Personal Finance 101 Canada’S Housing Market Analysis Buying Vs Renting a Home: A Case Study

By Dmitry Newman

Real estate market growth in Canada experienced unprecedented growth in the last five years, driving housing prices to an unaffordable level for an average household and giving an impression of a housing bubble, similar to the one seen in the United States in 2007.

Yet a large number of Canadian families are dreaming of becoming homeowners at any cost (even if they are not able to afford it) without clear understanding of risks and costs associated with a home purchase. But under current market conditions, homeownership is a luxury rather than a profitable investment.

The book provides a real-life illustration of two options available for a family debating between buying and leasing a townhouse in Toronto (the readers are able to easily extend this analysis to other types of residential properties). One of the findings from this mathematical exercise is that an unchanged house price by the end of a five-year term results in a $90,000 loss by the homeowner.

This implies that the only rational explanation for a desire to buy the townhouse is expectations of capital appreciation that will be sufficient to compensate for the additional costs of homeownership.

The analytical section of the book provides an insight into an upcoming price moderation stage for the Canadian housing market. Analysis include a discussion on the forces of supply and demand that drove the Canadian housing prices to the level where they are today and an outlook on what is likely to happen with these forces in years to come.

The user-friendly Excel model is available for download by readers free of charge and can be used for evaluation of their own personal options.

• Language: English
• Publisher: Xlibris US
• Release date: Feb 5, 2016
• ISBN: 9781514454732

Dmitry Newman

Dmitry Newman is a University of Toronto graduate and a Bay Street professional with a passion for investments, personal finance advisory, and macroeconomic analysis. He is a founder of a private consulting venture, Dmitry Newman Analytics, that undertakes a unique approach and provides commentary and analysis on global, national, and regional economic trends to help serve readers’ business and financial needs. The author takes pride in writing extensive research papers and commentaries on topics of Canada’s retirement income system, international finance, global investment opportunities, and real estate market.

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Copyright © 2016 by Dmitry Newman.

Library of Congress Control Number: 2016901455

ISBN:   Hardcover              978-1-5144-5475-6

              Softcover               978-1-5144-5474-9

              eBook                    978-1-5144-5473-2

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Thinkstock.

Rev. date: 01/28/2016

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CONTENTS

Section I: Housing Market Environment Overview

Section II: A Numerical Case Study

Buy Option

Rent Option

Analysis

Section III: Housing Market Growth Prospects

Expectations of Excess Supply

Immigration System Changes

A Limited Downside Potential for Mortgage Rates

Macroeconomic Environment in Canada

Some Lessons from Bob Farrell

Section IV: Final Word

About the Author

What you will find in this book:

• A case study that examines a real-life buy versus rent option available for a Canadian household.

• Tools to assess your financial position to make an optimal decision either to buy or to rent a home.

• Analysis of Canada’s real estate market and its growth prospects using jargon-free nontechnical language.

SECTION I

Housing Market Environment Overview

P erhaps one of the most important personal finance decisions made by a family in their lifetime is whether to buy or to rent a home. Shelter costs generally exceed a third of a disposable income, and a decision to buy a home can make a family wealthy due to excessive capital gains or result in a nightmare if the housing market undergoes a price correction.

A large number of American homeowners earned hefty profits by investing money in real estate and flipping homes in the early 2000s. By the same token, there was a large number of households that lost fortunes and fell into a multiyear debt trap during the 2008–09 financial crisis when the national average house prices plummeted by more than 20 percent in just four years (from its peak in January 2008 to the trough in December 2011).¹

Many homeowners were forced into a foreclosure after losing a job and found themselves in a so-called deep underwater mortgage situation (when the current market value of the house is less than the purchase price). To date, housing market prices in the United States were not able to fully recover and remain roughly 10 percent below the peak price level achieved in 2008, as illustrated in chart 1.

ch1.jpg

Despite such a disastrous outcome from the housing bubble burst in the United States and a worldwide economic meltdown, the housing sector in Canada was only briefly impacted by the financial crisis as home prices declined by 8 percent and returned to the prerecessionary price level by the end of 2009.² Afterward, the growth was continued, and since then, we are seeing home prices beating record highs month-after-month, as illustrated in chart 2.

The big question is how sustainable this price growth trend is. Section 3 of this book outlines forces of supply and demand that influenced the market in recent years and provides some insight on future growth prospects of home prices in Canada.

ch2.jpg

One might wonder what caused such a difference between housing markets in Canada and its southern neighbor. The answer is quite simple.

For one, there was no housing bubble in Canada at the verge of the economic crisis to begin with, while the US housing market was overheated by subprime mortgage lending (i.e., lending to households with poor credit ratings). On the other hand, housing in Canada was fairly priced, and conservative lending practices were taking place.

Currently, only around 5 percent of Canada’s mortgages are subprime, compared with nearly 25 percent of America’s mortgage loans before the market crash. Moreover, two-thirds of mortgages are insured by the federal body, Canada Mortgage and Housing Association, or one of its private competitors, which offers some degree of protection