The talk about housing prices and bubbles never ceases. I’ve been doing some thinking on this topic, myself; I don’t quite see the Canadian housing market as being in a bubble, myself, due to our recourse loans encouraging people to stick it out rather than default, and the fact that stricter lender requirements should mean that more of the lendees should have the ability to pay. This does not mean that high housing prices will not have a drag on the economy as over-leveraged people end up throwing most of their income into high monthly carrying costs.
One commonly accepted measure of housing affordability is the median price multiple. A good ratio of median price to median income is a ratio of around 3 times. In many Canadian cities, this index is now in the mid 4s and even reaching the 5s, signalling that housing prices are on the high side.
My own personal rule is that no more than 33% of net income should be spent on housing costs. In my own personal case, we will achieve that, but our income (which I personally consider to be normal middle class in terms of living standards) is a bit above the Canadian average, we don’t yet have kids, and we are buying a small condo, not a house. What about your family making 50-60k a year, or how about a single person making 40k or so a year. Will they also be able to afford a home, or will they be priced out of the market and forced to find something on the outskirts of the city or in a more run-down area?
There’s been plenty of discussion on whether the Canadian housing market is in a bubble or not; after all, housing in our neighbours to the south is now significantly cheaper! If you’ve owned property over the past few years, the rise up in prices must surely feel good; on the other hand, if you’re looking to buy, then the prices are quite high, indeed.
Instead of asking whether we’re in a bubble or not, I’d like to turn the question around and ask my fellow readers: Do you see a justification for a continued run up in prices, like we’ve seen in the past 5-6 years? What do you think that would mean for the average family, on the average family income?
My second question is what do you think will happen if interest rates rise 2 or 3 percentage points? As interest rates came down, families were able to buy a more expensive home for the same monthly carrying costs. How do you think that will affect the supply and demand?
Unfortunately, we have no crystal ball that tells us how things will be like in 5 to 10 years. We can, however, ask ourselves some basic questions, and see where the answers lead us. What do you think?
Weekend Reading
My friend Mich at Beating The Index had his first guest post over at Money Smarts Blog: 6 Reasons Canadians Should Invest In Oil Stocks. Go and check it out, and then let him know what you think!
I did a mini-roundup yesterday, so be sure to check those guys out, too.
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Have a great weekend, everyone!
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[...] the housing bubble collapse in the U.S., many homeowners who didn’t respect the above rules got severely burned. [...]