and price-to-income ratios as they show that our housing market is overvalued. Yet, while discussing indicators that point to a balanced market, CMHC pretended as if there are no caveats with those measures. In sum, the report's main message was Keep Calm and Carry On.

When the Housing bubble bursts, there wont be a soft landing


Odds are on a soft landing for the Canadian housing market



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