By Lachman Balani
TORONTO: In response to my article on how the Toronto housing market has only grown 3.4% year over year in the last 25 years and there is therefore no concern of a housing crash to come, many people have written in saying that the concern is that in the last decade, not the last 25 years, the market has grown much too much and therefore prices must drop.
Let us once again examine the table published in the last article (reproduced below) and use the average price in 2003 which is $293,000. Today it is, according to many news reports, approximately $530,000.
Using calculating tools readily available on several websites, we see that translates into a 6.1% per annum increase, which according to any textbook definition is not a frothy appreciation at all.
Let us now take a very probable scenario. A couple would have bought it with 5% down or $14,650 leaving $278,350 to be financed. The Canada Mortgage Housing Corporation for the mortgage default insurance was at that time 3.25% or $287,396 approximately to be financed (not using decimals here).
Let us use an average financing rate of 4% ( a relatively sound approximation) for the mortgage in the last 10 years for an amortization period of 25 years(In 2003 the maximum amortization period was 25 years).This leads to $98,850 being paid in interest . The calculation the average consumer is going to make is that the house cost $293,000 + $98,850 or $391,850 so far (the couple still has another 15 years to go to finish paying the home completely).
Now based on a cost of $391,850, with the price today at $530,000, the growth is only 3.1% per year!
Taking into account inflation of 2% (even though for the average Joe and Jane it seems higher- we will use the rate the government uses) that means the house has only appreciated 1.1% in real terms!
If one is to factor in that in the last 10 years there is every likelihood that painting has been done, new appliances may have been bought, kitchen cabinets may have been replaced, windows may have been upgraded and a host of other things that one must have spent on beautifying the home, then the appreciation will go down further and perhaps even be non-existent.
No wonder Robert Shiller, one of the Nobel Prize winners in economics this year, thinks that one’s home is a terrible investment, at least here in North America.
Considering the above, and realizing that it is based only on one metric, there is no reason for a crash to come, nor should prices drop significantly.
Looking at it from intelligence quotient (IQ), a home is a terrible investment. However, in terms emotional quotient (EQ), it is a wise investment for many people as it leads to peace of mind, security and the dream of owning a home!
Table below taken from Toronto Real Estate Board website:
Year Sales* Average Sale Price* Year Sales* Average Sale Price*
1988 49,381 $229,635 2000 58,343 $243,255
1989 38,960 $273,698 2001 67,612 $251,508
1990 26,779 $255,020 2002 74,759 $275,231
1991 38,144 $234,313 2003 78,898 $293,067
1992 41,703 $214,971 2004 83,501 $315,231
1993 38,990 $206,490 2005 84,145 $335,907
1994 44,237 $208,921 2006 83,084 $351,941
1995 39,273 $203,028 2007 93,193 $376,236
1996 55,779 $198,150 2008 74,552 $379,347
1997 58,014 $211,307 2009 87,308 $395,460
1998 55,344 $216,815 2010 85,545 $431,276
1999 58,957 $228,372 2011 89,096 $465,104
2012 85,585 $497,301
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