A recent CMHC report has raised alarms concerning overvaluation in real estate markets of several Canadian cities. We’ve reached out yet again to real estate consultant Jim Reid, who has been offering expert insights on agent strategies and Canadian market and industry trends, to comment on this concept, and to suggest some possible solutions. His insights are, as always, level-headed and piercing.
To what extent do prices of Canadian properties reflect their real value, and where do the major differences come from?
Many people who get their information from media reports, and even industry association spokespersons, feel that real estate in Canada is over-valued. Unfortunately, the vast majority of real estate information is presented with a positive spin, or statistics are relayed without revealing the range of values across the dominant heterogeneous product mixes in our industry.
Certainly average selling prices have risen significantly since 2008, but many people don’t understand that price and value are two different things. Price is merely the money (electrons) that changes accounts on a real estate transaction. Value is a much greater and more important in context.
It is only recently that Canadians have come to respect how little value financial investments can have. Inflation and deflation are creating great instability in monetary markets. Foreign currencies are being used to purchase not just residential properties, but also substantial acreage of land full of our natural resources.
Intrinsic value vs. fickle price
The intrinsic value of land and property has become so important to everyone nowadays because there are very few things with true lasting value in a modern economy.
This is why property homeowners often say they won’t sell at any price. People value their homes for their intrinsic value, not the price. There will always be a value for property and gold, but money can easily become worthless.
Rather than over-valued, people might consider whether the Canadian market is over-priced or under-priced. In fact, this would be a fruitless exercise as our real estate market is one of the most diversified markets in the world. It is much too complex to draw a common conclusion for the thousands of sub-markets in Canada.
Overview of Canadian real estate
To begin with, Canada does not have a national market with fixed prices. Every market marches to its own local tunes. Normal market forces push up prices in some areas and pull them down in other areas.
Sometimes a mass hysteria occurs due to external economic or political conditions that cause abnormal buying or selling behaviour. Massive people movements generated by wars, oppression, economic collapses, etc. elsewhere can temporarily drive prices sky high. But eventually, these settle back down to the general economic development real estate pricing trend lines.
Some popular markets will continue to experience population growth rates well above historical norms. Thus, property prices will remain high in these markets and they will have less downside potential. Those with extra liquidity will certainly drive prices up in popular areas, but the rest will tend to remain close to the long-term local market trend lines.
How the industry is contributing to the over-pricing myth
Real estate industry internal practices have also contributed to the over-priced myth. A relatively recent product pricing strategy has been a significant contributor to the public impression of over-pricing of Canadian real estate.
Self-inflating advertising such as “Sold 50% ABOVE ASKING PRICE” or “SOLD $200,000 ABOVE ASKING PRICE” creates the over-priced/over-valued image in the public’s minds. Yet these homes are very often artificially under-priced and actually sell close to their true market value price.
Another common industry practice is to assert that most properties sell in under 30 days. In fact, a large portion of them have been re-listed several times at ever-decreasing prices until the actual market value price is posted. This is not honest to the public and sets up high expectations for the sellers.
Perhaps the most important influence on Canada’s housing prices is the huge maintenance, upgrades and renovations sub-industry, which adds about $100 billion to our true property values each year. These are the homes that sell quickly at high prices, and pull up the averages for all others. Astute REALTORS® know such costs and value appreciation and should be able to correctly determine price values for their clients.
Of course, there are other factors that influence our prices, such as the need for four season housing and infrastructure. Our neighbourhoods require more investment than most other markets around the world.
When all is said and done, as long as Canadians need homes, and as long as market populations increase, there is no legitimate reason to consider our homes are over-priced or over-valued.
In a recent article you explained the difference between a bubble and a boom in real estate, and you stated that Canada will not experience a housing bubble. How should the market function in order to keep a healthy growth and avoid the risk of a bubble?
Canadians are making a mistake if they turn “bubble” into a generic term for high property values and prices. To avoid a “bubble”, Canada need only maintain its sound mortgage approval criteria.
What does “healthy growth” mean?
By this we might prefer to assume that further value increases are good, so maintenance, updates and renovations should be encouraged.
“Healthy growth” could also refer to an initiative to re-balance our housing mix in various markets, to closer meet the preferences of the demographic strata. This would not only take off pricing pressures, but it would also lead to innovations in creating affordable housing that offers the lifestyle choices the residents will enjoy. As our cities are now becoming “global cities” of “global cultures”, we must begin to envisage the new residences people will be owning.
The third form of “healthy growth” would be one where a responsible young generation will be financially able to acquire equity in a property and thus accumulate net worth for their family’s future investments. The family formation demographic in Canada needs immediate direction and guidance to be able to accumulate their down payments and then maintain their jobs and earnings.
This is not a simple state to achieve overnight, but it certainly can be enabled through prudent Canadian economic and industrial development policies, in conjunction with a motivated young work force.
Reality check and sustainable options for real estate
Of course, these comments are of little comfort to the responsible couple who have carefully budgeted and saved $10,000 last year. What hope is there, when an average Canadian home may cost $600,000, or even $1.2 million in certain markets. 6 to 12 year’s savings after inflation will turn into 8 to 16 year’s savings for a down payment on their first home.
Many of these homeowner aspirants could be thinking that if we indeed have a bubble, prices will collapse and wipe out our senior demographic’s equity as a cost of making homes affordable to them. But, I much prefer a more positive set of remedies for our “Centennials”.
The one market where supplies seem moderately plentiful is condominiums. They may not be as good at market appreciation as properties on the ground, but they do have location advantages in many places. Others may find suitable places to live in affordable areas they had never considered before. Young people who want to try a lifestyle for five years or so could find work in other places across Canada.
For those with a dream to own property, but unemployed, I can only say I have been there over 30 times since my first job. The secret to getting a good job is to like people, and let them know you like them and that you are happy to serve them. The second is to take inventory with a friend, of who you are and the skills you want to develop.
In other words, start skating, get your stick on the ice. The game has begun. Go Canada Go.