The most enduring and simplistic argument for buying a house is that you're making an investment.
What an understatement. Between your mortgage, property taxes, utility bills, maintenance, furnishings, renovations, landscaping and such, you'll be investing non-stop in your home. But what's the return on your money?
Looking back a decade, houses have been an excellent investment that rivalled the stock market. But the view ahead is not nearly so positive. Bear this in mind if you're considering a jump into this high-priced and increasingly unaffordable real estate market of ours.
How did the market get where it is today? Housing economist Will Dunning says resale housing prices have grown by an average annual 4.9 per cent in Canada since March, 1988, which is the year that comprehensive real estate industry data begins.
The more recent experience with housing is even better, Mr. Dunning found. The 10-year average annual price gain for a house is 8.3 per cent, almost on par with the average 8.9-per-cent increases logged by the S&P/TSX composite index, including dividends.
What we have here is a housing market that has been rising at close to double its long-term rate in the past decade. Don't expect this to continue.
"I'm not in the camp that says we have a big correction coming, but I think we are looking at a fairly long period of moderate changes in house prices - plus or minus 2 per cent," Mr. Dunning said.
In its most recent update on housing affordability, Royal Bank of Canada predicted a period ahead of very modest price increases. "(The) rapid home-price appreciation of the past 10 years has likely run its course overall in Canada," the report said.
We'll call that the optimistic view of what's ahead for the market. For the pessimists, the question is how far prices will fall, and for how long. Sample prediction: Toronto-based Capital Economics sees a decline in prices of up to 25 per cent in the next three years.
The negative outlooks for housing are based primarily on factors such as prices, income growth and interest rates, all of which are a function of current economic conditions and thus short-term in nature. A long-term concern for housing values is Canada's changing demographics.
The fastest-growing component of our population comprises those who are 65 and older. In other words, people who are going to be selling houses over the decades ahead and doing very little buying, if any. That's bound to affect demand for homes and the potential for price appreciation.
For an actual real life example of how real estate prices can fall, let's look at what happened in Toronto between April, 1989, and February, 1996. According to Mr. Dunning's numbers, the average resale home price in the city fell to $192,406 from $280,121, or 31 per cent.
That was an extreme plunge, fuelled in part by a level of rampant speculation that we aren't seeing in today's market. But prices can still fall in today's market. Check out the Calgary market, which dipped 1.7 per cent in March.
"The fact remains that housing can decline in value, and for prolonged periods," Moshe Milevksy, a finance professor at York University's Schulich School of Business, wrote in his 2009 book Your Money Milestones. "It is definitely not a risk-free investment."
Buying a house and living in it for decades can protect you from temporary market dips, just as long-term investing in stocks smoothes out the stock market's ups and downs. Still, it's worth noting that someone who bought an average-priced house in Toronto around the '89 market peak and still owned it would be looking at modest annualized gains in the 2-per-cent range.
Historical changes in housing prices are just a guideline, anyway. They don't consider things like mortgage interest, property taxes and maintenance, none of which add any value to a home.
Houses bought today have questionable investment value, but there are some other factors to consider if you're thinking of getting into the market. First, gradually paying down the mortgage on your house is a kind of forced savings plan. Not a great savings plan, but better than nothing.
Second, there's the best reason of all to own a house. It's freedom: Your family, your rules, your lifestyle. That's really what you're investing in when you buy a home today.
Here's how the housing market compares to other investments over the 10 years to March 31. Returns are expressed on an average annual basis.
Houses (Average resale housing price in Canada)
Stocks (S&P/TSX composite index with dividends included)
Bonds (DEX Universe Bond Index)
T-bills (91-day Treasury Bill Index)
Gold bullion (per ounce, in U.S. dollars)