Sunday, December 05, 2004

Stick with your house (Canada)


THIS REMARK has been whispered to me more than once lately. And interestingly, one of the times was during a conversation with a well-to-do builder.

The remark goes like this:

"A smart speculator would sell off all real estate assets now, rent for a while, then buy back in."

This is known as timing the market. Some call it a fool's game; others a visit to the casino. Whatever, it's gambling pure and simple, and the odds are you won't win.

But if you do get lucky -- like a few smart ones who called the housing crash of the 1990s -- you can strike it rich.

Bottom line is predicting when this record bull market in real estate will ever end is like trying to predict when Osama bin Laden will finally be caught.

Just when experts confidently stated a housing slowdown was in the works, last month crunches in as the best November ever for the Toronto Real Estate Board with an amazing 6,301 single-family homes changing hands.

That makes 2004 the best year ever, with a whopping 79,382 sales -- and we still have a month to go.

"With December still to come, we expect to break 80,000 total sales by the end of 2004, a first in board history," states TREB president Ron Abraham.


This market has been steaming to meltdown since 1996, when Toronto real estate crashed into the deepest darkest days of deflation, with average prices crashing from a boom-time 1989 high of $287,500 to as low as $196,600.

While a bubble was building in stock markets -- which prompted some gurus to preach the selling off home equity and converting to technology shares -- real estate began its recovery.

But, even after the bubble burst for equities early in the millennium and people who listened to the gurus lost their shirts, real estate kept recovering, scoring record sales year after year.

Stoking the fires of a hot housing market were investors who dumped stocks to convert paper wealth into brick and mortar. What better way to show off wealth, than a beautiful mansion?

So, is it any wonder average prices finally surpassed 1989 levels, to hit as high as $320,000? But the reality is, factor in inflation, and prices would need to hit $370,000 to truly compare to 1989.

Which leads to this: Believe it or not -- Toronto's market is still affordable, despite rising prices pushed even higher by bid-ups and multiple offers.

Latest affordability numbers by the economists at RBC Financial, show the carrying costs (principal, interest, taxes and utilities) of an average starter bungalow in Toronto, at $314,513, will eat up 38.4% of pre-tax income, or $1,956 a month.

That's up from a 1998 low of 34.8% or $1,462 a month for a $223,121 starter bungalow, but it's nowhere near the staggering 63.1% affordability rate in 1989, when it took $2,260 a month to carry the costs of a $261,670 starter home.

The cost back then was so unaffordable only 6% of renters could afford to get it. And when there are no first-time buyers, the bubble will burst.

But for now -- there are still first-time buyers, though the pool is shrinking, plus a lot of aging baby boomers who are using rising home equity and cheap mortgage rates to move up to the castle of their dreams.

"A home is part of a well-balanced investment portfolio," says Fred Ketchen, ScotiaMcLeod's director of equity trading, who always advised not to listen to gurus who urge investors to untap home equity to invest in stocks.

South of the border, the watchdog group National Association of Securities Dealers -- is clamping down on advisers who persuaded clients to take out lines of credit tied to home equity to buy stocks. The clampdown comes after growing complaints of people losing their homes.

Still, we keep hearing the lines: "When stocks are hot, real estate is not" and "buy low, sell high." So, will real estate crash and a new bull take over stock markets? Here's what the experts say.

No crash for real estate, though we'll see a slowdown in home-price gains, which are up 8.5% so far this year. First-time buyers may be tempted to keep renting, as rents fall with record-high apartment vacancies and landlord enticements. Our hot market will become more balanced, with more supply and no bid-ups.


But leading real estate analyst Frank Clayton, president of Clayton Research Associates, is more bullish. He says 2005 will be another banner year for housing and home prices will be up by at least another 6%, thanks to Premier Dalton McGuinty's green space policy, which will shrink land supply for builders.

Toronto real estate lawyer Alan Silverstein sums it this way. "The market is back to where it should be ... safe, stable and secure."

As for stocks, Ketchen predicts a decent year, but no blockbuster. So far this year, the TSX is up 10.15% at 9,000, and if Ketchen is right, Bay Street will hit 10,300 next year to gain another 10%.

Investors are already returning to equities, with total assets in mutual funds up to $485 billion last month -- the highest level ever.

With the RRSP deadline looming, expect more money to pour in. Meanwhile, all of Canada's 32 mutual fund indices were in the black in November.

So, here's Ketchen's advice: "Don't time the market, but invest your money in a diversified portfolio, which includes a home, stocks, mutual funds and safe, interest-bearing investments."

And, he adds, "don't forget to pay attention to your dreams." If you aspire to move up to your castle, and can afford it, do it.


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