Seth Perlman
This is a great time to be homeless. I don't mean destitute; I mean without title to a residence. Whether you call it a bubble or not, Canadian home prices, as measured by National Bank's Teranet house price index, climbed by an annual average of almost 7% over the 10 years up to early 2010. But they're looking shaky now.
The first warning sign is that decade-long bull market itself. Historically, the long-term average increase in home prices is about 4.4% a year. I don't care if you're talking about stocks, bonds, art or whatever, nothing escapes reversion to the mean. If house prices climb by roughly twice the long-term average for an extended period, they'll eventually slide back toward the long-term trend line, and will probably decline as the froth in the market evaporates.
Prices haven't declined sharply yet, but there are clear signals that the mean reversion has already started. First, sales volume has dipped sharply. According to the Canadian Real Estate Association (CREA), nationwide home sales declined by almost 7% from June to July, and were down 30% from July, 2009.
Buyers are also getting more patient. That's clear from inventory statistics, which tell you how long it will take to sell existing home listings at the current pace of sales. According to CREA, the average inventory of houses across the country climbed to seven months in July, up from 4.4 months a year earlier. Having to wait an extra three months is certainly enough to force the hand of a lot of sellers on price.
There don't seem to be any reasons for these trends to turn soon, which is more good news for buyers. Interest rates probably won't head higher any time soon. Normally, low rates help keep house prices up, but rates are low these days largely because bond markets fear we're headed for deflation-meaning lower prices for just about any asset, including housing.
Will Canada have a U.S.-style housing crash? Probably not, because we've had tougher lending rules and mortgage interest on your primary residence isn't tax deductible here. Still, there's quite a range of predictions of how far prices will drop. CREA forecasts a mere 1.2% decline this year. TD figures house prices will decline by about 10%. David Rosenberg, the respected chief economist of Gluskin Sheff + Associates has suggested that Canadian houses are overvalued by as much as 20%.
So what should you do? If you're a homeowner looking to sell, adjust your expectations. If you think you can still get a bull market price for your house, you may wait a long time before you realize you won't, and by then you'll have to settle for even less. If you're looking to buy soon: don't. Hold off until sellers are forced to realize that the boom is over.
A friend of mine is paying $6,000 a month to rent a house in Toronto that's been valued at $1.8 million. Even assuming a hefty down payment of 25%, it would cost more than $7,000 a month in mortgage payments (at current market five-year mortgage rates) if my friend bought the house. That doesn't include taxes and maintenance. Is the home's value sustainable, given what it fetches in rent?
A great buyer's market is hurtling toward us. Get used to it.
VALUE
Sun Gro Horticulture Income Fund
11.3 (Forward price/earnings ratio) It's a pretty sure sign of value when your No. 1 competitor quietly buys up a quarter of your shares. That's what's happened to Vancouver-based Sun Gro, which harvests peat moss, and which is the subject of a creeping takeover by the Belanger family of Quebec, who are also in the business. "It's just an investment," Jean Belanger tells us. Sure.
GROWTH Fortress Paper Ltd. 307% (One-year share price increase) Some shareholders weren't pleased when Fortress CEO Chad Wasilenkoff bought a dirty old pulp mill in Quebec a few months back. It didn't help that he got it for practically nothing. Fortress makes specialty paper, including wallpaper and currency. But investors have finally figured out that the pulp mill is a gem, because it can be used to make rayon-for which demand in Asia is shooting up, like Fortress's shares.